Corporate Finance

138
Corporate Finance

HLL Wipro Ltd RIL TISCO TELCO

EBIT/interest 63.16 11.23 3.36 1.64 0.99
PAT/net sales 10.67 12.91 13.24 6.46 –2.75
(percent)
PAT/net worth 56.61 53.47 22.60 13.78 –6.62
(percent)
EBDIT/capital 76.37 72.43 22.31 16.52 12.23
employed (percent)

Source: Prowess Database.

REFERENCES

Altman, E J (1968). ‘Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy’, Journal of Finance,
No. 23.
Barnes, Paul (1987). ‘The Analysis and Use of Financial Ratios: A Review Article’, Journal of Business Finance and Accounting,
Vol. 14, No. 4.
Firer, Colin (1999). ‘Driving Financial Performance Through the DuPont Identity: A Strategic Use of Financial Analysis and
Planning’, Financial Practice and Education, Spring–Summer.
Houghton, Keith A and David Woodliff (1987). ‘Financial Ratios: The Prediction of Corporate “Success” and Failure’, Journal
of Business Finance and Accounting, Vol. 14, No. 4.
Hubbard, Carl, Daniel Walz, and Diane Walz (1997). ‘An Empirical Test of the Percent-of-Sales Financial Forecasting Model’,
Financial Practice and Education, Fall–Winter.
Matsumoto, Keishiro, Melkote Shivaswamy, and James Hoban Jr. (1995). ‘Security Analysts’ Views of the Financial Ratios of
Manufacturers and Retailers’, Financial Practice and Education, Vol. 5, No. 2, pp. 44–55.
Taggart, Robert (1999). ‘Spreadsheet Exercises for Linking Financial Statements, Valuation and Capital Budgeting’, Financial
Practice and Education, Vol. 9, No. 1, pp. 102–10.

CONCEPT TEST

State whether the statements are true (T) or False (F):

1. A firm with high ROE is necessarily better than that with low ROE.


2. ROA = Gross profit margin (percent) × Asset turnover.


3. ROE = ROA × Financial leverage.


4. Return on equity measures the efficiency with which the firm employs total capital.


5. Return on assets is a basic measure of the efficiency with which a company allocates and manages its resources.


6. Asset turnover =
   Assets

Sales

.

7. Financial leverage refers to employing debt in the capital structure.


8. Return on equity increases as long as the return on assets is more than the post tax interest cost of debt.


9. Interest or fixed charges coverage measures the cushion available to the firm in servicing fixed financial obligations.

QUESTIONS

1. The balance sheets and income statements for Avon Granites (identity has been disguised) are given here:

Table contd.