ANALYSIS OF PROFITABILITY RATIOS OF OIL AND NATURAL GAS CORPORATION

LIMITED

(Term paper towards the fulfillment of the Project in the subject of Principles of Accounting)

SUBMITTED BY :

SUBMITTED TO :

UTKARSH SAXENA

DR. RUCHI BHANDARI

B.B.A L.L.B (HONS.)

FACULTY OF MANAGEMENT

UG SEMESTER I

NATIONAL LAW

UNIVERSITY

SECTION A

JODHPUR

NATIONAL LAW UNIVERSITY, JODHPUR

SUMMER SESSION

(JULY- NOVEMBER 2015)

ACKNOWLEDGEMENT

On the completion of this project, I take the opportunity of thanking the people who contributed
in the completion of it, without whose aid, contribution and help this project wouldnt have seen
practicability.
First I extend my heartfelt gratitude to, my mentor and teacher, Dr. RuchiBhandari, Faculty of
Management whose continuous guidance and support provided me with the much-needed
impetus and gave me a better insight into the topic. I also express my gratitude towards our
teaching assistant Ms. Supragya who gave us valuable inputs about how to go about the project .
I am grateful to the IT Staff for providing all necessary facilities for carrying out this work. I
thank all members of the Library Staff for providing me the assistance anytime needed.
I also thank my friends and batch mates for providing me the much needed aid whenever needed.
Most importantly, I would like to thank my parents for providing me the much-needed force for
accomplishing this project.

RESEARCH OBJECTIVES

The research during the course of this project was undertaken with the following research
objectives in mind:

To analyze the financial and profitability situation of a company using profitability ratios.
To conduct comparative analysis of the performance of the company over 3 accounting

years using various graphs.

To study the various trends in business performance through analysis of Profitability
Ratios.

RESEARCH METHODOLOGY

The research methodology used in this project is a non-empirical research in which annual
reports and secondary published data about the company have been used. The data collected has
been expressed in quantitative terms using various graphs and charts ,so it is a quantitative form
of research also.

INTRODUCTION
Oil and Natural Gas Corporation Limited1 is among oldest Public Sector Undertaking2 of the
Country. It was incorporated in the year 1955. The headquarters of ONGC is at Dehradun. The
main reason for the establishment was the importance to regulate import, manufacturing and
distribution of oil and natural gas in the development of the industrial sector after independence.
ONGC is one of the largest Exploration & Production companies in the world in terms of
reserves and production. It produces around 69% of Indias crude oil and around 62% of its
natural gas. ONGC produces more than 1.27 million Barrels of Oil Equivalent per day. ONGC
was ranked 21st among global Oil and Gas Operations industry in Forbes Global 2000 list of
worlds biggest companies for 2014. According to the 2012-2013 annual report, its market
capitalization was INR 2.6 Trillion, making it Indias second largest publicly traded company.
ONGC videsh limited is the international arm of ONGC. It currently has 14 projects in 16
countries like Brazil, Russia, Iraq, Myanmar, Cuba and Colombia. ONGC comprises of 9
directors including 6 functional directors and 3 Non-executive directors which are nominated by
the government of India. Currently the Chairman and Managing Director of ONGC is DK Sarraf.
ONGC has a work force of around 33000 workers which are skilled and talented professionals.
ONGC looks forward to become an integrated energy provider, with: New discoveries and fast
track development, Equity oil abroad, new sources of energy and production from small and
marginal fields.3
Ratio analysis is designed to help you identify those variables which are out of balance."
Financial ratios are used for all kinds of purpose. These include the assessment of a firm to pay
its debt, the evaluation of business and managerial success. There are two uses of financial ratios:
by accountants and analysts to forecast future financial variables and by researchers in statistical
models for mainly predictive purposes. A ratio expresses a mathematical relationship between
two items. It is important that the ratios should be examined together rather than independently.
1 Hereinafter ONGC
2 Hereinafter PSU
3 http://www.ongcindia.com/wps/wcm/connect/ongcindia/Home/Company/Profile/ <last visited on 4th
August 2015>

There are five major groups of ratios like Liquidity ratios, activity ratios, solvency ratios,
profitability ratios and leverage ratios4.

LIQUIDITY RATIO

Liquidity ratio measures the adequacy of current and liquid assets and helps evaluate the ability
of the business to pay its short-term debts. Short-term creditors like suppliers of goods and
commercial banks use liquidity ratios to know whether the business has adequate current and
liquid assets to meet its current obligations. Some examples of liquidity ratios are current ratio,
quick ratio, absolute liquid ratio.

ACTIVITY RATIOS

Activity ratios measure the efficiency of a firm or company in generating revenues by converting
its production into cash or sales. Generally a fast conversion increases revenues and profits. The
more commonly used operating ratios are the average collection period, the inventory turnover,
the fixed assets turnover, and the total assets turnover.

SOLVENCY RATIOS

Solvency ratios (also known as long-term solvency ratios) measure the ability of a business to
survive for a long period of time. These ratios are very important for stockholders and creditors.
solvency ratios include debt to equity, total debt to total assets, and interest coverage ratios.

PROFITABILITY RATIOS

Profitability ratios provide information about management's performance in using the resources
of the business. Profitability ratios reveal the company s ability to earn a satisfactory profit and
return on investment. The ratios are an indicator of good financial health and how effectively the
company in managing its assets. Profitability ratio analysis is widely used by managers, creditors
and investors. This analysis can reveal much about the company and its operating as well as after
tax profits. Common examples of profitability ratios are return on sales, return on investment,

4 Journal of business and accounting, 14(4) winter, 1987.

and return on equity, return on capital employed, cash return on capital invested, gross profit
margin and net profit margin.

OPERATING RATIO AND NET PROFIT RATIO MARGIN :

Operating ratio and net profit ratio represent the firms ability to translate sales in peso
into profits at different stages of measurement. Operating ratio examines the relationship

between sales and costs before taxes, interest, non-operational expenses5.

GROSS PROFIT RATIO :
It reflects the firms basic pricing decisions and its material costs. The greater the margin

and stability the greater is the expected profitability. A firm should have a reasonable gross
margin to ensure adequate coverage of direct expenses associated with the Business.

RETURN ON ASSETS :
It varies a great deal depending on the industry and the amount of fixed assets required by
the business. This ratio should be used with other ratios to compare firms in the same

industry.
RETURN ON INVESTMENT :
This ratio is used for final evaluation to determine whether to invest or not to invest in the
company. This ratio is considered as one of the best criteria of profitability. There should
be a direct relationship between Return on investment and risk, the higher the risk the

higher is the return6.

EARNING PER SHARE :

The basic aim of financial management is to maximize the wealth of the shareholders. This
ratio measures the earning available to each shareholder holding a single share. This ratio is of
primary importance to the shareholders as it is an indicator of hoe long it will take to get their
money back. This ratio is of primary importance to the shareholders as it is an indicator of hoe
long it will take to get their money back.

DIVIDEND PER SHARE :

5 International Journal of Business and Social Science Vol. 3 No. 21; November 2012
6 Understanding financial statements by James O Gill

Dividend per share (DPS) is the total dividends paid out over an entire year (including
interim dividends but not including special dividends) divided by the number of
outstanding ordinary shares issued. Dividends are a form of profit distribution to the

shareholder.
RETURN ON SHAREHOLDERS FUND :
It is a measure of overall profitability of the business and is computed by dividing the net
income after interest and tax by average stockholders equity. It is also known as return
on equity (ROE) ratio and return on net worth ratio. The ratio is usually expressed in
percentage.
IMPORTANCE OF ACCOUNTING RATIOS

Accounting Ratios serve as an important tool to management to evaluate the companys

performance based on the ratios of its competitors.

They provide valuable insight into a companys yearly growth by comparing the ratios of

different periods.
Ratio analysis allows the various stakeholders to make an evaluation of the functioning of

the business.
Accounting ratios help in making inter-firm and intra-firm comparisons. A firm can
compare its performance with the general trend in the industry and take corrective

measures wherever needed.

Accounting ratios are important for judging the company's efficiency in terms of its
operations and management. They help judge how well the company has been able to
utilize its assets and earn profits.

LIMITATIONS OF RATIO ANALYSIS

There may be a difficulty in comparison of accounting ratios with different companies as

there may be a difference in accounting practices adopted.

There is a difficulty in comparison of ratios over various years as the impact of inflation

is not accounted for over the years.

Ratios may be affected by window dressing. Manipulations of accounts are a way to

conceal vital facts and present the financial statements better than what it actually is.
All the information used in ratio analysis is derived from actual historical results. This
does not mean that the same results will carry forward into the future.

It is quite difficult to ascertain the reason for the results of a ratio. A more detailed
analysis might reveal that the current ratio will only be at that level, and will probably
decline in the near future.

PROFITABILITY RATIOS
GROSS PROFIT RATIOS
Formula Used: (Gross profit/Total Revenue)*100

2011-2012
35.26%

2012-2013
29.54%

2013-2014
31.77%

GRAPHICAL REPRESENTATION
36
35
34
33
32
31

Column2

30
29
28
27
26
2011-2012

2012-2013

2013-2014

NET PROFIT RATIOS

Formula Used: (Net Profit/Total Revenue)*100

2011-2012
18.81%

2012-2013
14.47%

GRAPHICAL REPRESENTATION

2013-2014
14.96%

20
18
16
14
12
10

Column1

8
6
4
2
0
2011-2012

2012-2013

2013-2014

OPERATING RATIOS
Formula Used: [(Cost of Goods sold+ Operating Expenses)/ Total Revenue]*100

2011-2012
39.54%

2012-2013
45.31%

2013-2014
46.96%

GRAPHICAL REPRESENTATION
48
46
44
42
Column1

40
38
36
34
2011-2012

2012-2013

2013-2014

RETURN ON INVESTMENT
Formula Used: (Profit before Interest and tax/ Capital Employed)*100

2011-2012
53.4%

2012-2013
46.7%

2013-2014
51.5%

GRAPHICAL REPRESENTATION
54
52
50
48

Column1

46
44
42
2011-2012

2012-2013

2013-2014

RETURN ON ASSET
Formula Used: (Net Income/ Total Assets)*100
2011-2012
115.88%

2012-2013
76.13%

GRAPHICAL REPRESENTATION

2013-2014
72.97%

54
52
50
48

Column1

46
44
42
2011-2012

2012-2013

2013-2014

EARNING PER SHARE

Formula Used: (Net Profit/ Total Number of Shareholders)*100
2011-2012
29.36%

2012-2013
24.46%

GRAPHICAL REPRESENTATION

2013-2014
25.83%

35
30
25
20
Column1

15
10
5
0
2011-2012

2012-2013

2013-2014

DIVIDEND PER SHARE

Formula Used: (Dividend per share/ Market value per share)*100
2011-2012
195%

2012-2013
190%

2013-2014
190%

GRAPHICAL REPRESENTATION
196
195
194
193
192
Column1

191
190
189
188
187
2011-2012

2012-2013

2013-2014

RETURN ON SHAREHOLDERS FUND

Formula used : Profit before interest and tax/ Shareholders Fund
2011-2012
21.02%

2012-2013
15.88%

2013-2014
15.58%

GRAPHICAL REPRESENTATION
25
20
15
Column1

10
5
0
2011-2012

2012-2013

2013-2014

INTERPRETATION & ANALYSIS

The analysis and interpretation of the various profitability ratios of ONGC has resulted in the
below stated findings:

The irregular increase and decrease in the gross profit ratio over the years is because of
the irregular rise in the total revenue coupled with an irregular rise in cost of goods sold

year after year.

The net profit decreases as there is a difference in the amount of indirect expenses in the

form of interest on loan taken from financial institutions.

The earnings per share is fluctuating due to the fact that there has been new issue of

shares during the 3 accounting years and earnings have also been steadily increased.
The return on shareholders fund is decreasing year by year because of the low return on

the shareholders investment.

The dividend per share for the last 3 years interprets the slight decrease in dividend per

share because of the decrease in percentage of net income to shareholders.

Operating ratio is increasing year after year because of the rise in operating profit and
flexibility of U.S dollar in international market.

CONCLUSION AND RECOMMENDATIONS

The following recommendations are made after carrying out the interpretation of the profitability
ratios:

ONGC should aim to reduce the cost of goods sold by reducing their amount of inventory

and ensuring faster conversion of inventories to sales.

ONGC should aim to reduce the indirect expenses like carriage outward, bad debts, bank
charges. This will help them to increase their net profit ratios, earning per share and

return on investment.
ONGC should try to reduce their long term debt and shift to short term debts. This is in

turn reduces their capital employed and thus increases their return on investment.
ONGC should do an efficient utilization of shareholders funds to improve its Return on
investment to maintain its goodwill in investors mind.

REFERENCES
James O. Gill, book Financial Basics of Small Business Success
www.Oil and Natural Gas Corporation limited.com
http://www.investopedia.com/
M.P. Vijaykumar
Journal of business and accounting, 14(4) winter, 1987
International Journal of Business and Social Science Vol. 3 No. 21; November 2012
ANNEXURE
This section contains the primary data used to calculate the various profitability ratios. The
various profitability ratios used are:

Annual report of ONGC of the year 2011-2012.

Annual report of ONGC of the year 2012-2013.
Annual report of ONGC of the year 2013-2014.

All the primary data has been collected from the official website of ONGC.