Ashok Leyland Case Study

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Capital Gearing Ratios:

Debt/Equity Ratio

[pic 6][pic 7]

Mar '15

Mar '14

Mar '13

Mar '12

Mar '11

12 mths

12 mths

12 mths

12 mths

12 mths

Total Debt/Equity Ratio

0.63251393

1.18630344

1.10966104

0.82737441

0.8838588

Analysis using the Debt/Equity Ratio:

The debt to equity ratio compares total liabilities to shareholders' equity. It is one of the most widely and consistently used leverage/gearing ratios, expressing how much suppliers, lenders and other creditors have committed to the company versus what the shareholders have committed. Different variations of the debt to equity ratio exist, and different unofficial standards are used among separate industries.

Debt to equity ratio values tend to land between 0.1 (almost no debt relative to equity) and 0.9 (very high levels of debt relative to equity). Most companies aim for a ratio between these two extremes, both for reasons of economic sustainability and to attract investors or lenders. Debt to equity, for example all gearing ratios, reflect the capital structure of the business. A higher ratio may not always be a bad thing, because debt is normally a cheaper source of financing and comes with increased tax advantages.

In our example, the Total Debt/Equity Ratio in 2010 was 0.88. In 2013, the capital gearing ratio was poor at 1.10 and worsened to 1.18 in 2014.

Secured Loans of Rs. 1,027 (ten millions) were settled and unsecured loans of Rs. 265.27(Ten Millions) were repaid in 2014-15 resulting in a much lower debt/equity ratio of 0.63 in 2014-15. This is mainly due to much improved Revenues in 2014-15 owing to higher sales of Commercial Vehicles. There was an increase in market share of medium and heavy commercial vehicle segment from 26.1% to 28.6%

Besides reporting better operating results in 2014-15, the Company also made changes to its capital structure by placing Rs. 185,200,000 equity shares through the process of Qualified Institutional Placement and raise an amount of Rs. 6,667M. The proceeds received through QIP were utilized for the purpose for which it was raised. Consequent to the above, the paid up value of the equity share capital increased from 2660 M to 2845 M.

This has resulted in a change in the Capital gearing whereby Equity capital has increased by Rs. 185 M. This exercise was undertaken by the Company to repay its borrowings besides financing operations. We think this is a prudent exercise undertaken to benefit the shareholders by lessening the debt burden on the existing share holders.

As such, the Company’s capital structure and changes in the gearing ratio are in line with how the Organization views the risks & returns.

Part (B)

Financial Analysis & Interpretation of the Company using ratios:

Current Ratio:-The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the total assets of a company (both liquid and illiquid) relative to that company’s total liabilities.

The formula for calculating a company’s current ratio, then, is:

Current Ratio = Current Assets / Current Liabilities

The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current assets and liabilities. The current ratio is also known as the working capital ratio.

Computing the Current Ratio for our Company, we get:

Current Assets/Current Liabilities

2014 -2015

2013 -2014

2012 -2013

2011 -2012

2010 -2011

65%

58%

70%

0%

94%

The Current Ratio shows a slightly weak Working Capital situation. However, this is due to higher short term Loans and Advances in 2015 (Rs. 5,2668 M) . It is expected that with the increase in Cash & Bank Balances in the coming year as a result of better Revenues and profitability, the Loans and Advances will reduce. This is evident from the increase in the Cash balances by Rs. 7396M from 2013-2014.

Quick Ratio:

The quick ratio is a financial ratio used to gauge a company's liquidity. The quick ratio is also known as the acid test ratio. The quick ratio compares the total amount of cash + marketable securities + accounts receivable to the amount of current liabilities.

Computing the Current Ratio for our Company, the following are the results :-

Quick Ratio

2014 -2015

2013 -2014

2012 -2013

2011 -2012

2010 -2011

14%

0%

0%

0%

5%

The above Quick Ratio clearly shows the increase in Cash & Bank balances resulting from improved profitability and cost control measures that the Company has taken.

PROFIT