PAKISTAN INSTITUTE OF DEVELOPMENT ECONOMICS

ISLAMABAD

Name: - HASSAN TAHIR

SUBMITTED TO: SIR ABDUL HAI

FINAL PROJECT ON: SUI SOUTHERN GAS COMPANY

What are accounting ratios?

Introduction:

A number of measurements developed from financial statements

will be explained effectively through using accounting ratios. It is a fact
that ratio analysis is one of the tools of the financial analysis. It is used
to diagnose the financial health of an enterprise. For example creditors
are concerned about the ability of a company to pay its current
obligation, management is concerned with the liquidly of stock of
goods and seek information relating to the number of times stock have
turned over during its financial period, shareholders are concerned
with dividends and seek information relating earning per share.

Definition:-
According to J. Batty,

“The term accounting ratios is used to describe significant

relationships which exist between figures shown in a balance sheet, in
a project and loss account, in a budgetary control system or in any
other part of the accounting organization.”

Advantages of Ratio Analysis:-

Decision making:
Mass of information contained in the financial statement may be
confusing. Ratios help in highlighting the areas deserving attention and
correction.

Calculation of profitability:
Accounting ratio is very useful to find the profitability of the
organizational business by. It helps the management to know about
the earning capacity of the business concern. Ratios illustrate the
actual performance of the business.

Solvency:
Solvency of the company can be measured with the help of
accounting ratios. These ratios show the relationship between the
liabilities and assets can be measured easily. In case external liabilities
are more than that of the assets of the company, it shows the unsound
position of the business. In this case the business has to make it
possible to repay its loans.

Future forecasting:
Ratio Analysis helps in planning and forecasting. A ratio
provides clues on trends and futures problems.

Analysis of financial statement:

Ratio analysis helps the outsider’s e.g. creditors,
shareholders, debenture-holders, bankers to know about the
profitability. It also shows ability of the company to pay interest
and dividend to its creditors.

Performance analysis:
Ratio analysis of a company may have comparative study of
its performance to the previous years. In this way company
comes to know about its weak point and be able to improve
them.

To simplify the accounting information:

Accounting ratios are very useful as they briefly summarize
the result of detailed and complicated computations.

To workout the operating efficiency:

Ratio analysis helps to work out the operating efficiency of
the company with the help of various turnover ratios. All turnover
ratios are worked out to evaluate the performance of the
business in utilizing the resources.

Useful to employees:
Employees are interested in fair wages or benefits. Ratio
helps the employees to get information about the efficiency and
profitability of the organization.

Types of accounting ratios:

Different types of ratios are computed depending on the purpose for

which they are needed. Types of accounting ratios are as under:
 Liquidity ratios
Solvency ratios
Profitability ratios

Liquidity ratios

A liquidity ratio measures the ability of the unit to meet its short-
term obligations and reveals the short-term financial strength or
weakness. Different types of Liquidity ratios are calculated for
testing short-term financial position.

Solvency Ratios

The long-term financial soundness of any business can be judged

by its long-term creditors by testing its ability to pay interest
charges and its ability to repay the principle as per schedule.

Solvency of any business is examined by calculating ratios

known as leverage of capital structure ratios. These ratios help us
the interpreting repays long-term debt as per installments
mentioned in the contract.

Profitability ratios

The main object of a business concern is to earn profits. In

general terms, efficiency in business is measured by profitability. A
low profitability may arise due to lack control over the expenses.
Banker’s financial institutions and other creditors look at the
profitability ratios as an indicator whether or not the firm earns
substantially more than it pays interest for the use of borrowed
funds and whether the ultimate repayment of their debt appears
reasonably certain. Owners are also interested to know the
profitability as it indicates the return which they can get on their
investments.

Formulas of accounting ratios:

Liquidity ratios:

i. Current ratio = current assets / current liabilities

 ii. Liquid ratio = current assets – stocks / current liabilities
iii. Debtors turnover = debtors / credit sales * 365
iv. Creditors turnover = creditors / credit purchase * 365
v. Stock turnover = average stock / cost of goods sold *365
vi. Working capital cycle = debtors turnover + stock turnover –
creditors turnover
vii. Net working capital to sales ratio = net working assets/ sales
*100
viii. Gearing ratio = fixed cost capital / total capital

Profitability ratios:

i. Gross profit margin = gross profit /sales *100

ii. Net profit ratio = NPBI / sales*100
iii. Return on capital employed = 100 * NPBI / capital employed
*100
iv. Return on equity = net profit / equity *100
v. Return on total Assets = NPBI / total assets *100
vi. Fixed assets turn over = net sales / total net book value of fixed
assets

Investment ratios:

i. Earnings per share = net profit / number of issued ordinary

shares
ii. Price earnings ratio = market price per share / earnings per
share
iii. Dividend yield = dividend paid and proposed / market price
iv. Dividend cover = profit available to pay for ordinary dividend /
ordinary dividend paid
v. Dividend per share = ordinary dividend paid / number of issued
ordinary shares

Cash flow ratios:

i. Operating flow to sales ratio = operating cash flow / sales *100

ii. Operating flow to current liability ratio = operating cash flow /
current liabilities *100
iii. Operating flow to interest expense ratio = operating cash flow /
interest expense *100
iv. Operating flow to dividend ratio = operating cash flow – interest
and taxes/ ordinary share holder dividend*100
Interpretation of ratios:

Calculation of ratios is simple in nature but interpretation of

ratios is highly sophisticated. The benefit of ratio analysis depends a
great deal upon the correct interpretation. It needs skill, training and
intelligence. Following are the different ways in which ratio can be
interpreted. Some points of interpretation are as under:

Inter-firm comparison:

Ratio of one unit may be compared with the ratios of

another identical unit. Such comparison can be very helpful for the
evaluation of financial position of another firm or unit.

Comparison with past:

Ratios may be interpreted by making comparison over a

period of time. It will be helpful for revealing upward position (profit),
downward position (loss) or stable position of a firm or an organization.

Helpful to Shareholder:

Profitability of company of firm can be calculated with the

help of accounting ratios.

Helpful to creditors:

Accounting ratios are very useful for the creditors.

Accounting ratios provide a clear view of a firms profit or loss so that
they can invest their money carefully.
CALCULATION OF FINANCIAL STATEMENTS OF SUI SOUTHERN GAS COMPANY WITH
COMPARISION OF YEAR 2008-2009:

S.N TITLE VALUES & CALCULATION RESULT RESULT DESCRIPTION

O 2008 2009 2008 2009
1 Current 36,279,235/33,455, 61,032,671/59,251,2 1.08 1.03
ratio 815 03
2 Liquid ratio 35766852/33,455,8 60,542,132/59,251,3 1.07 1.02
15 02
3 Debtors 365 X 29387130 / 365X55538334/5929 254 342 Debtors=trade debt
turnover 42271216 2622 DAYS DAYS +others receivables
Credit sales=50%
of sales

4 Creditors 365X30824628/346 365X 325 357 Creditors=trade

turnover 19118 50099746/51194429 DAYS DAYS debt +others
payables
Credit
purchases=50% of
cost of sales
5 Stock 365X512383/69238 365X490539/102388 3 2
turnover 236 858 DAYS DAYS
6 Working 254+3-325 342+2-537 -68 -193
capital cycle DAYS DAYS
7 Net working (2823420/84542431 100x(1781468/ 3% 2% Working Capital =
capital to )x 100 118585244) Current Assets −
sales ratio Current Liabilities
8 Gearing 27931963/3711136 31619203/40950608 0.75 0.77 Fixed cost capital =
ratio 8 long term liabilities
+ preferred share
capital
Total Capital =
issued ordinary
share capital + All
reserves + long
term liabilities +
preference share
9 Gross profit 100X(5387333/ 100X(5762229/ 7.22% 5.33%
margin 74625569) 108151087)
10 Net profit 100X(2381632/ 100X(416699/108151 3.19% 0.39%
ratio 74625569) 087)
11 Return on 100X(2381632/ 100X(416699/409506 6.42% 1.02% Capital employed =
capital 37111368) 08) Issued shares +
employed reserves + long
term liabilities
12 Return on 100X(991072/91794 100X(257489/933140 10.80% 2.76% Equity = Issue
equity 05) 5) ordinary reserves +
Reserves
13 Return on 100X(5387333/ 100X(5762229/ 7.51% 5.73% Total Assets =
total Assets 71702904) 100554000) Fixed Assets +
Current Assets
14 Fixed assets 74625569/3380756 108151087/3809563 2.21 2.84 property plant and
turn over 4 2 equipment is
considered as fixed
 assets

15 Earning per 991072/671174 257489/671174 1.48 0.38 No. of Shares =

share issued shares / face
value of shares
16 Price 13.62/1.48 13.62/0.38 9.20 35.84 Market Price on
earning 14/01/2009 of
ratio SSGC's Ordinary
shares.
17 Dividend 35587/13.62 838968/13.62 2612.8 61598. 2008 0.5 per share
yield 5 24 dividend was paid
and in 2009 1.25
per share dividend
was paid
18 Dividend 991072/35587 257489/838968 27.85 0.31
cover
19 Dividend 35587/671174 838968/671174 0.5 1.25
per share
20 Operating 100X(4838743/ 100X(5189460)/ 5.72% -4.38%
flow to sales 84542431) 118585244
ratio
21 Operating 100X4838743/3345 100X(5189460)/5925 14.46% -8.76%
flow to 5815 1203
current
liability ratio
22 Operating 100X(4838743/2038 100X(5189460)/4181 237.41 -
flow to 106) 967 % 124.09
interest %
expense
ratio
23 Operating 100X(3448183/3558 100X((5348670)/838 9689.4 637.53
flow to 7) 968) % %
dividend
ratio
Final assessment of SSGC:

LIQUIDITY RATIO:
We have compared the accounting ratios of Sui southern
gas for the both year 2008 and 2009, in comparison we find that the
liquidity ratio was 1.07 for the year 2008 and 1.02 for the current year
2009 but the best ratio of liquidity is at 2, so we analyze that the
business was better in 2008 rather in 2009. Stock turnover ratio has
also been decreased from 3 days to 2 days, as well as working capital
is also decreased from 68 days to 193 days.
From the above calculation I conclude that liquidity
position of SSGC is not very strong and day by day its position is falling
down, the management of SSGC will have to take effective steps to
make organization strong.

PROFITABILITY RATIOS:
In comparison of profitability ratio for both year 2008 and
2009 we may see that the gross profit and net profit of SSGC is
decreasing from 7.22% to 5.33% and 3.19% to 0.39% so we can see a
downfall of 1.89% for the year 2009 and 2.8% downfall in net profit.
In profitability the profit of the company is decreasing, the
management should take measures.

INVESTMENT RATIO:
After a downward trend in SSGC finally we find a positive
trend price earning ratio is in increasing in year 2009 from 9.20 to
35.84 with the difference of 26.64. Market values of the shares of SSGC
are much better then the previous year. Dividend share is also
increased in year 2009.

CASHFLOW RATIOS:
All cash flow ratios are representing a downward fall or
decrease of the SSGC. Steps should be taken by the management to
improve its position.