Telecommunication Industry- Ratio Analysis
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The telecom industry in India has grown significantly over the last decade due to government policies and increased production of devices. The document analyzes and compares the financial ratios of Hartron Communications Ltd. and ADC India Communications Ltd. It finds that while both companies have good liquidity, Hartron may have issues meeting short-term obligations. It also finds that the companies have decreased profitability due to economic slowdowns abroad, but are taking measures to control costs and invest in new technologies. The document recommends both companies improve cash reserves, explore new markets, and invest in high-growth areas like real estate, technology and 4G to boost profits.
Telecommunication Industry- Ratio Analysis
- 1. ACCOUNTING FOR MANAGERS Industry: Telecommunication-Equipment The Telecom industry in India has grown tremendously over the last decade. It is the fastest growing sector in the world. The Government policies and the policies implemented by TRAI has helped the telecom industry to a great extent to achieve this growth rate. So also the increased no of handset, routers, modems and other equipment’s has helped this industry grow. Below is the analysis and comparison of two industries namely 1. Hartron Communications Ltd.: It deals in delivering broadband services on any device. 2. ADC India Communications Ltd.: ADC India offers a range of Genuine KRONE products and delivers broadband and wireless connections throughout India. Ratio Comparison Hartron Communications Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Leverage Ratios Debt Equity Ratio Interest Cover Equity Multiplier 0.95 4.83 1.74 0.94 3.21 1.73 1.14 3.88 1.90 1.78 2.66 2.47 1.86 2.21 2.54 Profitability Ratio Net Profit Margin Return on Long Term Funds Earnings Per Share 22.78 17.62 5.78 22.62 15.2 5.44 31.54 15.58 4.77 25.48 16.5 4.13 24.97 14.83 2.77 Activity Ratio Investments Turnover Ratio Debtors Turnover Ratio Asset Turnover Ratio 2.69 33.26 0.58 5.03 29.33 0.44 412.22 17.56 0.28 440.36 17.23 0.3 293.57 8.21 0.29 1.71 0.71 1.22 1.93 1.43 3.25 2.17 2.03 7.25 1.97 1.96 6.53 0.46 0.46 1.59 Liquidity Ratio Current Ratio Quick Ratio Interval Measure
- 2. ADC India Communications Mar-13 Mar-12 Mar-11 Mar-10 Leverage Ratios Debt Equity Ratio Interest Cover Equity Multiplier Mar-09 0 0 0.46 0 0 0.46 0 174.23 0.46 0.009 36.62 0.46 0.012 9.59 0.47 -14.92 -3.48 1.83 1.22 3.86 8.57 2.79 5.16 1.62 2.31 -13.17 0.95 6.17 4.61 2.36 Activity Ratio Investments Turnover Ratio Debtors Turnover Ratio Asset Turnover Ratio 3.77 2.54 0.78 1.94 1.39 0.43 7.94 3.8 3.55 11.44 3.73 3.53 7.63 2.38 1.31 Liquidity Ratio Current Ratio Quick Ratio Interval Measure 5.11 4.04 5.18 6.71 5.19 12.07 4.26 3.58 1.01 4.67 4.07 1.15 3.47 2.91 2.22 Profitability Ratio Net Profit Margin (%) Return on Long Term Funds (%) Earnings Per Share Analysis and Interpretations 1. Liquidity Ratio The liquidity ratios of a company talks about its ability to meet its short term financial obligations in time by assessing the cash trapped in the cash cycle when creditors ask for payments. The margin of the liquidity ratios of Hartron Communications Ltd is less as compared to ADC India Communications which states that Hartron might not be able to meet their short term liabilities on time as indicated by its Quick and Current Ratio. The 4:1 quick ratio of the company indicates a strong liquidity position of the company as compared to Hartron. Therefore we can say that the company has safe margin of liquidity in order to meet its current liabilities.A huge variation between the quick and current ratio would indicate inventory- holdups. But in the case of the above companies the inventory holdup are not very large.
- 3. Interval measure approximately calculates the number of days a company can operate only using the cash in hand. Interval measure is generally used in liquidity ratio in order to judge the number of days a company can operate rather than the other ratios that only show the ease of making payments. The interval measure of both the above companies is very low which indicates it has very less cash in hand and should increase the amount in hand. 2. Activity ratio It tells us about the ability of the company to convert its inventor and other different accounts mentioned in the balance sheet into cash or sales. The ratios I have analyzed are investment turnover ratio, debtor’s turnover ratio and asset turnover ratio. The investment turnover ratio of both the companies has decreased drastically from Mar’11 as per the annual reports of the respective companies it indicates thatthe companies have been investing in long term projects for future improvement of network communication. Therefore their investment have not yet paid off which is the reason for the drastic decrease in the investment turnover ratio. The debtor’s turnover ratio of Hartron in increasing at a larger rate as compared to ADC communications which show a drop in the DTR in the year 2012. Therefore we can see that the companies are efficient enough in collecting the sales that are made on credit. ADC communication had shown a drop in receivables collection probably because as per news it had started exporting goods in 2011 and therefore maybe they got receivables at a later point of time. 3. Profitability Ratios The profit making ability of these companies is not so good as they are going facing loses due to reduction in export because of the economic slowdown in Europe and US which are their major exporting destinations. The profitability ratios of Hartron Communication shows that the company is doing very well but as per the previous growth rates in profit the current growth in is lesser, this is mainly because of its investment in Real Estate where it has established to gain its profits. The EPS is also increasing but at a slow rate with respect to both the companies which shows a signs of recovery.As per the annual report of ADC Communications the company has taken adequate measures of reducing the cost like the VRS, investing in new innovative technologies that are coming up etc. 4. Leverage Ratios The Leverage Ratio of the companies calculates the Debt the company shows on its balance sheet, it is also a measure of financial health of the company. ADC Communications Ltd has paid off all its debts and therefore does not show any debt to equity ratio. As per its annual reports the company has not accepted any deposits in 2013 nor are there unclaimed deposits due
- 4. for repayment at the close of the financial year. The debt/equity ratio for Hartron is also lessening which is a good sign. Interest coverage ratio measure the ability of the company to pay the interest occurred on its debts. The interest coverage ratio of both the companies is rising. This may be due to the government policies introduced in the last couple of years.The equity multiplier effect of both the companies is not improving consistently. Recommendations The companies have good liquidity ratio only thing it must focus on the cash control and reserves it keeps along with itself. The company should try exploring other markets as the markets in US and Europe are recovering at a very slow rate from the financial crisis. Investing in other industries which are currently profitable like real estate, technology, or investing in their own R&D can improve the profitability ratio of the company as it can reduce the impact of losses that the company is currently facing in the telecom industry. The companies should take advantage of the 4G services, which has overseen a positive impact from the government of India. The company should invest in this service and increase their profitability ratio Both the companies should improve their awareness throughout India, through marketing and other initiatives. Reference Websites http://www.moneycontrol.com/annual-report/adcindiacommunications/directors-report/KC07#KC07 http://www.moneycontrol.com/annual-report/hartroncommunications/directors-report/HC01#HC01 http://ratio-analysis.org/activity-ratios.php Books Accounting for Management 3rdEdition - Vikas Publishing House Pvt Ltd; Page No: 3.37