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Ratio Analysis of ICI Pakistan

Submitted to : Abdul Hai


Submitted by : Usman Jamil
Reg # 10

Pakistan Institute of
Development Economics
a. Ratio:
A ratio is a simple mathematical expression of the
relationship of one item to another. Every percentage may
be viewed as a ratio, that is, one number expressed as a
percentage of another.
Accounting Ratio:
Accounting Ratio is the numerical relationship between
two variables which are shown in a balance sheet and
profit and loss account connected with each other in some
way or the other.
I.e. As a percentage the relationship between 100 and 500
may be expressed as 20% of the latter (100/500*100) = 20%.

b. Significance/benefits of Ratios:
Accounting Ratios have great significance for many
sectors of accounting and serves as the yard stick to
predict results of different accounts related to
Balance Sheet and Profit & loss account.
1 Accounting ratios are used to assess the profitability
and assess the all capital provider’s point of view.
2 Financial analysts and decision makers us accounting
ratios to state in advance exactly what they are
shooting for because, if we aim at nothing we are likely
to hit it.
3 Ratios are used to reduce the chances of three future
oriented risks, firm risks, industry risks and economic
risks.
4 Several ratios are used to assess company’s ability to
service current debt requirements i.e.to remain a going
concern.
5 External users, particularly financial analysts, use ratios
to help explain the present and to predict the future.
6 Some ratios are used to examine the industry growth,
firm concentration, product differentiation cyclicality
and exit barriers.
7 Ratios serves the purpose of accounting quality. And
accounting quality includes general characteristics of
information that enable external decision makers to
assess and predict sustainability of current financial
characteristics.
8 Ratios are indicator, several of them paint a picture of
the firm’s situation.
9 Control is most important feature of a financial
organization. And this feature is attained by only
effective use of accounting ratios.
10Relevant data is recorded by using different types of
accounting ratio.
c. Types of accounting ratios.
1. Profitability ratio:
The main objective of a business concern is to earn profit.
In general terms, efficiency in business is measured by
profitability. A low profitability may arise due to lack of
control over the expenses.
Different profitability ratios:
1 Gross profit ratio=Gross profit*100/Net sales.
2 Operating profit ratio=Operating profit*/Net sales.
3 Net profit ratio=Net profit after tax*100/Net sales.
4 Operating ratio=Cost of goods sold+ Operating
expenses*100/Net sales.
5 Expense ratio=Selling and distribution
expenses*100/Net sales.
6 Return on capital employed ratio=NBPI*100/Capital
employed.
7 Return on equity ratio=Net profit after preference
dividends*100/Equity.
8 Return on Total Assets=NPBI*100/Total Assets.
9 Fixed Asset Turnover=Net Sales/Total Net Book Value
of Fixe Assets.
2. Liquidity ratio:
The creditors; creditors for expenses; commercial banks;
short-terms lenders are concerned with the short-term
financial position or liquidity of the unit. Liquidity ratios
measure the ability of the unit to meet its short-term
(generally one year) obligations and reveals the short-
term financial strength or weakness.
Different liquidity ratios:
1 Current ratio=Current Assets/Current Liabilities.
2 Liquid Ratio=Current Assets-Stock/Current Liabilities.
3 Debtors Turnover=Debtors*365days/Credit Sales.
4 Creditors Turnover=Creditors*365/Credit Purchases.
5 Stock Turnover ratio=Average Stock*365/Cost of Goods
Sold.
6 Net Working Assets*100/Sales.
7 Net Working Assets=Stock + Trade Debtors - Trade
Creditors.
8 Income Gearing=Profit before Interest and Tax
(PBIT)*100/Interest Expense.
9 Gearing Ratio=Fixed Cost Capital/Total Capital.
10Working Capital Cycle (in days)=Debtors Turnover (in
days)+Stock Turnover (in days)-Creditors Turnover (in
days).
3.Investment Ratios:
It is also called as “Return on Investments”. It indicates
the percentage of return on the total capital employed
in the business.
The term capital employed has been given different
meanings by different accountants. Some of the
popular meanings are as follows:
1 Sum total of all assets whether fixed or current.
2 Sum total of fixed assets.
3 Sum total of long-term funds employed in the business.
Different investment or stock turnover ratios:
1 Earnings per share=Net Profit-Preference Share
Dividend/No. of issued Ordinary Shares.
2 Price Earnings Ratios=Market Price per share/Earnings
per share.
3 Dividend yield=Dividend paid and proposed/Market
Price of share.
4 Dividend cover=Profit available to pay ordinary
dividend/Ordinary dividend paid.
5 Dividend per share=Ordinary dividend paid/Number of
issued ordinary sales.
4. Cash Flow Ratios:
An additional measure of liquidity that is sometimes
computed, based in part on information from the
statement of cash flows, is the ratio of cash flows from
operations to current liabilities. This measure provides
evidence of the company’s ability to cover its currently
maturing liabilities from normal operations.
Some cash flow ratios:
1 Operating Cash Flow*100/Sales.
2 Operating Cash Flow*100/Current Expense.
3 Operating Cash Flow*100/Interest Expense.
4 Operating Cash Flow Less Interest, Taxation and
Preference Dividend*100/Ordinary Shareholders
Dividend.
d. Calculation and interpretation of ratios:
Accounting ratios are calculated by using specified
formulae arranged by different accounting standards.
These modules are also called rules of thumb. i.e. if we
calculate quick ratio,
Formula of quick ratio=Liquid assets/Current liabilities.
Quick assets =111000
Current liabilities=130000
Calculation: Quick ratio=111000/130000=0.85:1
Interpretation of ratios:
Interpretation means to compare the result of present
year ratio with previous year ratio. Or interpretation ratio
tells us that debt ratio should be under 50 percent. As a
convention 2:1 is regarded as satisfactory level i.e.
current assets should be almost double than the current
liabilities.
e. Calculation and Analysis of ratios:
Profitability Ratios:
(1) Gross Profit Ratio:
Items 2007 2008
Gross Profit 4818754 5647341
Net Sales 23024123 27963915

Gross Profit Ratio=Gross Profit*100/Net Sales.


Gross Profit Ratio
2007=4818754*100/23024123=20.92%
Gross Profit Ratio
2008=5647341*100/27963915=20.19%
Gross Profit Ratio of 2007 is 20.92 and 2008 is 20.19. It
means that our Gross Profit in 2007 was greater as
compared in 2008.
(2) Net Profit Ratio:
Items 2007 2008
NBPI 2984004 3352360

Net Profit Ratio=NBPI*100/Net Sales.


Net Profit Ratio in
2007=2984004*100/23024123=12.96%
Net Profit Ratio in
2008=3352360*100/27963915=11.98%
Net Profit Ratio of 2007 was 12.96% and in 2008 is
11.98%. Net Profit of 2007 was greater than in 2008. It
means that company earned more profit in 2007 as
compared to 2008.
(3) Return on Capital Employed:
Items 2007 2008
Capital Employed 2593768 1973439

Return on Capital Employed=NBPI*100/Capital Employed.


Capital Employed=Issued Share + Reserves + Long
term liabilities.
Capital Employed in
2007=2984004*100/2593768=115.04%
Capital Employed in
2008=3352360*100/1973439=169.87%
Return on Capital Employed ratio for 2007 was 115.04% and
in 2008 it was 169.87%. It means that there is shown
a good impact for return on
Capital employed.

(4) Operating Expense Ratio:


Items 2007 2008
Operating 2294981 1834750
Expenses
Sales 27963915 23024123

Operating Expense Ratio in


2007=2294981*100/27963915=8.20%
Operating Expense Ratio in
2008=1834750*100/23024123=7.96%
After comparing both years ratios it appears that expenses
ratio of
2007 was 820% and in 2008 was 7.96%. It means that
company
controlled its expenses in 2008.

(5) Fixed Asset Turnover:


Items 2007 2008
Fixed Assets 8506736 9353769
Fixed Asset Turnover Ratio=Net Sales/Total Value of
Fixed Asset.
Fixed Asset Turnover Ratio in
2007=23024123/8506736=2.70
Fixed Asset Turnover Ratio in
2008=27963915/9353769=2.98
Company showed a good approach in case of fixed asset
turnover ratio. For example the fixed asset turnover ratio
in 2007 was 2.70. And in next year this ratio was
increased by 2.98. It showed that company’s turnover
regarding fixed assets is improving.

(6) Return on Total Asset:


Items 2007 2008
NBPI 2984004 3352360
Total Assets 18667685 18780423

Return on Total Asset=NBPI*100/Total Assets.


Return on Total Asset in
2007=2984004*100/18667685=15.98
Return on Total Asset in
2008=3352360*100/18780423=17.85
Return on total asset ratio is a measure to calculate the
total yield of a company through total assets of company.
And this ratio for 2007 reflects that it was 15.98. And in
2008 it was increased to 17.85. It also reflects that
company is in a better position.

(7) Return on Equity:


Items 2007 2008
Net Profit 1,784,800 2068872
Equity 11398450 1268388

Return on Equity=Net Profit *100/Equity.


Equity=Issued Ordinary Shares + Reserves.
Return on Equity in 2007=1,784,800 / 11398450= 15 %
Return on Equity in 2008= 2068872 / 1268388= 16 %
According to calculated ratio company’s return on
equity in 2007 is 15% and in 2008 it is 16% so for
company it is a good sign. Because it has a direct
impact on profit.
Liquidity Ratio:
Trade creditors, creditors for expenses, commercial banks,
short-terms lenders are concerned with the short-term
financial position or liquidity of the unit.

(1) Current ratio:


Items 2007 2008
Current Assets 9054770 8232427
Current 6250235 4281110
Liabilities
Current Ratio=Current assets/Current liabilities.
Current Ratio in 2007=9054770 / 6250235 = 1.44
Current Ratio in 2008=8232427 / 4281110 = 1.92
Current ratio is the difference between current
assets and current liabilities. In above calculated
ratio assets ratio for 2007 is 1.44 and in 2008 it is
1.92. It means that company’s assets have
improved.

(2) Liquid Ratio=Current Assets-Stock/Current


Liabilities. Liquid Ratio in 2007= 6743434 /
6250235= 1.07

Liquid Ratio in 2008= 5280471 / 4281119= 1.23

Liquid ratios of both years are showing that


company has increased its liabilities. Because the
liabilities in 2008 are greater than in 2007.

(3) Debtors Turnover:


Items 2007 2008
Debtors 1023596 1003612
Credit Sales 16116886 19574741

Debtors turnover in 2007=1023596 / 16116886 * 365 = 23.18


Debtors turnover in 2008=1003612 / 19574741* 365 = 18.71
Debtors turnover means that the return on debtors
of a company. And according to ICI debtors turnover
for 2007 was 23.18 and in 2008 it decreased to
18.71. Company’s profitability is affecting.
(4) Creditors Turnover:
Items 2007 2008
Creditors 6250235 4281110
Credit 15894033 1329154
Purchases
Creditors turnover in 2007=6250235 / 15894033* 365 = 142.35
Creditors turnover in 2008=4281110 / 1329154 * 365 = 1175.3
Creditors turnover means the calculation of debts
of the company. And creditors turnover ratio for
2007 was 142.35 and 2008 was 1175.3. It
determines that company’s debts are improved.

(5) Stock turnover:


Items 2007 2008
Average Stock 2311336 2631646
Cost of Goods 18205369 22316574
Sold

Stock turn over in 2007: 2311336 / 18205369 * 365 = 46.34


Stock turn over in 2008: 2631646 /22316574 * 365 = 43.04
Stock turnover is the profit in other word that a
company earns through it’s stock. And according to
ICI it was in 2007 46.34 and in 2008 it was 43.04.

Working Capital=Debtors Turnover + Stock


Turnover – Creditors Turnover.
Working Capital cycle 2007: 23.18+46.34- 142.35 = 72.83
(6) Working Capital cycle 2008: 18.71+43.04 – 1175.3 = - 1113.56

Working capital tells about the company’s current


assets and current liabilities. And in 2007 it was
72.83 and in 2008 it was 1113.56.
Items 2007 2008
325542 2915303
2796 3915 23024123

(7) Where Net Working Assets=Stock + Trade


Debtors- Trade Creditors
Net working assets in 2007=2915303/ 23024123 *
100= 12 %
Net working assets in 2008=325542/ 2796 3915 *
100= 1.16` %
Net working assets include stock, trade debtors but
it does not include creditors of a period. In 2007 this
ratio was 12% but in 2008 it was decreased 1.16.
This is not a good impact on company’s financial
position.

(8) Income Gearing Ratio:


Items 2007 2008
PBIT 2768523 3129908
Interest 146421 219308
Expense

Income Gearing in 2007=2768523/ 146421 * 100 = 15.28


Income Gearing in 2008= 3129908 / 219308 * 100=
20.37
Income gearing ratio is the difference between
profit and interest expense of a business.

Investment Ratios:
(1) Earnings per share:
Items 2007 2008
Net profit 1784800 2068872
No. of issued 138802 138802
ordinary shares

Earning per share in 2007=1784800 / 138802 = 12.86


Earning per share in 2008= 2068872 / 138802 = 14.91
Earning per share means the unit of earning or the
unit profit earned by a company. According to
calculated ratios in 2008 it is increased.
(2) Price earning ratio:
Price earning ratio in 2007 = 196.5/ 12.86= 15. 30
Price earning ratio in 2008= 68.71/ 14.91 = 4.61
The price of per share according to market and the
difference is called price earning ratio. It has
decreased.
(3) Dividend yield:
Dividend yield ratio in 2007=6/ 196.65= 0.03
Dividend yield ratio in 2008= 6.5 / 68.71 =0. 09
Dividend is the amount paid to shareholders out of
profit of the company. If it differes to market price
of share it is called dividend yield ratio. It has also
decreased.

Cash Flow Ratios:


(1) Operating Cash Flow * 100 / Sales
Operating Cash Flow in 2007=4093537 / 2964228 *
100= 17.88

Operation Cash Flow in 2008=985599 / 27963915 *


100=3.52

Operating cash flow ratio tells us how the


company's operation cash flow is effective. Ratio
showed that it has decreased.
(2) Operating Cash Flow *100/Current Liabilities.
For 2007=4093537/ 6250235 * 100= 65.5 % `

For 2008=985599 / 4281110 * 100= 23 %


Current liabilities tells us that how cash flow is
operative and according to previous ratio it has
decreased.

(3) Operating Cash Flow*100/Interest Expense.


For 2007=4093537 / 146421 = 28 %
For 2008=985599/ 219308= 4.5 %
Sometimes in cash flow interest is paid and
received. It can guide us about operating activities.
It means company paid more interest.