APOLLO TYRES LTD Case Solution
The return on asset, return on equity, and net profit margins of Apollo were high in 2010 as compared to 2012. The figures were 16.44% , 46.29% and 11.22% respectively. Now if we look at 2012 figures, these are 8.67%, 25.66% and 5.98% respectively. The company is now merely stabling its important ratios and it appeared that they are finding it hard to demonstrate the exact performance they showed in 2010. The reasons behind such a sudden drop in these ratios in 2011 and 2012 in terms of net profit margins seem that they are not controlling their costs properly. Which in turn shows its affect on net profit, another reason behind such fall is that the gross profit is not increasing the way it increased in 2010. The possible factors that may have contributed in the fall of return ratios like return on equity and return on assets are mainly internal, like management performance and their ability to run business in positive figures because return ratios consist of two factors, assets and profits. The greater return always showed that management is performing better internally.
The liquidity ratios from which Apollo has showed a good interest cover of 4.26 time in 2012 but it has shown a decline in 2012 interest cover is compared to last four preceding years in order to maintain a good interest cover Apollo Tyres Ltd have to earn good profits in order to maintain required interest cover. It is because financial institutions who offer loans and creditor that lend money tend to look at this ratio critically before granting any loan of funds. The current ratio of Apollo Tyres Ltd is not demonstrating a good figure, which is only 0.71:1 and quick ratio currently stands at 0.78:1 in 2012, which is not sufficient to meet short-term liabilities. It shows poor performance and inability of Apollo to meet short-term liabilities as they fall due. The current and quick ratio has always been low as it was below 1 during last five years which should be a point of concern for Apollo Tyres ltd. It appeared that it would further deteriorate if some concrete decisions relating to improvement of liquidity are not taken immediately.
Apollo Tyres Ltd has shown some good working capital management in the past and current inventory, debtor and payable showing a reasonable figures to be relied upon. Apart from debtors and creditors that are reasonable it appears that inventories are taking too much time to transform into liquid asset like cash inventory is currently taking 89 days which is too long and deteriorate Apollo Tyres’ liquidity.
Overall, Apollo is a suitable company for investment purposes. The industry within which it operates is showing a growth, the market shares can be further expanded and there are many opportunities in the external environment. Internally they just have to manage their liquidity issues. Apart from this, it appears that Apollo Tyres is a suitable company for Mr. Santanu’s investment portfolio.
Appendix :1
| Ratios | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |||
| Gross profit margin | 30.46% | 34.87% | 28.93% | 42.09% | 37.64% | 31.40% | |||
| ROCE | 22.61% | 33.77% | 20.04% | 34.35% | 21.02% | 20.29% | |||
| ROA | 7.83% | 15.72% | 9.00% | 16.44% | 9.43% | 8.67% | |||
| Net profit margin | 5.52% | 9.41% | 5.66% | 11.22% | 7.77% | 5.98% | |||
| Return on equity | 25.35% | 37.39% | 20.89% | 46.29% | 28.55% | 25.66% | |||
| Interest cover | 3.6333 | 7.6932 | 4.3571 | 10.067 | 5.5 | 4.26263 | |||
| Debtor days | 31.218 | 24.333 | 16.478 | 35.372 | 39.184 | 34.4187 | Days | ||
| Creditor days | 82.575 | 74.316 | 58.409 | 94.534 | 62.408 | 47.314 | Days | ||
| Inventories days | 80.928 | 87.108 | 67.394 | 83.072 | 110.46 | 87.806 | Days | ||
| Debt to equity | 46.84% | 35.34% | 39.76% | 46.45% | 50.68% | 50.34% | |||
| Current ratio | 0.50 | 0.84 | 1.03 | 0.51 | 0.60 | 0.71 | :1 | ||
| Quick ratio | 0.92 | 0.95 | 1.13 | 0.90 | 0.71 | 0.78 | :1 | ||
| Total share holders funds and total debt | 1759 | 1828 | 2241 | 3675 | 4893 | 5705 | |||
| capital employed | 1928 | 2005 | 2435 | 3927 | 5338 | 6240 | |||
| current asset – inventories | 1008 | 769 | 793 | 1446 | 1401 | 1668 | |||
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