We have a space constraint, so let us not discuss what was discusses in the previous article. But you can refer my article IL&FS fiasco and accounting statements for basic understanding.
Now let us straight away understand what are accounting ratios or financial ratios as they are famously referred to.
I have produced direct ratios as calculated by me in MS Excel. If you do not know how to calculate financial ratios or how to arrive at accounting ratios you can approach Super 20 Training Institute – Ahmedabad. We provide such case based, practical and detailed understanding of various topics in our Accounting Courses, Taxation Courses, GST Courses, Tally Courses etc. at our training institute in Ahmedabad.
Now let us look at Operating Profit Margin. In FY1617, Operating Profit Margin was 49%, whereas, in FY1718, Operating Profit Margin was 39%. Such a big erosion in margins is worrisome. That means the company has some serious operating issue which needs to be looked at. Or the figures may be misleading for the previous years.
The next important accounting ratio is EBIT margin. That is Earning Before Interest and Taxes Margin. In FY1617, EBIT Margin was 42%, whereas, in FY1718, EBIT Margin was 31%. This is the significant decline. That means the company has less amount of money to meet their interest expenses.
Finally, we are staring at Net Profit Margin. In FY1617, Net Profit Margin was 1%, whereas, in FY1718, Net Profit Margin was -10%. The company was barely profitable in the previous year. Hence, everything was not ok even in FY1617 also. It was not ignored by everyone concerned with the company. And now we are staring at a big loss in FY1718. Signals were there, but they were ignored.
How default is evident from the above analysis. It is from Interest Coverage Ratio. In FY1617, the company was barely able to meet its interest obligations. On the other side, in FY1718 the interest cover was less than 1.
That means that the company did not have sufficient funds to service their interest obligations. Still, the company kept raising funds from the markets. All these funds were short-term funds basically to see the day has gone off or passed. The management was doing time pass all these days. The regulators were sleeping. The Government thought that the investors like LIC, SBI are taking care of IL&FS. LIC, SBI and other foreign investors were thinking that the management was very much able and worthy. Credit rating agencies were giving AAA rating blindly. Lenders took money from public and loaned to IL&FS thinking it is backed by the Government and anyways AAA. But it was written on the wall that IL&FS is not functioning well. And the worst came true. The institution of this size, scale and reputation are staring at bankruptcy.
Friends, these are the easy tools to analyse the company’s accounting records. Anyone, who wants to understand such topics in detail may contact us at [email protected] or visit our website. We are proud to be known as the best accounting training institute in Ahmedabad. All the best.