CONTENTS

A.

Introduction

to

Ratio

Analysis

B.

C.

Objective of study,
Research
Methodology
&data source
Ratio
Interpretation

Analysis

D.

Findings & Conclusion

E.
Bibliography

Suggestion

&

&

Introduction
to
Analysis

CHAPTER - 1

Ratio

Objective of study, Research

Methodology & data source

CHAPTER - 2

OBJECTIVE OF STUDY,
RESEARCH METHODOLOGY
AND DATA SOURCE
OBJECTIVE OF STUDY
The main objective of Ratio Analysis is to get
knowledge about financial position of HDFC BANK
Phagwara.
Specially, objectives of study are as
follows :
To know about ratios prevailing at the end of different
financial years.
To form opinion about financial position of HDFC BANK
Phagwara, we have to find the trend of ratios.

DATA SOURCE
In order to complete this project report the data is
collected through primary as well as secondary sources of
the bank. The primary source includes the discussion with
clerk-cum-cashier of

J&K Bank, Phagwara.

The secondary source include reports of Balance

Sheet & Profit & Loss a/c of the bank.

Ratio Analysis & Interpretation

CHAPTER 3

INTRODUCTION TO RATIO ANALYSIS

Ratio is numerical relationship between two variables
which are connected with each other in some way or the
other. Ratios may be expressed in any one of the following
manners:

As a number between 500 and 100 may be expressed

as 5(500 divided by 100)
As a fraction may be expressed as former being 5 times
of the later.
As a percentage the relationship between 100 and 500
may be expressed as 20% of the later.
As a proportion relationship between 100 and 500 may
be expressed as 1:5.

Ratio analysis facilitate the presentation of information of

financial statements in simplified and concise and
summarized form.

In the words of Hund, William, Ratios are simply a means

of highlighting in arithmetical terms the relationship
between figures drawn from financial statements.

NATURE OF RATIO ANALYSIS

Ratio analysis is basically a technique of:
1.

Establishing
meaningful
relationship
significant variables of financial statement.

2.

Interpreting the relationship to form judgement

regarding the financial affairs of the unit.

between

Usefulness of ratio analysis depends upon

identifying

objective of analysis;

selection of relevant data;

deciding appropriate ratios to be calculated;

comparing the calculated ratios with norms of

standards or forecasts;
Interpretation of ratios.

INTERPRETATION OF RATIOS
Ratios are interpreted in following different ways:

individual ratio may be studied with reference to

certain rule of thumb.

group ratio may be interpreted by considering group of

several related ratios.
comparison with past.

comparison with projections.

inter-firm or inter-industry comparison.

Findings & Conclusion

CHAPTER 4

RATIO ANALTSIS

FINANCIAL RATIOS

Solvency
ratio

current
ratio
liquid
ratio

debt-equity
ratio
reserve to
capital ratio

absolute capital
ratio

Profitabi
lity ratio

turnover
ratio

Debtor
turnover
net working
capital ratio
fixed assets

gearing

turnover

ratio

ratio

solvency
Ratio
total
Indebtedness ratio
proprietary
Ratio
interest

inventory
turnover
ratio

Net profit
ratio
operating
profit ratio
earning
per share
dividend
payment
ratio
fixed assets
to net worth
return on
shareholders
investment

coverage
ratio

LIQUID RATIO

Liquid ratio measures the ability of the unit to meet its short
term obligations and reveals the short term financial strength
or weakness. This ratio is used to determine whether the unit is:
capable to meet short-term obligations
the working capital being properly utilized
the current financial position improving

Current ratio this ratio is also known as working

capital or 2:1 ratio. This ratio reveals the adequacy of
current assets to pay off all current liabilities. Formula to
calculate this ratio is:

Current Ratio:-

as a t as at
31-3-04
Rs.000
omitted

31-3-05

as at

as at

31-3-06

31-3-07

Rs. 000 Rs.000

omitted
omt.

Rs.000
omt.

C.A.

206527918 237846420 257643531 280858957

C.L.

31269359

39098622

41762693

49226764

C.R.
(current
ratio)

4.1

5.1:1

6.2:1

5.7:1

INTERPRETATION
The current ratio is very popular and
good indicator of liquidity position of the enterprise. Very
high current ratio is not desirable as it shall mean less
efficient use of funds. The current ratio of HDFC BANK is
high as standard specify, but as the ratio analysis revealed
this ratio has been improved as compared to earlier years.

SOLVENCY RATIO
The long-term financial soundness of any business can be
judge by its long-term creditors with the help of solvency
ratio. This ratio helps to interpreting the capacity of
business to:
make periodic payment of interest ,

repay long-term debt as per installments stipulated in

the contract.

Debt-equity ratio Debt-equity ratio measures the

relationship between borrowed funds and internal owners
funds. Higher equity shall mean a higher stake of owners
and may be a healthy sign.

Method to calculate this ratio is :

Debt

As at

as at

As at

31-3-04

31-3-05

31-3-06

Rs.
omt.
Debt

Equity

000 Rs.
omt.

000 Rs.
omt.

as at
31-3-07

000 Rs.
omt.

000

167820942 192243783 207371761 223353073

Equity 15937365

16654021

17994715

20087338

Ratio

12.54:1

12.52:1

12.11:1

11.53:1

INTERPRETATION
In the year 2004 debt-equity ratio of
HDFC BANK is low as compared to subsequent years. As,
in subsequent years this ratio is decreasing after the year
2005 which indicate higher owners stake and indicate
healthy sign of banks position.

Reserve to capital ratio This ratio establishes

between reserves and capital. Higher proportion of reserves
shows financial soundness because

I.

Unit shall be able to meet future losses as and when

suffered.
II. Unit can expand, grow, diversify as it may desire.

Reserve Capital

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs 000 Rs 000 Rs 000 Rs 000

omt
omt
omt
omt
Reserve 15454910 16169100 17509794 19602417
Capital

482455

484921

484921

484921

Ratio

33:1

34.3:1

35.1:1

41.4:1

INTERPRETATION
The upward trend of ratio reveals higher
proportion of reserves. It shows that HDFC BANK has
sufficient safety margin to meet its future losses in
contingency and may also utilize its funds/reserves for
expansion and diversification.

Capital gearing ratio it is the ratio between capital

plus reserves and fixed cost bearing securities. This ratio
measures the extent of capitalization by the funds raised by
the issue of fixed cost bearing securities. This ratio is
interpreted by the use of two terms. Highly geared means
lower proportion of equity, low geared means high
proportion of equity. Higher capital gearing ratio reveals
equity shareholders gain on the strength of their equity.
This ratio is calculated as under:

Equityfixed cost bearing securities

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs. 000

omt.
omt.
omt.
omt.
Equity

15937365 16654021 17994715 20087338

F.C.B.S. 2970103

3194819

2639347

6201895

6.91:1

4.23:1

(fixed cost bearing securities)

Ratio

5.46:1

5.31:1

INTERPRETATION
As the chat reveals that in earlier years
till 2006 capital gearing ratio was increasing & indicate
equity shareholders strength to gain on their investment,
but, in the year 2007 ratio comes down fastly because of
much more increase in fixed cost bearing securities as
compare to earlier & indicate less return to shareholders.

Solvency ratio solvency is the term which is used to

describe the financial position of any business which is
capable to meet outside obligations in full out of its own
assets. Solvency ratio is computed
as under:

Debt total assets

Debt

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs.
000omt.

Rs. 000 Rs.

omt.
000omt.

Rs. 000 omt.

167820942 192243783 207371761 223353073

Total 212057563 244801607 264489822 286465280

assets
Ratio 89.1%

88.5%

88.4%

87%

INTERPRETATION
Lower solvency ratio is always
desirable because lower ratio means more the bank is able
to meet its debt obligations out of its own funds and the
bank has no need to depend on outsiders and to pay fixed
interest on borrowings.

Total indebtedness ratio this ratio differs

slightly from debt-equity ratio as instead of term liabilities
only, we take total outside liabilities i.e. term and current
both. This may reflect the solvency position in a better way.
As it indicates the adequacy of firms equity in making
payment of outside liabilities. This ratio is computed as:

Total outsiders liability Tangible net

worth

as at

as at

as at

as at

31-3-04

31-4-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs. 000

omt.
omt.
omt.
omt.
T.O.L.

196120198 228147586 246495107 266377942

(Total
outsiders
liability)
T.N.W. 15937365

16654021

17994715

20087338

14.7:1

14.6:1

14.2:1

(Tangible net worth)

Ratio

13.3:1

INTERPRETATION
The capability of bank to pay
outsiders liability was decreasing in the year 2005 as the
chats upward trend indicate, but afterwards it starts
slopping downward and indicate improvement in banks
position, to pay its obligations.

Proprietary ratio This ratio establishes relationship

between proprietors funds to total resources of the unit.
This ratio highlights that what is the proportion of
proprietors and outsiders in financing the total business.
Formula to calculate ratio is:

Proprietors funds Total assets

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs.
omt.
P.F.

000 Rs. 000 Rs. 000 Rs. 000

omt.
omt.
omt.

15937365

16654021

17994715

20087338

(proprietors funds)
Total 208488666 239870406 259590699 282693408
assets
Ratio

8.64%

7.94%

7.93%

8.11%

INTERPRETATION
More proprietary ratio is always
desirable as it represents the funds financed by proprietors
and outsiders. HDFC BANK proprietary ratio is very low
& indicates only 7.11% of funds are financed by owners in
the year 2007 remaining by outsiders.

Interest coverage ratio this ratio measures debt

servicing capacity of a business so far as interest on longterm loans is concerned. This ratio shows how many times
the interest charges are covered by the earnings. This ratio
is calculated with the formula:

Earning before int & tax

Fixed interest charges

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs. 000

omt.
omt.
omt.
omt.
E.B.I.T. 4838403

1894184 3101800 3428131

(earning
before
interest & tax)
F.I.C.
(fixed
charges)
Ratio

712963

692812

1278974 588522

6.78:1

2.42:1

interest
2.73:1

5.82:1

INTERPRETATION
The chart shows fluctuations in interest
coverage ratio HDFC BANK As more interest coverage
ratio is desirable in the year 2006 this ratio falls at
increasing rate which was not good sign but in the year
2007 its rate/trend again gone upward & indicate
improvement in coverage capacity.

EFFICIENCY/TURNOVER RATIO
Efficiency ratios are concerned with measuring the
efficiency in asset management. Efficiency implies
effective utilization of available resources in the process of
business activity, in relation to sales or cost of goods sold.
Net working capital ratio This ratio states as how
efficiently or actively working capital is being used. This
ratio is useful when inter-firm or inter-period comparison is
being done. Formula to calculate this ratio is:

Net salesNet working capital

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs. 000

omt.
omt.
omt.
omt.
Net 18229464
sales
Net

16312577

18171054

20595369

175258559 198747798 215880838 231632193

working capital
Ratio 0.104:1

0.082:1

0.084:1

0.088:1

INTERPRETATION
Increasing ratio indicates that working
capital is more active, it is supporting, comparatively,
higher level of production and sales, it is being more
intensively. Chart shows HDFC BANK working capital
ratio decreased in 2005 but afterwards, it starts increasing,
which is good indication.

Fixed assets turnover ratio this ratio

establishes relationship between sales and fixed assets. The
purpose is to judge whether firm is generating adequate
sales for the investment in fixed assets of the firm. The
formula of this ratio is as under:

Annual sales Fixed assets

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs. 000

omt.
omt.
omt.
omt.
Annual 18229464 16312577 18171054 20595369
sales
Fixed
assets

1960748

2023986

1947168

1834451

Ratio

7.2 times

7.1 times

8.3 times

10.2 times

INTERPRETATION
Fixed assets turnover ratio of HDFC
BANK falls during the year 2005 as indicated by chart. But
after 2005 chart shows upward trend of this ratio, indicate
firm is generating adequate sales for investment in fixed
assets and the ratio is satisfactory.

PROFITABILITY RATIO
In general terms efficiency, in business is measured by
profitability. Low profitability may arise due to lack of
control over expenses. Bankers and other financial
institutions looks at the profitability ratio as an indicator
whether or not firm earns substantially more than it pays
interest for use of borrowed funds and whether ultimate
repayment of their debt appears reasonably certain. This
ratio also indicates return which owners get on their
investment.
Net profit ratio this ratio expresses relationship
between net profit and sales. This ratio indicates what
proportion of net sales is left for owners after all expenses
have been met. It is calculated as follows:

Net profit * 100 Sales

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs. 000

omt.
omt.
omt.
omt.
Net 4063300
profit

1150690

1768434

2744863

Sales 18229464 16312577 18171054 20595369

Ratio 22%

7.1%

9.7%

13.3%

INTERPRETATION
Net profit ratio of HDFC BANK falls
at increasing rate in the year 2005, but after year 2005
upward trend shows increasing profitability of bank.

Operating net profit ratio This ratio establishes

relationship between operating net profits and sales. This
ratio helps in determining the ability of the management in
running the business. It is calculated as:

Operating net profit *

100 Sales

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs.

omt.
omt.

000 Rs.
omt.

000 Rs.
omt.

000

Operating 85289(P) 2407655(L) 2344014(L) 2122286(L)

net profit/
loss
Sales

81229464 16312577

18171054

20595369

Ratio

0.47%

13%

10.3%

14.7%

INTERPRETATION
The ratio analysis and graph indicates that
HDFC BANK management is not efficient to operate its
business as after year 2004 its operating ratio falls and bear
huge losses in the year 2005, but after this its position starts
improving & recovering from losses, which is good
indication for its financial health/position.

Earning per share This ratio indicates earning

power of business and gives view of comparative earning
of firm, inter-firm. In case of intra-firm comparison it gives
view of increase or decrease in earning power of firm over
the period of time. Ratio is calculated with following
formula:

Net profit after tax & preference

dividend Number of shares
as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs. 000

omt.
omt.
omt.
omt.
N.P.A.T&D 4063300

1150690

1768434

2744863

(N.P. after tax & pref.

dividend)
Number
of shares

482455/10 484921/10 484921/10 484921/10

Ratio

86:1

25.7:1

38.48:1

58.62:1

INTERPRETATION
The chart indicates that in the year
2005 HDFC BANK. earning power decreases/goes down
but afterwards upward trend of ratio reveals progress in the
earning ratio/power of the bank.

Dividend pay-out ratio dividend pay-out ratio

is calculated to find the extent to which earning per share
have been retained in the business. It is an important ratio
because ploughing back of profits enable a unit to grow &
pay more dividends in future. This ratio is calculated as:

Dividend per share Earning per share

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs. 000 omt.

omt.
omt.
omt.
Dividend 5.02
per share

7.99

7.99

11.49

Earning 84
per share

23.7

36.48

56.62

Ratio

33%

21%

20%

5%

INTERPRETATION
The ratio indicates that dividend
payment per share increasing continuously & earning per
share also starts increasing after the year 2005. HDFC
BANK dividend pay-out ratio declines after year 2005, as
the rate of payment is higher than the rate of earnings.

Fixed assets to long-term funds this ratio

indicates the extent to which the total fixed assets are
financed by long-term funds of firm. If fixed assets exceed
from long-term funds, it means fixed assets part has
financed out of current funds, which is not a good financial
policy. If fixed assets are less, it means that a part of
working capital required is met out of long-term funds of
firm. This ratio is calculated as:

Fixed assets Long-term funds

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs. 000

omt.
omt.
omt.
omt.
Fixed
assets

1960748

2023986

Long
term
funds

18907468 19848840 20634062 26289233

Ratio

10.37%

10.19%

1947168

9.43%

1834451

6.97%

INTERPRETATION

The ratio indicates that fixed assets

proportion is less and coming down gradually as compared
to long-term funds, it means that a part of working capital
of HDFC BANK is financed by or met out of its long-term
funds.

Fixed assets to net worth ratio the ratio

indicates the extent to which shareholders funds are sunk
into fixed assets. Generally, purchase of fixed assets should
be financed by shareholders equity. If ratio is less than
100% it means working capital is provided by shareholders
funds. If ratio is more than 100% it means that owners
funds are not sufficient to finance fixed assets & firm has to
depend on outsiders. Ratios formula is:

Fixedassets Shareholders fund

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs. 000

omt.
omt.
omt.
omt.
Fixed
assets

1960748

2023986

1947168

1834451

sh.h.F. 15937365 16654021 17994715 20087338

(shareholders
funds)
Ratio

12.3%

12.1%

10.8%

9.1%

INTERPRETATION
The downward trend of ratio indicates
that fixed assets proportion is coming down as compared to
net worth, & the working capital is provided by
shareholders funds.

Return on shareholders investment the

profitability from the view point of shareholders is judge
through this ratio. This ratio is useful in making investment
decisions. This ratio is also used in finding out whether the
shareholders are getting adequate return on their money or
not. Ratio is computed as under:

Net profit after tax Shareholders

funds

as at

as at

as at

as at

31-3-04

31-3-05

31-3-06

31-3-07

Rs. 000 Rs. 000 Rs. 000 Rs.

omt.
omt.
omt.
omt.
Net

4063300

1150690

1768434

000

2744863
profit

Sh.h.F. 15937365 16654021 17994715 20087338

(shareholders
funds)
Ratio

25.4%

6.9%

9.82%

13.66%

INTERPRETATION
The higher the ratio most profitably
shareholders funds are invested in business. J & K banks
ratio fall in 2005, but afterwards upward trend shows
increase in ratio & indicates improvement in funds effective
utilization.

FINDINGS

Findings The liquidity ratio, capital gearing ratio,

solvency ratio, profitability ratios, Return on shareholders
funds ratio, all these fall in the year 2005, which express
bad impression of financial position/health of HDFC
BANK ltd., because these ratios are always desirable to rise
in subsequent years, as these are the main indications of
progress of any unit. On the other hand, debt-equity ratio,
reserve to capital ratio, interest coverage ratio, dividend
pay-out ratio, all these ratios arise in the year 2005 which
too is undesirable, increasing Reserve ratio shows
increasing need to maintain separate funds to meet
prevailing unfavourable conditions, & which may interpret
smooth day-to-day functioning of bank. Increasing
Dividend pay-out ratio shows undesirable burden to pay
even under unfavourable conditions which too/further leads
to misery position of business.

CONCLUSION
Conclusion The overall analysis of financial
position of HDFC BANK Ltd. States that banks efficiency
decreased in the year 2005 due to the posting of inefficient
transactions & bank had to bear losses, especially, the loss
of operating profits, but without being too late bank
performs carefully & improved its financial position. Now,
banks position is at recovering stage.

SUGGESTIONS
Suggestions An analysis of above conditions
direct to form serious planning to recover but as year 200607 shows progress in banks condition, it is at recovering
stage. In nutshell, it can be said that Bank shall review the
strategies followed in the years 2006 & 2007.

BIBLIOGRAPHY
1.

Chawla R. K., Juneja C. Mohan, Saksena K. K.

Finanical Accounting

2.

Kalyani Publication.

3.

Swaroop Gopal, Varshnay P. N. ,

Banking Law & Practice
Sultan Publication.

4.

Gupta Shashi. K. , Sharma R. K.

Accounting For Managerial Decisions
Kalyani Publication.

Suggestion &
Bibliography
CHAPTER - 5