Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis - II - Question Paper

0.56
0.67
0.95

Interest coverage
1.68
-3.64
-1.48


Interpretation of ratios

The year 2004-05 is good for the company as it has a positive profit margin and positive return on equity and total assets.

Fixed assets turnover ratio has increased from the past years this implies that fixed assets are being efficiently utilized this year and the identical can be seen in the profitability ratio. Increased total asset turnover ratio with increased sales implies that the company is maintaining low level of total assets. If company is having low level of inventory it may affect its sales in the long run when there is an increase in demand. However, this may also mean improving efficiency in the utilization of total assets.

Company’s liquidity position is not comfortable as shown by a declining current ratio. The current ratio is above one. This indicates that company is well protected with its liquidity position to meet its current liabilities.

Company is having a low debt-equity ratio and it has declined from the year 2002-03. Almost one-third amount of both secured and unsecured loans has been decreased by the company. Presently, interest cover is at a reasonable level but it was negative for the last 2 years. This increase in the coverage ratio and decline in the total-debt equity ratio indicates healthy profitability of the company.

Hence, the company appears to have a favorable financial position in the year 2004-05 in all fronts other than liquidity.

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3. needed rate of return = 5.5 + 0.77 (16 – 5.5) = 13.585%

SOTL’s Free Cash Flow to Equity for the year 2004 - 2005 is computed as follows:

(in crores)

Net income
7.85

Plus: Depreciation
26.68

Less: capital expenditure
44.05

Less: Investment in working capital
10.80

FCFE
-20.32


Note:

1. Capital expenditure = (328.84+ 26.68) – 311.46=44.06

2. Working capital calculation:

For the year ending 31-3-2005

(Rs. in million)

Current assets
294.15

Other liabilities & provision
214.95

Net Working capital
79.20


For the year ending 31-3-2004

(Rs. in million)

Earning:   Approval pending.