1/5/2014

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RELIANCE INDUSTRY LIMITED

FINANCIAL STATEMENT ANALYSIS (2011 TO 2013)

TABLE OF CONTENTS

1. INTRODUCTION………………………………………………………………………………………………………3

1.1 Background of Reliance Industry

Ltd…………………………………………………………3

1.2 Financial

Highlights…………………………………………………………………………………..3

1.3 Objectives of the

Assignment……………………………………………………………………3

2. FINANCIAL RATIO

ANALYSIS…………………………………………………………………………………….4

2.1 Profitability

………………………………………………………………………………………………4

2.2 Liquidity

……………………………………………………………………………………………………7

2.3 Gearing…………………………………………………………………………………………………….1

0

2.4 Investment……………………………………………………………………………………………….

.11

3. SWOT ANALYSIS ……………………………………………………………………………………………………..13

4. CONCLUSIONS AND

RECOMMENDATIONS……………………………………………………………..15

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5. REFERENCES …………………………………………………………………………………………………………..15

6. APPENDICES……………………………………………………………………………………………………………16

6.1 Appendix A- Balance Sheet (2011 to 2013)

……………………………………………….16

6.2 Appendix B-Profit and loss (2011 to 2013)

………………………………………………..18

6.3 Appendix C-Workings for financial

ratio……………………………………………………21

INTRODUCTION

Background of Reliance Industries Limited

Reliance Industries Limited (RIL) is a conglomerate holding

Multi National Company headquartered in Mumbai, Maharashtra,

India. Reliance Industries Limited company activities are

Production and Exploration of Oil and Gas, Textiles, Retail,

Petrochemicals (Plastics, chemicals, polyester) and Petroleum

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refining. Reliance Industry Limited got listed in SGX during

the year 2004.

As of 2013, RIL is ranked 107 under Fortune Global 500 list of

world’s biggest corporations. The company has 123 subsidiary

and 10 associate companies. RIL’s shareholders are approx. 3

million people. Chairman family i.e. Ambani family holds

45.34% of the total shares.

Financial Highlights

In 2013, Reliance Industries Limited achieved record turnover

of $ 68.4 billion and also achieved highest exports rate ever

of $44.1 billion

Total assets value has touched record high $ 58,674 million.

Its net profit value as of 2013 has seen drastic increase when

compared with 2012 and 2011 which is $3,869 million.

Revenue has grown 42% on a year on year basis.

Number of new stores included is 184 across the globe in 2013

and hence the total number of stores is 1,466.

Share of production in 2012 saw an increase of 166% compared

to previous year.

The company is under the list of top 100 companies in the

world ranking which is 99th in terms of revenue and 130th in

terms of profit in 2012. (Reliance, n.d.)

Statement by RIL’s Chairman to the press and its Shareholders

(2013)

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Mukesh D Ambani, the chairman and managing director of

Reliance Industries Limited has said that despite global

financial challenges due to Eurozone, the company continued to

grow to increase its shareholders wealth and stated all

financial highlights that occurred during FY 2012-2013. He

also stated the future investments the company is willing to

undertake and assured of good returns for its investors.(Limited, 2013)

OBJECTIVES OF THE ASSIGNMENT

Main objective is to analysis the company’s capability and

risk associated with it to determine suitability for the

investment. Financial analysis for the past performance of the

company will be determined to judge the present and future

situation of the company. Based upon analysis judgement has to

be made to whether the company can be preferred for investment

or not.

FINANCIAL RATI O ANALYSIS

Profitability

Ratio 2011 2012 2013Gross Profit Ratio (%) 8.96 6.97 6.47Net Profit Ratio (%) 7.19 5.41 5.16ROCE (%) 8.76 8.4 8.25ROA (%) 6.27 6.03 5.76ROE (%) 12.52 11.64 11.47

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Gross Profit Ratio

Net Profit Ratio

ROCE ROA ROE0

2

4

6

8

10

12

14

201120122013

Gross Profit Ratio

“The gross margin is the gross profit (sales minus cost of

sales) divided by sales; this is normally expressed as a

percentage. If the gross margin falls below the budgeted level

this may indicate a problem. A relatively high sales margin

demonstrates the ability of a business either to charge a

premium price or to control input costs

Gross profit margin % = Gross profit/Sales * 100%” (Wyatt, 2012)

Analysis

Gross profit ratio of 2013 is low when compared with 2012 and

2011 with decrease in more than 2% overall from 2011. Even

though we can see increase in revenue of about 40,000 crores

from 2012 to 2013 and 1,36,000 crores from 2011 to 2013, gross

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profit notably went down because of Cost of Goods which has

also increased dramatically. Other reason is manufacturing

cost for producing materials became high in 2013 with an

increase of 36,000 crores from 2012.

Net Profit Ratio

Net profit ratio is Revenue-(Direct costs + Overhead

costs)/Revenue * 100% where direct costs are those incurred

expressly on the product or service and overhead costs are

those that are incurred independently of the products such as

rent, rates and so on. Operating profit is preferred to other

profit totals, as it excludes finance and taxation costs,

which can vary between business and years. (Secrett, 2010)

Analysis:

Just like Gross profit ratio, even Net profit ratio of 2013

decreased of about 0.25 % from 2012 and 2 % from 2011 because

of expenses the company faced. The expense amount became high

compared to previous two years. The company faced increase in

cost of materials consumed, purchases of stock-in-trade,

finance costs. Net profit obtained from that year 2013 is high

i.e. 1155 crores more than 2012 and 1585 crores than 2011. But

still the net profit ratio of 2013 is low than other two years

because of increase in cost of goods sold. Cost of goods sold

is increasing year by year. Company should cut down its

expenditures.

Return on capital employed

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“The ROCE ratio is calculated by expressing the profit before

long term interest and tax as a proportion of the total

capital employed. It measures the profits generated from the

utilization of resources, it reflects the earning power.

ROCE= net profit/equity + debt * 100%” (Barrow, 2001)

Analysis:

Even though capital employed for 2013 is high, ROCE in the

year 2013 is 0.51 % less when compared it with 2011 and 0.15%

less when compared with 2012. The reason behind this is

increased long term borrowings where changes from previous

year were seen in bonds, term loans from banks, non-

convertible debentures, long term maturities of finance lease

obligations which is 5608 crores high than 2012.

Return on assets

“Return on assets measures the amount of profit the company

generates as a percentage of the value of its total assets.” (Answers, 2009)

ROA= net profit/Total Assets * 100%

Analysis

Reliance Industries is performing good in converting the money

of its investors into net income. ROA of 2013 is 0.24% less

when compared to 2012and 0.51% less when compared with 2012.

The reason behind this decline is the value of total assets in

2013 that has increased with increase in inventories, bank

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balances and decrease in trade receivables which is 35,166

crores high than 2012 and 54,838 crores than 2011.

Return on equity

“ROE ratio is calculated of net profit to shareholders equity.

It measure how well a company uses shareholders' funds to

generate a profit.” (financial, n.d.)

ROE= net profit/equity * 100%

Analysis

ROE of 2011 is 12.52% which is about 1% decrease i.e. 11.47%

in 2013 and 0.92% decrease i.e. 11.64 % in 2012. This is

because of total equity including Share capital, Reserves and

surplus in 2013 is much higher than 2012 and 2011. Total

equity in 2013 is 12585 crores higher than 2012 and 27937

crores higher when compared with 2011. Decrease in ROE

occurred in spite increase in net profit in the year 2013.

LIQUIDITY

2011 2012 2013Current Ratio 1.43 1.82 1.62Quick Ratio 0.92 1.23 1.05Stock turnoverRatio(Days) 66.9 53.48 58.46

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2011 2012 20130

0.20.40.60.81

1.21.41.61.82

Current Ratio Quick Ratio

Current Ratio

“A business’s ability to meet its immediate liabilities can be

estimated by relating its current assets to its current

liabilities. If for any reason current liabilities cannot be

met, then the business is being exposed to an unacceptable

level of financial risk.” (Barrow, 2001)

Current ratio= current assets/current liabilities

Analysis

From the calculation of current ratio of this company, it’s

known that company has the ability to pay its debt. Current

assets amount is higher than current liabilities value in all

three years (2011, 2012, and 2013). Company’s performance

will be at its best when the ratio capacity is of 2:1. For

reliance industries in 2013 the current ratio proportion is

1.62: 1 indicates the company is healthy. But the proportion

has come down when compared with 2012 which was 1.82: 1.

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Quick ratio

“The quick ratio is really a belt and braces figure. In this,

only assets that can be realised quickly, such as debtors and

cash in hand are related to current liabilities.

Quick ratio= Cash + Debtors/Current liabilities (Barrow, 2001)

Analysis:

In 2013, the quick ratio value is 1.05: 1 after deducting

inventories, which indicates the company’s stability. Reliance

industries have the ability to meet its short term obligations

because the ratio is greater than 1.This value is

comparatively low with 2012 and high with 2011. This is

because of debt i.e. Trade payables in 2013 is high, 40,368

crores which is higher than other two years. This increase is

due to current maturities of long term debt. Trade receivable

is 9,750 crores in 2013, 16,939 crores in 2012 and 15,696

crores in 2011.

Stock Turnover Ratio

2011 2012 201301020304050607080

Stock turnover Ratio

Stock turnover Ratio

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Days

“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” (Wagner, 2007)

Analysis:

Stock turnover ratio of 2013 is 58 days, 2012 is 53 days and

2011 is 67 days. Reliance industry is performing well in

selling of its inventories within short period. Reliance

industry is efficient in managing and controlling stock

levels. But when examined its seen that finished goods value

stock is high in 2013 which is 4,000 crores than other two

years, hence it should take steps in selling off its

inventories as soon as possible because of warehouse space

cost.

Gearing

Leverage 2011 2012 2013Gearing Ratio 0.43 0.39 0.39Debt Ratio 0.22 0.20 0.20Interest

coverage ratio

8.00 6.82 6.03

Gearing Ratio

“Gearing (or leverage) is a measure of a business’s long term

financing arrangements (or capital structure). It is

essentially the proportion of a business financed via debt

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compared to equity. If no profits are made, then the owner and

other shareholders simply do not get dividends” (Barrow, 2011)

Gearing ratio= Debt/Equity

Analysis:

Reliance industry is low geared because it has low debt in

relation to shareholders’ equity. Gearing ratio reminded

stable in 2012 and 2013 with 0.39 and notable decrease of 0.4

from 2011(0.43). Reliance industry is less risky because it

has more equity than debt. And also because of high profit,

the equity shareholders are benefitting tremendously.

Debt Ratio

“This measures the ability of a business to meet its debts in

the long term. It is a measure of ‘security’ for financiers.

Debt capital puts the business at financial risk they expect

an interest payment every year, irrespective of the

performance of the business.

Debt ratio=Total debts/Total assets” (Barrow, 2011)

Analysis:

Debt ratio also remained constant in 2012 and 2013 with 0.20

each and in 2011 it was 0.22. Company has the ability to pay

back and the risk is low since its total assets are high than

debt. Reliance industry can use this opportunity to get

further loans since it has less debt ratio.

Interest Coverage Ratio

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“This measures how many times a business can pay its interest

charges (or finance expenses) from its operating profit (or

profit before interest and tax). Ideally a business should be

able to cover its interest at least two or more times. The

ability to service debt is a measure of risk to debt

providers, share-holders and ultimately the business itself

Interest cover (times) = Operating profit/Finance Expenses” (Warner, 2010)

Analysis:

In 2011, Reliance industries’ interest coverage ratio was

8.00. But in 2012 and 2013 the value has come down to 6.03 and

6.82 respectively. Even though the company performance of 2013

is not good when compared with previous years 2011 and 2012

which happened due to high finance charges, it has the ability

to pay its interest easily with the value of 6.03 interest

coverage ration because of high net profit (20,879 crores).

Investment

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Earnings per share-

“This is a popular profitability statistic used by financial

analysts. ‘Earnings available for distribution’ is bottom line

net profit attributable to shareholders after all other costs

have been deducted. Many remuneration packages are linked to

EPS growth.

EPS= Earnings available for distribution/Number of shares in

issue “ (Warner, 2010)

Analysis:

Net profit to number of shares is 70.65 (face value per

equity share is 10 ) in 2013 which is higher when compared

with 64.75 in 2011 and 66.15 in 2012. Investors return is

good since EPS is high and also stable. The company is

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Investment 2011 2012 2013Earnings per

share(face

value 10 )

64.75 66.15 70.65

Price

Earnings

13.21(Assumed

)

13.21(Assumed

)

13.21

Dividend per

share

8 8.5 8.5(Assumed)

Share of

paid-up value

of Rs 10 per

share.

expected to supplement earnings growth for operations for

higher EPS.

Price Earnings

“A company’s P/E ratio represents, in part, the market’s

expectations of its future growth potential. P/E ratio= Share

price/ EPS. The earnings per share(eps) will be negative at

the start of the cycle, turning positive and growing with the

company’s profit. When company matures, expectations stabilize

and so does the share price” (Ward, 2009)

PE = Market price of shares/No. of shares

Analysis:

Market price of shares to EPS of 2013 is 13.21. Assumed it’s

the same in 2011 and 2012. Investors are willing to pay more

than the actual price i.e. they are willing to pay 13.21 where

the actual price value is 6.4 per share. This indicates the

market consensus of the future prospects of the share is good

and also faster growth is expected.

Dividend per share

“Dividend per share (DPS) is the total dividends paid out over

an entire year (including interim dividends but not including

special dividends) divided by the number of outstanding

ordinary shares issued.” (Wagner, 2007)

Analysis:

Total Dividend paid to Number of shares is 8 in 2011, 8.5 in

2012 and 8.5 in 2013(Assumed). Investors are getting good deal

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because the dividend they are getting is high than EPS. It’s

seen that dividend per share has increased from 8 in 2011 to

8.5 in 2012 which indicates the company is earning good profit

and returns.

SWOT ANALYSIS

Strength

Strong Liquidity Position:

Reliance Industry Limited has the ability to repay short term

debt easily. Current ratio analysis led us to the value of

1.62: 1 for the year 2013. From the analysis, it is seen that

company’s performance is stable i.e. liquidity ratio is 1.82

in 2012 and 1.43 in 2011.

Substantial Increase in Exports:

Exports for FY 2012-13 were Rs. 239,226 crore ($ 44.1 billion)

Exports for FY 2011-12 were Rs. 208,042 crore ($ 40.9 billion)

Dominant Foothold in the Market 

Reliance Industries Limited has dominant foothold in the market because of several years of its services and also because of substantial increase in revenue each year. RIL’s Revenues for FY 2012-13 were $ 68.4 billion, Net Profit was 3.9 billion, and Total Assets were Rs. 318,511 crore.

RIL declared Dividend of 90%.

All the above made RIL it to be dominant with its competitors in the market.

Backward Vertical Integration:

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RIL uses backward vertical integration strategy which helps it

to cut down transportation costs, increase profit margin and

hence the company is more competitive.

Weakness

On analysis RIL’s weaknesses are

Cost Controls- Cost of goods sold is becoming higher year by

year because the cost of materials consumed became high (due

to Inflation in India)

Lack of Midstream Operations- RIL lacks in midstream

operations such as in storage of inventories, transportation

etc.

Opportunities

On analysis, RIL’s opportunities are

RIL’s has high growth rate hence it can be expanded widely in

Asia-Pacific Refining Capacities and also in US Shale Gas

market.

It can form business partnerships to further expand its growth

and also for investment.

RIL can concentrate on unconventional energy sources for its

production of energy to reduce its cost.

Threats

US shale gas market is competitive- Environment is more

competitive in US market where RIL stands 4th and it is

thriving to stay in that position by competing hard.

Petrochemical production cost is low

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CONCLUSION AND RECOMMENDATION

To earn good profits, Investors can invest in RIL.

Earnings per share continue to grow despite decrease in net profit ratio and dividends the shareholders gets is also high.Company’s Liquidity is very stable and less chance of bankruptcy by the investors. Risk is low as Gearing is low. Even though the global economic scenario in FY 2012-13 continued to be tough with challenges, RIL grew by 9 % in revenue and net profit growth of 5%. Opportunities for furthergrowth can be expected in future

References1. Answers, I., 2009. Investing Answers. [Online]

Available at: http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/return-assets-roa-1627[Accessed 5 January 2013].

2. Barrow, C., 2001. Financial Management for the Small Business. 5th ed. s.l.:Thanet press Ltd.

3. Barrow, C., 2011. The 30 day MBA in Business Finance. s.l.:Replika Press Pvt Ltd.

4. Financial, t., n.d. Financial Times-Lexicon. [Online] Available at: http://lexicon.ft.com/Term?term=return-on-equity--roe[Accessed 5 January 2013].

5. Limited, R. I., 2013. Reliance Industries Limited, s.l.: Reliance Industies Limited.

6. Reliance, 2012. Reliance Industries Limited. [Online] Available at: www.rit.com[Accessed 05 January 2014].

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7. Reliance, n.d. Reliance Industries Limited. [Online] Available at: http://www.ril.com/html/aboutus/aboutus.html[Accessed 05 January 2014].

8. Secrett, M., 2010. brilliant Budgets and forecasts. s.l.:Pearson Education Limited.

9. Wagner, C. J. a. C., 2007. Investopedia. [Online] Available at: http://www.investopedia.com/terms/i/inventoryturnover.asp[Accessed 5 January 2014].

10. Wagner, C. J. a. C., 2007. Investopedia. [Online] Available at: http://www.investopedia.com/terms/d/dividend-per-share.asp[Accessed 5 January 2014].

11. Ward, R. B. a. K., 2009. Corporate Financial Strategy. 3rd ed. s.l.:Elsevier.

12. Warner, S., 2010. Finance Basics Secrets The esperts tell all!. 1st ed. Great Britain: HarperCollins publishers.

13. Wyatt, N., 2012. Essential Guides to Budgeting and Forecasting, How todeliver accurate numbers. s.l.:Pearson Education Limited, Financial Times publisher .

APPENDICES

APPENDIX A- Balance Sheet(2011 to 2013)

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Appendix B- Profit and Loss (2011 to 2013) (Reliance,2012)

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Appendix c- Financial Ratio Workings

Profitability Formula 2011 2012 2013Gross Profit

Ratio

Gross

profit/sales *

100%

24,055/2,68

,354 * 100

%

8.96 %

25,408/3,64

,695 * 100%

6.97%

26,217/4,04

,929 * 100%

6.47%

Net profit

ratio

Net profit/sales

* 100 %

19,294/2,68

,354 * 100

%

7.19%

19,724/3,64

,695 * 100

%

5.41%

20,879/4,04

,929 * 100

%

5.16%ROCE Net

profit/(equity +

debt) * 100 %

19,294/

(154,093+66

236) * 100

%

8.76%

19,724/

(1,69,445+6

5352) *

100%

8.4 %

20,879/

(70,960+1,8

2,030) *

100%

8.25%ROA Net profit/total

assets * 100%

19,294/3,07

,519 * 100%

6.27%

19,724/3,27

,191*100%

6.03%

20,879/3,62

,357*100%

5.76%ROE Net profit/Equity

* 100%

19,294/1,54

,093*100%

12.52%

19724/1,69,

445*100%

11.64%

20,879/1,82

,030*100%

11.47%

Liquidity formula 2011 2012 2013Current ratio Current

assests/curre

nt

liabilities

1,07,494/75,0

94

1.43

144,849/79,60

7

1.82

1,55,914/96,2

74

1.62

Quick ratio Current

assets-

inventories/c

1,07,494-

38,520/75,094

0.92

1,44,849-

46,692/79,607

1.23

1,55,914-

54,601/96,274

1.05

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urrent

liabiltiesStock

turnover

ratio

Closing

inventory/COG

S *365 days

38,520/210,15

9 * 365 days

66.9

46,692/2,05,0

39 * 365 days

53.48 days

54,601/3,40,8

92 * 365 days

58.46

Gearing Formula 2011 2012 2013Gearing ratio Debt/Equity 66,236/1,54,0

93

0.43

65,352/1,69,4

45

0.39

70,960/1,82,0

30

0.39Debt ratio Debt/Total

Assets

66,236/3,07,5

19

0.22

65,352/3,27,1

91

0.20

70,960/3,62,3

57

0.20Interest

coverage

ratio

Net

profit/Intere

st Expenses

19,294/2,411

8.00

19,724/2,893

6.82

20,879/3,463

6.03

Investment Formula 2011 2012 2013Earnings per

share(EPS)

Net

profit/No. of

shares

64.75 66.15 70.65

Price

Earnings(PE)

Market price

of shares/EPS

13.21 13.21 13.21

Dividend Per

share

Total

Dividend

paid/No. of

shares

8 8.5 8.5

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