pROJECT - rEPORT - 2009-11 Ratio Analysis (3) .Docx edITED123

Ratio Analysis & Interpretation Of Financial Statement In IOCL (Barauni Refinery)
A PROJECT REPORT ON
RATIO ANALYSIS & INTERPRETATION OF FINANCIAL STATEMENT IN BARAUNI REFINARY

SUBMITTED TO: COMPANY GUIDE Mr. MUKESH KUMAR Sr. Accounts Officer Submitted by: Vivek Kumar LNMCBM/Rl.No.-091045 FACULTY GUIDE Mr. A. K. Mishra
A Report submitted in partial fulfillment of the requirement of M.B.A Programme of

L.N. Mishra College of Business Management (Affiliated to UGC & Approved to All India Council for Technical Education) An Autonomous (Constituent) College under B.R. Ambedkar Bihar University Muzaffarpur - 842001
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ACKNOWLEDGEMENT
Stepping out into the world is a process of garnering knowledge and applying them as a child does from the time it takes birth. The process is facilitated by numerous people who directly or indirectly aid the learning and growth of any persons. They are the ones to whom the person is obliged to forever.
At the outset, I would like to express my deep indebtness to Mr. A. K. Biswas Chief Training Manager and Mr. J. N. Bhilware, TRO for giving me a chance to do the project in his esteemed organization. I would also like to thanks Shakuntala Madam for her cooperation in successful completion of project.
I would like to thank Mr. Mukesh Kumar, SACO for their guidance in completing this project.
Not the least, I would like to express my deep gratitude to our MR. A.K. Mishra and who guided me. I also express my heartfelt gratefulness to my parents who guided me in the project. I would also like to thank other esteemed faculty of finance, and others without whom the project would not have been possible. I also would like to thank all those who have helped me in this encounter with the practical world.
TABLE OF CONTENTS
TOPIC Acknowledgement List of Illustration 1.About IOCL 1.1 Indians Downstream Major 1.2 Network Beyond Compare 1.3 Widening Horizons 1.4 Vision ,Mission & values 2. Barauni Refinery-An Overview 2.1 Quality policy of Barauni Refinery 2.2 Rewards of Barauni Refinery 3. Introduction 3.1 Literature Survey 3.2 Oil Price History and Analysis 3.3 Crude Oil Imports 3.4 Objective 3.5 Sources of Data collection PAGE NO ii 4-10
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13-18
4. Analysis and Interpretation of Financial statement A Theoretical Aspect 19-48 4.1 Financial Analysis 4.2 Ratio Analysis 5. Analysis and Interpretation of Financial statement Indian Oil Corporation Ltd, Barauni 5.1 Balance Sheet of IOCL 5.2 P/L A/c of IOCL 5.3 Analysis of Ratios 5.4 Ratio analysis of Indian Oil Companies 6. Conclusion & Suggestions Bibliography
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72-74 75
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Type Founded Location Key person Industry Products
Revenue Website
PSU 1959 India Brij Mohan Bansal (Chairman) Petroleum Refining, Transportation, Marketing Fuel, LPG, Petrol, Kerosene, Diesel, Light Diesel Oil, Low Sulphur Heavy Stock, Fuel Oil, Sulphur, Bitumen, Lubricants Rs. 1,756,386,000,000 (Rs. 175638.60 crores), 2006 www.iocl.com
Indian Oil Corporation Limited or IOC is an Indian company. It is India's largest commercial enterprise and the only Indian company to be among the world's top 200 corporations according to Fortune magazine. It is also among the 20 largest petroleum companies in the world.
History
Indian Oil Bhavan, Delhi
Indian Refinery Ltd. A Refining company Incorporated in 1958
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Indian Oil Company

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Indian Oil Company A Marketing Company Incorporated in 1959
Indian Oil Corporation

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HISTORY OF INDIAN OIL CORPORATION LTD.

The Indian Oil Corporation, a 100% state-owned company, is the largest commercial organization in India and ranks among the 100 largest industrial corporations in the world. Since 1959, this refining, marketing, and international trading company has served the Indian state with the important task of reducing India's dependence on foreign oil and thus conserving valuable foreign exchange. Exploration and production are reserved largely for two other government organizations, the Oil and Natural Gas Commission (ONGC) and Oil India Ltd. Indian Oil owes its origins to the Indian government's conflicts with foreign-owned oil companies in the period immediately following India's independence in 1947. The leaders of the newly independent state found that much of the country's oil industry was effectively in the hands of a private monopoly led by a combination of British-owned oil companies Burmah and Shell and U.S. companies Standard-Vacuum and Caltex. An indigenous Indian industry barely existed. During the 1930s, a small number of Indian oil traders had managed to trade outside the international cartel. They imported motor spirit, diesel, and kerosene, mainly from the Soviet Union, at less than world market prices. Supplies were irregular, and they lacked marketing networks that could effectively compete with the multinationals. Burmah-Shell entered into price wars against these independents, causing protests in the national press, which demanded government-set minimum and maximum prices for kerosene--a basic cooking and lighting requirement for India's people--and motor spirit. No action was taken, but some of the independents managed to survive until World War II, when they were taken over by the colonial government for wartime purposes. During the war the supply of petroleum products in India was regulated by a committee in London. Within India, a committee under the chairmanship of the general manager of BurmahShell and composed of oil company representatives pooled the supply and worked out a set price. Prices were regulated by the government, and the government coordinated the supply of oil in accordance with defense policy. Wartime rationing lasted until 1950, and a shortage of oil products continued until well after independence. The government's 1948 Industrial Policy Resolution declared the oil industry to
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be an area of the economy that should be reserved for state ownership and control, and stipulated that all new units should be government-owned unless specifically authorized. India remained effectively tied to a colonial supply system, however. Oil could only be afforded if imported from a country in the sterling area rather than from countries where it had to be paid for in dollars. In 1949 India asked the oil companies of Britain and the United States to offer advice on a refinery project to make the country more self-sufficient in oil. The joint technical committee advised against the project and said it could only be run at a considerable loss. The oil companies were prepared to consider building two refineries, but only if these refineries were allowed to sell products at a price 10% above world parity price. The government refused, but within two years an event in the Persian Gulf caused the companies to change their minds and build the refineries. The companies had lost their huge refinery at Abadan in Iran to Prime Minister Mussadegh's nationalization decree and were unable to supply India's petroleum needs from a sterling area country. With the severe foreign exchange problems created, the foreign companies feared new Iranian competition within India. Even more important, the government began to discuss setting up a refinery by itself. Between 1954 and 1957 two refineries were built by Burmah-Shell and Standard-Vacuum at Bombay, and another was built at Vizagapatnam by Caltex. During the same period the companies found themselves in increasing conflict with the government. The government came into disagreement with Burmah Oil over the Nahorkatiya oil field shortly after its discovery in 1953. It refused Burmah the right to refine or market this oil and insisted on joint ownership in crude production. Burmah then temporarily suspended all exploration activities in India. Shortly afterward, the government accused the companies of charging excessive prices for importing oil. The companies also refused to refine Soviet oil that the government had secured on very favorable terms. The government was impatient with the companies' reluctance to expand refining capacity or train sufficient Indian personnel. In 1958, the government formed its own refinery company, Indian Refineries Ltd. With Soviet and Romanian assistance, the company was able to build its own refineries at Noonmati, Barauni, and Koyali. Foreign companies were told that they would not be allowed to build any new refineries unless they agreed to a majority shareholding by the Indian government.
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In 1959, the Indian Oil Company was founded as a statutory body. At first, its objective was to supply oil products to Indian state enterprise. Then it was made responsible for the sale of the products of state refineries. After a 1961 price war with the foreign companies, it emerged as the nation's major marketing body for the export and import of oil and gas. Growing Soviet imports led the foreign companies to respond with a price war in August 1961. At this time, Indian Oil had no retail outlets and could sell only to bulk consumers. The oil companies undercut Indian Oil's prices and left it with Storage problems. Indian Oil then offered even lower prices. The foreign companies were the ultimate losers because the government was persuaded that a policy of allowing Indian Oil dominance in the market was correct. This policy allowed Indian Oil the market share of the output of all refineries that were partly or wholly owned by the government. Foreign oil companies would only be allowed such market share as equaled their share of refinery capacity. In September 1964, Indian Refineries Ltd. and the Indian Oil Company were merged to form the Indian Oil Corporation. The government announced that all future refinery partnerships would be required to sell their products through Indian Oil. It was widely expected that Indian Oil and ONGC would eventually be merged into a single state monopoly company. Both companies have grown vastly in size and sales volume but, despite close links, they have remained separate. ONGC has retained control of most of the country's exploration and production capacity. Indian Oil has remained responsible for refining and marketing. During this same decade, India found that rapid industrialization meant a large fuel bill, which was a steady drain on foreign exchange. To meet the crisis, the government prohibited imported petroleum and petroleum product imports by private companies. In effect, Indian Oil was given a monopoly on oil imports. A policy of state control was reinforced by India's closer economic and political links with the Soviet Union and its isolation from the mainstream of western multinational capitalism. Although India identified its international political stance as non-aligned, the government became increasingly friendly with the Soviet Bloc, because the United States and China were seen as too close to India's major rival, Pakistan. India and the USSR entered into a number of trade deals. One of the most important of these trade pacts allowed Indian Oil to import oil from
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the USSR and Romania at prices lower than those prevailing in world markets and to pay in local currency, rather than dollars or other convertible currencies. For a time, no more foreign refineries were allowed. By the mid-1960s, government policy was modified to allow expansions of foreign-owned refinery capacity. The Indian Oil Corporation worked out barter agreements with major oil companies in order to facilitate distribution of refinery products. In the 1970s, the Oil and Natural Gas Commission of India, with the help of Soviet and other foreign companies, made several important new finds off the west coast of India, but this increased domestic supply was unable to keep up with demand. When international prices rose steeply after the 1973 Arab oil boycott, India's foreign exchange problems mounted. Indian Oil's role as the country's monopoly buyer gave the company an increasingly important role in the economy. While the Soviet Union continued to be an important supplier, Indian Oil also bought Saudi, Iraqi, Kuwaiti, and United Arab Emirate oil. India became the largest single purchaser of crude on the Dubai spot market. The government decided to nationalize the country's remaining refineries. The Burmah-Shell refinery at Bombay and the Caltex refinery at Vizag were taken over in 1976. The BurmahShell refinery became the main asset of a new state company, Bharat Petroleum Ltd. Caltex Oil Refining (India) Ltd. was amalgamated with another state company, Hindustan Petroleum Corporation Ltd., in March 1978. Hindustan had become fully Indian-owned on October 1, 1976, when Esso's 26% share was bought out. On October 14, 1981, Burmah Oil's remaining interests in the Assam Oil Company were nationalized, and Indian Oil took over its refining and marketing activities. Half of India's 12 refineries belonged to Indian Oil. The other half belonged to other state-owned companies. By the end of the 1980s, India's oil consumption continued to grow at 8% per year, and Indian Oil expanded its capacity to about 150 million barrels of crude per annum. In 1989, Indian Oil announced plans to build a new refinery at Pradip and modernize the Digboi refinery, India's oldest. However, the government's Public Investment Board refused to approve a 120,000 barrels-per-day refinery at Daitari in Orissa because it feared future over-capacity. In the 1990s Indian Oil refines, produces, and transports petroleum products throughout India. Indian Oil produces crude oil, base oil, formula products, lubricants, greases, and other
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petroleum products. It is organized into three divisions. The refineries and pipelines division has six refineries, located at Gwahati, Barauni, Gujarat, Haldia, Mathura, and Digboi. Together, the six represent 45% of the country's refining capacity. The division also lays and manages oil pipelines. The marketing division is responsible for storage and distribution and controls about 60% of the total oil industry sales. The Assam Oil division controls the marketing and distribution activities of the formerly British-owned company. Indian Oil has established its own research center at Faridabad near New Delhi for testing lubricants and other petroleum products. It develops lubricants under the brand names Servo and Servoprime. The center also designs fuel-efficient equipment. The Indian Oil Corporation is not the only state-owned refining organization in India, but it is the country's largest commercial company and the inheritor of most of the role and market dominance established by its colonial predecessor, Burmah-Shell. With nearly two-thirds of oil industry sales and responsibility for the country's international oil trade, Indian Oil is likely to remain a powerful force in India.
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Indian Oil Corporation Limited

An Overview
Corporate
Indian Oil is the country's largest commercial enterprise, with a sales turnover of Rs. 4,09,957 crore (85,550)million tones of petroleum products, including exports) and profits of Rs. 4,891 crore for fiscal 2004 Indian Oil is Indias No.1 Company in Fortune's prestigious listing of the world's 500 largest corporations, ranked 87 for the year 2012 based on fiscal 2003 performance. (List for the fiscal 2004 is yet to be released.) It is also the 19th largest petroleum company in the world. Indian Oil has also been adjudged No.1 in petroleum trading among the national oil companies in the Asia-Pacific region, and is ranked 325th in the current Forbes' "Global 500" listing of the largest public companies.
Indias Flagship National Oil Company Beginning in 1959 as Indian Oil Company Ltd., Indian Oil Corporation Ltd. was formed in 1964 with the merger of Indian Refineries Ltd. (Estd. 1958). As India's flagship national oil company, Indian Oil accounts for 56% petroleum products market share among PSU companies, 42% national refining capacity and 69% downstream pipeline throughput capacity. The Indian Oil group of companies owns and operates 10 of India's 18 refineries with a current combined rated capacity of 54.20 million metric tonnes per annum (MMTPA) or 1.3 million barrels per day (bpd). These include two refineries of subsidiary Chennai Petroleum Corporation Ltd and one of Bongaigaon Refinery and Petrochemicals Limited. Indian Oil owns and operates the countrys largest network of cross -country crude oil and product pipelines of 7,730 km, with a combined capacity of 58.62 MMTPA.
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Indian Oil controls 10 of India's 18 refineries - at Digboi, Guwahati, Barauni, Koyali, Haldia, Mathura, Panipat, Chennai, Narimanam and Bongaigaon - with a current combined rated capacity of 54.20 million metric tones per annum (MMTPA) Indian Oil accounts for 42% of India's total refining capacity
REFINING
Born from the vision of achieving self-reliance in oil refining and marketing for the nation, Indian Oil has gathered a luminous legacy of more than 100 years of accumulated experiences in all areas of petroleum refining by taking into its fold, the Digboi Refinery commissioned in 1901. Indian Oil controls 10 of Indias 19 refineries. The group refining capacity is 60.2 million metric tonnes per annum (MMTPA) or 1.2 million barrels per day -the largest share among refining companies in India. It accounts for 40.4% share of national refining capacity.
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Pipeline
Indian Oil owns and operates India's largest network of cross-country crude oil and product pipelines of 7,730 km, with a combined capacity of 58.62 MMTPA. Indian Oil also operates two Single Buoy Mooring systems in the high seas off Vadinar coast in the Gulf of Kutch for Indian Oil owns & operates 67% of India's downstream pipeline throughput capacity Marketing Indian Oil provides a wide range of marketing services and consultancy in fuel handling, distribution, storage and fuel/lube technical services. With a formidable bank of technical and engineering talent, Indian Oil is fully equipped to handle small to large-scale infrastructural projects in the petroleum downstream sector anywhere in the country. The wide network of services offered by Indian Oil, Marketing Division is illustrated in this section, which includes; commercial/reticulated LPG; total fuel management/ consumer pumps; Indian Oil Aviation Service; LPG Business (non-fuel alliances); loyalty programs; retail business (non-fuel alliances) and SERVO technical services. SERVO Technical Services Marketing Total Fuel Management/ Consumer Pumps Commercial/Reticulated LPG LPG Business (Non-Fuel Alliances) Retail Business (Non- Fuel Alliances) IndianOil Aviation Service Loyalty Programs
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Marketing Indian Oils countrywide network of over 21,000 retail sales points is backed for supplies by its extensive, well spread out marketing infrastructure comprising 169 bulk storage terminals, installations and depots, 93 aviation fuel stations and 79 LPG bottling plants. Its subsidiary, IBP Co. Ltd, is a stand-alone marketing company with a nationwide retail network of over 2500 sales points. Indian Oil caters to over 53% of India's petroleum consumption.
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Research & Development Indian Oils world-class R&D Centre has won recognition for its pioneering work in lubricants formulation, refinery processes, pipeline transportation and bio-fuels. It has developed over 2,100 formulations of SERVO brand lubricants and greases for virtually all conceivable applications automotive, railroad, industrial and marine meeting stringent international standards and bearing the stamp of approval of all major original equipment manufacturers. The Centre has to its credit over 90 national and international patents. The Centre has recently incorporated a subsidiary company for commercializing its innovations and technologies. The wide range of SERVO brand lubricants, greases, coolants and brake fluids meet stringent international standards and bear the stamp of approval of all major original equipment manufacturers. The Centre has to its credit over 60 national and international patents, including 5 from US.
Research & Development Centre

In today's dynamic business environment, innovation through a sustained process of Research & Development (R & D) is the only cutting edge tool for organizations to thrive. With emphasis on development and speedy commercialization of globally competitive products, processes and technologies, the focus has now shifted from R & D to R & D (Research, Development & Deployment).
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Spreading Wings Indian Oil is also strengthening its existing overseas marketing ventures and simultaneously scouting new opportunities for marketing and export of petroleum products to new energy markets in Asia and Africa. Two wholly-owned subsidiaries are already operational in Sri Lanka and Mauritius, and a regional office at Dubai is coordinating expansion of business activities in Middle East region. Within a year of incorporation, Lanka IOC Pvt. Ltd. (LIOC) has captured a 25% market share in Sri Lanka, with a target to take it to about 40% in the near future. IndianOil is investing US$ 18 million in Mauritius through its subsidiary, Indian Oil Mauritius Ltd. (IOML), to set up a range of marketing infrastructure there. The Corporation has launched 11 joint ventures in partnership with some of the most respected corporates from India and abroad -- Lubrizol, Nyco SA, Elf, Petronas, Oiltanking GmbH, Marubeni, Mitsubishi, to name a few. SERVO lubricants are being marketed in Dubai, Nepal, Bhutan, Kuwait, Malaysia, Bahrain, Indonesia, Sri Lanka, Kyrgyzstan, Mauritius, Bangladesh, etc. Indian Oil has been lending its expertise for nearly two decades to various countries in several areas of refining, marketing, transportation, training and research & development. These include Sri Lanka, Kuwait, Bahrain, Iraq, Abu Dhabi, Tanzania, Ethiopia, Algeria, Nigeria, Nepal, Bhutan, Maldives, Malaysia and Zambia. Indian Oil's sincere commitment to Quality, Safety, Health and Environment is reflected in the series of national and international certifications and awards (current ones listed separately) earned over the years. The 17th largest petroleum company in the world, Indian Oil, is well on its way to becoming an integrated, trans-national energy corporate.
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Linear Integration E&P: Indian Oil is focusing on acquiring equity oil & gas in India and abroad. Indian Oil was awarded two exploration blocks under NELP-I (New Exploration Licensing Policy of the Government of India) in partnership with ONGC (Oil & Natural Gas Corporation Ltd). Under the 2nd round of NELP, Indian Oil, in consortium with ONGC, GAIL, GSPC and OIL, was awarded eight exploration blocks. Under the 3rd round of NELP, Indian Oil, in consortium with ONGC, was awarded one exploration block in Mizoram. Indian Oil -ONGC combine has also been awarded two blocks in the first round of bidding for exploration of Coal Bed Methane (CBM). The ONGC-Videsh-IOC-OIL consortium has been awarded Farsi exploration block in Iran under Service Contract. IOC-ONGC combine was also qualified by KOC/KPC as non-operators for the development of Northern oil fields of Kuwait. A consortium of BP-Occidental-IOC-ONGC, under the operatorship of BP, has been formed for participation in Kuwait bidding round. IOC has acquired a 27% participating interest in the block AAP-ON-94/1 from HOEC, which is operated by Premier Oil with 38% a participating interest. HOEC and OIL have a 25% and 10% participating interest in this block. LNG: As co-promoter of Petro net LNG Limited (PLL), Indian Oil has tied up the complete sale of 2.52 MMSCMD of LNG allotted to it through strategic gas sales agreements with key customers. PLL's Dahej terminal received its first parcel of LNG by January-end, 2004 and commercial supplies to customers are expected to commence from April 2004 onwards. Major customers who have signed up with Indian Oil for gas supplies include Essar Steel, Gujarat State Petroleum Corporation, Haryana Sheet Glass, Hindustan Nat
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Petrochemicals
Petrochemical new growth path Indian Oil is continuously striving for growth through integration of its core business with opportunities available in the petrochemicals sector. The LAB unit (Linear Alkyl Benzene, used in the manufacture of detergents) at Gujarat Refinery achieved 93.3% capacity utilization in its first full year of operation. The product has been successfully marketed within India, attaining a significant market share, and has also Been exported. An integrated PX/PTA plant at Panipat Refinery has commenced commercial production since June 2006. Indian Oil has initiated various activities for setting up a world scale Naphtha Cracker project along with downstream polymer units at Panipat. In addition, activities for setting up integrated complex of refinery and petrochemicals at Paradip in Orissa have also progressed significantly.
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FINANCIAL ANLYSIS
Financial analysis is the systematic numerical calculation of the relationship of one financial fact with the other to measure the profitability, operational efficiency, solvency and the growth potential of the business. The analysis serves the interests of shareholders, debenture-holders, potential investors, creditors, bankers, journalists, legislators, politicians, researchers, stock exchange, taxation authorities and economists. The analysis of financial statements makes it simple, intelligible and meaningful for all the concerned parties. Financial statement is the process of rearranging, regrouping, and the calculations of various ratios. The analysis simplifies, summaries, and systematizes the monotonous figures. Financial analysis is this way is the purposeful and statements. The analysis and interpretation of financial statements are an attempt to determine the significance and meaning of financial statements data. So that forecast may be made of the prospects for future earning, ability to pay interests and debt maturities both current and long term and profitability of sound dividend policy. Ratio analysis of financial statements is a study of relationship among various financial factors in a business, as disclosed by a single set of statements and a study of the trend of these factors as shown in the series of statements. The use of financial analysis is made to measure the profitability, efficiency and financial soundness of the business, to make comparative studies and effective future plans.
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Importance of financial analysis for different parties

Every person concerned with the affairs of the business has an interest in the financial statements of the business. The information available from the analysis serves the interest of different sections. The following parties have an interest in the analysis of financial statements:MANAGEMENT: - The management needs information regarding the profitability, operational efficiency and financial soundness of the business, that weakness of the business may be identified and effective business plans may be formulated. SHAREHOLDERS: - The shareholders, the virtual owners of business corporate units have an interest in the welfare and progress of the business. They want to know about the profitability and future prospects of the enterprise. The requisite information is available from the analysis of financial statements. WORKERS: - Employees of the business are interested in the profit of the business. In case of sufficient profits, labaur unions have moral justification to demand are paid bonus on the basis of productivity and profitability, so they have an interest in the financial analysis of the business. CREDITORS: - Creditors of the enterprise are interested in the short term and long term financial soundness of the business. They want to ensure themselves, whether their funds are safe and secured and the business is capable of making payment of interest regularly and also refund as per agreements. GOVERNMENT: - Financial statements help government in determining tax liability. The government is also capable of ascertaining the economic development of the country through the financial analysis. The government requires the information for formulating effective economic plans and balanced growth of different sectors and regions of the economy. POTENTIAL INVESTORS: - The potential investors of the business have an interest in the operational efficiency and profit earning capacity of the business unit. They would like to know, how far their previous investment. ECONOMIST AND RESEARCHERS: - There parties are interested in the financial activities of the business, so that they may stuffy the rate of economic growth, compare it with other economics and suggest effective measures to accelerate the pace of growth. STOCK EXCHANGE: - It is an institution which deals in securities. In other words, it facilitates purchase and sale of shares exchanges are interested in the financial statements because they have to collect, analyze and report the financial status of the companies.
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Purpose of Financial analysis

Financial statements are prepared at a certain point of time according to established conventions. These statements are prepared to suit the requirements of the proprietor. It is, therefore, necessary to analyze financial statements to measure the efficiency, profitability, financial soundness and future prospects of the company. Financial analysis serves the following purposes. 1. Judging the operational efficiency of the business: - It is very significant that the company must know the operational efficiency of its management. We analyze the financial statements, match the amount of manufacturing, selling distribution & financial expenses of the current year with the corresponding expenses of the previous year and assess the managerial efficiency of the business. We can judge the operational efficiency of the business by calculating profitability ratios. 2. Measuring short and long term financial position: - The business must know its financial soundness. It should satisfy itself that it current liabilities. We can calculate current and liquid ratios for comparing current assets and current liabilities to ascertain short term financial soundness. Long term financial position can be measured by calculating debt equity, proprietary and fixed asset ratio. The result of the financial analysis may be studied and corrective steps can be taken, if necessary. 3. Indicating the trend of achievements: - Financial statements of the previous years can be compared and the trend regarding various expenses, purchases, sales, gross profit and net profit can be ascertained, cost of goods sold, values of assets and liabilities can be prepared and the future prospects of the business can be indicated. 4. Assessing the growth potential of the business: - The trend and dynamic analysis of the business provide us sufficient information indicating the growth potential of the business. If the trend predicts glooming pictures, effective measures can be applied as remedial or corrective measures. If the cost production is rising without corresponding increase in sales price, efforts should be made to reduce cost of production. 5. Measuring the profitability: - Financial statements show the gross profit, net profit and other expenses. The relationship of these items can be established with sales. Gross profit, net profit, expenses and operating ratios may be calculated and the profitability of the business ascertained. In case of improving profitability ratios, the causes responsible for this performance should be reinforced.
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6. Intra-firm and Inter-firm comparison of the performance: - Analysis of financial statements can be made with the previous year performance of the same firm and also with the performance of other firms. Intra-firm analysis provides an opportunity to self appraisal, whereas Inter-firm analysis presents the operational efficiency of the firm as compared to other firms. Comparison helps us in detecting our weaknesses and applying corrective measures. 7. Forecasting, budgeting and deciding future line of action: - Analysis of financial statements predicts the growth potential of the business. Comparison of actual performance with the desired performance shows our shortcomings. The analysis provides sufficient information regarding the profitability performance and financial soundness of the business on the basis of these informations, we can make effective forecasting, budgeting and planning. 8. Simplified, systematic and intelligibility presentation of facts: - Analysis of financial statements is an effective tool for simplifying, systematizing and summarizing the monotonous figures. An average person can draw conclusion from these ratios the facts can be made more attractive by graphs and diagrams, which can be easily understood. 9. Judging the solvency of the undertaking: - Creditors are always interested in knowing the solvency i.e., capacity to the business to repay their loans. We will have to look into the following facts to ascertain liquidity : Whether current assets are sufficient to meet current liabilities. Proportion of liquid assets to current assets. Future prospects of the business. Whether debentures and other loans are secured or not. Managerial efficiency of the company.
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Limitation of Financial Analysis

1. Suffering from the limitations of financial statements: - Financial statements suffer from variety of weakness. Balance sheet is prepared on historical record of the value of assets. It is just possible that assets may not have the same value. Financial statements are prepared according to certain conventions. At a point of time, whereas the investor is concerned with the present and future of the company. Certain assets and liabilities are not disclosed, personal judgment plays an important role in determining the figures of the balance sheet. In other words, we can say that balance sheet cannot be said to have a complete accuracy. Financial statements cannot said to be always reliable. 2. Absence of standards universally accepted terminology: - According is not an exact science. It doesnt have standard, universally accepted terminology. Different meanings are given to a particular term. These are different measures of providing depreciation. Interest may be charged on different rates. In this way, there are sufficient possibilities of manipulation and the financial statements have to suffer. As a consequence financial analysis also proved to be defective. 3. Ignoring price level changes: - The result shown by financial statements may be misleading, if price level changes have not been accounted for. The ratio may improve with the increase in price, whereas the actual efficiency may not improve. Ratios of the two years will not be meaningful for comparison, if the prices of commodities are different. Changes in price effect cost of production, sales and values of assets and as a consequence comparability of ratios also suffers. 4. Ignoring qualitative aspects: - Financial analysis doesnt measure the qualitative aspects of the business. It doesnt show the skill, technical knowledge and the efficiency of its employees and managers. It is the qualitative measurement of the performance. It means the analysis of financial statements measures only the one sided performance of the business. It completely ignores human resource. 5. Financial statements are affected by window dressing: - The management displays rosy pictures of the enterprise through financial statements. Sometimes material information is concealed. Financial statements sometimes contain false information. In order to show excellent profit, sales may be exaggerated, stock may be overvalued and certain purchases may not be shown. In such cases analysis of financial statements will also be incorrect. 6. Financial statements are affected by the personal ability and bias of analyst: Financial statements dont speak themselves. These informations are analyzed and interpreted by shrewd analysts, who may have their own views, reflected in the analysis. In many situations the accountant has to choose between alternatives available i.e. choice between LIFO and FIFO method of the valuation of stock. In other words, it is the personal ability of the analyst which manipulates
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the information of the financial statements in its own favor and satisfies their own whims. As subjectivity is inherent in the personal judgment, so financial statements can never be free from bias. In such cases, financial analysis fails to disclose the true picture. 7. Misleading results in the absence of absolute data: - Results shown by financial analysis may be misleading in the absence of absolute data. We cannot have the idea of the size of the business. Increase in sales from Rs.40,000 to Rs.80,000 shows that sales has doubled. In case of other firms increase of sales from Rs.20,00,000 to Rs.40,00,000 also shows that the sales has doubled but the size of the firm is quite different. Profitability ratio of two firms may be the same, but magnitude of their business may be quite different. 8. Financial analysis is only a tool, not the final remedy: - analysis of statements is a tool to measure the profitability, efficiency and financial soundness of the business. It should be noted that personal judgment of the analyst is more important in financial analysis. We should not rely on single ratio. Before reaching any conclusion, we should calculate several ratios. Accountant should not be biased in the calculation of ratios. It should be calculated to prove the personal contention. 9. Financial analysis spotted the symptoms but doesnt arrive at diagnosis: Financial analysis shows the trend of the affairs of the business. It may spot symptoms of financial unsoundness and operational inefficiency but that cannot be accepted. A final decision in this regard will require further investigations and through diagnosis.
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Types of Financial Analysis

1. Trend Analysis: - The financial analysis indicates the trend of purchases, sales, direct expenses, cost of production, gross profit, net profit, assets and liabilities and other items. Financial statements are analyzed over period of years from the comparative financial statements of different years. 2. Ratio Analysis: - Ratio analysis is the process of determining and interpreting numerical relationships based on financial statements. Financial ratio analysis is a study of ratios between various items or group of items in financial statements. 3. Comparative Financial Statement: - Comparative financial statements are those statements which have been designed in a way so as to provide time perspective to the consideration of various elements of financial position embodied in such statements. In these statements figures for two or more periods are placed side by side to facilitate comparison. 4. Common Size statement: - This is a unique way of presenting financial statements. In this approach, all financial figures are present in terms of percentage. In case of presentations of figures of profit/loss, sales is considered 100% and other figures like cost of goods sold, gross profit, selling & distribution overheads etc and other figures profit before interest & tax(EBIT) are expressed as a percentage of sales. Similarly, in case of balance sheet all figures of assets & liabilities individually are expressed as a percentage of total assets and total liabilities.
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Introduction to Financial Ratios

Financial ratio analysis is a fascinating topic to study because it can teach us so much about accounts and businesses. When we use ratio analysis we can work out how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy! Ratio analysis can also help us to check whether a business is doing better this year than it was last year, and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. A financial ratio is a ratio of two numbers of reported levels or flows of a company. It may be two financial flows categories divided by each other (profit margin, profit/revenue). It may be a level divided by financial flow (price/earnings). It nay be a flow divided by level (return on equity or earnings/equity). The numerator or denominator may itself be a ratio (PE ratio). It could be further explained as: Flow To Flow Compensation ratio (compensation expenses/revenue) Efficiency ratio (operating expenses/revenue) Gross margin(gross profit/net sales) Non-compensation ratio(non-compensation expenses/revenue) Operating leverage Operating margin Pre-tax margin(pre-tax earnings/ revenue) Level to - Level Debt to equity ratio Current ratio Quick ratio Equity shareholders ratio(equity shareholders/all equity share holder and all others equity)
Ratio to Ratio Price, earning, growth ratio(PEG ratio) To cash flow Cash flow return on investment(CFROI) Cash return on gross investment(CROGI)
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To Earnings Return on assets(ROA) Return on equity(ROE) Return on capital(ROC) Risk adjusted return on capital(RAROC) Return on capital employed(ROCE) Return on investment(ROI) Return on net assets(RONA) Return on revenue(ROR) Return on sales(ROS) To Market Capitalization Price/earnings ratio(PE ratio) Price/sales ratio Price/tangible assets ratio Price/intangible assets ratio Price/equity ratio
Thus ratio analysis has a very broad scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results. Ratio analysis isnt just comparing different numbers from the balance sheet, income statements, and cash flow statement. Its comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the past, and might perform in the future.
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RATIO ANALYSIS
The financial statements i.e. income statement and the balance sheet report what has actually happened to the earnings during a specified period and presents a summary of financial position reconciles income earned during the year and any dividends distributed with the change in retained between the start and the end of financial year under study. RATIO ANALYSIS is a very powerful analytical tool useful for measuring performance of an organization. The ratio analysis concentrates on the inter relationship among the figures appearing in the aforementioned four financial statements. The ratio analysis helps the management analyze the past performance of the firm and to make the future projections. While interpreting the financial information, the analyst has to be careful in limitation imposed by the accounting concept and methods of valuation. Information of non-financial nature will also be taken into consideration before a meaningful analysis is made. Ratio analysis is extremely helpful in providing valuable insight into a companys financial picture. Ratios normally pinpoint a business strengths and weakness in two ways: Ratios provide an easy way to compare present performance with the past. Ratios depict the area in which particular business is competitively advantaged through comparing ratios to those of other business of the same size within the same industry.
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Importance of Ratio Analysis

Ratio analysis stands for the purpose of determining and presenting the relationship of items and group of items in the financial statements. It is an important technique of financial analysis. It is a way which financial stability and health of a concern can be judged. The following are the main points of importance of ratio analysis: -
Useful in financial position analysis: - Accounting ratios reveal the financial position of any concern. This helps the banks, insurance companies and other financial institutions in lending and making investment decisions. Useful in simplifying accounting figures: - Accounting ratio simplify, summaries and systematize the accounting figures in order to make them more understandable and in a lucid form. They highlight the interrelationship which exists between various segments of the business as expressed by accounting statements. Often the figures standing alone cannot help them convey any meaning and ratios help them to relate with other figures. Useful in assessing the operational efficiency: - Accounting ratios help to have an idea of the working of a concern. The efficiency of the firm becomes evident when analysis is based on accounting ratios. They diagnose the financial health by evaluating liquidity, solvency, profitability, etc. This helps the management to access financial requirements and the capabilities of various business units. Useful in forecasting purpose: - If accounting ratios are calculated for a number of years, then a trend is established. This trend helps in setting up future plans and forecasting. For example, expenses as a percentage of sales can be easily forecasting on the basis of sales and expenses of the past years. Useful in locating the weak spots of the business: - Accounting ratios are of great assistance in locating the weak spots in the business even though the overall performance may be efficient. Weakness in financial structure due to incorrect policies in the past or present are revealed through accounting ratio. For example, if a firm finds that increase in distribution expenses is more than
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proportionate to the result expected or achieved, it can take remedial steps to overcome this adverse situation. Useful in comparison of performance: - Through accounting ratios comparison can be made between one departments of the firm with another of the same firm in order to evaluate the performance of the various departments in the firm. Manager is naturally interested in such comparison in order to know the proper and smooth functioning of such departments. Ratios also help him to make any change in the organization structure.
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Purpose and Type of Financial Ratios

Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets. Debt ratios measure the firm's ability to repay longterm debt. Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return. Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. Financial ratios allow for comparisons

between companies between industries between different time periods for one company between a single company and its industry average
Ratios generally hold no meaning unless they are benchmarked against something else, like past performance or another company. Thus, the ratios of firms in different industries, which face different risks, capital requirements and competition are usually hard to compare. Liquidity ratio or Short term Solvency Ratio Liquidity ratios measure the availability of cash to pay debt. Short term solvency ratios, which measure the liquidity of the firm and its ability to meet its maturing short term obligations. Liquidity is defined as the ability to realize value in money, the most liquid of assets, it refers to the ability to pay in cash, the obligations that are due. The corporate liquidity has two dimensions viz., quantitative and qualitative concepts. The quantitative concept includes the quantum, structure and utilization of liquid assets and in the qualitative concept, it is the ability to meet all present and potential demands on cash from any source in a manner that minimizes the cost and maximizes the value of the firm. Thus, corporate liquidity is a vital factor in business excess liquidity, though a guarantor of solvency would reflect lower profitability, deterioration in managerial efficiency, increased speculation and unjustified expansion, extension of too liberal credit and dividend policies. Too little liquidity then may lead to frustration of business objections, reduced rate of return, business opportunity missed and weakening of morale. The important ratios in measuring short term solvency are: 31
Current ratio: - This ratio measures the solvency of the company in the short term. Current assets are those assets which can be converted into cash within a year. Current liabilities and provisions are those liabilities that are payable within a year. A current ratio of 2:1 indicates a highly solvent position. A current ratio of 1.33:1 is considered by banks as the minimum acceptable level for providing working capital finance. The constituents of the current assets are as important as the current assets themselves for evaluation of a companys solvency position. A high current ratio will have adverse impact on the pilling up of inventory, inefficiency in collection of debtors, high balances in cash and bank account to without proper investment. Current assets, Loans & Advances Current Ratio = ------------------------------------------Current Liabilities & provisions Acid-test ratio (Quick ratio): - Quick ratio is used as a measure of companys ability to meet its current obligations. Since bank overdraft is secured by the inventories, the other current assets must be sufficient to meet other current liabilities. A quick ratio highly of 1:1 indicates highly solvent position. This ratio is also called Acid Test Ratio. This ratio serves h Current Assets + Loans & Advances Inventories Quick Ratio =------------------------------------------------------------Current Liabilities & Provisions Bank Overdraft Absolute Cash Ratio(Liquidity Ratio or Cash Assets Ratio): - The cash ratio methods is a formula for measuring the liquidity of a company by calculating the ratio between all cash and cash equivalent assets and all current liabilities. It excludes both inventory and account receivable in comparison to the current ratio. The Cash Ratio model measures only the most liquid of all assets against current liabilities, and is therefore seen as the most conservative of the three liquidity ratio. Cash equivalent + Cash Absolute Cash Ratio = ---------------------------------------------------------Current liabilities & provision Bank Overdraft Activity Ratio (Efficiency Ratio) Activity ratios or Operational Efficiency Ratio refers to the profitable, efficient and judicious use of financial resources available to the concern. All ratios coming into this category are calculated with reference to sales or cost of sales and are expressed
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in number of times, i.e., rate of turning over or rotation. The following are the important ratios which are commonly included in this category: Average collection period: - The term Average/Debtors Collection Period indicates the average time taken to collect trade debts. In other words, a reducing period of time is an indicator of increasing efficiency. It enables the enterprise to compare the real collection period with the granted credit period. Debtor Collection Period = (Average Debtors/ Credit Sales) x 365 (No. of days) (Average debtors = debtors at the beginning of the year + debtors at the end of the year, divided by 2) (Credit Sales are all sales made on credit (i.e. excluding cash sales). A long debtor collection period is an indication of slow or late payments by debtors). Average payment period: - Creditors Turnover shows the relationship between net purchases for the whole year and total payables. like Receivables Turnover, it can also expressed in number of days, in that case it is known as Average payment period. Average Payment Period = (Accounts Payable/Annual Credit Purchases)365 Asset turnover: - Asset turnover is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company. Asset Turnover Ratio = Sales / Average Total Assets

"Sales" is the value of "Net Sales" or "Sales" from the company's income statement. "Average Total Assets" is the value of "Total assets" from the company's balance sheet in the beginning and the end of the fiscal period divided by 2.
Stock turnover ratio: - To analyze stocks a little further it is possible to use ratio analysis. The stock turnover ratio show how many times over the business has sold the value of its stocks during the year. It is calculated by The higher stock turnover ratio is better, because money is then tied up for less time in stocks. A quicker stock turnover also means that the firm gets to make its profit on the stock quicker, and so the firm should be more competitive. However, it will vary between industries and so it is important to compare within an industry.
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It is also possible to express the ratio as a number of days/months, which is sometimes an easier way to understand it. To do this uses the following formula: Average Inventory 365/12 Stock Turnover Ratio (in days/months) = -----------------------------------------Cost of goods sold The result of this ratio gives the number of days that on average money is tied up in stocks. The longer this is, obviously the worse this is for the business as the money is not available to be used elsewhere. Since the stock is part of the working capital. It is important that it is available for use promptly. Receivables Turnover Ratio: - Receivables turnover ratio is calculated by dividing the net credit sales by average receivables outstanding during the year. It measures the liquidity of a firms receivables. Net credit sales are the gross credit sales minus returns, if any, from customers. Average receivable is the value of "Total receivables" from the company's balance sheet in the beginning and the end of the fiscal period divided by 2. Net Credit Sales Receivable Turnover Ratio = ----------------------------------Average Net Receivables Profitability Ratio The purpose of study and analysis of profitability ratios are to help assessing the adequacy of profits earned by the company and also to discover whether profitability is increasing or declining. The profitability of the firm is the net result of the large number of policies and decisions. The profitability ratio shows the combined effects of liquidity, asset management and debt management on operating results. Profitability ratios are measured with reference to sales, capital employed, total assets employed, shareholders funds etc. the major profitability rates are as follows: Profitability measures look at how much profit the firm generates from sales or from its capital assets. Different measure of profit gross and net. Gross profit = effectively total revenue (turnover) variable cost (cost of sales) Net profit = effectively total revenue (turnover) variable cost and fixed cost (overheads)
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Gross profit margin: - The ratio measures the gross profit margin on the total net sales made by the company. The ratio measures the efficiency of the companys operations and this can be compared with the previous year result to ascertain the efficiency of the partners with respect to the previous year. Since it is based on assumptions that all costs are deducted when competing gross profit which are directly variable with sales. A stable gross profit margin is therefore the norm and an variation from it calls for careful investigations, which may be caused due to the following reasons: Price cuts - Cost increases Change in mix - Under or over valuation of stock Gross profit Gross Profit Margin = -----------------------100 Sales The higher the better enable the firm to assess the impact of its sales and how much it cost to generate (produce) those sales. A gross profit margin of 45% means that for every 1 Rs. of sales, the firm makes 45p in gross profit. Net profit margin: - The ratio reflects net profit margin on the total sales after deducting all expenses but before deducting interest and taxation. This ratio measures the efficiency of operation of the company. The net profit is arrived from gross profit after deducting administration, selling and distribution expenses. The non operating incomes and expenses are ignored in computation of net profit before tax, depreciation and interest. Net profit before Interest & Tax Net Profit Margin = ----------------------------------------100 Sales Net profit takes into account the fixed cost involved in production overheads. Keeping control over fixed costs are important could be easy to overlook for example the amount of waste-paper, stationary, lighting, heating, water, etc. e.g. leaving a photocopier on overnight uses enough electricity to make 5300 A4 copies (1,934,500 per year) o 1 ream 500 copies. o 1 ream Rs.5.00 (on average)
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o Total cost therefore = Rs. 19,345 per year or one persons salary. Operating Profit Ratio: - Operating profit or operating income is a measurement of the money a company generated from its own operations (it doesnt include income from investments in other businesses, for instance). Operating income can be used to gauge the general health of the core business or businesses. Operating income = gross profit operating expenses The operating income figure is tremendously important because it is require calculating the interest coverage ratio and the operating margin. Operating Margin (Operating profit margin): - The operating margin is another measurement of managements efficiency, it compares the quality of a companys operations to its competitors. A business that has a higher operating margin than its industrys average tends to have lower fixed costs and a better gross margin, which gives management more flexibility in determining prices. This pricing flexibility provides an added measure of safety during tough economic times. Operating Margin = Operating income/Total revenue Return on Total Assets: - The profitability of the firm is measured by establishing relation of net profit with the total assets of the organization. This ratio indicates the efficiency of assets in generating revenue. Net Profit after Tax Return on Assets = ---------------------------------100 Total Assets Return on Capital Employed (ROCE) or Return on Investment (ROI): - The strategic aim of a business enterprise is to earn a return on capital. If in any particular case, the return in the long run is not satisfactory, then the deficiency should be corrected or the activity should be abandoned for a more favorable one. Measuring the historical performance of an investment centre calls for a comparison of the profit that has been earned with capital employed. The rate on investment is determined by dividing net profit on income by the capital employed or investment made to achieve that net profit. ROI = (Net Profit / Capital Employed) 100
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ROI consists of two components viz. 1. Profit margin 2. Investment turnover, as shown below: Net Profit ROI = ----------------Investment OR Net Profit Sales --------------------- ---------------------Sales Investment
It will be seen from the above formula that ROI can be improved by increasing one or both of its components viz., the profit margin and the investment turnover in any of the following ways: Increasing the profit margin Increasing the investment turnover, or Increasing both profit margin and investment turnover. The obvious generalization that can be made about the ROI formula that any action is beneficial provided that it: Boosts sales Reduces invested capital Reduces costs (while holding the other two factors constant) Return on investment analysis provides a strong incentive for optimum utilization of the assets of a company. This encourages managers to obtain assets that will provide a satisfactory return on investment and to dispose of assets. Return on Equity (ROE): - Return on equity (ROE) is an accounting valuation method similar to Return on investment (ROI). Because the numerator (Net Income) is an un reliable corporate performance measurement, the outcome of the formula for ROE must also be unreliable to determine success or corporate value. However the formula keeps showing up in many annual reports still. The degree to which return on equity (ROE) overstates the economic value depends on at least five factors. Length of project life (the longer, the bigger the overstatement) Capitalization policy (the smaller the fraction of total investment capitalization in the books, the greater will be the overstatement). The rate at which depreciation is taken on the books (depreciation rates faster than straight-line basis will result in a higher ROE)
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The lag between investment outlays and the recoupment of these outlays from cash inflows (the greater the time lag, the greater the degree of overstatement). The growth rate of new investment (faster growing companies will have lower Return On Equity) On top of this, ROE is sensitive to leverage assuming that proceeds from debt financing can be invested at a return greater than the borrowing rate. ROE will increase with greater amounts of leverage. The formula is: PAT Return On Equity (ROE) = ------------------------Shareholders Fund
Leverage Ratio (Solvency Ratio) One of many ratios used to measure a company's ability to meet long-term obligations. The solvency ratio measures the size of a company's after-tax income excluding non-cash depreciation expenses, as compared to the firm's total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations. The measure is usually calculated as follows:
Debt-Equity Ratio: - The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. Total Debt (Liabilities) Debt-Equity Ratio = -----------------------------Total Equity Debt to Total Fund Ratio: - The calculated debt to total fund ratio is viewed by the company as providing a more complete picture of the groups debt situation. The calculation uses balance sheet items related to total debt which include secured and unsecured both kind of debt. Two additional adjustments are made for different reasons. Debt to Total Fund Ratio = Long term debt / Capital Employed
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Where Capital employed: - (Share capital + Reserve & Surplus + Secured + Unsecured Loan + Differed Tax Liability + Provisions) Miscellaneous Expenditure Interest Coverage Ratio: - The interest coverage ratio is a measurement of the number of times a company could make its interest payments with its earnings before interest and taxes. Lower the ratio, the higher the companys debt burden. Interest coverage is the equivalent of a person taking the combined interest expense from their mortgage, credit cards, auto and education loans, and calculating the number of times they can pay it with their annual pre-tax income. For bond holders, the interest coverage ratio is supposed to act as a safety gauge. It gives you a sense of how far a companys earnings can fall before it will start defaulting on its bond payments. For stockholder, the interest coverage ratio is important because it gives a clear picture of the short-term financial health of a business. To calculate the interest coverage ratio, divide EBIT (earnings before interest and taxes) by the total interest expense. EBIT (earnings before interest & taxes) Interest Coverage Ratio = -------------------------------------------------Interest Expenses As a general rule of thumb, investors should not own stock that has an interst coverage ratio under 1.5. An interest coverage ratio below 1.0 indicates the business is having difficulties generating the cash necessary to pay its interest obligations. The history and consistency of earnings is tremendously important. The more consistent a companys earnings, the lower the interest coverage ratio can be. EBIT has its short fallings, companies do pay taxes therefore it is misleading to act as if they didnt. A wise and conservative investor would simply take the companys earnings before interest and divide it by the interest expense. This would provide a more accurate picture of safety. Capitalization Ratio: - The capitalization ratio measures the debt component of a company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations and growth. Long-term debt is divided by the sum of long-term debt and shareholders' equity. This ratio is considered to be one of the more meaningful of the "debt" ratios - it delivers the key insight into a company's use of leverage. There is no right amount of debt. Leverage varies according to industries, a company's line of business and its stage of development. Nevertheless, common
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sense tells us that low debt and high equity levels in the capitalization ratio indicate investment quality. Formula: Long-term Debt Capitalization Ratio = -----------------------------------------------Long-term Debt + Shareholders Equity Market ratios Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. Earnings per share (EPS): - It is calculated by dividing net profit after tax & preference share dividend by number of equity share. EPS also highlights upon the overall profitability and helps in determining the market price of equity shares. It reflects upon the ability of the concern to pay dividend to its equity shareholders. Net Profit after Tax & Preference Dividend E.P.S. = ---------------------------------------------------No. Of Equity Shares Payout ratio: - Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends. It is also known as rate of dividend to net profit and is calculated by the formula: Equity dividend 100 Pay-out Ratio = --------------------------------------------Net Profit after Tax & Pref. Dividend OR Dividend per Equity Share 100 Pay-out Ratio = --------------------------------------------E.P.S. The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors.
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Note that dividend payout ratio is the reciprocal of dividend cover, which is calculated as EPS/DPS. P/E ratio: - This ratio indicates the number of times earnings per share is covered by its market price. This ratio is of much help to the investors in deciding whether to invest in the equity shares of a company at a particular market price or not. The formula is: Market Price per Share (equity) Price-Earning Ratio = ---------------------------------------E.P.S. Dividend yield Ratio: - The dividend yield or the dividend-price ratio on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share, divided by the price per share. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio. Dividend per Share 100 Dividend yield Ratio = --------------------------------Market Price per Share Price/cash flow ratio: - The price/cash flow ratio (also called price-to-cash flow ratio or P/CF), is a ratio used to compare a company's market value to its cash flow. It is calculated by dividing the company's market cap by the company's operating cash flow in the most recent fiscal year (or the most recent four fiscal quarters); or, equivalently, divide the per-share stock price by the per-share operating cash flow. In theory, the lower a stock's price/cash flow ratio is, the better value that stock is. Price/cash flow ratio = Market Price of Share/Present value Cash Flow per Share (CFPS) CFPS = (NI + Depreciation + Amortization)/ Common Shares Outstanding Price to book value ratio (P/B or PBV): - The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's book value to its current market price. Book value is an accounting term denoting the portion of the company held by the shareholders; in other words, the company's total tangible assets less its total liabilities. The calculation can be performed in two ways, but the result should be the same each way. In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet. The second way, using per-share values, is to divide the company's current share price by the book value per share (i.e. its book value divided by the number of outstanding shares). As with most ratios, it varies a fair amount by industry. Industries that require more infrastructure capital (for each dollar of profit) will usually trade at P/B ratios much
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lower than, for example, consulting firms. P/B ratios are commonly used to compare banks, because most assets and liabilities of banks are constantly valued at market values. A higher P/B ratio implies that investors expect management to create more value from a given set of assets, all else equal (and/or that the market value of the firm's assets is significantly higher than their accounting value). P/B ratios do not, however, directly provide any information on the ability of the firm to generate profits or cash for shareholders. This ratio also gives some idea of whether an investor is paying too much for what would be left if the company went bankrupt immediately. For companies in distress, the book value is usually calculated without the intangible assets that would have no resale value. In such cases, P/B should also be calculated on a "diluted" basis, because stock options may well vest on sale of the company or change of control or firing of management. It is also known as the market-to-book ratio and the price-to-equity ratio (which should not be confused with the price-to-earnings ratio), and its inverse is called the book-to-market ratio. Book-to-market ratio = Market Price per Share/Balance Sheet Price per Share
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Du-Pont Analysis
DuPont analysis (also known as the DuPont identity, DuPont equation, DuPont Model or the DuPont method) is an expression which breaks ROE (Return On Equity) into three parts.

Operating efficiency (measured by profit margin) Asset use efficiency (measured by asset turnover) Financial leverage (measured by equity multiplier)
ROE = (Profit margin)*(Asset turnover)*(Equity multiplier) = (Net profit/Sales)*(Sales/Assets)*(Assets/Equity) = (Net Profit/Equity) The name comes from the DuPont Corporation that started using this formula in the 1920s. Calculating Asset Turnover: - The asset turnover ratio calculates the total asset (revenue) for every Rupee of assets a company owns. To calculate asset turnover, take the total revenue and divide it by the average assets for the period studied. [If XYZ Ltd. had Rs.1 in assets in 2008 and Rs.10 in assets in 2009, the average asset value for the period is Rs.5 because Rs.1 + Rs.10 divided by 2 = Rs.5]. A quick exercise would benefit your understanding. Asset Turnover = Total Revenue / Average Assets for Period OR Asset Turnover = Revenue / Total Asset Indicate the relationship between assets and revenue.
Things to Remember
Companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover it indicates pricing strategy. This ratio is more useful for growth companies to check if in fact they are growing revenue in proportion to sales.
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Assets Turnover Analysis: - This ratio is useful to determine the amount of sales that are generated from each dollar of assets. As noted above, companies with low profit margins rend to have high asset turnover, those with high profit margins have low asset turnover Corys Tequila Co.s asset turnover seems to be relatively low, meaning that it makes a high profit margin on its products. For companies in the retail industry you would expect a very high turnover ratio mainly because of cut throat and competitive pricing. In todays dynamic business environment, it is important for credit professionals to be prepared to apply their skills both within and outside the specific credit management function. Credit executives may be called upon to provide insights regarding issues such as strategic financial planning, measuring the success of a business strategy or determining viability of an acquisition candidate. Even so, the normal duties involved in credit assessment and management call for the credit manager to be equipped to conduct the financial analysis in a rapid and meaningful way. Financial statement analysis is employed for a variety of reasons. Outside investors are seeking information as to the long run viability of a business and its prospects for providing an adequate return in consideration of the risk being taken. Creditors desire to know whether a potential borrower or customer can service loans being made. Internal analysis and management utilize financial statement analysis as a means to monitor the outcome of policy decision, predict future performance target, develop investment strategies, and assess capital needs. As the role of credit manager is expended cross-functionally, he may be required to answer the call to conduct financial statement analysis under any of these circumstances. The DuPont ratio is a useful tool in providing both an overview and a focus for such analysis. A comprehensive financial statement analysis will provide insights as to a firms performance and/or standing in the areas of liquidity, leverage, operating efficiency and profitability. A complete analysis will involve both time series and crosssectional perspectives. Time series analysis will examine trends using the firms own performance as a benchmark. Cross-sectional analysis will augment the process by using external performance benchmarks for comparison purposes. Every meaningful analysis will begin with a qualitative enquiry as to the strategy and policies of the subject company, creating a context for the investigation. Next, goals and objectives of the analysis will be established, providing a basis for interpreting the results. The DuPont ratio can be used as a compass in this process by directing the analyst toward significant areas of strength and weakness evident in the financial statements.
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Return on Shareholders Funds or Return on Net Worth: - The ratio expresses the net profit in terms of equity shareholders fund. This ratio is an important yardstick of performance for equity shareholders since it indicates the return on funds employed by them. However this measure is based on the historical net worth and will be high for old plants and low for new plants. The factor which motivates the shareholders to invest in a company is the expectation of an adequate rate of return on their funds. They will want to assess the rate of return earned in order to decide whether to continue with their investment. This ratio is useful in measuring the rate of return as a percentage of the book value of the shareholders equity. Net Profit after Interest & Tax Return on Net Worth = ----------------------------------------- 100 Total Net Worth Where, Net Worth = Equity Capital + Reserve & Surplus
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Limitations of Ratio Analysis

The ratio analysis is a widely used tool for determining financial position of a company however it suffers from certain limitations: 1. It is difficult on the proper basis of comparisons: - Ratios of a company have meaning only when they are compared with some standards with industry averages. But it is difficult to find a proper basis of comparison or to find industry averages. 2. Differences in situations of two companies make the comparison difficult: Situations of two companies never same. Also the factors affecting the performance a company in one year may change in another year. 3. The price level changes make the interpretations of ratio invalid: - The change in monetary value (due to inflation or changes in crude oil price internationally) renders the interpretations and comparison invalid. Three effects of inflation can be identified: a) The nominal value of inventory increases on account of increasing prices. A firm will lose in real terms if the general price level increases faster than appreciation in the value of inventory. b) Assets are stated at original cost (less depreciation) in the balance sheet. Because of inflation, their current value will be much higher than book value. Thus depreciation calculated on book value will be much higher. c) It affect as accounting profit to the firms, which borrow. If the interest rate is fixed, shareholders gain at the cost of lenders. The real value of lenders obligations gets reduced by inflation. The accounting profit doesnt recognize the gain from borrowing arising due to inflation. Since firms will differ in term of nature of their inventory, age & type of assts and debt policy, inflation will affect them differently. 4. The difference in definition of items in the Balance Sheet and Income statement makes the interpretations difficult: - In practice, difference exists as to the meaning of certain terms. Diversity of views exists as to what be included in net worth, current assets or current liabilities etc. 5. The ratios calculated at a point of time are less informative and defective as they suffer from short term changes: - The ratios do not have much use if they
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are not analysed over the years. The ratios at a moment of time may suffer from temporary changes. This problem can be resolved by analysing trends of ratios over the years. The balance sheet prepared at different point of time is static in nature. They do not reveal the changes which have taken place between dates of two balance sheets. The statements of changes in financial position reveal this information. 6. The ratios are generally calculated from past financial statements and thus are no indicators of the future: - The basis of calculate ratios are historical financial statements. The financial analyst is more interested in what happen in future, while the ratios indicate what happened in the past. Management of the company has information about the companys future plans and policies and therefore, is able to predict future happening to a certain extent. But the outside analyst has to rely on the past ratios, which may not necessarily reflect the firms financial position and performance in future.
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Ratio Analysis of Different Oil Companies

Debt - Equity Ratio
Company Name IOCL HPCL BPCL Essar Oil 2011-12 0.29 2.12 1.75 2.80 2010-11 2010-09 0.28 0.88 1.59 1.10 1.29 1.05 2.78 2.86 2009-08 1.02 0.76 0.92 2.41 2008-07 0.67 0.26 0.61 2.13
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Analysis:
A high Debt-Equity Ratio implies that a high proportion of long term debt source i.e. the firm is using a great deal of financial leverage. It is clear that in case of Indian Oil Corporation Ltd. Lenders have contributed more than owners when analysed for five years. Only in 2004-05, creditors had majority stake in the capital employed. The debt in the capital fund of the company was highest in the year of 2008-09. This was due to low posting of sales and profit. During this period debts have been reduced and company has not maintained the conventional rule of 1:1 but was able to maintain a positive through those ratios. The outstanding debts were further reduced during the year. Consequently, the debt equity ratio has come down to 0.67:1 from 0.90:1 at the end of the previous year. All the other companies had a similar trend except Essar Oil. Essar Oil had its highest debt equity ratio of 2.86 in the year ended 2007 which was maintained by the company throughout the years. The increase demands of Oil & its by-product all over the world has increases the demand in the international market this has been a major reason for the investors getting attracted to Oil & Natural Gas industry through shareholding in the booming Oil sector.
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Fixed Assets to Long Term Debt Ratio

Company Name IOCL HPCL BPCL Essar Oil 2008-09 2007-08 1.89 1.79 1.36 1.32 1.45 1.47 1.46 1.38 2006-07 2.13 1.92 1.77 1.28 2005-06 1.86 2.06 1.79 1.41 2004-05 2.17 4.34 2.58 1.50
Analysis:
This ratio indicates the level of fixed assets owned by a company in relation to the long term debts of the company. The higher the ratio the better it is for a company and the assets which are debt free and fully owned by the company. Among the companies only IOCL has a trend which shows a favourable movement and has been higher than other companies since 2006. The ratio even indicated the level of long term funds invested in working capital.
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Proprietary Ratio
Company Name IOCL HPCL BPCL Essar Oil 2011-12 2011-10 2010-09 0.27 0.31 0.56 0.39 0.48 0.44 0.49 0.26 0.26 2009-08 0.49 0.32 0.36 0.26 2004-05 0.60 0.79 0.62 0.32
Analysis: Proprietary ratio indicates the ownership of the company in the hands of its shareholders, the higher is the ratio the better is the financial situation of any company. IOCL is continuously leader in proprietary ratio except in 2004-05, in which year HPCL & BPCL has more than IOCL. All four companies proprietary ratio continuously decreased over the years due to higher price of crude oil and market slow-down. Only Essar Oil maintaining its proprietary ratio by maintain its net worth over the years.
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Interest Coverage Ratio

Company Name IOCL HPCL BPCL Essar Oil 2008-09 3.36 1.58 2.10 2.13 2007-08 7.11 2.32 4.69 -8.25 2006-07 7.19 5.91 7.79 -4.67 2005-06 7.85 5.07 4.45 -5.08 2004-05 12.27 25.43 12.10 -2.69
Analysis: Interest coverage ratio indicates the funds available to meet the needs for payment on borrowed funds of a company. Interest coverage ratio of IOCL has been declining since the year 2005 and was the lowest by the year 2009 this means that they have not enough funds to fulfil the requirements of interest payment. Other companies interest coverage ratio also not better. Only in 2005 HPCL and in 2007 BPCL have better interest coverage than IOCL. Essar Oil always has negative interest coverage except in 2009. This means thst the company do not have enough funds to fulfil its interest requirement.
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Short Term Solvency Ratio

Current Ratio
Company Name IOCL HPCL BPCL Essar Oil 2008-09 1.09 1.19 1.18 0.88 2007-08 1.32 1.37 1.28 0.97 2006-07 1.10 0.99 1.15 1.16 2005-06 1.18 1.18 1.23 1.01 2004-05 1.18 1.13 1.02 0.90
Analysis: IOCL has maintained its current ratio in between 1.3 to 1, but has never let the current ratio for below 1. Anyhow they have never faced shortage in funds to meet its short term requirements. HPCL & BPCL has shown an improvement in its current ratio. HPCL was one of the best in 2008 & 2009 whereas BPCL and Essar Oil was one of the best in 2005 and 2006. Essar Oil has been very stable but at a very low ratio and might have faced problems in meeting its working capital.
62
Quick Ratio or Liquid Ratio

Analysis: IOCL has low quick ratio like its current ratio, they never touch the conventional ratio of 1:1. In the year 2007 & 2009 their quick ratio had gone down to almost half of conventional ratio (0.48:1). Essar oil has shown an improvement in its liquidity since the year 2005 & 2006 but in next year their quick ratio had decreased up to 0.30:1 level. Only BPCL shows improvement in quick ratio throughout the years but they never reach up to conventional ratio.
63
Profitability Ratio
Return on Capital Employed
Company Name IOCL HPCL BPCL Essar Oil 2008-09 15.20 9.82 13.63 17.04 2007-08 14.74 6.75 11.80 -0.36 2006-07 17.37 12.52 17.61 -0.43 2005-06 14.01 5.29 6.28 -1.25 2004-05 17.11 19.78 16.47 -0.60
Analysis: IOCL shows up and down in Return on investment throughout the years. Among all the companies IOCL has best return on investments. Essar Oil has displayed a smart move by converting its losses on investments in the year 2005,2006,2007 & 2008 into profit, infect not only profit but to be the highest earner on its investments for the year 2009.
64
Earning Per Share (EPS)

Company Name IOCL HPCL BPCL Essar Oil 2011-12
16.19 26.92 36.27
2011-10
30.67 45.45 42.78 0.76
2010-09
42.10 38.48 42.53 0.58
2009-08
12.15 16.98 20.35 0.10 24.74 16.94 43.72 -4.27
Analysis: EPS is one of the most important ratios which measure the net profit earned per share. EPS is one of the major factors affecting the dividend policy of the firm and the market prices of the company. Growth in EPS is more relevant for pricing of shares from absolute EPS. A steady growth in EPS year after year indicates a good track of profitability. EPS for IOCL has been increasing up to 2007, after this period company EPS decreasing but the company always give highest EPS throughout the years. It shows more than 100% growth over the year 2006 and had crossed Rs. 58 per share. Essar oil had negative EPS up to 2008, in 2009 the company make positive EPS.
65
Net Profit Margin

0.95 0.45 0.54 -1.34
2007-08
2.78 1.08 1.42 -7.21
2006-07
3.43 1.74 1.85 -13.94
2005-06
2.78 0.56 0.38 -14.04
2004-05
3.48 2.11 1.65 0.85
Analysis: IOCL has shown a decreasing trend over the years but the company gives highest net profit among all the companies throughout the years. Essar Oil was in trouble since 2006 but it improved its financial results later on. HPCL & BPCL also showing decreasing trend throughout the years and have minimum net profit in last year.
66
Return on Networth
6.71 5.35 6.06 -14.70
2007-08
16.99 10.74 13.53 -1.19
2006-07
21.62 16.36 17.57 -2.25
2005-06
16.80 4.64 3.21 -3.71
2004-05
18.84 15.13 15.11 0.41
Analysis: Return on Net worth or ROE of IOCL showing decreasing trend because of heavy downfall in net profit throughout the years but highest among all the companies. Essar oil shows always negative ROE. This means company does not have any profit throughout the years. In 2009 company faces heavy loss due to slowdown in oil market.
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Activity Ratio or Turnover Ratio

Inventory Turnover Ratio
Analysis: IOCL had a very stable inventory turnover ratio and has a turnover of more than 8 times throughout the years and in 2009 they had more than 13 times of ratio. BPCL too had a positive trend and has been one of the best performers in India. They had in 2009 more than 21 times of ratio. All the companies have a positive trend and their turnover has increased through this period of five years except Essar Oil, they have zero turnover in 2007 & 2008.
68
Debtors Turnover Ratio

Analysis: IOCL has seen an upward trend and has been very successful in managing the debtors. BPCL too shows upward trend and were able to increase the debtors turnover ratio and have set records for this ratio, it had taken necessary actions to control credit limits allowed to its customers. They set an example to the entire Oil industry by controlling the debtors turnover ratio and shape it to be the best in India. HPCL too shows better debtors turnover ratio than IOCL, they control ratios between from 55 to 60.
69
Asset Turnover Ratio

Fixed Asset Turnover Ratio
Analysis: This ratio has a positive trend for IOCL and in 5 years it has experienced a growth of around 50%. Similarly, HPCL & BPCL have increased ratio. Both have better ratio than IOCL. Essar oil shows decreasing trend throughout the years, except in 2009 they experienced a growth of more than 150% comparing with 2008.
70
Market Ratio
Dividend Payout Ratio
Analysis: Dividend payout ratio for all the PSU companies looks handsome. They give around 30-40% of dividend to his shareholders except in 2007-08 they give only 10%. HPCL give 45% dividend to his shareholder in 2005 & 2007. This means all PSUs are very interesting for investors in term of dividend payout ratio. Essar oil never distribute dividend to his shareholder throughout the years.
71
CONCLUSION
The purpose of the study is to develop an empirically-based classification pattern for commonly used financial ratios and to measure the long term stability of the ratios. The selected financial ratios are according to a prior classification, the measures of short term solvency, long term solvency, profitability and efficiency. Classification patterns of the financial ratios are developed via factor analysis and the stability analysis is carried out via transformation analysis. The empirical results show that empirically-based classifications are not fully equivalent to the prior classification. The empirical results are based both on the value and equal weighted indices of the ratios. Classification patterns are developed using variables (indices) both in the level and in the time series. The use of the first differences of ratios becomes necessary because of the clear positive or negative trend in the time series. The use of first differences of ratios makes it also possible to overcome the open and quite serious problem concerning the role of constant term in financial ratio analysis. Further, empirical results show that different aggregation methods lead to different results. The theoretically better value weighted indices (in the first difference form) give more accurate and interpretive empirical results. Factor patterns based on value weighted variables. In the first difference form displays also very clear time series stability. This result confirms the great importance of aggregation method in ratio analysis. Finally, financial ratios act as an important tool in macroeconomic analysis.
72
SUGGESTIONS
The empirical results show that empirically-based classifications are not fully equivalent to the prior classification. The empirical results are based both on the value and equal weighted indices of the ratios. In the first difference form displays also very clear time series stability. This result confirms the great importance of aggregation method in ratio analysis. Finally, financial ratios act as an important tool in macroeconomic analysis. Liquidity Ratio: Current ratio is below the standard while the increase in stock is not good for the organization as it is blocking the cash of the company. Investments have to be increased in the current assets in order to improve the companys Liquidity position. Quick ratio is comparatively lower in the year as compared to the standard norms of the company. The company has to invest in quick ratio.
Turnover Ratio: Debtors turnover ratio has been increased the improvements in credit policies to be given importance, if not it may affect the overall start term financial position of the organisation. Inventory turnover has gone up till last year which indicates less inventory turnover ratio. The promotional has to be taken down the turnover the inventory quickly & effectively. Average debtors collection period has come down. It shows the improvement in the collection procedures. The maintenance of this improvement is necessary. Leverage Ratio: -
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Debt equity ratio has increased over the years mainly due to increasing amount of long term debts. This indicates that company is working at high risk as external financing is increasing. Interest coverage ratio has decreased over the years. It shows the lesser ability of the firm to hendle fixed charge liabilities. Profitability Ratio: The gross profit ratio has decreasing over the years. It shows that the operational performance is not improving. The net profit ratio has decreased over the years. Because frequently increase in crude oil price is higher than net sale increases.
74
BIBLIOGRAPHY
1. Dr. S.N. Maheshwari 2. Ravi M. Kishore 3. K.G. Gupta 4. Dr. S.P. Gupta 5. I.M. Panday 6. Project Report Management accounting & Financial Control Financial Management Management Accounting Management Accounting Financial Management TMDC 2004 2005 1999 2009 2009
Sites Visited: www.iocl.com www.bpcl.com www.hpcl.com www.essoil.com www.economictimes.com www.moneycontrol.com
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