CHAPTER - 5 ANALYSIS OF PROFITABILITY

CHAPTER - 5 ANALYSIS OF PROFITABILITY 5.1 INTRODUCTION 5.2. CONCEPT OF PROFITABILITY 5.3 MEARUREMENT OF PROFITABILITY 5.4 IMPORTANCE OF PROFITABILITY 5.5 ANALYSIS OF PROFITABILITY 5.5.1 Gross Profit Ratio 5.5.2 Operating Profit Ratio 5.5.3 Return on Capital Employed Ratio 5.5.3(i) Return on Gross Capital Employed Ratio 5.5.3(ii) Return on Capital Employed Ratio 5.5.4 Net Profit Ratio 5.5.5 Return on Owner s Equity (Net Worth) Ratio 5.5.6 Return on Equity Capital Ratio 5.5.7 Dividend Pay-out Ratio 5.5.8 Earnings Per Share (EPS) 5.6 REFERENCES An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 145

5 - ANALYSIS OF PROFITABILITY 5.1 Introduction: The main aim of a business enterprise is to earn profit which is necessary for the endurance and expansion of the business enterprise. It can be earned with the help of amount invested in business. It is necessary to identify how much profit has been earned by the amount invested in the business. It can be ascertained through profitability ratio. These ratios inspect the current operating performance and efficiency of the business concern. These ratios can be helpful to the management to take remedial measures if there is a negative trend. The business firms are usually established with a view of earning profit from the business operations. Therefore the main purpose of any business is to make profit. The profit is golden egg. It is not easy for a business to breathe well without profit. According to Prof. Diskey An economic activity, which is undertaken for profit is business. Profit is centre of the attraction and interest in the corporate unit, therefore, it is necessary to analyze and interpret the profitability in the corporate sector. According to Lord Keynes. Profit is the engine that drives the business enterprise. Profit is the heart of business, if an enterprise fails to make profit, capital invested is eroded and if this condition continues, the enterprise ultimately ceases to exist. The profit is the index to the economic progress. Profit improves national income and standard of living of the people related with the business. It is also viewed as a mirror of the operating performance of the business. But only profit is not the only objective in today s business environment. Profit is not sole but one among the most important objectives. Profit normally guides and directs business operations. No doubt, profit is main objective of business but it should not be over emphasized. The management should concentrate to maximize its profit with the welfare of society. Thus, profit is not just the reward of owners, but it is also related with the interest of other segments of society, such as shareholders, customers, creditor, government etc. 5.2 - Concept of Profitability: In the period of economic development, the profit and the profitability are two different concepts. Profit is the absolute term and profitability is a relative concept. An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 146

The word Profitability is composition of two words profit and ability. Remarkably, profit indicates the income while profitability indicates the ability of making profit. Although both of them are controversial, though, both are inter-related and inter-dependent. In the vision of accounting the profit is the difference between total revenue and total expenses over a period of time. The term profitability is referred to earning capacity or operating performance. In the words of Haward and Upton profitability is the ability of a management in given investment to earn a return from its use. Sometimes the term profitability and profit are used synonymously but actually they are different. The very high profit does not always point out a sound organizational efficiency and low profit is not always a mark of organizational sickness. Thus, profitability is a composite concept relating to efficiency of an organization to earn profit. 5.3 - Measurement of Profitability: Profitability of a firm can be measured by its profitability ratios. The operating efficiency of a firm can be measured by profitability. In the process of performance appraisal of a business enterprise, profitability ratios are calculated to measure the operating efficiency. Generally measurement of profitability relies on two variables i.e. sales to revenue and investment to revenue. In the words of James C. Van Horne, profitability ratios are of two types: those showing profitability in relation to sales, and those showing profitability in relation to investment. An organization should try to produce higher profit on each rupee of sale or revenue. If an organization fails to generate adequate profit it becomes difficult to cover its operation cost as well as interest burden. A study of financial analysis of any organization is incomplete unless it measures profitability in relation to the sale, assets, revenue, net worth and capital employed etc. 5.4 - Importance of Profitability: Profit is a very good symbol of business performance, but the actual standard of performance of a business enterprise cannot be judged by absolute size of its periodic profit. Profitability is a good tool which represents the earning of a business firm. The analysis of profitability is useful for management, bankers, investors, shareholders, employees and government. The management can assess the effectiveness of its own plan and policies. It is also helpful for creditors for granting credit. Investors are also An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 147

interested to know profitability. By this, they can take decisions of buying, selling or holding shares in the company, employees of the organization can think over fringe benefits. The government uses it for the purpose of regulations and administration. 5.5 - Analysis of Profitability of Selected Car Manufacturing Companies in India: A management of the Car Manufacturing in India is very interesting to locate and pinpoint the causes which are responsible for low or high profitability. Generally profitability of industry in India has been analyzed from the view point of financial management and share holders. The following ratios are calculated to measure Profitability of selected Car Manufacturing companies in India, 1) Gross profit ratio 2) Operating profit ratio 3) Return on capital employed ratio 4) Net profit ratio 5) Return on owner s equity (Net worth) ratio 6) Return on equity capital ratio 7) Dividend pay-out ratio 8) Earnings per Share (EPS) 5.5.1 - Gross Profit Ratio Generally excess of net sales over cost of goods sold is known as gross profit margin. The gross profit ratio indicates the efficiency of controlling the cost of goods as it shows the margin between the cost of goods sold and the sales revenue. It indicates the efficiency with which management produces each unit of product. This ratio is of vital importance for evaluating business results. Any fluctuation in the gross profit ratio is the result of a change in cost of goods sold or sales or both. It reflects pricing policies of a business. A low gross profit ratio will suggest a decline in business which may because of insufficient sales, higher cost of production with the existing or reduced selling price or all round inefficient management. The finance manager must detect the causes of falling gross profit margin. The high gross profit margin is a sign of good and efficient management. A high gross profit ratio is an indication of effectiveness of management. The gross profit ratio may increase due to any of the following factors. An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 148

Increase in sales prices where cost of goods sold remaining constant. Reduction in cost of goods sold where sales prices remaining constant. An increase in the proportionate volume of higher margin items A combination of variations in sales prices and costs. While, in the case of low profit ratio, it may reveal over investment in plant and machinery due to firm s inability to purchase at favourable terms, higher cost of goods sold etc. Further, this ratio will also be low because of a decrease in price in the market. This ratio is calculated by dividing gross profit by net sales and is generally expressed as a percentage. The formula of gross profit ratio is given as under: (Sales Cost of Goods Sold) Gross Profit Ratio = ------------------------------------ x 100 Sales TABLE 5.1 - GROSS PROFIT RATIO (%) YEAR MARUTI TATA MAHINDRA FORCE AVERAGE 2005-06 17.92 16.84 19.51 6.08 15.09 2006-07 21.38 15.81 22.01 7.81 16.75 2007-08 17.06 17.73 20.58 3.54 14.73 2008-09 16.23 16.12 20.44 2.53 13.83 2009-10 16.57 18.43 25.04 11.36 17.85 2010-11 19.7 19.4 22.51 13.6 18.80 2011-12 17.37 17.95 17.95 10.24 15.88 2012-13 21.34 16.2 19.02 8.12 16.17 2013-14 23.44 13.27 20.33 12.77 17.45 2014-15 23.89 11.03 22.07 13.78 17.69 Maximum 23.89 19.40 25.04 13.78 18.80 Minimum 16.23 11.03 17.95 2.53 13.83 Average 19.490 16.278 20.946 8.983 16.424 Sources: computed from the annual reports & accounts of the perspective companies. An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 149

CHART 5.1 - GROSS PROFIT RATIO (%) 30 25 20 15 10 5 Maruti Tata Mahindra Force 0 CROSS-SECTIONAL RATIO ANALYSIS: Maruti Suzuki India Ltd.: It is clear from the table no. 5.1 that the Gross Profit Ratio of Maruti Suzuki India Ltd. shows fluctuation trend during study period. It is ranged between 23.89% in the year 2014-15 and 16.23% in the year 2008-09 with an average ratio of 19.49%. The average ratio of this company was 19.49%, which is higher than the average ratio (16.425%) of sampled companies. So company is doing better than average. So we can say that the company is doing better. Gross Profit Ratio company was 17.92% in 2005-06 and then after 21.38% in 2006-07. Then it was decreased constantly for next two years; 17.06% in 2007-08 and 16.23% in 2008-09. Then it was increased for two years; 16.57% in 2009-10 and 19.70% in 2010-11. Then it was decreased in next year; 17.37% in 2011-12Then again for three year it was decreased 21.34% in 2012-13, 23.44% in 2013-14 and 23.89% in 2014-15. So company has satisfactory average ratio compare to average ratio of the Car Manufacturing companies in India under study. Tata Motors Ltd.: The Gross Profit Ratio of Tata Motors Ltd. was found in the above table no. 5.1. It shows slight fluctuation trend during study period. It is ranged between 19.40% in the years 2010-11 and 111.03% in the years 2014-15, with an average ratio of 16.28%. An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 150

The average ratio of this company was 16.28%, which is slight less than average ratio (16.425%) of sampled companies. So we can say that the company is not doing satisfactory. Gross Profit Ratio of Tata Motors shows up and down trends in every year. It was 16.48% in 2005-06 and 15.81% in 2006-07. Then it was increased in the next year; 17.73% in 2007-08. Then it was decreased in the next year; 16.12% in 2008-09. Then it was constantly increased for next two years; 18.43% in 2009-10 and 19.40% in 2010-11. Then constant decreased in next four years, 17.95% in 2011-12, 16.20% in 2012-13, 13.27% in 2013-14 and 11.03% in 2014-15. This way there was up and down in the Gross Profit Ratio of the company. Mahindra & Mahindra Ltd. It is clear from the table no. 5.1 that the Gross Profit Ratio of Mahindra & Mahindra Ltd. shows fluctuation trend during study period. It is ranged between 25.04% in the years 2009-10 and 17.95% in the year 2011-12 with an average ratio of 20.95%. The average ratio of this company was 20.95%, which is more than the average ratio (16.425%) of sampled companies. So company is doing better than average. Gross Profit Ratio of the company was 19.51% in 2005-06 and 22.01% in 2007-08. Then it was constantly two years decreased; 20.58% in 2008-09 and 20.44% in 2009-10. Then it was constantly decreased in next two years; 22.51% in 2010-11 and 17.95% in 2011-12. Then it was constantly increased in next three years; 19.02% in 2012-13, 20.33% in 2013-14 and 22.07% in 2014-15. So company has satisfactory average ratio compare to average ratio of the Car Manufacturing companies in India under study. Force Motors India Ltd.: It is clear from the table no. 5.1 that the Gross Profit Ratio of Force Motors India Ltd. shows fluctuation trend during study period. It is ranged between 13.78% in the years 2014-15 and 2.53% in the year 2008-09 with an average ratio of 8.98%. The average ratio of this company was 8.98%, which is very much less than the average ratio (16.425%) of sampled companies. So we can say that the company is not doing satisfactory. An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 151

Gross Profit Ratio of the company was 6.08% in 2005-06 and 7.81% in 2006-07. Then in next two years it was constantly reduced; 3.54% in 2007-08 and 2.53% in 2008-09. Then ratio increased in next two years; 11.36% in 2009-10 and 13.60% in 2010-11. Then ratio decreased in next two years; 10.24% in 2011-12 and 8.12% in 2012-13. Then ratio increased in next two years; 12.77% in 2013-14 and 13.78% in 2014-15. So company has no satisfactory ratio compare to average ratio of the Car Manufacturing companies in India under study. TREND AND TIME-SERIES ANALYSIS: Financial Year 2005-06: The above table no. 5.1 shows that in the financial year 2005-06 the Gross Profit Ratio of the sampled companies was ranged between 19.51% and 6.08%. The average ratio of the year was 15.09%, which was lower than the average ratio of the study period (16.424%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 17.92%, Tata Motors 16.84%, Mahindra & Mahindra 19.51% (highest) and Force Motors 6.08% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2006-07: The above table no. 5.1 shows that in the financial year 2006-07 the Gross Profit Ratio of the sampled companies was ranged between 22.01% and 7.81%. The average ratio of the year was 16.75%, which was higher than the average ratio of the study period (16.424%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 21.38%, Tata Motors 15.81%, Mahindra & Mahindra 22.01% (highest) and Force Motors 7.81% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2007-08: The above table no. 5.1 shows that in the financial year 2007-08 the Gross Profit Ratio of the sampled companies was ranged between 20.58% and 3.54%. The average ratio of the year was 14.73%, which was lower than the average ratio of the study period (16.424%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 17.06%, Tata Motors 17.73%, Mahindra & Mahindra An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 152

20.58% (highest) and Force Motors 3.54% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2008-09: The above table no. 5.1 shows that in the financial year 2008-09 the Gross Profit Ratio of the sampled companies was ranged between 20.44% and 2.53%. The average ratio of the year was 13.83%, which was lower than the average ratio of the study period (16.424%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 16.23%, Tata Motors 16.12%, Mahindra & Mahindra 20.44% (highest) and Force Motors 2.53% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2009-10: The above table no. 5.1 shows that in the financial year 2009-10 the Gross Profit Ratio of the sampled companies was ranged between 25.04% and 11.36%. The average ratio of the year was 17.85%, which was higher than the average ratio of the study period (16.424%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 16.57%, Tata Motors 18.43%, Mahindra & Mahindra 25.04% (highest) and Force Motors 11.36% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2010-11: The above table no. 5.1 shows that in the financial year 2010-11 the Gross Profit Ratio of the sampled companies was ranged between 22.51% and 13.60%. The average ratio of the year was 18.80%, which was higher than the average ratio of the study period (16.424%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 19.70%, Tata Motors 19.40%, Mahindra & Mahindra 22.51% (highest) and Force Motors 13.60% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2011-12: The above table no. 5.1 shows that in the financial year 2011-12 the Gross Profit Ratio of the sampled companies was ranged between 17.95% and 10.24%. The average ratio of the year was 15.88%, which was lower than the average ratio of the study period (16.424%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 17.37%, Tata Motors 17.95% (highest), Mahindra & An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 153

Mahindra 17.95% (highest) and Force Motors 10.24% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2012-13: The above table no. 5.1 shows that in the financial year 2012-13 the Gross Profit Ratio of the sampled companies was ranged between 21.34% and 8.12%. The average ratio of the year was 16.17%, which was lower than the average ratio of the study period (16.424%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 21.34% (highest), Tata Motors 16.20%, Mahindra & Mahindra 19.02% and Force Motors 8.12% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2013-14: The above table no. 5.1 shows that in the financial year 2013-14 the Gross Profit Ratio of the sampled companies was ranged between 23.44% and 12.77%. The average ratio of the year was 17.45%, which was higher than the average ratio of the study period (16.424%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 23.44% (highest), Tata Motors 13.27%, Mahindra & Mahindra 20.33% and Force Motors 12.77% (lowest). Therefore Maruti Suzuki had done better in the year. Financial Year 2014-15: The above table no. 5.1 shows that in the financial year 2014-15 the Gross Profit Ratio of the sampled companies was ranged between 23.89% and 11.03%. The average ratio of the year was 17.69%, which was higher than the average ratio of the study period (16.424%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 23.89% (highest), Tata Motors 11.03% (lowest), Mahindra & Mahindra 22.07% and Force Motors 13.78%. Therefore Maruti Suzuki had done better in the year. TABLE 5.2 - GROSS PROFIT RATIO (ANOVA TEST) Source of Variation SS df MS F F crit Between Years 88.88765 9 9.8764058 1.177821 2.250131 Between Company 852.3864 3 284.12879 33.88408 2.960351 Error 226.4036 27 8.3853169 Total 1167.678 39 An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 154

It is clear from the table No. 5.2 that the Gross Profit Ratio among the sampled car manufacturing companies was significant, because the calculated value of F (33.88408) was greater than that of the table value (2.96035) at 5% level of significance. Hence, the null hypothesis is rejected and alternative hypothesis is accepted. The difference between the years for same company was not significant, because the calculated value of F (1.177821) was less than that of the table value (2.25013) at 5% level of significance. Hence, the null hypothesis is accepted and alternative hypothesis is rejected. Therefore, it is concluded that there is significant difference in the Gross Profit Ratio among sampled car manufacturing companies under study. It is also concluded that there is no significant difference in the Gross Profit Ratio in between the years of sampled car manufacturing companies under study. 5.5.2 - Operating Profit Ratio: This ratio indicates the relationship between operating profit and net sales in the form of percentage. The operating profit margin reflects the efficiency with which the business enterprise produces each unit of product. There is no standard rule for operating profit ratio and it may differ from one type of business to other business. A high operating profit ratio is the sign of managerial efficiency. A low ratio should be carefully investigated and compared with the ratios of similar business enterprises operating in the industry, to diagnoses as also to remedies the problem. Operating profit arrived by adjusting all non-operating expenses and income in net profit in the other words; we can say profits earlier than depreciation and taxes (EBDIT). A constent high ratio indicated effective and efficient operation of business. It is calculated as under: Operating Profit Operating Profit Ratio = ------------------------ x 100 Net Sales An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 155

TABLE 5.3 - OPERATING PROFIT RATIO (%) YEAR MARUTI TATA MAHINDRA FORCE AVERAGE 2005-06 15.29 10.68 10.71-4.49 8.05 2006-07 14.88 9.70 11.45-6.10 7.48 2007-08 14.12 10.53 10.23-5.04 7.46 2008-09 9.18 6.71 9.81-9.70 4.00 2009-10 12.74 11.40 16.29 3.84 11.07 2010-11 9.93 9.90 14.72 9.22 10.94 2011-12 7.06 7.69 11.83 5.82 8.10 2012-13 9.70 3.81 11.64 2.73 6.97 2013-14 11.66-2.65 11.65 4.78 6.36 2014-15 13.43-3.40 10.71 6.21 6.74 Maximum 15.29 11.40 16.29 9.22 11.07 Minimum 7.06-3.40 9.81-9.70 4.00 Average 11.799 6.437 11.904 0.727 7.717 Sources: computed from the annual reports & accounts of the perspective companies. 20 CHART 5.2 - OPERATING PROFIT MARGIN (%) 15 10 5 0-5 Maruti Tata Mahindra Force -10-15 CROSS-SECTIONAL RATIO ANALYSIS Maruti Suzuki India Ltd.: It is clear from the table no. 5.3 that the Operating Profit Ratio of Maruti Suzuki India Ltd. shows fluctuation trend during study period. It is ranged between 15.29% in the year 2005-06 and 7.06% in the year 2011-12 with an average ratio of 11.799%. The An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 156

average ratio of this company was 11.799%, which is more than the average ratio (7.717%) of sampled companies. So company is doing better than average. Gross Profit Ratio company was 15.29% in the year 2005-06. Then it was decreased constantly for next three years; 14.88% in 2006-07, 14.12% in 2007-08 and 9.18% in 2008-09. Then it was increased in next year; 12.74% in 2009-10. Then it was decreased constantly for next two years; 9.93% in 2010-11 and 7.06% in 2011-12. Then again for three year it was constantly increased; 9.70% in 2012-13, 11.66% in 2013-14 and 13.43% in 2014-15. So company has satisfactory average ratio compare to average ratio of the Car Manufacturing companies in India under study. Tata Motors Ltd.: The Operating Profit Ratio of Tata Motors Ltd. was found in the above table no. 5.3. It shows slight fluctuation trend during study period. It is ranged between 11.40% in the years 2009-10 and -3.4% in the years 2014-15, with an average ratio of 6.437%. The average ratio of this company was 6.437%, which is less than average ratio (7.717%) of sampled companies. Operating Profit Ratio of Tata Motors shows up and down trends in every year. It was 10.68% in 2005-06 and 9.70% in 2006-07. Then it was increased in the next year; 10.53% in 2007-08. Then it was decreased in the next year; 6.71% in 2008-09. Then it was increased in next year; 11.4% in 2009-10. Then for next five years the ratio was constantly decreased; 9.90% in 2010-11, 7.69% in 2011-12, 3.81% in 2012-13, - 2.65% in 2013-14 and -3.4% in 2014-15. This way there was up and down in the Gross Profit Ratio of the company. Mahindra & Mahindra Ltd. It is clear from the table no. 5.3 that the Operating Profit Ratio of Mahindra & Mahindra Ltd. shows fluctuation trend during study period. It is ranged between 25.04% in the years 2009-10 and 17.95% in the year 2011-12 with an average ratio of 20.95%. The average ratio of this company was 20.95%, which is more than the average ratio (16.425%) of sampled companies. So company is doing better than average. Operating Profit Ratio of the company was 19.51% in 2005-06 and 22.01% in 2007-08. Then it was constantly two years decreased; 20.58% in 2008-09 and 20.44% in 2009-10. Then it was constantly decreased in next two years; 22.51% in 2010-11 and An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 157

17.95% in 2011-12. Then it was constantly increased in next three years; 19.02% in 2012-13, 20.33% in 2013-14 and 22.07% in 2014-15. So company has satisfactory average ratio compare to average ratio of the Car Manufacturing companies in India under study. Force Motors India Ltd.: It is clear from the table no. 5.3 that the Operating Profit Ratio of Force Motors India Ltd. shows fluctuation trend during study period. It is ranged between 13.78% in the years 2014-15 and 2.53% in the year 2008-09 with an average ratio of 8.98%. The average ratio of this company was 8.98%, which is very much less than the average ratio (16.425%) of sampled companies. So company is not doing better than average. Operating Profit Ratio of the company was 6.08% in 2005-06 and 7.81% in 2006-07. Then in next two years it was constantly reduced; 3.54% in 2007-08 and 2.53% in 2008-09. Then ratio increased in next two years; 11.36% in 2009-10 and 13.60% in 2010-11. Then ratio decreased in next two years; 10.24% in 2011-12 and 8.12% in 2012-13. Then ratio increased in next two years; 12.77% in 2013-14 and 13.78% in 2014-15. So company has no satisfactory ratio compare to average ratio of the Car Manufacturing companies in India under study. TREND AND TIME-SERIES ANALYSIS: Financial Year 2005-06: The above table no. 5.3 shows that in the financial year 2005-06 the Operating Profit Ratio of the sampled companies was ranged between 15.29% and -4.49%. The average ratio of the year was 8.05%, which was higher than the average ratio of the study period (7.717%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 15.29% (highest), Tata Motors 10.68%, Mahindra & Mahindra 10.71% and Force Motors -4.49% (lowest). Therefore Maruti Suzuki had done better in the year. Financial Year 2006-07: The above table no. 5.3 shows that in the financial year 2006-07 the Operating Profit Ratio of the sampled companies was ranged between 14.88% and -6.10%. The average ratio of the year was 7.48%, which was lower than the average ratio of the study period (7.717%) of the sampled companies. Ratios of the sampled companies in An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 158

the year were; Maruti Suzuki 14.88% (highest), Tata Motors 9.70%, Mahindra & Mahindra 11.45% and Force Motors -6.10% (lowest). Therefore Maruti Suzuki had done better in the year. Financial Year 2007-08: The above table no. 5.3 shows that in the financial year 2007-08 the Operating Profit Ratio of the sampled companies was ranged between 14.12% and -5.04%. The average ratio of the year was 7.46%, which was lower than the average ratio of the study period (7.717%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 14.12% (highest), Tata Motors 10.53%, Mahindra & Mahindra 10.23% and Force Motors -5.04% (lowest). Therefore Maruti Suzuki had done better in the year. Financial Year 2008-09: The above table no. 5.3 shows that in the financial year 2008-09 the Operating Profit Ratio of the sampled companies was ranged between 9.81% and -9.07%. The average ratio of the year was 4.00%, which was lower than the average ratio of the study period (7.717%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 9.18%, Tata Motors 6.71%, Mahindra & Mahindra 9.81% (highest) and Force Motors -9.07% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2009-10: The above table no. 5.3 shows that in the financial year 2009-10 the Operating Profit Ratio of the sampled companies was ranged between 16.29% and 3.84%. The average ratio of the year was 11.07%, which was higher than the average ratio of the study period (7.717%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 12.74%, Tata Motors 11.40%, Mahindra & Mahindra 16.29% (highest) and Force Motors 3.84% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2010-11: The above table no. 5.3 shows that in the financial year 2010-11 the Operating Profit Ratio of the sampled companies was ranged between 14.72% and 9.22%. The average ratio of the year was 10.94%, which was higher than the average ratio of the An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 159

study period (7.717%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 9.93%, Tata Motors 9.90%, Mahindra & Mahindra 14.72% (highest) and Force Motors 9.22% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2011-12: The above table no. 5.3 shows that in the financial year 2011-12 the Operating Profit Ratio of the sampled companies was ranged between 11.83% and 5.82%. The average ratio of the year was 8.10%, which was higher than the average ratio of the study period (7.717%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 7.06%, Tata Motors 7.69%, Mahindra & Mahindra 11.83% (highest) and Force Motors 5.82% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2012-13: The above table no. 5.3 shows that in the financial year 2012-13 the Operating Profit Ratio of the sampled companies was ranged between 11.64% and 2.73%. The average ratio of the year was 6.97%, which was lower than the average ratio of the study period (7.717%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 9.70%, Tata Motors 3.81%, Mahindra & Mahindra 11.64% (highest) and Force Motors 2.73% (lowest). Therefore Mahindra & Mahindra had done better in the year. Financial Year 2013-14: The above table no. 5.3 shows that in the financial year 2013-14 the Operating Profit Ratio of the sampled companies was ranged between 11.66% and -2.65%. The average ratio of the year was 6.36%, which was lower than the average ratio of the study period (7.717%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 11.66% (highest), Tata Motors -2.65%, Mahindra & Mahindra 11.65% and Force Motors 4.78% (lowest). Therefore Maruti Suzuki had done better in the year. Financial Year 2014-15: The above table no. 5.3 shows that in the financial year 2014-15 the Operating Profit Ratio of the sampled companies was ranged between 13.43% and -3.40%. The An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 160

average ratio of the year was 6.74%, which was lower than the average ratio of the study period (7.717%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 13.43% (highest), Tata Motors -3.40%, Mahindra & Mahindra 10.71% and Force Motors 6.21% (lowest). Therefore Maruti Suzuki had done better in the year. TABLE 5.4 - OPERATING PROFIT RATIO (ANOVA TEST) Source of Variation SS df MS F F crit Between Years 156.7265 9 17.41406 0.793347 2.250131 Between Company 846.9219 3 282.3073 12.86131 2.960351 Error 592.653 27 21.95011 Total 1596.301 39 It is clear from the table No. 5.4 that the Operating Profit Ratio among the sampled car manufacturing companies was significant, because the calculated value of F (12.86131) was greater than that of the table value (2.96035) at 5% level of significance. Hence, the null hypothesis is rejected and alternative hypothesis is accepted. The difference between the years for same company was not significant, because the calculated value of F (0.793347) was less than that of the table value (2.25013) at 5% level of significance. Hence, the null hypothesis is accepted and alternative hypothesis is rejected. Therefore, it is concluded that there is significant difference in the Operating Profit Ratio among sampled car manufacturing companies under study. It is also concluded that there is no significant difference in the Operating Profit Ratio in between the years of sampled car manufacturing companies under study. 5.5.3 - Return on Capital Employed Ratio: Return on Capital Employed Ratio is one of the most important profitability ratios and the most important measure of performance. Return on capital employed is a proper tool to measure the overall performance and earning power of the capital invested. ROI is the basic profitability ratio. This ratio establishes relationship between net profit (before interest, tax and dividend) and capital employed. It is expressed as a percentage on investment. The term investment here refers to long-term funds invested in business. This investment is called capital employed. It shows how the management has used the funds provided by owners and creditors. The comparison of this ratio with the ratio of other organization in similar business will An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 161

reveal the relative operating efficiency of the business enterprise. The main goal of making investment in any business is to obtain satisfactory return on the capital invested. Hence, the return on capital employed is used to measure success of a business. In day to day use the term capital employed is used to indicate the total investment in the firm whether owners or borrowed. The capital employed in a firm may be defined in a number of ways and the two most widely accepted definitions are Gross Capital Employed and Net Capital Employed. Gross Capital Employed usually comprises the total assets used in the business while net capital employed consists of the total assets of the business less its current liabilities. 5.5.3 (i) Return on gross capital employed: As defined earlier gross capital employed is the total of assets (except fictitious assets). Alternatively, it is the quantum of liabilities plus shareholders equity. The numerator, i.e. net profit before interest and taxes (EBIT) has been taken for computing this ratio. Net Profit before Interest and Taxes Return on Gross Capital Employed = -------------------------------------------- x 100 Gross Capital Employed TABLE 5.5 - RETURN ON GROSS CAPITAL EMPLOYED (%) YEAR MARUTI TATA MAHINDRA FORCE AVERAGE 2005-06 32.52 28.46 29.81-9.54 20.31 /2006-07 31.03 27.91 28.16-3.72 20.85 2007-08 27.42 21.63 21.58-9.89 15.19 2008-09 17.54 6.73 12.12 57.68 23.52 2009-10 28.93 12.98 27.40 13.26 20.64 2010-11 22.32 10.34 29.02 18.81 20.12 2011-12 13.53 8.36 24.91 86.99 33.45 2012-13 15.93 4.68 25.95 2.29 12.21 2013-14 16.92 0.93 22.55 5.76 11.54 2014-15 21.24-6.77 20.05 9.91 11.11 Maximum 32.52 28.46 29.81 86.99 33.45 Minimum 13.53-6.77 12.12-9.89 11.11 Average 22.740 11.525 24.154 17.154 18.893 Sources: computed from the annual reports & accounts of the perspective companies. An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 162

CHART 5.3 - RETURN ON NET CAPITAL EMPLOYED 100 80 60 40 20 Maruti Tata Mahindra Force 0-20 CROSS-SECTIONAL RATIO ANALYSIS: Maruti Suzuki India Ltd.: It is clear from the table no. 5.5 that the Return on Gross Capital Employed of Maruti Suzuki India Ltd. shows fluctuation trend during study period. It is ranged between 32.52% in the year 2005-06 and 13.53% in the year 2011-12 with an average ratio of 22.74%. The average ratio of this company was 22.74%, which is more than the average ratio (18.89%) of sampled companies. So company is doing better than average. The return on Gross Capital Employed of the company was 32.52% in the year 2005-06. Then it was decreased constantly for next three years; 31.03% in 2006-07, 27.42% in 2007-08 and 17.42% in 2008-09. Then it was increased in next year; 28.93% in 2009-10. Then it was decreased constantly for next two years; 22.32% in 2010-11 and 13.53% in 2011-12. Then again for three year it was constantly increased; 15.93% in 2012-13, 16.92% in 2013-14 and 21.24% in 2014-15. So company has satisfactory average ratio compare to average ratio of the Car Manufacturing companies in India under study. An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 163

Tata Motors Ltd.: The Return on Gross Capital Employed of Tata Motors Ltd. was found in the above table no. 5.5. It shows slight fluctuation trend during study period. It is ranged between 28.46% in the years 2005-06 and -6.77% in the years 2014-15, with an average ratio of 11.52%. The average ratio of this company was 11.52%, which is less than average ratio (18.89%) of sampled companies. So we can say that the company is not doing satisfactory. The Return on Gross Capital Employed of Tata Motors shows up and down trends in every year. It was 28.46% in 2005-06 Then it was decreased constantly for next three years; 27.91% in 2006-07, 21.63% in 2007-08 and 6.73% in 2008-09. Then it was increased in the next year; 12.98% in 2009-10. Then it was decreased constantly for next five years; 10.34% in 2010-11 and 8.36% in 2011-12, 4.68% in 2012-13, 0.93% in 2013-14 and -6.77% in 2014-15. This way there was up and down in the Gross Profit Ratio of the company. Mahindra & Mahindra Ltd. It is clear from the table no. 5.5 that the Return on Gross Capital Employed Operating Profit Ratio of Mahindra & Mahindra Ltd. shows fluctuation trend during study period. It is ranged between 29.81% in the years 2005-06 and 12.12% in the year 2008-09 with an average ratio of 24.15%. The average ratio of this company was 24.15%, which is more than the average ratio (18.89%) of sampled companies. So company is doing better than average. The Return on Gross Capital Employed of the company was 29.81% in 2005-06. Then it was constantly decreased in next three years; 28.16% in 2006-07, 21.58% in 2007-08 and 12.12% in 2008-09. Then it was increased constantly in next two years; 27.40% in 2009-10 and 29.02% in 2010-11. Then it was decreased in the next year; 24.91% in 2011-12. Then it was increased in the next year; 25.95% in 2012-13.Then it was constantly decreased in next two years; 22.55% in 202013-14 and 20.05% in An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 164

2014-15. So company has satisfactory average ratio compare to average ratio of the Car Manufacturing companies in India under study. Force Motors India Ltd.: It is clear from the table no. 5.5 that the Return on Gross Capital Employed of Force Motors India Ltd. shows fluctuation trend during study period. It is ranged between 86.99% in the years 2011-12 and -9.89% in the year 2007-08 with an average ratio of 17.15%. The average ratio of this company was 17.15%, which is less than the average ratio (18.89%) of sampled companies. So company is not doing better than average. The Return on Gross Capital Employed of the company was -9.54% in 2005-06 and - 3.72% in 2006-07. Then in next year it was reduced; -9.89% in 2007-08. Then in next year it was increased very highly; 57.68% in 2008-09. Then in next year it was reduced; 13.26% in 2009-10. Then ratio increased constantly in next two years; 18.81% in 2010-11 and 86.99% in 2011-12. Then in next year it was highly reduced; 2.29% in 2012-13. Then ratio increased in next two years; 5.76% in 2013-14 and 9.91% in 2014-15. So company has no satisfactory ratio compare to average ratio of the Car Manufacturing companies in India under study. TREND AND TIME-SERIES ANALYSIS: Financial Year 2005-06: The above table no. 5.5 shows that in the financial year 2005-06 the Return on Gross Capital Employed of the sampled companies was ranged between 32.52% and - 9.54%. The average ratio of the year was 20.31%, which was higher than the average ratio of the study period (18.893%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 32.52% (highest), Tata Motors 28.45%, Mahindra & Mahindra 29.81% and Force Motors -9.54% (lowest). Therefore Maruti Suzuki had done better in the year. Financial Year 2006-07: The above table no. 5.5 shows that in the financial year 2006-07 the Return on Gross Capital Employed of the sampled companies was ranged between 31.03% and - 3.72%. The average ratio of the year was 20.85%, which was higher than the average An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 165

ratio of the study period (18.893%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 31.03% (highest), Tata Motors 27.91%, Mahindra & Mahindra 28.16% and Force Motors -3.72% (lowest). Therefore Maruti Suzuki had done better in the year. Financial Year 2007-08: The above table no. 5.5 shows that in the financial year 2007-08 the Return on Gross Capital Employed of the sampled companies was ranged between 27.42% and - 9.89%. The average ratio of the year was 15.19%, which was lower than the average ratio of the study period (18.893%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 27.42% (highest), Tata Motors 21.63%, Mahindra & Mahindra 21.58% and Force Motors -9.89% (lowest). Therefore Maruti Suzuki had done better in the year. Financial Year 2008-09: The above table no. 5.5 shows that in the financial year 2008-09 the Return on Gross Capital Employed of the sampled companies was ranged between 57.68% and 6.73%. The average ratio of the year was 23.52%, which was higher than the average ratio of the study period (18.893%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 17.54%, Tata Motors 6.73% (lowest), Mahindra & Mahindra 12.12% and Force Motors 57.68% (highest). Therefore Force Motors had done better in the year. Financial Year 2009-10: The above table no. 5.5 shows that in the financial year 2009-10 the Return on Gross Capital Employed of the sampled companies was ranged between 28.93% and 12.98%. The average ratio of the year was 20.64%, which was higher than the average ratio of the study period (18.893%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 28.93% (highest), Tata Motors 12.98 (lowest)%, Mahindra & Mahindra 27.40% and Force Motors 13.26%. Therefore Maruti Suzuki had done better in the year. Financial Year 2010-11: The above table no. 5.5 shows that in the financial year 2010-11 the Return on Gross Capital Employed of the sampled companies was ranged between 29.02% and 10.34%. The average ratio of the year was 20.12%, which was higher than the average An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 166

ratio of the study period (18.893%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 22.32%, Tata Motors 10.34% (lowest), Mahindra & Mahindra 29.02% (highest) and Force Motors 18.81%. Therefore Mahindra & Mahindra had done better in the year. Financial Year 2011-12: The above table no. 5.5 shows that in the financial year 2011-12 the Return on Gross Capital Employed of the sampled companies was ranged between 86.99% and 8.36%. The average ratio of the year was 33.45%, which was higher than the average ratio of the study period (18.893%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 13.53%, Tata Motors 8.36% (lowest), Mahindra & Mahindra 24.91% (highest) and Force Motors 86.99%. Therefore Mahindra & Mahindra had done better in the year. Financial Year 2012-13: The above table no. 5.5 shows that in the financial year 2012-13 the Return on Gross Capital Employed of the sampled companies was ranged between 25.95% and 2.29%. The average ratio of the year was 12.21%, which was lower than the average ratio of the study period (18.893%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 15.93%, Tata Motors 4.68%, Mahindra & Mahindra 25.95% (highest) and Force Motors 2.29 (lowest)%. Therefore Mahindra & Mahindra had done better in the year. Financial Year 2013-14: The above table no. 5.5 shows that in the financial year 2013-14 the Return on Gross Capital Employed of the sampled companies was ranged between 22.55% and 0.93%. The average ratio of the year was 11.54%, which was lower than the average ratio of the study period (18.893%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 16.92%, Tata Motors 0.93% (lowest), Mahindra & Mahindra 22.55% (highest) and Force Motors 5.76%. Therefore Mahindra & Mahindra had done better in the year. Financial Year 2014-15: The above table no. 5.5 shows that in the financial year 2014-15 the Return on Gross Capital Employed of the sampled companies was ranged between 21.24% and - 6.77%. The average ratio of the year was 11.11%, which was lower than the average An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 167

ratio of the study period (18.893%) of the sampled companies. Ratios of the sampled companies in the year were; Maruti Suzuki 21.24% (highest), Tata Motors -6.77% (lowest), Mahindra & Mahindra 20.05% and Force Motors 9.91%. Therefore Maruti Suzuki had done better in the year. TABLE 5.6 - RETURN ON GROSS CAPITAL EMPLOYED (ANOVA TEST) Source of Variation SS df MS F F crit Between Years 1666.843 9 185.20474 0.554588 2.250131 Between Company 997.9564 3 332.65215 0.996114 2.960351 Error 9016.648 27 333.94992 Total 11681.45 39 It is clear from the table No.5.6 that the Return on Gross Capital Employed among the sampled car manufacturing companies was significant, because the calculated value of F (0.996114) was greater than that of the table value (2.96035) at 5% level of significance. Hence, the null hypothesis is accepted and alternative hypothesis is rejected. The difference between the years for same company was not significant, because the calculated value of F (0.554588) was less than that of the table value (2.25013) at 5% level of significance. Hence, the null hypothesis is accepted and alternative hypothesis is rejected. Therefore, it is concluded that there is no significant difference in the Return on Gross Capital Employed among sampled car manufacturing companies under study. It is also concluded that there is no significant difference in the Return on Gross Capital Employed in between the years of sampled car manufacturing companies under study. 5.5.3 (ii) Return on Net Capital Employed: Net Capital Employed is the total of assets (except fictitious assets) minus current liabilities. Alternatively, it is the quantum of permanent capital e.g. Non-current liabilities plus shareholder s equity, the numerator, e.g. Net profit before interest and taxes (EBIT). Net Profit before Interest and Taxes Return on Net Capital Employed = -------------------------------------------- x 100 Net Capital Employed An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 168

TABLE 5.7 - RETURN ON NET CAPITAL EMPLOYED YEAR MARUTI TATA MAHINDRA FORCE AVERAGE 2005-06 47.04 135.52 54.48-32.85 51.05 2006-07 44.70 77.76 47.99-19.81 37.66 2007-08 38.72 75.18 33.97-57.02 22.71 2008-09 25.94 11.80 19.53 498.89 139.04 2009-10 38.56 28.12 42.63 59.60 42.22 2010-11 30.80 19.50 50.20 86.03 46.63 2011-12 20.15 24.77 44.82 129.92 54.92 2012-13 22.60 9.30 45.42 3.74 20.26 2013-14 24.48 1.53 39.07 9.36 18.61 2014-15 31.97-10.44 34.07 17.71 18.33 Maximum 47.04 135.52 54.48 498.89 139.04 Minimum 20.15-10.44 19.53-57.02 18.33 Average 32.495 37.306 41.217 69.557 45.144 Sources: computed from the annual reports & accounts of the perspective companies. 600 500 CHART 5.4 - RETURN ON NET CAPITAL EMPLOYED 400 300 200 100 0 Maruti Tata Mahindra Force -100 CROSS-SECTIONAL RATIO ANALYSIS Maruti Suzuki India Ltd.: It is clear from the table no. 5.7 that the Return on Net Capital Employed of Maruti Suzuki India Ltd. shows fluctuation trend during study period. It is ranged between 47.04% in the year 2005-06 and 20.15% in the year 2011-12 with an average ratio of 32.495%. The average ratio of this company was 32.495%, which is less than the An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 169

average ratio (45.144%) of sampled companies. So company is not doing better than average. The return Net Capital Employed of the company was 47.04% in the year 2005-06. Then it was decreased constantly for next three years; 44.70% in 2006-07, 38.72% in 2007-08 and 25.94% in 2008-09. Then it was increased in next year; 38.56% in 2009-10. Then it was decreased constantly for next two years; 30.80% in 2010-11 and 20.15% in 2011-12. Then again for three year it was constantly increased; 22.60% in 2012-13, 24.48% in 2013-14 and 31.97% in 2014-15. So company has satisfactory average ratio compare to average ratio of the Car Manufacturing companies in India under study. Tata Motors Ltd.: The Return on Net Capital Employed of Tata Motors Ltd. was found in the above table no. 5.7. It shows fluctuation trend during study period. It is ranged between 135.52% in the years 2005-06 and -10.44% in the years 2014-15, with an average ratio of 37.306%. The average ratio of this company was 37.306%, which is less than average ratio (45.144%) of sampled companies. So we can say that the company is not doing satisfactory. The Return on Net Capital Employed of Tata Motors shows up and down trends in every year. It was 135.52% in 2005-06. Then it was decreased constantly for next three years; 77.76% in 2006-07, 75.18% in 2007-08 and 11.80% in 2008-09. Then it was increased in the next year; 28.12% in 2009-10. Then it was decreased in next year; 19.50% in 2010-11. Then it was increase in next year 24.77% in 2011-12. Then it was decreased constantly for next three years; 9.30% in 2012-13, 1.53% in 2013-14 and -10.44% in 2014-15. This way there was up and down in the Return on Net Capital Employed Ratio of the company. Mahindra & Mahindra Ltd. It is clear from the table no. 5.7 that the Return on Net Capital Employed Operating Profit Ratio of Mahindra & Mahindra Ltd. shows fluctuation trend during study period. It is ranged between 54.48% in the years 2005-06 and 19.52% in the year 2008-09 with an average ratio of 41.217%. The average ratio of this company was An Appraisal of Financial Performance of Selected Car Manufacturing Companies in India 170