Financial Analysis of Sesa Goa free essay sample

FINANCIAL MANAGEMENT SAKET LOHIA 10BSPHH010671 1/11/2011 Table of Contents Objective:3 Introduction:3 Leverage:4 Financial Statement analysis:5 Working Capital Analysis:8 Dividend policy:9 Conclusion:9 Objective: To study the financial performance of Sesa Goa Pvt. Ltd over a period of five years. Introduction: Sesa Goa Limited was incorporated in the year 1965 as a private limited company. Basically the companys business division is alienated into two broad categories, such as the Iron ore division and Metcoke division. Apart from the two main divisions, the shipping also added to the business. The company exports approximately 5 million tons of iron ore, fines and lumps to customers in Japan, China and Europe from ports on both the east and west coasts of India. Besides the mining activities in Goa, mining operations in Karnataka and Orissa. During the year 2004, compact charging system for coke plant was commissioned and Sesa Kembla Coke Company Limited, a 100% subsidiary of the company was merged with Sesa Goa Limited with effect from 1 April 2004. During the period of 2006, Forbes Asia ranks Sesa Goa as one of Asias 200 companies with sales greater than 1 billion US $ in its Best Under A Billion study and also the Dun Bradstreet ranks Sesa Goa as the 4th best in the Indian Mining Sector among Indias top 500 companies. In 2007, the Vedanta Resources plc, a diversified metals and mining group, listed on the London Stock Exchange acquires 51% controlling stake in Sesa Goa Limited from Mitsui Co. Ltd. The Company Will invest Rs3, 000 crore to double ore capacity to 20-25 million tones a year and increase pig iron, coke capacity in the year 2008. Leverage: Operating Leverage affects a firms operating profit; DOL indicates the fluctuation in EBIT with a unit percentage change in sales. For Mar-10, if sales increase by 1%, the EBIT will change by 0. 60 times. OPERATING LEVERAGE| Mar-07| 0. 80| Mar-08| 1. 90| Mar-09| 0. 43| Mar-10| 0. 60| Financial leverage affects earning per share of the company. DFL is measured as percentage change in EPS for every unit change in EBIT. The firm leverages upon the debt. The variability of EPS may be caused by change in EBIT and is called financial risk. FINANCIAL LEVERAGE| Mar-07| 1. 10| Mar-08| 1. 02| Mar-09| -5. 19| Mar-10| 0. 89| Combined leverage measures the change in EPS with a unit change in Sales. High value of combined leverage indicates high return and at the same time high financial and operating risk. TOTAL LEVERAGE| Mar-07| 0. 87| Mar-08| 1. 94| Mar-09| -2. 23| Mar-10| 0. 54| Financial Statement analysis: Year| 2005-06| 2006-07| 2007-08| 2008-09| 2009-10| Liquidity Ratios| | | | | | Current Ratio| 2. 136429831| 2. 229822565| 2. 265734883| 2. 891278807| 3. 902479446| Quick Ratio| 1. 06545566| 1. 155055422| 1. 490333971| 2. 472480795| 3. 524118584| Turnover Ratios| | | | | | Accounts receivables turnover ratio| 9. 739281003| 9. 10978574| 10. 74934722| 14. 525493| 19. 9227564| Average Collection period| 36. 96371426| 39. 5179437| 33. 49040576| 24. 7840125| 18. 06978877| Inventory Turnover | 3. 617161867| 3. 41624413| 5. 305768229| 9. 713703001| 8. 774283216| Profitability Ratios| | | | | | Gross Profit Margin Ratio| 0. 471280132| 0. 461170158| 0. 633239501| 0. 526944576| 0. 519422347| Net Profit Margin Ratio| 0. 304379237| 0. 3005539| 0. 414112644| 0. 377810395| 0. 38604037| Asset Turnover| 1. 492098515| 1. 2655186| 1. 446589602| 1. 22322517| 0. 692400804| Return on Equity| 0. 96437676| 0. 46961953| 0. 694219184| 0. 525443602| 0. 35101211| Ownership Ratios| | | | | | EPS | 131. 4299961| 147. 7199899| 371. 4200061| 24. 28999999| 24. 94000001| Price-Earning Ratio| 0. 007608613| 0. 006769565| 0. 00269237| 0. 041169205| 0. 040096231| DPS| 38. 37203153| 38. 23715194| 44. 10379144| 2. 24063394| 3. 272627463| Dividend payout ratio| 0. 291957924| 0. 258848866| 0. 118743715| 0. 092245119| 0. 131220027| Capital Structure Ratios| | | | | | Debt-Equity Ratio| 0. 009067262| 0| 0| 0. 000422774| 0. 267149046| Debt Ratio| 0. 008985785| 0| 0| 0. 000422595| 0. 210826853| Liquidity Ratios: Current ratio of Sesa Goa seems to be impressive as its always above 2 and also have gone to 3 in the recent years implying good overall liquidity * Quick ratio of Sesa Goa also suggests that it is quite liquid and inventories as a part of current assets is not more, moreover it has been almost same as that of the current ratio from the past two years Turnover Ratios: * Accounts receivables turnover ratio of Sesa Goa suggests that on an average the receivables are generated and collected between 9 and 19 times in a year over a period of time it is good that it can generate the receivables as high as 19 times during the year. As we can see from the above table that Average Collection period has been reduced considerably over the years and has come down to around 18 f rom 37 which suggests that it takes 18 days to collect the receivables amount now from 37 days in 2006. * Inventory turnover ratio of the company suggests that how fast the inventory is moving through the firm and generating sales it has been increasing over the years for Sesa Goa suggesting that inventory is being converted to sales quite often. Profitability Ratios: Profitability ratios measure the efficiency of the firm’s activities and its ability to generate profits * Gross profit margin ratio which gives gross profit as a percentage of net sales has been fluctuating in case of Sesa Goa in mid years it has even reached to 63% indicating high production and operational efficiency and good correlation between production costs and selling price * Net profit margin ratio shows the earnings left for shareholders as a percentage of sales and gives a picture of the overall efficiency of the firm which also gives the profit margins a firm sets over its sales it also indicates efficiency of production, administration, selling, financing, pricing and tax management * Asset turnover ratio highlights the amount of assets that a firm uses to generate its total sales for e. g. in 2006 Asset turnover was 1. 492 which indicates that Sesa Goa with 1 unit of asset base can produce 1. 492 units of sales but it has come down in the recent years and is not quite stable over the period * Return on Equity measures the profitability of equity funds invested in the firm; in short it reflects the productivity of capital employed in the firm it has been fluctuating over the period for Sesa Goa Ownership Ratios: Ownership ratios help the stockholders to analyze their present and future performance of investment in their firm. It helps the analysts to assess the future value of the market * EPS is very important ratio to all the investors as well as the organization as it can decide as to how much dividends it can give to its shareholders and how much portion can it retain for its future business endeavors on this very important indicator to them i. e. how much it has earned per share. It has been come down drastically in case of Sesa Goa from some 131 to around 24 which can be compared to industry figures to give a better and clear understanding of the situation. * Price-Earnings ratio gives the relationship between the market price of the stock and its earnings by revealing how earnings affect the market price of the firm’s stock. Capital Structure Ratios: * Debt-Equity ratio gives the firm capital structure as to what percentage of firms capital is debt and what percentage of it is equity, it gives the relative contributions of creditors and owners of the firm Sesa Goa’s analysis shows that in initial years it has take minimum debt not leveraging the financial risk of the company and has relied heavily on equity capital Dividend Ratios: As the common stockholder is very much concerned about the firm’s policy of payment of cash dividends, dividend ratios become very important to both the individual as well as the company as it attracts the prospects to buy more shares of the company * DPS gives the dividend paid per share to the shareholders it has been decreasing gradually which says that the firm plough backs its retained earnings rather than distributing it as dividends as it is a relatively cheap source of finance for the company * Dividend payout ratio is the ratio of DPS to EPS which gives the percentage of dividends distributed by a firm of its EPS Working Capital Analysis: Year| 2005-06| 2006-07| 2007-08| 2008-09| 2009-10| A. Raw material storage period| 124. 64777| 136. 86052| 107. 03211| 56. 7033| 47. 526284| B. Average conversion period| 0. 4636364| 0. 492126| 0. 3298429| 0. 2095808| 0. 2160256| C. Finished goods storage period| 22. 161533| 22. 214291| 21. 47094| 15. 460208| 23. 167539| D. Average collection period| 36. 963717| 39. 517944| 33. 490406| 24. 784016| 18. 069789| E. Average payment period| 88. 484539| 90. 192557| 93. 340486| 154. 11257| 257. 6458| Gross operating cycle = A+B+C+D| 184. 23665| 199. 08488| 162. 3233| 97. 157106| 88. 979638| Net operating cycle = (Gross operating cycle E)| 95. 752114| 108. 89232| 68. 982809| -56. 95546| -168. 6662| Sesa Goa has tremendously improved its operating cycle efficiency over the years as we can clearly see from the above table The Raw material storage period has been continuously decreased showing excellent inventory management as also the average payment period is increased tremendously showing the confidence of creditors on the company’s operations post its takeover by the Vedanta group This also implies that the firm is recovering the money before it is required to pay its suppliers and it has also implied that the firm has minimized on its external borrowings, it shows that the firm has adopted some strict credit control policies as well to reduce its operating cycle Dividend policy: Company Name| Rs. per share| Yield| Dividend Rate| Ex-date| Div-date| | | | | | | Sesa Goa Ltd. | 20| 1. 98| 200| 11-Jul-05| 31-May-05| | 15| 1. 89| 150| 13-Mar-06| 27-Feb-06| | 25| 1. 24| 250| 4-Dec-06| 28-Oct-06| | 15| 2. 2| 150| 19-Feb-07| 12-Feb-07| | 25| 2. 15| 250| 21-Sep-07| 23-Jul-07| | 15| 1. 33| 150| 6-Feb-08| 23-Jan-08| | 30| 0. 96| 300| 11-Jul-08| 29-Apr-08| | 22. 5| 2. 58| 225| 31-Jul-09| 20-Apr-09| | 32. 5| 0. 49| 325| 2-Jul-10| 20-Apr-10| As we can see from the above table the company has regularly announced dividends to lure the investors to buy their shares as they have always considered relevance of the dividend theories according to the psyche of the Indian investors Walters model| Year| Price per share| | 2006| 1406. 48963| | 2007| 1315. 546763| | 2008| 5227. 067654| | 2009| 266. 473683| | 2010| 183. 3969079| As per the Walters model of dividend policy we see that the value of the firm depends on payment of the dividends which is evident from the above table Conclusion: Thus we have studied and implemented the key statistical financial data for Sesa Goa Pvt. Ltd. over a period of 5 years to gain insight into the industry and see its practices and performance over the same period.