Ratio Analysis of Mahindra Lifespace

Developers
 FINANCIAL RATIO ANALYSIS

Ratio analysis is a study of analyzing the financial statement by computing ratios . In

other words , ratio analysis is a process of determining and interpreting relationship
between the items of financial statements to provide a meaningful understanding of the
performance and financial position.

“Ratio analysis is a study of relationship among various financial factors in a business.”

In the world of finance, ratios indicate the performance of companies in key functions
and help the managers and investors analyze the operations and sustainability of the
businesses.
 Uses of ratio analysis
Ratios calculated from the information in financial statements help investors in three ways:
 Simplify financial statements :
Ratio analysis simplifies information given in companies’ financial statements. Investors can
easily obtain data from a few ratios instead of trying to understand entire financial statements.
 They help detect a problematic trend :
Each type of ratio analyzed over a long period can point to a defect in the functioning of a
business. The analysis can also predict the future performance of a company in a particular aspect
of business.
 Facilitate comparisons:
Ratios not only helps to analyze the performance of a company but also facilitate a comparison of
the performances between two or more companies within an industry or a sector.
For example, two companies in the traditional manufacturing sector can be compared on the basis
of their current ratios. A company with a current ratio of 3:1 can more easily clear its current debts
than one with a current ratio of 1.5:1, for example.
 Limitations of Ratios
The ratio analysis is one of the most powerful tools of financial management. Though ratios
are simple to calculate and easy to understand, they suffer from some serious limitations:
1. Limited Use of a Single Ratio:
 A single ratio, usually, does not convey much of a sense. To make a better interpretation a
number of ratios have to be calculated which is likely to confuse the analyst than help him in
making any meaningful conclusion.
2. Lack of Adequate Standards:
 There are no well accepted standards or rules of thumb for all ratios which can be accepted as
norms. It renders interpretation of the ratios difficult.
3. Inherent Limitations of Accounting:
 Like financial statements, ratios also suffer from the inherent weakness of accounting records
such as their historical nature. Ratios of the past are not necessarily true indicators of the
future.
 REAL ESTATE SECTOR

 The real estate sector is one of the most globally recognized sectors. In India, real
estate is the second largest employer after agriculture and is slated to grow at 30%
over the next decade.
 The growth of this sector is well complemented by the growth of the corporate
environment and the demand for office space as well as urban and semi-urban
accommodations.
 It is also expected that this sector will incur more non-resident India (NRI)
investments in both the short term and long term.
 Real estate sector in India is expected to reach a market size of US$ 1 trillion by
2030 from US$ 120 billion in 2017 and contribute 13 per cent of the country’s
GDP by 2025.
Mahindra Lifespace Developers

Our Mission
"Transforming urban landscapes by creating
sustainable communities."
 About Mahindra Lifespace Developers
 Mahindra Lifespace is one of the leading real estate development companies in India. Mahindra
Lifespace Developers Ltd. is the real state and infrastructure development arm of Mahindra &
Mahindra Ltd. The company is committed to transforming India's urban landscape through its
residential development’s under the Mahindra 'Lifespace' and Happinest brands.
 The Company has also been ranked 22nd amongst India’s great mid-size workplaces – 2018, by the
Great Places To Work Institute.
 The Managing Director & CEO of Mahindra lifespace is Sangeeta Prasad appointed on 1St October
2018.
 The philosophy of the Company in relation to corporate governance is to ensure transparency in all
its operations, make disclosures, and enhance shareholder value without compromising in any way
on compliance with the laws and regulations.
CLASSIFICATION OF RATIOS
 LIQUIDITY RATIOS
Liquidity ratios are those ratio which are computed to evaluate the capacity of the entity to meet its
short-term liabilities.
Commonly used liquidity ratios are:

i) CURRENT RATIO :
Current ratio is a relationship of current assets to current liabilities and computed to assess the
short-term financial position of the enterprise. It means Current Ratio is an indicator of enterprise's
ability to meet its short-term obligations.
ii) QUICK RATIO or LIQUID RATIO :

• Quick ratio is the relationship of liquid assets with current liabilities and is computed to assess
the short-term liquidity of the enterprises.
• Liquid assets are the assets which are either in form of cash and cash equivalent or can be
converted into cash within a short period. Liquidity ratio is a indicator of short-term debt paying
capacity of an enterprise.
• A high Liquidity Ratio compared to Current Ratio may indicate understocking while a low
Liquidity Ratio indicates overstocking.

“ Quick Ratio of 1:1 is an accepted standard ,since for every rupee of current liabilities there is a
rupee or quick assets.”

or
 CASH RATIO
 The cash ratio is the ratio of a company’s total cash and cash equivalents to its
current liabilities.
 The cash ratio is generally a more conservative look at a company’s ability to cover
its liabilities than many other liquidity ratios because other assets, including
accounts receivable, are left out of the equation.

Cash Ratio = Cash / Current liabilities

 SOLVENCY RATIO

• Solvency Ratio are those ratios which show the ability of the
enterprise to meet its long-term liabilities.
• General rule of thumb is, a solvency ratio of greater than 20% is
considered financially healthy.
• The lower a companies solvency ratio, the greater the profitability that
the company will default on its debt obligations.
• Some of the solvency ratios are:
i. Proprietary Ratio
ii. Interest Coverage Ratio
 PROPRIETOR’S RATIO

• The proprietary ratio (also known as the equity ratio) is the proportion
of shareholder’s Equity to total assets and as such provides a rough estimate of
the amount of capitalization currently used to support a business.
• If the ratio is high, this indicates that a company has a sufficient amount
of equity to support the functions of the business.
• Conversely, a low ratio indicates that a business may be making use of too
much debt or trade payables.

Following formula is used to calculate proprietary ratio:

Proprietary ratio = Proprietor's funds / Total assets
 INTEREST COVERAGE RATIO
• The ratio establishes the relationship between net profit before interest and
tax and interest payable on long term debts.
• Interest is a charge on profit. It is very useful for debenture holders.
• The main objective to calculate this ratio is to ascertain the amount of
profit to cover interest.
It is calculated as follows:
Interest Coverage Ratio = EBIT/ Interest expenses
WORKING CAPITAL TURNOVER RATIO

• Working capital turnover ratio is computed by dividing the net sales by

average working capital.
• It indicates a company’s effectiveness in using its working capital.
• The working capital turnover ratio is calculated as net annual sales divided by
the average amount of working capital during the same 12 months period.

Formula:
Working Capital Turnover Ratio = Net Annual Sales/ Avg. amount of working capital
during the same 12 month period
 Gross Profit Ratio

 It is a profitability ratio that shows the relationship between gross profit and total net sales
revenue.
 It is a popular tool to evaluate the operational performance of the business.
 It is very important for any business. It should be sufficient to cover all expenses and
provide for profit.
 A consistent improvement in gross profit ratio over the past years is the indication of
continuous improvement.

Formula:
Gross Profit Ratio = Gross profit/ Net sales
 Net Profit
• This ratio measures the overall profitability of company considering all direct as
well as indirect cost.
• A high ratio represents a positive return in the company and better the company is.

Formula:
Net Profit = Net Profit/ Sales
or
Net Profit = Gross Profit + Indirect Income – Indirect Expenses
 Operating Expenses Ratio
 It is a measure of what it costs to operate a piece of property compared to the
income that the property brings in.
 It is calculated by dividing a property’s operating expense by its gross operating
income and used for comparing the expenses of similar properties.

Formula:
Operating Expenses = Operating Expense/ Sales
 Assets Turnover Ratio
 It is an efficiency ratio that measures a company’s ability to generate sales from its assets by
comparing net sales with average total assets.
 This ratio shows how efficiently a company can use its assets to generate sales.
 Higher turnover ratios means that the company is using its assets more efficiently.
 Lower ratios means that the company is not using its assets efficiently and most likely is
having management or production problems.

Formula:
Assets Turnover Ratio = Net Sales/Avg. Total Assets
 ROTA
 It is a ratio that measures a company’s earnings before interest and taxes relative to
its total net assets.
 The ratio is considered to be an indicator of how effectively a company is using its
assets to generate earnings before contractual obligations must be paid.
ROTA = Net Income/ Avg. Total Assets
OR
ROTA = PAT/ Total Assets
 RONA
 Return on net assets is calculated by dividing a company’s net income in a
given period by total value of both its fixed assets and its working capital.
 Increase in Rona indicate higher levels of profitability.
RONA = Net Income/ Fixed+ Working Capital
OR
RONA = PAT/ Net Assets
 OBSERVATION
Current ratio:
 Among all the three years, current ratio in the year 2016 is the best which is 2.60 followed by the year
2018 which is 2.57 and then 2017.
 Overall the current ratio of the company is good as there is not much increase or decrease in the ratio.

Quick Ratio:
 Among all the three years, quick ratio in the year 2018 is the best which is 1.50 followed by the year
2017 which is 1.14 and then 2016.
 Overall the quick ratio of the company is good as there is little fluctuations between 2018 and 2017 but
not much fluctuations between 2017 and 2016.

Cash Ratio:
 The cash ratio of all the three years aren’t good as it is less than one which clearly indicates from the
balance sheet that the liabilities of the company has slightly declined but there is a huge downfall in
cash and cash equivalents.
 This indicates a weak financial position of the company.
 ...contd
Proprietary Ratio:
 The proprietary ratio is stable for all the three years a low ratio indicates that a business
may be making use of too much debt or trade payables.

Interest Coverage Ratio:

 In all the three years the interest coverage ratio is above 1.5 which indicates a better
financial health as it means that the company is more capable of meeting its interest
obligations from operating earnings.

Gross Profit Ratio:

 A higher gross profit ratio is considered better.
 The gross profit of all the three years is good, but the year 2017 has a higher ratio
as compared to other years.