Ratio Analysis

According to J. Batty “The term accounting ratio is used to describe significant relationships
which exist between figures shown in the balance sheet, in a profit and loss account, in a
budgetary control system or in any other part of the accounting organization”. The accounting
ratios indicate a quantitative relationship which is used for analysis and decision making. It
provides basis for inter-firm as well as intra-firm comparison. The ratios will be effective
only when they are compared with ratios of base period or with standards or with the industry
ratios. The financial statement viz income statement, and balance sheet report what has
actually happened to earnings during a specific period and presents a summary of financial
position of the company at a given point of time. The statement of retained earnings ,
reconciles income during the year and any dividends distributed with the change in retained
earnings between the start and the end of the financial years under study.

Here the following ratios are being compared among Tata motors Ltd, Maruti Suzuki Ltd and
Mahindra & Mahindra with the Balance sheet and Profit & loss account for the year 2019

1) Liquidity ratio: The Liquidity ratio measures the liquidity of the firms and its ability to
meet its maturing short-term obligations. Liquidity is defined as the realise value in money,
the most liquid of assets, it is the ability to meet all present and potential demands on cash
from any source in a manner that minimizes cost and maximises the value of the firm. Thus,
corporate liquidity is a vital factor in business.

a) Current ratio
b) Quick ratio
c) Absolute liquid ratio
d) Defensive-interval ratio

Current ratio:

This ratio measure the solvency of the company in short-term. Current assets are those assets
which can be converted into cash within a year. Current liabilities and provisions are those
liabilities that are payable within a year.

Current assets
Current ratio=
Current liabilities
 The Table showing comparative current ratio

Company Current assets Current liabilities Ratios

Tata motors Ltd 11796.12 18220.99 0.6473
Maruti Udyog Ltd 7316.10 14000.70 0.5225
Mahindra & Mahindra 15087.10 13794.84 1.093677
Ltd

The current ratio levels the ability of the firm to meet all the obligations maturing within a
year. Conventionally it is said that the current ratio should be 2:1. It means that for every one
rupee for current liability the firm must have two rupees worth of current assets. The reasons
for this conventional norm is that, all the current assets cannot be converted into cash
immediately.

The chart showing comparative current ratio:

Current ratios
1.2

0.8

0.6

0.4

0.2

0
Tata Motors Ltd Maruti suzuki Ltd Mahindra & Mahindra
Ltd

Interpretation:

A Current ratio of 2:1 indicates a highly solved position. A current ratio of 1:33:1 is
considered by banks as the minimum acceptable level for providing working capital finance.
M&M have a positive current ratio (1.0936) comparatively as Tata motors and Maruti Suzuki
has negative working capital as their Current liabilities exceeds current assets. Maruti Suzuki
has less current ratio (0.5225).
Quick ratio/ Acid test ratio:

Quick ratio is used as a measure of the company’s ability to meet its current obligations.
Since bank overdraft is secured by the inventories, the other current assets must be sufficient
to meet other current liabilities.

Current assets−Inventory
Quick ratio=
Current liabilities

Table showing Comparative liquid ratio

Company Current assets- Current liabilities Ratios

inventory
Tata Motors Ltd 7134.12 16994 0.41980
Maruti Suzuki Ltd 3990.4 12703.4 0.31412
Mahindra & Mahindra 11247.83 12904.83 0.87153

The Chart showing Comparative quick ratio

Quick ratios
0.87
0.9
0.8
0.7
0.6
0.42
0.5
0.31
0.4
0.3
0.2
0.1
0
Tata Motors Ltd Maruti Suzuki Ltd Mahindra &
Mahindra

Interpretation:

In this chart, Mahindra & Mahindra indicates a highly position when compare to the other
companies whilst Maruti Suzuki has the lowest quick ratio.
Absolute Liquid/Super quick ratio

It is the ratio of absolute liquid assets to quick liabilities. However, for calculation purposes,
it is taken as ratio of absolute liquid assets to current liabilities. Absolute liquid assets include
cash in hand, cash at bank and short term or temporary investments.

Absolute liquid assets

Absolute quick ratio=
Current liabilities

Absolute liquid assets=cash in hand+ cash at bank+ short-term investments

The Table showing Comparative absolute liquid ratio

Company Cash and Short-term Current Ratio

bank investment liabilities
Tata motors Ltd 1306.61 9537.23 16994.00 0.8536
Maruti Suzuki Ltd 178.90 3910.5 12703.40 0.3219
Mahindra & 3731.66 9097.75 12905.84 0.7049
Mahindra

The company’s absolute liquid ratio is 0.64:1 and an ideal ratio is 0:5:1 it means that more
50% of current assets are highly liquid. Hence the company’s liquidity position can be able
to meet uncertainties in payment obligations of short-term liabilities.

The Chart showing comparative absolute liquid ratio

 Absolute liquid ratio

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Tata motors Ltd Maruti Suzuki Ltd Mahindra & Mahindra

Interpretation:

The chart is showing Tata motors Ltd is more than the liquid liabilities ( 0.8536) compared to
the other companies. Hence the company liquid position cab be able to meet uncertainties in
payment obligations of short-term liabilities when it is compared to the other companies.

Profitability Ratios

The profitability ratios are to help assessing the adequacy of profit earned by the company
and also to discover whether profitability is increasing or declining. The profitability ratios
show the combined effects of liquidity, asset management and debt management on opening
results

Gross profit margin:-

This ratio measures the gross profit margin on the total net sales made by the company. The
gross profit represents the excess of sales proceeds during the period under observation over
their cost, before taking into account administration, selling and distribution and financing
changes.

Sales−cost of goods sold Gross profit

X 100 Or X 100
Sales Sales

The Table showing comparative Gross profit ratio

 Company Gross profit Sales Ratios
Tata Motors Ltd 5497.57 69202.76 7.9441
Maruti Suzuki Ltd 13484.5 86020.3 15.67595
Mahindra & Mahindra 8184.41 53614.00 15.26543

The Chart shows comparative Gross profit ratio

Gross profit ratios

15.68 15.27
16

14

12

10
7.94
8

0
Tata motors Ltd Maruti Suzuki Ltd Mahindra & Mahindra

Interpretation:

A high margin enables all operating expenses to be covered and provides a reasonable return
to the shareholders. In order to keep the ratio high, management has to minimize cost of
goods sold and improve sales performance.

From the above table it clearly shows that the gross profit ratio of Maruti Suzuki Ltd is
slightly more than of Mahindra & Mahindra.

Profit on sales ratio:-

This ratio indicates the extent to which all profits will go up should the sales go up by a
specified quantum.
 Profit after tax
Profit on sales=
Sales

The Table showing Profit on sales ratio

Company Profit after tax Sales Ratios

Tata Motors Ltd 2020.6 69202.76 0.087196
Maruti Suzuki Ltd 7500.6 86020.3 0.087196
Mahindra & Mahindra 4796.04 53614.00 0.089455

The Chart shows the comparative Profit on sales ratio

Profit on sales
0.1
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
Tata Motors Ltd Maruti Suzuki Ltd Mahindra & Mahindra

Interpretation:

In the above chart the profitability ratio of Mahindra and Maruti are almost same.

Return on Total assets (ROTA):-

The profitability of the firm is measured by establishing relation of net profit with the total
assets of the organisation. This ratio indicates the efficiency of utilization of assets in
generating revenue.

Net profits after tax

ROTA= Total assets
 The Table showing comparative return on assets ratio

Company Profit after tax Total assets Ratios

Tata Motors Ltd 2020.6 38810.6 5.2063
Maruti Suzuki Ltd 7500.6 46274.3 16.209
Mahindra & 4796.04 35176.03 13.6344
Mahindra

Chart showing comparative Return on assets ratio

R e t ur n on as s e t s

16.21
13.63

5.21

Tat a Mo t o r s L t d M a r u ti S u z u k i L t d Mah i n d ra &

Mah i n d ra

Interpretation:

Return on total assets the Maruti Suzuki Ltd is higher (16.209) compared to the other
companies. Tata motors is low return (5.2063) when compared to the other companies.

Operating profit ratio

Operating profit ratio studies the relationship between operating profit (EBIT-Earning before
interest and tax) and sales. The purpose of this ratio is to find out the amount of operating
profit for each rupee of sales

Operating profit
O perating profit ratio= X 100
Sales

Table showing comparative operating profit ratio

 Company Operating profit Sales Ratios
Tata Motors Ltd 7291.14 69202.76 10.5359
Maruti Suzuki Ltd 13560.3 86020 15.7641
Mahindra & 8298.8 53614 15.4787
Mahindra

The Chart showing comparative operating profit ratio

Operating profit
18
15.76 15.48
16
14
12
10.54
10
8
6
4
2
0
Tata motors Ltd Maruti Suzuki Ltd Mahindra & Mahindra

Interpretation:

A high ratio is an indicator of the operational efficiency of the Maruti Suzuki Ltd (15.76)
compared to other two companies. A low ratio stands for operational efficiency of the firm,
when comparing with other companies. The purpose of this ratio is to find out amount of
operating profit for each rupee of sales.

Stock Turnover ratio

This ratio establishes the relationship between cost of goods sold and average value of
inventory of stock. The purpose of this ratio is to show the number of times the inventory of a
firm is rotated in a year. It gives an indication of the efficiency of inventory management

Sales
Stock turnover ratio= X 100
Inventory

The Table showing Comparative stock turnover ratio

 Company Sales Inventories Ratios
Tata Motors Ltd 69202.76 4662.00 1484.401
Maruti Suzuki Ltd 86020.30 3325.70 2586.532
Mahindra & 53614.00 3839.27 1396.463
Mahindra

The Chart showing Comparative stock turnover ratio

Stock turnover ratio

3000

2500

2000

1500 2586.53

1000 1484.4 1396.46

500

0
Tata motors Ltd Maruti Suzuki Ltd Mahindra & Mahindra

Interpretation:

This chart is showing a high inventory turnover ratio for Maruti Suzuki Ltd is an index of
efficient inventory management and a low ratio for Mahindra & Mahindra stands for
comparatively inefficient inventory management. A low ratio also implies that the firm has
excess stock in relation to production and sales when the comparison to other companies