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
Current Assests - Inventory
Current Liablities

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
Interest Coverage Ratio
Interest
115 .50
For, HMC the interest coverage ratio 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

Days of Inventory Holding

360
42 days
8.6

( March 2011 )

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 quality of
debtors to a great extent.

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

(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
ROTA

2. 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
RONA

( 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

Mar. 2010

Mar. 2011

Gross profit margin

0.175

0.178

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

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