KEY FINANCIAL RATIOS
The following are the most important financial ratios that investors and analysts look at when
evaluating the auto industry.
1. Debt-to-Equity Ratio
Because the auto industry is capital-intensive, an important metric for evaluating auto
companies is the debt-to-equity ratio (D/E), which measures a company's overall financial
health and indicates its ability to meet its financing obligations. An increasing D/E ratio
indicates a company is being increasingly financed by creditors rather than by its own equity.
Therefore, both investors and potential lenders prefer to see a lower D/E ratio. A D/E ratio of
1 indicates a company whose assets and liabilities are equal. However, it's important to
compare D/E ratios to companies within the same industry, as different industries have
different debt requirements. The average D/E ratio is typically higher for larger companies
and particularly for more capital-intensive industries such as the auto industry.
Alternative debt or leverage ratios that are often employed to evaluate companies in the auto
industry include the debt-to-capital ratio and the current ratio.
2. Inventory Turnover Ratio
The inventory turnover ratio is an important evaluation metric specifically applied within the
auto industry to auto dealerships. It is usually considered a warning sign for auto sales if auto
dealerships begin carrying substantially more than about 60 days’ worth of inventory on their
lots. The inventory turnover ratio calculates the number of times in a year, or another
specified time frame, that a company's inventory is sold, or turned over. It is a good measure
of how efficiently a company manages ordering and inventory, but more importantly for car
dealerships, it is an indication of how rapidly they are selling the existing inventory of cars on
their lot.
Alternatives to considering the inventory turnover ratio include examining the days sales of
inventory (DSI) ratio or the seasonally adjusted annual rate (SAAR).
3. Return on Equity Ratio
The ROE is a key financial ratio for evaluating almost any company, and it is certainly
considered an important metric for analyzing companies in the auto industry. The ROE is
especially important to investors because it measures a company's net profit returned in
relation to shareholder equity, essentially how profitable a company is for its investors.
Ideally, investors and analysts prefer to see higher returns on equity, and ROEs of 15% to
20% are considered favorable.
Along with the return-on-equity ratio, analysts may also look at the return on capital
employed (ROCE) ratio or the return on assets (ROA) ratio.
NON-FINANCIAL RATIOS IN THE AUTOMOBILE INDUSTRY
Non-financial ratios are those that do not have a monetary value. There are several sorts of
non-financial ratios – any data in business that contains a number may almost certainly be
classified as a ratio and evaluated. Because many non-financial metrics are less vulnerable to
external noise than accounting measures, using them may improve managers' performance by
giving a more accurate assessment of their activities. This also reduces the risk that managers
face when calculating remuneration. They aid in determining a company's strengths and
weaknesses.
It is no secret that the automobile market is highly competitive, pushing any automotive
company to make every potential improvement to compete. A firm must know precisely what
to measure and how to measure it. A firm can evaluate the areas of success and areas
requiring development and the extent to which those areas must be addressed by examining
the most significant non-financial ratios. The non-financial ratios listed below are the most
important in the car business.
1. Employee Turnover Ratio
The proportion of employees who leave or are asked to leave an organization and are
replaced by new employees is known as employee turnover. Employee turnover is usually
monitored each year.
Calculation: divide the total number of leavers in a month by your average number of
employees in a month
2. Average Downtime
Downtime is one of the most important indications for automotive firms to be aware of.
Average Downtime = (downtime hours in a time period) ÷ (total time available to produce
vehicles in the same time period) x 100.
Of course, every automobile company must take steps to guarantee that this period is as short
as possible. Downtime is expensive, especially in the automobile sector, where it is
considered to be considerably more costly than in other manufacturing industries.
3. Utilization Rate:
This is a ratio of how many automobiles an automotive business can create in a certain
amount of time to how many vehicles the company might theoretically make in the same
timeframe if time and labour were used optimally.
Calculation:
Utilization rate = (actual level of output) ÷ (maximum level of output) x 100.
This is a ratio of how many automobiles an automotive business can create in a certain
amount of time to how many vehicles the company might theoretically make in the same
timeframe if time and labour were used optimally.
The utilization rate is essential for automotive firms because it shows how efficiently they
spend their time and labour. If the rate goes below the standard, the consequences for the firm
might be severe.
4. Safety Incidents per Employee
When it comes to moving the automobile sector toward a safer workplace, worker safety is of
the highest significance.
The following calculation gives the value of this metric:
Safety incidents per employee = (number of safety incidents in a time period) ÷ (number of
employees working during the time period).
Having a comprehensive system for measuring safety events in place helps to keep workers
safe. However, it is also a method of detecting when equipment is not working correctly, as
accidents are frequently the consequence of equipment faults.
5. Throughput
Throughput is the average number of units generated during a specific time period.
Throughput = (units produced) ÷ (time)
Throughput may be used by automobile industries to determine if there are any flaws in the
production process. If Downtime is excessive, machines are not functioning at appropriate
cycle times, tools and equipment are not well maintained, or there is simply an inefficient
cycle, throughput will be poor.
6. Yield
This statistic calculates the proportion of cars built correctly and according to the vehicle
requirements the first time they pass through the manufacturing line, with no rework.
Calculation
This metric may be calculated by dividing the number of vehicles appropriately manufactured
by the total number of vehicles that went through an auto company's production line.
This measure is significant since it reflects an automaker's ability to be efficient on the
assembly line, minimize scrap, and increase capacity.
7. Defective Units/Recall Rates
This measure calculates the percentage of faulty cars produced in a given time period as a
percentage of total vehicles manufactured.
Calculation
This measure is computed by dividing the total number of vehicles recalled owing to a defect
in the vehicle manufactured within a specific time period by the total number of vehicles
produced within the same time period.
This statistic is a significant quality indicator for automakers. If the rate is low, it keeps
consumers safe and reduces the costs associated with product recalls and the potential
negative press that comes with recalls, which may deter consumers from purchasing products
from companies with high recall rates.
8. Scrap Rate
This measure calculates the proportion of material utilized that cannot be used because it is
faulty or there were mistakes in the process of manufacturing
Calculation:
The total amount of scrap material is divided by the total amount of materials used.
This measure is significant because it assesses an automotive company's capacity to be as
efficient as feasible without discarding vehicles or materials due to mistakes and how
effectively it maintains quality control. A high scrap rate can be expensive for a firm.
Analysing Non-Financial indicators of Tata Motors Ltd
Employee Turnover Rate - 8.70%
The employee turnover ratio is low, and hence the company is performing well with the
employees. The company is emphasizing many areas such as growth opportunities, skill up-
gradation, learning and development, technical and functional know-how, grievance
redressal, occupational health and safety, employee wellbeing to ensure the satisfaction of
their employees.
Capacity Utilization Rate - 100%
Number of units produced-4, 58,512
Operating at 100% capacity utilization today, the plant has rolled out 4, 58,512 units since
inception and is among the fastest expanding Tata Motors plants.
Safety Performance Ratio -0.26
The safety performance increased in FY 21 from last year due to the higher displacement of
people from one job to another and restriction of physical training of employees due to the
COVID-19 pandemic. Safety considerations are taken care into account at the
conceptualization and design phase, even in new offices, establishments, and warehouses..
HIRA and programmes like Work Permit System, JSA, Hot Work, LOTO, Confined Space,
Electrical safety and Road safety are practised to ensure that the exposure to risks is
eliminated, minimized and managed correctly to avoid any incidents. These standards and
procedures are common across all plants/sites and incidents.
Scrap rate - 4- 6%
The scrap rate for the company is 4- 6%, which is fairly a good metric that shows the
company's ability to manufacture the vehicles as per the customer requirements in an efficient
manner.
Fig: Non - Financial from Annual Report of Tata Mors 2020-2021
