AUTOMOBILE SECTOR

Classification of Ratios Profitability Ratios Gross Profit Margin (%) Operating Profit Margin (%) Liquidity Ratios Current ratio Quick ratio Activity Ratios Debtors Turnover ratio Total Assets Turnover ratio Leverage Ratios Debt Equity ratio Interest Coverage ratio Ashok Leyland (Company 1) 2009 2010 2011 4.77 7.49 8.32 7.66 10.23 10.67 1.29 0.72 9.25 1.54 0.93 2.27 1.22 0.72 7.51 1.65 0.98 5.83 1.09 0.53 10.34 2.19 1 5.23 Swaraj Mazda (Company 2) 2009 2010 2011 3.38 6.61 6.62 4.96 7.81 7.62 0.85 1.16 3.28 1.72 2.28 1.27 1.19 0.91 5.09 2.63 0.45 2.76 1.23 0.78 7.04 2.99 0.4 6.36

2008 7.86 10.09 1.08 0.6 17.74 2.7 0.42 8.33

2012 6.78 9.43 0.88 0.48 11.02 2.75 0.83 3.68

2008 7.31 7.8 0.96 1.03 3.35 2.84 1.52 4.53

2012 6.76 7.78 1.25 0.87 8.67 2.63 0.41 6.95

Gross Profit M
10 5 0

MAR'8 MAR'9MAR'1 Ashok Leyland

Current Rat
2 1 0

MAR'8 MAR'9MAR'1 Ashok Leyland

Debtors Turnover Ratio

20 10 0 MAR'8 MAR'9MAR'10 MAR'11 MAR'12 Ashok Leyland Swaraj Mazda

Interpretation of ratios Profitability Ratios Gross Margin Ratio From the above chart it is clearly seen that Gross Profit Margin of Ashok Leyland is decreasing because of various factors such as increase in raw material cost, labor cost, power and fuel cost. So company has to undertake research and development to reduce the costs. Similar is the case with Swaraj Mazda as their ratio is also decreasing. So we can say that there is a common trend in both the companies but on the other hand if we see the sales turnover Ashok Leyland has more than Swaraj Mazda so still they can improve its margin.

Operating Margin Ratio:Here, Ashok Leyland has increase and decrease trend in operating ratio. In 2009 it is decreasing as compared to 2008 because of increase in raw material affects the companys overall operating margin capacity. There is high fluctuations in steel prices which not only affects operating margin but also affects the inventory management of the steel required for production. Swaraj Mazda shows an increasing trend which suggests that company has effective control over the costs or their sales are increasing faster than operating costs. So we can say that company 2 is performing better in maintaining their operating costs.

Liquidity Ratios Current ratio Here upto 2010 company 1 is showing an increasing trend which means company has enough funds to pay its liabilities in the short run but it again decreases in 2012 because liabilities are more than its assets. Company 2 is in a good position as it shows an increasing trend which suggests that company has enough cash and bank balance to pay its liabilities in the short term. So overall we can say that company 2 has enough resources to fulfill its short requirements.

Quick ratio: Here company 1 shows a decreasing trend which is not good for the company. Generally quick ratio greater than 1 is acceptable. If it is less than 1 than company has to sell its inventories to meet its requirements. Already there is shortage of inventory so company has to utilize its resources efficiently. Similar is the case with company 2 so they have to manage its resources in an optimum manner.

So we can say that there is a common trend between two companies. But company 2 has more inventory than company 1 which means they are utilizing their resources effectively.

Activity Ratios Debtors Turnover ratio Here company 1 is showing a decreasing trend which is not good for the company. Lower ratio suggests that company has to reassess its credit policies by selling its policies to creditworthy customers and teach them how to qualify properly. There is an increasing trend in company 2 because company is operating on a cash basis and the extension of credit and collection of accounts are efficient. So we can say that company 2 is better because of maintaining proper credit policies and collection from the customers.

Total Assets Turnover ratio There is an increasing trend in company 1 because if we are talking about current assets and fixed assets it is increasing continually which means company is utilizing their assets efficiently. Similarly is the case with company 2. Thus we can say that both the companies are using their assets to the full capacity.

Leverage Ratios Debt Equity ratio Here ratio shows an increasing trend which is unfavorable for the company 1 because being a joint venture company sometimes they have to import technology from outside countries at higher risk and high rate of interest which on the other hand increase their borrowings from others. There is decreasing trend in company 2 which is favorable indicating less risk. So we can say that company 2 is better as it has less borrowings from others compared to company 1.

Interest cover ratio There is decreasing trend in company 1 which means company is more burdened by debt expense. Due to this it will not be able to generate enough revenue to satisfy interest expenses and on the other hand it affects the companys profitability. Here, the ratio is increasing in company 2. Normally the ratio higher than 1 indicates the comfort level of any company in any industry. So we can say that company 2 is better in terms of interest coverage ratio as lower ratio does not affect the companys profitability.

Recommendations & Conclusion Company 1 Companys Gross Profit ratio is continuously decreasing so they can take several steps such as reduce the direct cost of goods, reduce the inventory waste, readjust the sales mix, integrate new products or services. These steps can be taken by the company to improve its margin. Normally ideal current ratio is 2:1 but here companys ratio is continuously decreasing so in order to improve this ratio company can take measures such as selling the unproductive assets, improving the current assets by rising shareholders funds and cut down the hard cash levels and keep the money in bank accounts. As Ashok Leylands major market share is in military buses so they can expand their business in other sectors also which will lead to increase in sales and profitability.

Company 2 The overall gross profit and operating margin ratio was good but if we talk about current ratio it is decreasing which shows negative sign on the business. Company has to bring this ratio nearer to the ideal ratio by reducing the cost of inventories and maintaining proper collection period. Company is expected to improve its sales as it is lower as compared to other automobile companies like Tata Motors, Ashok Leyland by the way of implementing sales policies. Also there is a slowdown in manufacturing as there is economic slowdown in the Indian economy which had a major impact on the commercial vehicle. So in order to resolve this problem company had to hire the market experts who forecast for the future.

Conclusion The Indian Automobile Industry had a great market potential. It can also bring the foreign players to invest it into Indian market as of now many small scale industries are also moving up to increase their market share. By bringing foreign players we get the benefit of FDI. But on the other hand there is threat of increasing the petrol prices so we have to adopt the particular method to bring control to this.

References http://www.moneycontrol.com/financials/ashokleyland/balance-sheet/AL#AL http://www.moneycontrol.com/financials/smlisuzu/balance-sheet/SM#SM For ratios interpretation

A Textbook of Accounting for Management Third Edition S N Maheshwari (Page No 3.1-3.68)