Question

find the best publically traded company that is a competitor in the industry where you would like to start a business.

a. Do a complete ratio analysis of this corporation. Based on the numbers,

explain what the future looks like for this company.

b. If you are to compete in this industry and maintain the same profit margin

as your competitor, what must you hold your cost of goods sold to as

a percentage of sales?

c. What must you hold your operating expenses to as a percentage of sales?

d. What return on equity ratio should you look for?

Answer 1

The publically traded company used for analysis is TVS motor company. It is a 2 wheeler manufacturer incorporated and domiciled in India. In addition to 2 wheeler the company also manufacturers 3 wheeler and automobile parts. The company has manufacturing plants located in different parts of India.

To do a ratio analysis of the company the following is the excerpt of Balance Sheet and Profit & loss statement.

Profit & Loss
	31-Mar-16	31-Mar-17	31-Mar-18
Sales	11,105.00	12,135.00	15,130.00
Expenses	10,294.34	11,275.84	13,999.79
Material Cost	7,978.94	8,853.70	11,132.65
Manufacturing Cost	199.89	212.36	243.59
Employee Cost	651.86	745.09	868.46
Gross Profit	2,274.30	2,323.85	2,885.29
Other Cost	1,463.64	1,464.69	1,755.08
Operating Profit	810.67	859.16	1,130.21
Other Income	104.00	171.00	145.00
Interest	49.00	44.00	57.00
Depreciation	236.00	288.00	339.00
Profit before tax	629.67	698.16	879.21
Tax %	22.00%	20.00%	25.00%
Net Profit	491.14	558.53	659.41

Balance Sheet
	31-Mar-16	31-Mar-17	31-Mar-18
Liabilities
Share Capital	48	48	48
Reserves	1911	2361	2833
Networth	1959	2409	2881
Borrowings	924	1107	1189
Other Liabilities	2148	2532	3261
Trade Payables	1564.45	1883.75	2540.69
Total Liabilities	5031	6048	7331
Assets
Fixed Assets	1719.59	1983.87	2371.87
Gross Block	3465.14	3929	4545.43
Accumulated Depreciation	1745.55	1945.13	2173.56
CWIP	31	62	131
Investments	1215	1588	2035
Other Assets	2066	2414	2793
Inventories	696.33	966.95	964.39
Trade receivables	578.03	723.77	968.37
Cash Equivalents	32.74	8.51	10.9
Loans n Advances	658.21	630.92	785.95
Total Assets	5031	6048	7331

A. We have conducted the trend analysis of financial ratios to understand the company. The comments of the financial ratio has been indicated in few words adjacent to each ratio.

• The negative working capital cycle is good. It means company gets orders upfront before it starts manufacturing the product. Also this is the characteristic of any Original Equipment manufacturer.
• The profitability ratios though stable could be improved further
• Raw material cost forms significant portion of sales. Over the years it has increased slightly.
• Gearing and interest coverage ratios are comfortable.

	31-Mar-16	31-Mar-17	31-Mar-18	Comments
								Profitability Ratios
Gross Profit	20.48%	19.15%	19.07%	Stable
Operating Profit	7.30%	7.08%	7.47%	Stable
Net Profit	4.42%	4.60%	4.36%	Stable
Cost As % of Sale
Material Cost	71.85%	72.96%	73.58%	Slightly Increasing
Manufacturing Cost	1.80%	1.75%	1.61%	Improving
Employee Cost	5.87%	6.14%	5.74%	Stable
Working Capital Days
Working Capital	-21	-16	-28	Very Good
Inventory Days (A)	32	40	32	stable
Debtor Days (B)	19	22	23	stable
Payable Days (C )	72	78	83	Improving
Return Ratios
RoE	25.07%	23.18%	22.89%	Slightly Moderating
RoCE	17.04%	15.89%	16.20%	Stable
RoA	28.56%	28.15%	27.80%	Stable
Liquidity Ratio
Current Ratio	0.84	0.90	0.77	Low, but working capital is negative which is good
Quick Ratio	0.39	0.39	0.39	Stable
Financial Leverage
Debt to Equity	0.47	0.46	0.41	Comfortable
Interest Coverage (EBIDTA)	16.54	19.53	19.83	Very Good

The future sales outlook of the company looks strong with company posting 24.68% YoY sales growth. Also the company has been making profits consistently over the years. With stable financial metrics, strong operating performance the company looks to be stable going ahead.

B. The cost of goods sold is the price of finished product leaving factory. Hence costs like freight cost, selling expense will not be a part of Cost of Goods Sold.

Here we have considered Material Cost, Manufacturing Cost, Employee Cost to be a part of COGS. The gross profit for the year is 19.07% from which Cost of Goods Sold is (1- Gross Profit Margin ) i.e it needs to be maintained at 80.93% of sales.

C. The operating expense includes costs like freight cost, selling and admin expense in which the finished product which leaves the factory premises is sold to the end customer. The cost is difference between the Operating profit margin and gross profit margin. Hence the operating cost should be maintained at 11.60% of sales.

D. The return of equity is a ratio of net profit to the overall equity. The overall equity is the sum of share capital and reserves& surplus. The RoE in case of TVS motors is 22.89% which is the indicative RoE that we should look for.