RATIO ANALYSIS

WHY RATIO ANALYSIS ?

TO JUDGE STRENGTH AND WEAKNESS OF THE FIRM.

BUT FOR WHOM ?

RESULT OF RATIO ANALYSIS (USE BY)

OUTSIDERS Management Of The Same Firm 1.Trade creditors 2.Supplier of debts 3.investors

Ratio analysis with respect to; Hindustan Manufacturing Company

1.LIQUIDITY RATIO

USED TO CHECK THE ABILITY OF THE FIRM TO MEETS ITS CURRENT OBLIGATIONS OR LIABILITIES.....

A. CURRENT RATIO
Total of Current Assets Total of Current Liablities
1870.92 For, HMC the current ratio is := = 1.20 : 1 1555.75
( March 2011 )

B.QUICK RATIO \ ACID TEST RATIO

C rren u t A ssests - In en ry v to C rren u t L lities iab

720 .53 For, HMC the Quick Ratio is : = 0.46 : 1 1555 .75
( March 2011 )

HMC: Liquidity Ratio

Mar. 2009

Mar. 2010

Mar. 2011

Current Ratio

1.24

1.25

1.20

Quick Ratio

0.56

0.56

0.46

Leverage Ratios
Leverage ratios measure the extent to which a firm has been financed by debt. Leverage ratios include: Debt Ratio Debt--Equity Ratio Interest-coverage Ratio Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business. Thus, high leverage ratios make it more difficult to obtain credit (loans).

Total Debt Ratio

Proportion of interest bearing debt in the Capital structure. In general, the lower the number, the better. Total Debt Debt Ratio = Capital Employed (Total Debts + Net Worth) For, HMC the debt ratio is : = 1229.06 = 0.646 or 64% 1901.87
( March 2011 )

Debt-Equity Ratio
The Debt-Equity Ratio indicates the percentage of total funds provided by creditors versus by owners. This ratio indicates the extent to which the business relies on debt financing (creditor money versus owners equity).

Total Debt Debt Equity Ratio = Net Worth 1,229.06 For, HMC Debt - Equity ratio is : = = 1.83 672.81
( March 2011 )

Interest Coverage Ratio

interest coverage ratio indicates the extent to which earnings can decline without the firm becoming unable to meet its annual interest costs.

EBIT InterestCoverageRatio = Interest 115.50 For, HMC the interestcoverageratio is :: = = 105 1.10
( March 2011 )

HMC: Leverage Ratios Mar. 2009 Mar. 2010 Mar. 2011

Total Debt ratio

0.56

0.63

0.65

Debt-equity ratio

1.26

1.72

1.83

Activity Ratios
These ratios evaluate the efficiency with which the firm manages and utilizes its assets. They indicate the speed with which assets are being converted or turned over into sales. Activity ratios include:
Inventory Turnover Debtors Turnover Assets Turnover Working Capital Turnover

Inventory Turnover Ratio

Indicates the efficiency of the firm in producing and selling its product. Cost of goods sold/average inventory Cost of goods sold = opening stock + purchases + direct expenses closing stock Average inventory = average of opening and closing inventory

For, HMC the Inventory Turnover ratio is :

Inventory Turnover Ratio =

Cost of Goods Sold 3,053.66 = = 8.6 Avg Inventory (244.26 + 7461 .81) / 2 360 = 42 days 8.6
( March 2011 )

Days of Inventory Holding =

It means that the firm is turning its inventory of finished goods into sales 8.6 times in a year.

DEBTORS TURNOVER
A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of companies. When the firm extends credit to its customers , debtors are created in the firms account . Debtors are convertible into cash over a short period and therefore they are included in current assets. The liquidity position of the firm depends on the

For, HMC the Debtors Turnover ratio is :

Credit Sales Debtors(AR ) Turnover = Avg Debtors Sales 3,717.23 = = = 7.7 times Avg AR 483.18
( March 2011 )

This means the firm is able to turnover its debtors 7.7 times in a year.

ASSETS TURNOVER
Assets are used to generate sales A firm should manage its assets efficiently to maximize sales. The relationship between sales and assets is called assets turnover.

For, HMC the Assets Turnover ratio is :

Sales Net Assets Turnover = Net Assets 3,717.23 = = 1.95 times 1901.87

( March 2011 )

This implies that firm is producing Rs. 1.95 of sales for one rupee of capital employed in net assets.

WORKING CAPITAL TURNOVER

Sales/Net Current Assets Net Current Assets = Current Assets Current Liabilities Working capital means the day to day requirements of the firm.

For, HMC the Working Capital Turnover ratio is :

Sales Working Capital Turnover ratio = Net Current Assets 3,717.23 = = 3.2 times 115.04
( March 2011 )

Profitability Ratios
Profitability ratios measure managements overall effectiveness as shown by returns generated on sales and investment. Profitability ratios include
Gross profit margin Net profit margin Operating Expense ratio Return on equity (ROE) Return on investment (ROI)

Gross Profit Margin

Gross Profit GP Margin = Sales 663.57 The ratio for HMC is : = = 0.179 or 17.9% 3,717.23

Net Profit Margin

Profit after tax NP Margin = Sales 134.86 The ratio for HMC is : = = 0.036 or 3.6% 3717.23

Operating Expense Ratio

Operating Expense Operating Expense Ratio = Sales 3411.53 The ratio for HMC is : = = 0.918 or 91.8% 3717.23
( March 2011 )

Return on equity (ROE)

Profit After Tax(PAT) Return on equity = Net Worth (Equity) 134.86 The ratio for HMC is : = = 0.20 or 20% 672.81
( March 2011 )

Return on investment (ROI) 1. ROTA

ROTA =

(Return on Total Assets)

EBIT (1 - T) Total Assests (TA) 342.61 (1 - .32) The ratio for HMC is : = = 0.089 or 8.9% 2617.75

2. RONA
RONA =

( March 2011 )

(Return on Net Assets)

EBIT (1 - T) Net Assests (NA) 342.61 (1 - 0.32) The ratio for HMC is : = = 0.122 or 12.2% 1901.87
( March 2011 )

Since, taxes are not controllable by management and firms opportunity for availing tax incentives differ, it may be more prudent to use before-tax measures of ROI. Thus, the before-tax ROI ratios are:

1. ROTA (Return on Total Assets)

EBIT ROTA = Total Assests (TA) 342.61 The ratio for HMC is : = = 0.131 or 13.1% 2617.75

( March 2011 )

2. RONA (Return on Net Assets)

EBIT Net Assests (NA) 342.61 The ratio for HMC is : = = 0.180 or 18.0% 1901.87 RONA =

( March 2011 )

HMC: Profitability Ratios Mar. 2009 Gross profit margin 0.175 Mar. 2010 0.178 Mar. 2011 0.179

Net profit margin

0.036

0.094

0.092

Return on equity (ROE)

0.164

0.191

0.200

Project Interpretation / Summary / Findings

Liquidity ratio analysis indicates that HMCs liquidity is deteriorating. HMC seems to depend more on outsiders funds to finance its expending activities. The level of long term debts is not very excessive, but the proportion of other liabilities is increasing. From the creditors point of view, the trend is risky and undesirable.

Project Interpretation / Summary / Findings

Activity ratio analysis shows HMCs turnover ratios do not show improvement. The company has marginally improved its utilizations of fixed assets, but its current assets turnover is declining. Profitability ratio analysis indicates that the companys EPS and DPS are increasing.

Thank you.
P.K. and Team