Analysis Of Balance Sheet: TATA Motors

This blog provides with insight on how to analyse a balance sheet with reference to TATA Motors

Balance sheet

Balance sheet is one of the three main financial statements which shows the company’s financial position on a particular date usually at the end of a financial year. Assets and Liabilities are balanced to show what the company owns and what it owes.

Anyone who is looking to invest for long-term, must-see and understand balance sheets as it gives you the health report of any company. The three main constituents of a balance sheet are assets, liability and equity. They are further divided into different sub-heads which are important to understand.

The Accounting Equation

Assets are financed by two resources Debt and Equity whereas equity can be called as internal liability and debt as external liability. These three items need to satisfy a equation.

Assets = Liability + Equity

Here is a consolidated balance sheet of Tata Motors Limited.

Asset

Assets are the resources owned by a company which will help them reap the benefits in future. Every asset carries an economic value. Assets are further subdivided into current assets and non-current assets. In the above balance sheet we can see the blue headings of Non-current and Current Assets in (1) and (2) respectively.

Non-Current Assets

Assets which help the company to run its operations and are not for sale are called fixed assets. They are bought to support the business for long-term and earn revenue. Let us observe the changes in some of these assets.

a) Property, Plant and Equipment - These consists of all the office buildings, furniture, plant, machinery etc. They are core to the business and are tangible in nature. P,P&E was (Rupee- 72619 crores in the year 2019) and have increased to (Rupee- 77882 crore in the year 2020) here we can observe an increase of 7.2 %, this means the company have invested in P,P&E and are positive in the long-term.

b) Goodwill - It is an intangible asset which represents a company’s reputation in the market among the customers, suppliers and competitors. It does not have any physical presence but aligning with the definition of assets it provides economic benefits. In our case, it has increased from (Rupee- 747 crores in 2019 to Rupee- 777 crores in 2020) A total of 4% increase. This shows growth in the market reputation of the company.

c) Deferred tax assets - If a company have paid taxes in advance and therefore does not need to pay in future is considered as deferred tax assets. It is similar to prepaid expenses, In our case, deferred taxes have increased from (Rupee- 5151 crore in 2019 to Rupee 5457 crore in 2020). An increase of approx 6%. This can be considered good as the company will have less tax obligation in the future.

Current Assets

Assets which will provide benefits within one year is be considered as current assets for instance inventories can be sold and converted into cash within a year. They show the liquidity in the business and the company’s ability to pay off its current debts.

a) Inventories:- These are ready to sell goods available in the warehouse or godown. Because of their high liquidity, they are classified as current assets. It is used in the day-to-day operations of the company. In our case as Tata motors produce commercial and passenger vehicles, therefore, these vehicles will be considered as inventory. We can observe a decrease, this can be a signal that because of low demand the company is not producing that much vehicle.

b) Trade receivables:- when the company sell goods on credit, it is entitled to receive an amount of money in the near future. The sell of vehicles on credit would generate trade receivables and we can see that it has decreased significantly, this may be due to low demand in the economy or the company have changed its policies for credit sales.

Equity

Shareholders equity is the capital that the business owes to its internal investors (Shareholders) and is the sum left after paying all the debts. Higher Portion of Equity assures that the company can pay off its debt is and will not go into insolvency.

Shareholders equity = Assets – Liability

a) Share Capital:- The capital contributed by the shareholders over a period of time in exchange for partial ownership in the company is known as share capital. It includes common shares plus the additional paid-in capital. Tata motor’s equity capital has increased slightly from 2019 to 2020.

Liability

Liabilities are the obligations on the company which needs to be paid back in form of money or some other economic benefit. It is what the company owes to the external people for example:- loan borrowed from the bank which after a period of time will be paid back. Or material bought on credit for which an amount is due to the supplier. These can be further divided into current and non-current liability.

1. Non-Current Liability

In simple terms, money borrowed for long-term usages can be categorised as long-term liability, this includes borrowing from bank, Assets taken on lease, Bonds Issued to raise fund etc. Liabilities are not always bad as it can be used to grow the business and is a cheaper way to raise capital than equity.

a) Borrowings -these are debt borrowed from the market in form of a debenture or, loan from banks. The Company’s borrowed amount has decreased by 20% approximately this may be because the company does not see any use of borrowing and must have paid back some of the debt.

b) Lease liability - It is a contract between two-party that transfers the right to use an asset from the lessor for an agreed period of time but, does not pass the possession of the asset. In exchange, the lessee gives lump sum or periodical payment to the lessor. Here, we can see extreme changes from the year 2019 to 2020 hence, We can conclude that the company have taken many assets on lease.

2. Current Liability

Obligations which needs to be paid within one year, are categorized as current liabilities for example amount owes to the supplier after a credit purchase which needs to be paid in near future. Some more examples of current liability are Notes payable, Interest payable, Salaries payable and current portion of non-current liability.

a) Borrowing -Companies can also borrow funds for less then a year, which is known as short-term borrowings. A company can go to banks or reach out money market for this type of borrowings. In our case, these borrowings have decreased by around 20%. This may be due to the universal decrease in credit transactions.

b) Trade payable - The sum of money payable by a company for the credit purchase of goods is known as trade payables. This liability has to be paid within one year to the supplier therefore, it indicated the future outflow of the cash.

Conclusion

The balance sheet will give you a birds-eye view of the business. A better way to understand and analyse a balance sheet is to use the financial ratios. They are categorised into profitability, liquidity, Solvency and valuation. For a deeper insight into the business, you also need to understand “Income Statement” and “Cash flow statement” along with Balance Sheet.