Toyota Indus Motors

Introduction

Indus Motor Company IMC Limited operating as Toyota Indus, is a Pakistani automobile
manufacturer which is a subsidiary of Japanese multinational automaker Toyota. It is based in
Karachi, Pakistan and it was founded in 1990 as a joint venture between Toyota Japan and house
of habib.

Indus Motor is the authorized assembler and manufacturer of Toyota and Daihatsu vehicles, auto
parts and accessories in Pakistan. It has a 105 acres manufacturing plant at Port Bin Qasim
Industrial Zone, outside Karachi.

The vehicles manufactured by Toyota Indus motors include several variants of the flagship
‘Corolla’ in the passenger car segment, ‘Hilux’ in the light commercial vehicle segment and
‘Fortuner’ in Sports Utility Vehicle segment. Over 29 years, since inception, IMC has sold more
than 875,000 vehicles.
It has also demonstrated impressive growth in terms of volumetric increase. From a modest
beginning of 20 vehicles per day production in 1993 to a daily production of the Company which
is now increased to 268 (with overtime) units per day in 2018-19.

Toyota Indus Motors has played a major role in the development of the entire value chain of the
local auto industry, This, in turn, has directly created thousands of job opportunities and
transferred technology to over 46 vendors supplying parts. The Company is also a major tax
payer and thus contributing towards the betterment of the country.

Products

 Cars and MPV’s: Corolla, Camry, Prius and Avanza.

 SUV’s and Pickups: Rush, Hilux, Fortuner, Land Cruiser, etc.
 Buses and Vans: Hi-ace and Coaster.

Mission Statement:

Action, Commitment and Teamwork to become number 1 in Pakistan.

Vision Statement:

To be the most respected and successful enterprise, delight customers with a wide range of
products and solutions in the automobile industry with the best people and the best technology.
 Ratio Analysis
Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational
efficiency, and profitability by comparing information contained in its financial statements.

Importance:

Ratio analysis is used to evaluate or analyze the financial performance of the firm in terms of
risk, profitability, credit worthiness, and efficiency. It helps us to compare the trends of a
company over a period of time.

We will be analyzing five heads of ratios:

 Liquidity Ratios
 Asset Management Ratios/ Efficiency Ratio /Activity Ratio
 Profitability Ratios
 Debt Management Ratios
 Market Value Ratios

A) Liquidity Ratio:

A liquidity ratio is a financial ratio that indicates whether a company's current assets will be
sufficient to meet the company's obligations when they become due or in other words it helps in
determining a company's ability to cover short-term obligations and cash flows.

1) Current Ratio

The current ratio is a financial ratio that shows the proportion of a company's current assets to its
current liabilities. The current ratio measures a company's ability to pay off its current liabilities
with its current assets such as cash, accounts receivable and inventories. It tells investors and
analysts how a company can maximize the current assets on its balance sheet to satisfy its current
debt and other payables.
 Current Ratio = Current Assets/ Current Liabilities

2018: 2019:

CR = 74543128/45160011 CR = 50857994/24178833

=1.65 ≈ 1.63 = 2.1

Analysis:

The Ratio is favorable as it is greater in 2019 than it was in 2018.

Micro Analysis:

The current assets of the company are decreasing in 2019 but the current liabilities are also
rapidly decreasing with it, the data shows that liabilities have decreased more than as compared
to the assets in 2019, in 2018 the assets are much higher but the liabilities are also higher thus
resulting in an increase in current ratio of 2019. This means that Toyota indus motors are
efficiently and effectively using their liquid assets to cover or pay for their liabilities. The
decrease in current assets in 2019 is due to less number of manufactured vehicles, liquefaction of
the assets and the decrease in current Liabilities is due to decrease in short term borrowings.

Macro Analysis:

Toyota is the largest car manufacturer of the country, they have managed their resources well
thus showing positive results despite serious macro-economic concerns such as economic
instability, currency exchange rate fluctuation, political instability, poor auto manufacturers
policy etc. Toyota IMC analyzed the situation well and improvised with it.

2) Quick Ratio:

The quick ratio is a financial ratio used to gauge a company's liquidity. The quick ratio is also
known as the acid test ratio. The quick ratio is an indicator of a company’s short-term liquidity
position and measures a company’s ability to meet its short-term obligations with its most liquid
assets without relying on the sales of inventories.

Quick Ratio = (Current Assets – Inventory)/Current Liabilities

2018: 2019:

QR = 74543128 – 11451990/45160011 QR = 50857994 – 14104398/24178833

= 63091138/45160011 = 36753596/24178833

= 1.39 ≈ 1.40 = 1.52

Analysis:

The Ratio is favorable as it is greater in 2019 than it was in 2018.

Micro Analysis:

The current assets of the company are decreasing in 2019 but the current liabilities are also
rapidly decreasing with it, the data shows that liabilities have decreased more than as compared
to the assets in 2019, the inventory of 2019 is higher than 2018 but still the quick ratio is higher
in 2019 than 2018 this is because the firm has become more liquid in 2019, the higher number of
inventory in 2019 can be decreased by promotions, incentives and effective inventory
management.

Macro Analysis:

Toyota IMC has strived hard to increase the quick ratio in 2019 despite some serious challenges
faced by the industries especially the auto manufacturing industry, this shows that with sheer
determination one can achieve success even in difficult situations. There is an increase in the
inventory this is due to less demand and more supply of vehicles, the less demand is due to rapid
and sudden inflation and economic instability.
B) Asset Management Ratios:

Asset management ratios indicate how successfully a company is utilizing its assets to generate
revenues, it indicates the ability of a company to translate its assets into the sales. Asset
management ratios are also called turnover ratios or efficiency ratios.

1) Receivable Activities:

The receivable activities ratio is an accounting measure used to quantify a company's

effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a
company uses and manages the credit it extends to customers and how quickly that short-term
debt is collected or is paid. It is also known as debtor turnover ratio.

Receivable Activities = Annual Sales/Receivables

2018: 2019:

RA = 139715429/2009954 RA = 157996212/5657464

= 69.51 = 27.9
Analysis:

The debtor turnover ratio has decreased which means that the ratio is unfavorable.

Micro Analysis:

Ratio of 2019 is lower than the ratio of 2018 this shows that in 2018 the company was collecting
their receivables more frequently and regularly than they are collecting in 2019. A low
receivables activity in 2019 ratio might be due to a company having a poor collection process,
bad credit policies, or customers that are not financially able or creditworthy. It is very important
for Toyota to improve the receivable activities and they can do this by increasing sales and
number of receivables, Toyota can also give incentives to pay early and charge interest on late
payments.

Macro Analysis:
The macro factors affecting this ratio are Inflation, volatile economy, Fluctuation in currency
exchange rates, increase in taxes and implementation of new taxes such as Federal Excise Duty
FED, this caused unrest and unpredictable situation of the market which led to decrease in the
receivable acivities.

How to Improve?

Receivable activities or Debtor turnover ratio can be increased by increasing the number of sales
and by ensuring that the account receivables are collected on time, The company can also to
improve the receivable activities and they can do this by increasing sales and number of
receivables, Toyota can also give incentives to pay early and charge interest on late payments
this will increase the receivable turnover.

2) Days sale outstanding:

Days sales outstanding is a measure of the average number of days that it takes a company to
collect payment after a sale has been made or Days sales outstanding (DSO) is the average
number of days that receivables remain outstanding before they are collected. It is used to
determine the effectiveness of a company's credit and collection efforts in allowing credit to
customers, as well as its ability to collect from them. It is also called Average collection Period.

(Receivables x Days in year)/Annual Sales

2018: 2019:

DSO = 2009954 × 365/139715429 DSO = 5657464 × 365/157996212

= 733633210/139715429 = 2064974360/157996212

= 5.25 ≈ 6 days = 13.06 ≈ 13 days

Analysis:

This ratio of Toyota Indus Motors is unfavorable as it has increased from previous year.

Micro Analysis:

This ratio of Toyota Indus Motors is unfavorable as it has increased from previous year. which
means debtors are taking more time in making payments, this may be because the company is
having a poor collection process, bad credit policies, customers that are not financially able to
make a payment, etc. It is very important for a company big like Toyota to decrease this ratio as
much as they can because if this continues it can cause some serious consequences for the
company.

Macro Analysis:

The macro factors affecting this ratio are Inflation, volatile economy, Fluctuation in currency
exchange rates, increase in taxes and implementation of new taxes such as Federal Excise Duty
FED, this caused unrest and unpredictable situation of the market, this further caused the delay in
payments despite the increase in annual sales in 2019.
How to Improve It:

Toyota IMC can improve this ratio by making the collection departments work harder to improve
this ratio and they should adopt some strict policies regarding the collection of payments. Credit
dealings should be decreased and they should focus on debit payments. Research and
Development department should seek opportunities to be more innovative and cost effective so
that its products can be bought more frequently. Toyota Should also export their products and
target the international customer.

3. Payable Turnover in days

Accounts payable turnover is a ratio that measures the speed with which a company pays its
suppliers. If the turnover ratio declines from one period to the next, this indicates that the
company is paying its suppliers more slowly, and may be an indicator of worsening financial
condition.
Significance
Also known as payable turnover ratio or creditors’ turnover ratio, the accounts payable turnover
ratio measures the number of times a company pays its creditors in a given accounting period.
It’s what’s known as a liquidity ratio, which measures the relationship between a company’s
liquid assets and its current liabilities. The accounts payable turnover ratio measures short-term
liquidity; generally speaking, the higher it is, the better things are for your company’s cash flow
and credit rating.
Formula
Accounts payable x days in year/ annual purchases
Calculations

2018: 2019:

--Rs-- --Rs--

= 15731241000 x365/101424363000 = 15950203000 x365/ 123648690000

= 56.61 days = 47.08 days

Analysis

The ratio is favorable.

Micro analysis

Due to the increase in sales respectively from previous year, company returned the money to
suppliers and paid and its accounts payable on time.

Macro analysis

Due to the unstable economic conditions in Pakistan, the tax imposed on motor car manufactures
was increased due to which the prices of the company were also increased and the revenue
generated was increased. That’s why company payable turnover was less than the previous year.

Maintain it:

Toyota should set a better overall price for the products to increase demand, which in turn
boosts sales and inventory turnover. Discounts can be offered. Good inventory management
system should be used. Further Toyota should increase demand for the product line by working
with your marketing team. It can offer a sales promotion.
4. Inventory Turnover in Days
Inventory Turnover (Days) (Days Inventory Outstanding) – an activity ratio measuring the
efficiency of the company's inventories management. It indicates how many days the firm
averagely needs to turn its inventory into sales. The ratio can be computed by multiplying the
company's average inventories by the number of days in the year, and dividing the result by the
cost of goods sold.
Significance
Inventory turnover is important because a company often has a significant amount of money tied
up in its inventory. If the items in inventory do not get sold, the company's money will not
become available to pay its employees, suppliers, lenders, etc.

It is also possible that a company's inventory will become less in demand, perhaps become
obsolete, or even deteriorate. If that occurs some of the company's money will be lost. Having
slow-moving items in inventory also uses valuable space and makes the warehouse less efficient.
Formula
(Inventory x Days in a year)/Cost of Goods sold
Calculations

2018: 2019:

--Rs-- --Rs--

= 11451990000 x365/115830771000 = 14104398000 x365/138804538000

= 36.08 days =37.08 days

Analysis

The ratio is unfavorable.

Micro analysis

 Expensive purchases
 Bigger inventory than previous year
Macro analysis

Due to extreme downfall in the value of PKR against USD and JPY, the prices were increased of
the raw material that affected negatively on the company’s inventory turnover.
 5. Fixed Asset Turnover
Fixed-asset turnover is the ratio of sales (on the profit and loss account) to the value of fixed
assets (on the balance sheet). It indicates how well the business is using its fixed assets to
generate sales.
Significance
Essentially, the fixed asset turnover ratio measures the company's effectiveness in generating
sales from its investments in plant, property, and equipment. It is especially important for a
manufacturing firm that uses a lot of plant and equipment in its operations to calculate this ratio.
Formula
Sales/ Net Fixed Assets
Calculations

2018: 2019:

--Rs-- --Rs--

= 139715429000/7311379000 = 157996212000/13898033000

= 19.10 = 11.36

Analysis

This ratio is unfavorable.

Micro analysis

The company increased its production in the country and purchased more machinery and
equipment which negatively affect the assets turnover ratio of the company.

Macro analysis

Due to strict import policy of the government on the used vehicles, the company have to increase its local
manufacturing and in result, the company’s fixed asset turnover decreased.
How to improve it

The best way to maintain this ratio is to sell the old assets which are being discarded or install
new machinery so that fixed assets could be better utilized, and keep the sales high. It can do
this through social media. Social media provides interactive engagement with consumers along

with real time results in order to stay connected with the customers and their needs. Online
marketing is another important medium to interact with customers globally.
 5. Total Asset Turnover
The asset turnover ratio measures the value of a company's sales or revenues relative to the value
of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a
company is using its assets to generate revenue. The higher the asset turnover ratio, the more
efficient a company.
Significance
Since asset turnover ratio measures the efficiency of a company in managing its resources to
generate its sales, it is very obvious that higher turnover ratios are preferred to reflect a better
state of affairs at the company. This ratio gives an insight to the creditors and investors into the
internal management of the company. A low asset turnover ratio will surely signify excess
production, bad inventory management or poor collection practices. Thus, it is very important to
improve the asset turnover ratio of a company.

Formula
Annual Sales/ Total Assets

Calculations

2018: 2019:

--Rs-- --Rs--

=139715429000 /81927064000 = 157996212000/64783062000

= 1.70 = 2.43
Analysis

The ratio is favorable.

Micro analysis

Due to decrease in short term investments, the total sum of assets was decreased. In result the
total sum of assets in 2019 were decreased in respect to 2018, and the total asset turnover was
increased.

Macro analysis

Due to the unstable economic condition of Pakistan, the Toyota Indus motors decrease their
short-term investment due to lack of political stability and investment safety which result in
higher asset turnover.

Maintain it

Toyota should increase the sales by increasing the quality of its products, giving good discounts,
advertisement and through creating customer satisfaction. The company should dispose the
inefficient assets and should refurbish the existing ones.
 c. Profitability Ratios
Profitability ratios are a group of quantitative values that measure a company’s profitability
against its revenue, cost of sales, equity and balance sheet assets. It is a metric that measures a
company’s ability to generate income from its operations over the specific period of time.

1. Net profit Margin

Net profit margin is the percentage by which a company's total sales or revenue exceeds or is less
than the sum of its expenses. If a company has a positive net profit margin during a certain
period of time, it means the company made more money during that period than it spent whereas
a negative net profit margin means the company spent more money than it made. The Net Profit
Margin is increasing which makes this ratio very favorable.
Significance
It gives profit per dollar of sales and measures the profitability of sales. It helps investors to
assess a company’s management generating enough profit from its sales whether operating costs
and overhead cost are being maintained.
Formula
Net Income or Net Profit after taxes/ Sales

Calculations

2018: 2019:

--Rs-- --Rs--

= 15771860000/139715429000 = 13714975000/157996212000

= 11.28% = 8.68%
Analysis

This ratio is unfavorable.

Micro analysis

 Due to increase in cost of good sold

 Due to increase in distribution expense
 Increase operating expense

Macro analysis

due to increase in tax on the vehicle manufacturing industry, the net income of the Toyota Indus
motor was decreased and due to extreme devaluation of PKR, the raw material was expensive
which increased cost of goods sold and result in decrease in net profit margin.
2. Gross Profit Margin
The gross profit margin looks at the cost of goods sold as a percentage of sales. This ratio looks
at how well a company controls the cost of its inventory and the manufacturing of its products
and subsequently pass on the costs to its customers.

Significance

It gives the percentage of revenue you return after accounting for cost of goods sold. In other
word it shows how much money you make against the product.

Formula

Gross Profit or (Net sales – Cost of goods sold)/Net sales

Calculation

2018: 2019:

--Rs-- --Rs--

= 139715429000- = 157996212000-
115830771000/139715429000 138804538000/157996212000

= 17.09% = 12.15%
Analysis

The ratio is unfavorable.

Micro analysis

The ratio is unfavorable as it is decreasing from 17.09% in 2018 to 12.15% in 2019. The net
sales have increased from Rs. 139715429000 to Rs. 157996212000. The cost of goods sold have
also increased from Rs. 115830771000 to Rs.138804538. While the gross profit has increased from
Rs.23884658000 to Rs.19191674000 The cost of goods sold is less than the sales. The value of
purchases was increased. The raw material was expensive as compared to previous year.

Macro analysis

During the period under review the Rupee has undergone a major correction, interest rates have
more than doubled, energy prices have been significantly enhanced; there have been significant
increases in the Customs Duties and Regulatory Duties and multiple measures taken to improve
documentation and increase the tax base.

How to improve this ratio?

 Figure out your gross profit margin

 Analyze your profit margins
 Increase your prices
 Review all your prices
 Take cash discounts from suppliers
 Use inventory systems
3. Return on Investment
Return on investment is a useful and simple measure of how effective a company generates
profits from an investment. Many firms use return on investment as a convenient tool to compare
the benefit of an investment with the cost of the investment. If a company effectively utilizes an
investment and produces gains, return on investment ratio will be high. Whereas if a company
ineffectively utilizes an investment and produces losses, return on investment ratio will be low.

Significance

The best purpose of return on investment, though, is to see how your business performs relative
to industry norms. It tells the bottom-line return of any investment. It is also useful for sizing up
investment used by businesses to determine profitability of an expenditure.

Formula

Net Income or Net Profit after Tax/ Total Asset

Calculation

2018:
2019:
--Rs--
--Rs--
= 15771860000/81927064000
=13714975000/64783062000
= 19.25%
= 21.17%
Analysis

This ratio is unfavorable.

Micro analysis

There was around 50% decrease in short-term investments (current assets) which in result
decrease the total assets by almost 20%-25% and increase in cost of good sold affected the return
on investment negatively.

Macro analysis

Due to lack of investment safety in current year in Pakistan, the Toyota Indus Motor decided to
decrease their short-term investment so that their unsecured investment could be saved and this
action result in decrease return on investment.
How to improve this ratio?

 Increase Revenues

One way to increase your return on investments is to generate more sales and revenues or raise
your prices. If you can increase sales and revenues without increasing your costs, or only
increase your costs enough to still provide a net gain in profits, you’ve improved your return.

 Reduce Costs

Another way to improve your return is to reduce your expenses. You won’t have to increase your
sales or raise your prices to improve the return on your investment this way. Divide your
expenses into overhead and production costs to help you better find expense-reduction
opportunities.
4. Return on Equity
The return on equity ratio is a profitability ratio that measures the ability of a firm to generate
profits from its shareholder’s investments in the company. In other words, the return on equity
ratio shows how much profit each dollar of common stockholders’ equity generates. A rising
return on equity suggests that a company is increasing its ability to generate profit without
needing as much capital. It also indicates how well a company's management is deploying the
shareholders' capital. In other words, the higher the ROE the better.

Significance

It is profit generating efficiency. It helps investors determine whether a company in a profit

machine or inefficient operator. This ratio also determines the growth of company.

Formula

Net Income available to common stock holders or Net Profit after Tax /Common Equity or
Shareholder’s equity

Calculation

2018: 2019:

--Rs-- --Rs--

= 15771860000/36744342000 = 13714975000/40045309000

= 42.9% = 34.24%
Analysis

This ratio is unfavorable.

Micro analysis

A firm’s ROE is affected by three things: profit margin, asset turnover, and its equity multiplier or
financial leverage. Toyota’s general decline in return on equity is the result of an improving net profit
margin, a declining asset turnover ratio and declining leverage. Therefore, when looking at the core
operations of the business, Toyota shareholders do not need to be too concerned due to the company’s
general improvement in profitability along with a general decline in operational efficiency and declining
leverage

The net income has decreased in 2019. It was Rs.13714975000 in 2018 while it increased to Rs.
15771860000 while the equity has increased from Rs. 36744342 in 2018 to Rs.40045309. This
tells us that the company is using its shareholder’s funds not very efficiently and not generating
more profit.

Macro analysis

The government’s tax policy affected both positively and negatively to the automobile industry.
Now one must be tax filer in order to buy 1700 cc and above cars and this resulted in slightly
slow purchasing as for as luxury cars are concerned.

How to improve this ratio?

Companies can finance themselves with debt and equity capital. By increasing the amount of debt capital
relative to its equity capital, a company can increase its return on equity. As profits are in the numerator
of the return on equity ratio, increasing profits relative to equity increases a company's return on equity.
Increasing profits does not necessarily have to come from selling more product. It can also come from
increasing prices of each product sold, lowering the cost of goods sold, reducing its overhead expenses, or
a combination of each. Asset turnover is a measure of a company's efficiency. You can calculate it by
dividing sales by the company's total assets. In general, the more sales a company produces relative to its
assets, the more profitable it should be, and the higher return on equity it should earn.

d. Debt Management Ratio

The debt management ratio measures how much of a company's operations comes from debt
instead of other forms of financing, such as stock or personal savings. A measure of the extent to
which a firm uses borrowed funds to finance its operations. Owners and creditors are interested
in debt management ratios because the ratios indicate the riskiness of the firm's position.

1. Debt to Equity Ratio

Formula

Total Debt/Shareholders Equity

Calculations

2019: 2018:

--Rs.000s-- --Rs.000s--

= 24178833/64783062 = 45160011/36744342

= 0.6177 or 61.77 % = 1.22 0r 122.90%

The debt to equity ratio is a measure of a company's financial leverage, and it represents the
amount of debt and equity being used to finance a company's assets. It gives a snapshot of the
company’s financial leverage and liquidity by showing the balance of how much debt versus
how much of shareholders’ equity is being used to finance assets. A low debt/equity ratio means
lower risk to investors, since it means there is less debt relative to the available equity. A high
debt/equity ratio translates to higher risk, since there may not be enough available equity from
shareholders to fulfill obligations in the event of a financial decline.
Reasons

Micro analysis:

The ratio is basically telling us that creditors are providing Rs.0.6 of financing for each Rs.1
being provided by shareholders. The borrowings have debt to equity ratio which is 0.6 in 2019 as
compared to 1.2 at the end of 2018. Typically, if the ratio goes above 1, it can be very alarming.
When debt is the primary way a company finances its business, it is considered highly leveraged
and the ratio goes above 1. Luckily the ratio has still not crossed 1 this year but was increased in
last year. The total liabilities have decreased from Rs.81927064000 in 2018 to Rs.64783062000
in 2019.

Macro analysis:

Fresh long term loans are obtained under SBP financing scheme for investment in plant and
machinery for renewable energy projects. Company has drawn Rs 80540 million on a markup of
3.25% per annum. But due to the restrictions on import by government sales of Toyota corolla
increased and there was increase in overall sale by company.

How to maintain this ratio?

Increases in revenue can keep the ratio stable. When the sales increase, Indus Motor can reinvest
the money in the company, adding assets or paying down debt. That increases equity, which
keeps the debt/equity ratio down. Further the ratio can be reduced by swapping debt holders and
making them an equity shareholder in the company. This will cancel the debt owed to him and in
turn, reduce the debt of the company and improve the ratio. If planned in advance, convertible
debentures can be issued.
 2. Debt to Total Asset Ratio
Formula
Total Debt/Total Assets

Calculations

2019: 2018:

--Rs.000s-- --Rs.000s--

= 24178833/64783062 = 45160011/81927064

= 0.37 or 37.32% = 0.55 or 55.12%

The debt to total assets ratio is an indicator of a company's financial leverage. It tells you the
percentage of a company's total assets that were financed by creditors. The higher the ratio, the
higher the degree of leverage and, consequently, financial risk. The ratio is favorable

Reasons

Micro analysis:

There were low debts taken by company this year in terms of advance payments from the
customers and dealers also the sales increased this year which shows more stability in the
company although the total assets decreased this year.

Macro analysis:

There were two supplementary budgets passed by the government in year 2018-2019 there was
decrease in imports around 5 billion this year and increase in exports which was great for local
manufactures.

How to maintain the ratio?

The best way to maintain this ratio is to reduce the debts and increase the assets. The long term
loan must be paid sooner. The debt holders can be made the equity shareholder. This way the
liabilities can be reduced. The sales should be increased by improving existing products and
through proper marketing.
 3. Gearing Ratio

Formula

Long term Debt/total capitalization

Calculations

2019: 2018:

= 80540/400485849 = 0/36744342

= 2.011 or 0.02% =0

The gearing ratio measures the proportion of a company's borrowed funds to its equity. The
ratio indicates the financial risk to which a business is subjected, since excessive debt can lead
to financial difficulties. A high gearing ratio represents a high proportion of debt to equity,
while a low gearing ratio represents a low proportion of debt to equity. This ratio is similar to
the debt to equity ratio, except that there are a number of variations on the gearing ratio formula
that can yield slightly different results.

Reasons

Micro analysis:

A high gearing ratio typically indicates a high degree of leverage. In Indus motor company the
gearing is 0.02% which is nothing to its total capital and company should not worry much about
gearing

Macro analysis:

The government’s tax policy affected both positively and negatively to the automobile industry.
Now one must be tax filer in order to buy 1700 cc and above cars and this resulted in slightly
slow purchasing as for as luxury cars are concerned.
How to improve

Sell shares: The board of directors could authorize the sale of share in the company which could
be used to pay down debt.

Increase profits: Use any available methods to increase profits which should generate cash with
which to pay down debt.

e. Market Value Ratio

Market value ratios are used to evaluate the current share price of a publicly-held company's
stock. These ratios are employed by current and potential investors to determine whether a
company's shares are over-priced or underpriced.

1. Earnings per Share

Formula
Net Income or Net Profit after Tax/ Number of Common Shares Outstanding

Calculations

2019: 2018:

=13714975/786000 =15771860/786000

=174.49 =200.7

Earnings per share or EPS are an important financial measure, which indicates the
profitability of a company. EPS is the portion of a company’s profit that is allocated to every
individual share of the stock. It is a term that is of much importance to investors and people who
trade in the stock market. The higher the earnings per share of a company, the better is its
profitability.
Reasons

Micro analysis:

The company issued same number of shares in both 2018 and 2019. This ratio has thus decreased
due to decrease in the profit after tax it decreased -13% and also due to the return on equity
decreased -20% as compared to 2018.

Macro analysis

There is a decrease in earnings per share due to the bad economic condition of Pakistan and the
consistent decrease in stock market also the devaluation of Pakistani rupee against dollar.

How to improve this ratio?

Indus Motors Company can increase its Earnings per share by increasing its net profit. It can also
increase its EPS by repurchasing its own stock. In both cases EPS will be increased.
Price Earnings P/E Ratio

The price earnings ratio, often called the P/E ratio or price to earnings ratio, is a market prospect
ratio that calculates the market value of a stock relative to its earnings by comparing the market
price per share by the earnings per share. In other words, the price earnings ratio shows what the
market is willing to pay for a stock based on its current earnings.

Investors often use this ratio to evaluate what a stock’s fair market value should be by predicting
future earnings per share. Companies with higher future earnings are usually expected to issue
higher dividends or have appreciating stock in the future.

Obviously, fair market value of a stock is based on more than just predicted future earnings.
Investor speculation and demand also help increase a share’s price over time.
The PE ratio helps investors analyze how much they should pay for a stock based on its current
earnings. This is why the price to earnings ratio is often called a price multiple or earnings
multiple. Investors use this ratio to decide what multiple of earnings a share is worth. In other
words, how many times earnings they are willing to pay.

SIGNIFICANCE OF P/E RATIO

 price to earning ratio indicates how cheap or expensive a stock is. If P/E ratio of a stock
is 10, then it tells that investors are willing to pay 10 times of a company’s earning to buy
that stock.

 Stock with P/E ratio less than 10 are considered as cheaper. These type of stock often
provide a good opportunity for buying. High price to earning ratio indicate that investors
are expecting high earning growth in future. But while investing, don’t consider P.E ratio
as a standalone parameter.

 Companies that don’t make profit or make loss have zero or negative price to earning
ratio. Most analysts say that their P.E ratio does not exist.
Formula
The price earnings ratio formula is calculated by dividing the market value price per share by
the earnings per share.
Market Price per Share/Earnings per share

CALCULATION

2019: 2018:

--Rs.000s-- --Rs.000s--

=1203.92/174.57 =1421.46/200.66

= 6.89 = 7.08
ANALYSIS

Macro analysis:

When a company increases its debt, it can cause the price earnings ratio for its stock to fall. This
is what is happening here. Many investors concerned that the costs of higher debt will negatively
affect the company's future earnings so they sell their shares in response, causing share prices to
decline. However, surprisingly the market price has increased. Sometimes price earnings ratios
fall in response to increased risk. This is effectively the opposite of price earnings ratios rising in
response to expectations of future growth.

Micro analysis:

Price earnings ratio decreased to 4.65 times from 7.38 times, which is a combined result of
higher earnings per share and improvement in market price of the shares. The P/E ratio of the
Toyota IMC is unfavorable, as it has decreased in the year 2019 with the difference of 2.73.
Higher price earnings ratio shows that investors are willing to pay a higher share price today
because there are growth expectations in the future. Although the ratio is decreasing but the
market price per share is increasing in 2019. The earning per share is also increasing which is
good.

HOW TO IMPROVE

Toyota IMC can improve this ratio by letting the upper management take effective and efficient
decisions concerning disposing off the assets, which are idle, decreasing the cost of goods sold,
introducing new marketing strategies, corporate social responsibility, research and development
by bringing innovation, produce spare parts, by introducing new attractive pricing strategies. All
these things will improve the ratio.
 BOOK VALUE PER SHARE

The book value per share formula is used to calculate the per share value of a company based on its
equity available to common shareholders. The term "book value" is a company's assets minus its
liabilities and is sometimes referred to as stockholder's equity, owner's equity, shareholder's equity,
or simply equity.

Common stockholder's equity, or owner's equity, can be found on the balance sheet for the
company. In the absence of preferred shares, the total stockholder's equity is used.

FORMULA

Common Equity/ Number of Shares

CALCULATION

2019: 2018:

--Rs.000s-- --Rs.000s--

=40045309000/78600000 =36744342000/78600000

= 509.48 = 467.48
 SIGNIFICANCE OF BOOK VALUE PER SHARE

 Book value is considered important in terms of valuation because it represents a fair and accurate
picture of a company’s worth. This means that investors and market analysts get a reasonable
idea of the company’s actual worth.
 Book value is primarily important for investors using a value investing strategy because it can
enable them to find bargain deals on stocks, especially if they suspect that a company is
undervalued and/or is poised to grow, and the stock is going to rise in price.
 Stocks that trade below book value are often considered a steal because they are anticipated to
turn around and trade higher. Investors who can grab the stocks while costs are low in relation to
the company’s book value are in an ideal position to make a substantial profit and be in a good
trading position down the road.

ANALYSIS

Micro analysis:

The ratio has increased from Rs.467.48 to Rs.509.48, this is why the ratio is favorable. The
numerator is greater than the denominator, which means the total equity is more than the number
of shares. The equity has increase from Rs.36744342000 in 2018 to Rs. 40045309000 in 2019.
Increasing breakup value shows that a company is performing well than its previous year. This is because
the company has more assets than the liabilities this year than the previous year. Total assets in 2018 were
Rs.81927M while they decrease to Rs.64783M in 2019. The total liabilities were Rs.74702M while it
decrease to Rs.24738M.

Macro analysis:

Political situation in the country is not stabilized, which can affect the interest rates and taxes,
which in turn increases liabilities. Business also faces challenges due to energy crisis. Still IMC
is providing highly quality oriented customers with variety of new and trendy products. They
meet this challenge with team of experts who not only understand automotive but also trends,
and monitor them effectively, which helps in maximizing profits.

HOW TO MAINTAIN

Toyota IMC can come up with new idea to increase the in sales. Furthermore, profits can be
increased by reducing expenses due to which the share price of the company would increase and
in turn increase the ratio of the company.

COVERAGE RATIO

A coverage ratio, broadly, is a group of measures of a company's ability to service its debt and
meet its financial obligations such as interest’s payments or dividends. The higher the coverage
ratio, the easier it should be to make interest payments on its debt or pay dividends.

INTREST COVERAGE RATIO

The interest coverage ratio is a financial ratio that measures a company’s ability to make interest
payments on its debt in a timely manner.

FORMULA

Earnings before Interest and Tax/Finance cost or Interest charges

CALCULATION

2019: 2018:

--Rs.000s-- --Rs.000s--

= 19043336/67407 = 23079477/80311

= 282.51 = 287.37

SIGNIFICANCE OF INTREST COVERAGE RATIO

 The interest coverage ratio is used to see how well a firm can pay the interest on
outstanding debt.
 Also called the times-interest-earned ratio, this ratio is used by creditors and
prospective lenders to assess the risk of lending capital to a firm.
  A higher coverage ratio is better, although the ideal ratio may vary by industry.

ANALYSIS

Micro analysis:

The higher the ratio the greater the firm could cover its interest payments without any
difficulties. However, the level of debt was high but increased profitability helped in increase in
interest coverage ratio. Thus the ratio has decrease to 282.51 (2019) from 287.37 last year
(2018). The earnings before interest and tax has decrease in 2019. Although the interest charges
have decrease in 2019.

Macro analysis:

Due to political instability, most of the investors has pulled back their investment that is why
growth of Toyota IMC has fallen down. In addition, due to hefty taxes on luxuries vehicle has
affected major automobiles of Toyota IMC.

HOW TO IMPROVE

To increase your chances of getting a loan or to maintain payments on your existing loan you
may need to improve your DSCR. Here are a few ways to increase your debt service coverage
ratio:

 Increase your net operating income

 Decrease your operating expenses
 Pay off some of your existing debt
 Decrease your borrowing amount