Ratio Analysis of

Idea Cellular

Financial Accounting Project

Under Dr. Jayanta Kumar Seal

Submitted By

Akarshan Sachdeva (05) || Jatin Chauhan (20)

1 | Page

Shashank Garg (43) || Pratik Dokania (83)

Profitability Ratios
A class of financial metrics that are used to assess a business's ability to generate earnings
as compared to its expenses and other relevant costs incurred during a specific period of
time. For most of these ratios, having a higher value relative to a competitor's ratio or the
same ratio from a previous period is indicative that the company is doing well.
Some examples of profitability ratios are
(Net) Profit Margin
Effective Tax Rate
Return on Assets
Return on Equity
Return on Capital Employed
Earnings per Share
Profitability ratios are the most popular metrics used in financial analysis.

2 | Page

Net Profit Margin

It is the amount of profit generated by the company as a percent of the sales generated.
The objective of margin analysis is to detect consistency or positive/negative trends in a
company's earnings.
Net Profit Margin =

Net Income
Net Sales(Revenue)

Where, Net Profit = Revenue COGS Operating Expenses Interest and Taxes

Positive profit margin analysis translates into positive investment quality. To a large
degree, it is the quality, and growth, of a company's earnings that drive its stock price.

Net Profit Margin(%)

30

20

10

0
Mar'14

-10

-20

-30

Analysis
3 | Page

Mar'13

Mar'12

Mar'11

Mar'10

Net Profit Margin of IDEA has increased marginally as compared to that of its last year's
values. IDEAs Net profit margin has remained almost constant and it is almost in
accordance with the Industry average.
Return on Capital Employed
The return on capital employed (ROCE) ratio, expressed as a percentage, complements
the return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to
equity to reflect a company's total "capital employed".
This measure narrows the focus to gain a better understanding of a company's ability to
generate returns from its available capital base. By comparing net income to the sum of a
company's debt and equity capital, investors can get a clear picture of how the use of
leverage impacts a company's profitability.
Return on Capital Employed (ROCE) =

Net Income
Capital Employed

Where, Capital Employed = Average Debt Liabilities + Average Shareholders Equity

Return on Capital Employed

30

20

10

0
Mar'14

-10

-20

-30

-40

Analysis
4 | Page

Mar'13

Mar'12

Mar'11

Mar'10

A moderate performance is been displayed by IDEA. A higher Return on Long term

funds ratio shows that IDEA has been more effective in generating earnings from a
company's total pool of capital.
Earnings per Share
The portion of a company's profit allocated to each outstanding share of common stock.
Earnings per share serves as an indicator of a company's profitability.
EPS =

Net IncomeDividends on Preferred Stock

Average Outstanding Shares

When calculating, it is more accurate to use a weighted average number of shares

outstanding over the reporting term, because the number of shares outstanding can
change over time.
Earnings per share is generally considered to be the single most important variable in
determining a share's price. It is also a major component used to calculate the price-toearnings valuation ratio.

Earnings Per Share

30
25
20
15
10
5
0
Mar'14
-5
-10

Analysis

5 | Page

Mar'13

Mar'12

Mar'11

Mar'10

High growth of the telecom industry has favored strategic players like Idea, Airtel and
Vodafone. Ownership sharing issues with Reliance and demerger and profitability issues
of TATA teleservices with NTT DOCOMO has led to a decline in publics confidence in
the company.

Leverage Ratios
Companies rely on a mixture of owners' equity and debt to finance their operations. A
leverage ratio is any one of several financial measurements that look at how
much capital comes in the form of debt (loans), or assesses the ability of a company to
meet financial obligations.
Too much debt can be dangerous for a company and its investors. Uncontrolled debt
levels can lead to credit downgrades or worse. On the other hand, too few debts can also
raise questions. If a company's operations can generate a higher rate of return than the
interest rate on its loans, then the debt is helping to fuel growth in profits. A reluctance or
inability to borrow may be a sign that operating margins are simply too tight.
There are several different specific ratios that may be categorized as a leverage ratio, but
the main factors considered are include
Interest Cover Ratio
Fixed Charges Coverage Ratio
A leverage ratio may also refer to one used to measure a company's mix of operating
costs, giving an idea of how changes in output will affect operating income. Fixed and
variable costs are the two types of operating costs; depending on the company and the
industry, the mix will differ.
Finally, the consumer leverage ratio refers to the level of consumer debt as compared
to disposable income and is used in economic analysis and by policymakers

6 | Page

Interest Cover Ratio

A ratio used to determine how easily a company can pay interest on outstanding debt. The
interest coverage ratio is calculated by dividing a company's earnings before interest and
taxes (EBIT) of one period by the company's interest expenses of the same period.
Interest Cover Ratio =

EBIT
Interest Expenses

The lower the ratio, the more the company is burdened by debt expense. When a
company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may
be questionable. An interest coverage ratio below 1 indicates the company is not
generating sufficient revenues to satisfy interest expenses.

Interest Cover Ratio

100

80

60

40

20

0
Mar'14

-20

7 | Page

Mar'13

Mar'12

Mar'11

Mar'10

Analysis
IDEA has a consistently moderate interest cover which indicates that although the
company has the burden of debt, it has the ability to pay the interest through income
earned from its operations. Also Interest cover has almost doubled from last year and it is
on an increasing trend year on year.
Fixed Charges Coverage Ratio
A measure of a company's ability to meet its financial obligations. In broad terms, the
higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to
its lenders.
The trend of coverage ratios over time is also studied by analysts and investors to
ascertain the change in a company's financial position. Common coverage ratios include
the interest coverage ratio, debt service coverage ratio and the asset coverage ratio.
Fixed Charges Coverage Ratio

8 | Page

Net Earnings+ Charge

Charge + Interest

Fixed Charges Coverage Ratio

60

50

40

Axis Title

30

20

10

0
Mar'14

Mar'13

Mar'12

Mar'11

Mar'10

Analysis
IDEA has shown a high growth performance since last 2 years as far as fixed charge
coverage ratio is concerned. IDEA can easily cover its fixed charges as 11.72 is
considered as a good fixed charge coverage ratio.
Total Debt to Owners Fund
A debt ratio used to measure a company's financial leverage, calculated by dividing a
companys total liabilities by its stockholders' equity. The debt equity ratio indicates how
much debt a company is using to finance its assets relative to the amount of value
represented in shareholders equity.
Total Debt to Owners Fund

Total Liabilities
Shareholder s ' Equity

A higher debt-to-equity ratio typically shows that a company has been aggressive in
financing its growth with debt, and there may be a greater potential for financial distress
if earnings do not exceed the cost of borrowed funds.
9 | Page

Total Debt to Ow ners' Fund

1.2

0.8

0.6

0.4

0.2

0
Mar'14

Mar'13

Mar'12

Mar'11

Mar'10

Analysis
IDEAs debt to owners fund ratio is growing very rapidly since past 5 years and currently
IDEA has the highest debt to owners fund ratio i.e. 1.14 while Industry average is 0.54.
A high debt to owners fund means that IDEA has been aggressive in financing its growth
with debt.

Activity Ratios
Accounting ratios that measure a firm's ability to convert different accounts within its
balance sheets into cash or sales. Activity ratios are used to measure the relative
efficiency of a firm based on its use of its assets, leverage or other such balance sheet
items. These ratios are important in determining whether a company's management is
doing a good enough job of generating revenues, cash, etc. from its resources.
Following are some of the activity ratios:
Asset Turnover Ratio
Fixed Asset Turnover Ratio
Debtors Turnover Ratio
10 | P a g e

 Inventory Turnover Ratio

Investment Turnover Ratio
Companies will typically try to turn their production into cash or sales as fast as possible
because this will generally lead to higher revenues. Such ratios are frequently used when
performing fundamental analysis on different companies. The total assets turnover ratio
and inventory turnover ratio are two popular examples of activity ratios used widely
across most industries.

Debtors Turnover Ratio

An accounting measure used to quantify a firm's effectiveness in extending credit as well
as collecting debts.
Debtors Turnover Ratio =

Net Credit Sales

Average Account Receivables

The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses
its assets. By maintaining accounts receivable, firms are indirectly extending interest-free
loans to their clients. A high ratio implies either that a company operates on a cash
basis or that its extension of credit and collection of accounts receivable is efficient.
11 | P a g e

A low ratio implies the company should re-assess its credit policies in order to ensure the
timely collection of imparted credit that is not earning interest for the firm.

Debtors Turnover Ratio

40
35
30
25
20
15
10
5
0
Mar'14

Mar'13

Mar'12

Mar'11

Mar'10

Analysis
IDEA cellular maintained a high debtors turnover ratio consistently and it is successful
in maintaining the top position compared to the other players. It implies that IDEA
operates on a cash basis or that its extension of credit and collection of accounts
receivable
is
very
efficient.
Inventory Turnover Ratio
A ratio showing how many times a company's inventory is sold and replaced over a
period. The days in the period can then be divided by the inventory turnover formula to
calculate the days it takes to sell the inventory on hand or "inventory turnover days."
Inventory Turnover Ratio =

Sales
Inventory

or

Cost of Goods Sold

Average Inventory

This ratio should be compared against industry averages. A low turnover implies poor
sales and, therefore, excess inventory. A high ratio implies either strong sales or
ineffective buying.
12 | P a g e

High inventory levels are unhealthy because they represent an investment with a rate of
return of zero. It also opens the company up to trouble should prices begin to fall.

Inventory Turnover Ratio

50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
Mar'14

Mar'13

Mar'12

Mar'11

Mar'10

Analysis
IDEA Cellulars Inventory turnover ratio has increased year-on year basis with a
consistent growth rate but it is way behind Industry average which has gone very high in
recent years due to Airtels Unprecedented growth.
Asset Turnover Ratio
The ratio of the value of a companys sales or revenues generated relative to the value of
its assets. The Asset Turnover ratio can often be used as an indicator of
the efficiency with which a company is deploying its assets in generating revenue.
Asset Turnover =

SalesRevenue
Total Assets

Generally speaking, the higher the asset turnover ratio, the better the company
is performing, since higher ratios imply that the company is generating more revenue per
dollar of assets.
13 | P a g e

This ratio can vary widely from one industry to the next. As such, considering the asset
turnover ratios of an energy company and a telecommunications company will not make
for an accurate comparison. Comparisons are only meaningful when they are made for
different companies within the same sector.

Asset Turnover Ratio

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Mar'14

Mar'13

Mar'12

Mar'11

Mar'10

Analysis
IDEA has shown a good performance and in recent years it has the highest Asset turnover
ratio among the competitors. A higher asset turnover ratio shows that IDEA has been
more effective in using the investment in fixed assets to generate revenues.

Liquidity Ratios
A class of financial metrics that is used to determine a company's ability to pay off its
short-terms debts obligations. Generally, the higher the value of the ratio, the larger the
margin of safety that the company possesses to cover short-term debts.
Common liquidity ratios include the following
Current ratio
Quick ratio
14 | P a g e

 Operating cash flow ratio

Debt Equity Ratio
Long Term Debt Equity Ratio
A company's ability to turn short-term assets into cash to cover debts is of the utmost
importance when creditors are seeking payment. Bankruptcy analysts and mortgage
originators frequently use the liquidity ratios to determine whether a company will be
able to continue as a going concern.
Testing a company's liquidity is a necessary step in analysing a company.

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 companys
total liabilities.
The formula for calculating a companys current ratio, then, is:
15 | P a g e

Current Assets
Current Liabilities

Current Ratio =

The current ratio is mainly used to give an idea of the company's ability to pay back its
liabilities with its assets. The higher the current ratio, the more capable the company is of
paying its obligations, as it has a larger proportion of asset value relative to the value of
its
liabilities.

Current Ratio
2.5

1.5

0.5

0
Mar'14

Mar'13

Mar'12

Mar'11

Mar'10

Analysis
IDEAs Current ratio is on a downward trend and currently the average of top 5 players
comes out to be = 0.732, for IDEA, it is 0.42 which is way below than the average. As the
Current ratio is less than 1, IDEA is not in a position to pay out its current obligations
using current Assets.
Quick Ratio
An indicator of a companys short-term liquidity. The quick ratio measures a companys
ability to meet its short-term obligations with its most liquid assets. For this reason, the
ratio excludes inventories from current assets, and is calculated as follows:
Quick ratio =
16 | P a g e

Current AssetsInventories
Current Liabilities

Or
Cash Equivalents+ Marketable Securities+ Accounts Receivable
Current Liabilities
The quick ratio measures the dollar amount of liquid assets available for each dollar of
current liabilities. The higher the quick ratio, the better the company's liquidity position.
Also known as the acid-test ratio" or "quick assets ratio."

Quick Ratio
2.5

1.5

0.5

0
Mar'14

Mar'13

Mar'12

Mar'11

Mar'10

Analysis
Currently IDEA has the lowest Quick ratio compared to the Top 5 players in Industry and
it is on a downward trend since 2010. A quick ratio of 0.46 of IDEA means that a
company has $0.46 of liquid assets available to cover each $1 of current liabilities.
Long Term Debt Capitalization Ratio
A ratio showing the financial leverage of a firm, calculated by dividing long-term debt by
the amount of capital available.
Long Term Debt Capitalization Ratio=
Long Term Debt
Long Term Debt + Preferred STock+ Deffered Stock
17 | P a g e

A variation of the traditional debt-to-equity ratio, this value computes the proportion of a
company's long-term debt compared to its available capital. By using this ratio, investors
can identify the amount of leverage utilized by a specific company and compare it to
others to help analyze the company's risk exposure. Generally, companies that finance a
greater portion of their capital via debt are considered riskier than those with lower
leverage ratios.

Long Term Debt Equity Ratio

1.2

0.8

0.6

0.4

0.2

0
Mar'14

Mar'13

Mar'12

Mar'11

Mar'10

Analysis
IDEAs Long Term Debt Equity ratio is 1.1 while Industry average is 0.51. The ratio
gauges not just how much a company owes, but also what that long-term debt (what is
owed more than a year from now) amounts to as a percentage of the firm's equity. As
IDEA has a high Long Term Debt Equity ratio, thus we can conclude it is more risky as in
comparison to its counterparts

18 | P a g e