boc financial ratio analysis 234343434

Ratio Analysis

Financial Ratio Analysis

Introduction:

Financial statements are prepared primarily for decision making. They

play a dominant role in setting the frame work of managerial decisions.

But information provided in the financial statements is not analysis end

in itself as no meaning full conclusions can be drawn from these

statements alone. However, the information provided in the financial

statements is of the immense use in making decisions through analysis

and interpretation of financial statements. Financial ratio analysis is

the process of identifying of financial strength and the

weakness of the firm by properly establishing a relationship

between the items of the balance sheet and the profit and loss

account. There are various methods used in analyzing financial

statements such as comparative statements, schedules of changes in

working capital, common size percentages, funds analysis and the

ratio analysis. The ratio analysis is the most powerful tool of financial

analysis.

We performed the ratio analysis on BOC Pakistan Ltd which is a listed

company and it deals in Gases, Welding (Gases and Electric), Medical

and Industrial Gases and Medical Equipments. Following few pages

consist of the Introduction of the Company.

Financial Management

1

Ratio Analysis

HISTORY:

BOC Pakistan Limited (Formerly Pakistan Oxygen Limited) has played a

distinguished role since it was established on 8 June 1949. The

Company was one of the pioneers of the infant state of Pakistan in the

field of Industrial & Medical Gases and Welding Technology and has all

along proved a steady partner in the economic development of the

Country.

It was incorporated in 1949 to acquire the assets in Pakistan of the

then Indian Oxygen and acetylene Company Limited which started

operations in India in 1935 when the British Oxygen Company Limited

acquired and amalgamated a few oxygen and acetylene producing

units in the Country to form that Company.

It was originally a 100% subsidiary of the British Oxygen Company

Limited (now the BOC Group) which was established in 1886. On 17th

March 1958, the company became a Public Limited Company and its

capital structure was broadened by the offer of 40% shares to Pakistan

Nationals. Since then this equity structure has been maintained.

BOC Pakistan (BOCP) is a portfolio of three businesses - industrial and

special gases, health care and welding products. It is a part of the BOC

Group, one of only a handful of truly global companies based in the

U.K. The market, technology and management of the Group are global

in nature and transcend 60 countries. Our technology, developed in

many different parts of the World, is deployed on every continent. The

40,000 employees serve some two million customers worldwide, many


2

Ratio Analysis

of whom themselves operate around the world and expect us to serve

them consistently everywhere they do business.

In Pakistan, the company continues to play a leadership role in adding

strategic value to the nation’s industrial and infrastructure

development since 1949. Through its core business, industrial gases, it

meets the significant and emerging needs in the metal processing,

manufacturing/ fabrication/construction, chemicals, petrochemicals,

pharmaceuticals, petroleum, glass and defense manufacturing market

sectors. In health care, BOCP provides the majority of health care

facilities (hospitals) inhaled anesthetic pharmaceuticals. In fact the

Group invented and developed these systems on a worldwide basis.

Business:

The Company's core business is to manufacture and supply industrial

gases to the various industries in the country. The Company also

markets medical gases, welding equipment and consumables and

anesthetic and related medical equipment. From the very inception the

company has been a pioneer and pacesetter in the industrial

development of the country

BOC World Wide

BOC operates in more than 60 countries including Pakistan. BOC Gases

- the Core Business of The BOC Group - is one of the world’s largest

Industrial Gases Companies. BOC gases have over £ 2.6 billion sales

and over 27,600 employees in over 60 countries. BOC Gases worldwide

supplies over 20,000 different gases and mixtures, from atmosphere

gases like oxygen and nitrogen to complicated specialty products.

Every year about 1000 new products and processes to meet the

evolving needs of worldwide customers are added in the product


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Ratio Analysis

range. BOC Gases constantly review their systems and use their world

wide experiences to identify and shares the best operating practices

from each market in order to apply them to customer needs in other.

BOC Pakistan, being a member of the BOC Group can offer customers

in Pakistan both the experience to solve local problems and the highest

international standards demanded by the industrial leaders of today.

ANALYSIS OF ACCOUNTING RATIOS:

Now we shall analyze some important factors like liquidity, profitability,

long term solvency and activities of firm with the help of ratios which

are usually brought under observation by the creditors, investors,

management and other stake holders.

Liquidity Ratios:

These are the most important ratios from the lenders’ point of view.

These are the ratios which measure the short term solvency or

financial position of firm. These ratios are calculated to comment upon

the short-term paying capacity of a concern or a firm’s ability to meet

its current obligations.

The various liquidity ratios are current ratio, liquid ratio (Acid

Test Ratio) and absolute liquid ratio.

Current Ratio:

Current ratio measures general liquidity and is widely used to make

the analysis for a short term financial position or liquidity of a firm.

Current ratio is basically a relationship between current assets and

current liabilities. This ratio is also known as working capital ratio.

Current Ratio =

Current AssetsCurrent Liabilities

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)


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Ratio Analysis

= 1,039,945545,644

=1,062,250694,602

= 1.90:1 = 1.52:1


5

Ratio Analysis

Interpretation:

The current ratio of BOC Pakistan Ltd. up to 30th September 2009

shows that it has the ability to meet all its obligations in respect of

financial debts. But the ratio up to December 31st is the indication that

the enterprise has been in good liquid position since last fifteen

months. It is an attractive sign for the stakeholders to keep full

confidence in the operations and policies of the enterprise. The

company can avail easily short term borrowing facility from banks and

financial institutions with more reliably than the previous year as its

current position is better than the previous year.

Liquid Ratio (Acid Test Ratio):

This ratio shows better liquidity than the current ratio as it is a

relationship between liquid assets and current liabilities. Liquid assets

include all current assets except prepayments and stock because

prepayments usually are not converted into cash and stock takes much

time to be converted into cash.

Acid Test Ratio

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

Liquid AssetsCurrent Liabilities =

Liquid AssetsCurrent Liabilities

Liquid Assets = Current Assets - (Stock + Prepayments)

= 1,062,250−(244,401+20,048)

694,6021,039,945−(166,801+11,401)

545,644

=

= 1.14:1 = 1.51:1


6

Ratio Analysis

Interpretation:

The liquid ratio of BOC Pakistan Ltd. is showing its better liquidity

position and its liquid ratio is better than the requirement that is

usually observed by the banks and other financial institutions. The

stake holders especially creditors can rely on the company because

BOC Pakistan Ltd. has liquid assets to pay the short term liabilities in

time or when they will become due. The liquidity of the enterprise has

been increased from the last year which is an indication of the better

business operations and policies.

Analysis of Profitability: (profitability Ratios)

Profit earning is considered essential for the survival of the business

and it is primary motive of any business. A business needs profit not

only for its existence but also for expansion and diversification. The

investors want adequate return on their investments creditors want

higher security for their interest and loan and so on. A business

enterprise can discharge its obligations to the various segments of the

society only thorough earning profits. Profit is a useful measure of

overall efficiency of a business. Profitability ratios are measured by the

investors and share holders to assess the management in order to

assess how efficiently the business operations are being carried out.

Profitability is the main base for liquidity as well solvency. Creditors,

bankers and financial institutions are interested in profitability ratios

since they indicate liquidity of the business to meet interest obligations

and regular improved profits to enhance the long term solvency of the

business. Owners are interested in profitability to indicate the growth

and also the rate of return on their investments. Generally profitability

ratios are calculated with respect to sales and with respect to

investments.

Following ratios are calculated with respect to sales.


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Ratio Analysis

Gross Profit Ratio (Gross Profit Margin):

Gross Profit ratio is a ratio of Gross Profit to Net Sales expressed as

percentage. It expresses the relationship directly between gross profit

and sales and indirectly between cost of goods sold and sales.

Gross Profit Ratio =

Gross ProfitNet Sales

×100

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

549,1161,753,726

×100 397,845

1,741,090×100

= 31.31% = 22.85%

Interpretation:

The gross profit percentage of BOC Pakistan Ltd. has been reduced

from 31.31% to 22.85%.Management should assess that why their cost

has been increased. However this GP Margin is still up to the mark GP

margin can be made by increasing sales, by decreasing cost and

adopting better purchase policies.


8

Ratio Analysis

Net Profit Ratio:

This is the ratio of net profit (before tax) to net sales expresses as

percentage:

Net Profit Ratio

=

Net Profit aftere TaxationNet Sales

×100

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=238,499

1,753,726×100 =

136,6341,741,090

×100

= 13.59% = 7.80%

Interpretation:

Net profit ratio of the company is decreased from 13.59% to 7.80%.

One reason of this decrease is the remarkable increment in some

expenses like deprecation, repairs and maintenance and traveling

expenses due to revision of estimated useful life of assets and rising in

fuel prices. There is a pressure on the profit margin of the company.


9

Ratio Analysis

Profitability Ratios with respect to Investment:

Following ratios are important to find out the profitability of a company with

respect to investment. As investors demand adequate returns to their

investments so with the help of these ratios they can realize and analyze about

the security and returns of their investments.

Return on Equity Capital:

In real sense ordinary shareholder are the real owners of the company

and they assume highest risk in the company. Preference share

holders have a preference over ordinary shareholders in the payment

of dividend as well as capital. Preference share holders get a fixed rate

of dividend irrespective of the quantum of the company. The rate of

dividend varies with the availability of profits in case of ordinary shares

only. The ordinary share holders are more interested in the profitability

of a company and its performance should be judged on the bases of

return of equity capital of the company.

Return on Equity

=Net profit after taxes

Shareholde r ' s Equiy

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=238,499

1,753,726×100 =

136,6341,741,090

×100

= 13.59% = 7.84%


10

Ratio Analysis

Return on Share Holder’s Fund:

It is a relationship between net profit (After interest and Tax) and

shareholder fund expressed in percentage.

Returns on share holder fund

=

Net Pr ofit After TaxShare Holder Fund

×100

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

518 ,2851,752 ,399

×100=

518 ,2851,752 ,399

×100

= 34.79% = 37.09%

Share Holder Fund = Capital +Reserves

Interpretation:

There is increase in the return from the last year and it is an indication

that the operations of business are good and management efficiently

employs the share holders’ fund in generating the revenues. It is also a

better sign for the stock holders that their investments are being

utilized to give them better returns.

Return on Capital Employed:

It is relationship between operating profit and capital employed of the

company. There are various methods to calculate the capital

employed. We use the share capital, long term liabilities and reserves

to calculate the capital employed. Capital employed can also be

calculated with the debit side of the balance sheet.

Return on capital Employed

=

Net After Omterest +TaxShare Holder Fund

×100

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

518 ,2851,752 ,399

×100=

518 ,2851,752 ,399

×100


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Ratio Analysis

= 41.66% = 47.36%

Capital Employed = long term liabilities + share Holder’s Fund.


12

Ratio Analysis

Interpretation:

As there is remarkable increase in the ratio which is an indication that

the management is using efficiently funds provided by the creditors

and shareholders and the reserves of previous profits kept for the

financial purposes. There is a suitable return to the capital employed

that is 47.36 % which means funds of Rs. 100 are generating profit of

Rs. 47.36. This is good sign for the stake holders especially for the

investors which are interested in the return of the capital employed.

Earnings per Share :

Earnings per share is a small variation of return on equity capital and it

is calculated by net profit after tax and preference dividend dived by

the total number of equity shares. It determines the per share earnings

in Rupees.

Earnings per Share =

Earning After Tax−Pr eference Share DividendNo .Of Ordinary Shares

In the BOC Pak (Ltd) there is no prefers share holder so the formula will be.

=

Earning After TaxNo .Of Ordinary Shares

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

518 ,2851,752 ,399

×100=

583 ,7022 ,381 ,420

×100

= Rs. 14.77/Share = Rs. 17.96/Share

Interpretation:

Earnings per share of BOC Pakistan Ltd. is relative increased from the previous

years and is satisfactory for the share holders with respect to their return on the

shares purchased by them. As this ratio describes the rate of dividend so it can

be assumed company is distributing high dividends.


13

Ratio Analysis

Dividend Payout Ratio:

Dividend payout ratio is the relationship between dividend per equity share and

the earring per share expressed in percentage:

Dividend Pay-out Ratio

=

Dividend Per ShareMarket Value Per Share

×100

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

12157 . 55 =

518 ,2851,752 ,399

×100

= 81.24% = 83.51%

Interpretation:

BOC Pakistan Ltd. is paying many dividends and its retained earnings per share

are lower. The company is paying more dividends and retaining lesser portion of

the profit for its reserves. This policy might be the result that already company’s

reserves are three times greater than the share capital. Investors are going to

have adequate return on their investments because 83 % of the profit is being

paid to them.

Analysis of Current Assets Movement (Liquidity Ratios):

The liquidity ratios generally liquid Ratio and Absolute Liquidity

Ratio generally indicate the adequacy of current assets for meeting

current liabilities. This is one dimensions of liquidity analysis. The other

dimension of liquidity is determination of the rate at which various

short term assets are converted into cash. The efficiency with which

assets are managed directly, affect the volume of sales. The better the

management of assets, the larger is the amount of sales and profits.

Activity ratios measure the efficiency or effectiveness with which a firm

manages its resources or assets. These ratios are also called turnover

ratios because they indicate the speed with which assets are converted

or turned over into sales.


14

Ratio Analysis


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Ratio Analysis

Inventory Turnover Ratio:

Every firm has to maintain a certain level of inventory of finished goods

so as to be able to meet the requirements of the business. But the

level of inventory should neither be too high nor too low. A too high

inventory means higher carrying costs and higher risk of stocks

becoming obsolete whereas too low inventory may mean the loss of

business opportunities. Thus, it is very essential to keep sufficient

stocks in business.

Inventory turnover ratio, also known as stock turnover, is the

relationship between the cost of goods sold during a particular period

of time and the cost of average inventory during that period. It is

expressed in number of times.

Inventory Turnover Ratio

=

Cost Of Goods SoldAvg . Clo sing Stock

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

101 ,701 ,668 ,408 =

143 ,298 ,2142 ,132

= 14.9 times = 10.08 times

No. of Days (Rotation period)

=

Avg Clo sin g StockCost of Goods Sold

×365

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

68 ,408101 ,701 ,6 =

1, 42,132143 ,298 ,2

×365

= 25 days = 36 days

Interpretation:

The results of the stock turnover ratio show that there is a little bit

mismanagement of the inventory because rotation period has been

increased from 25 to 36 days and stock turnover ratio of BOC Pakistan


16

Ratio Analysis

Ltd. has been shifted from 14 to 10 times which means last year stock

of the company converted 14 times into sale in period of 25 days and

in year 2010 it could be converted only 10 times into sales and the

whole process was completed in 36 days. BOC Pakistan Ltd is needed

to be efficient in inventory. One reason of this substantial increase may

be the increased cost of goods sold during this year (increased up to

41%).

Debtors or Receivables Turnover Ratio:

The volume of sales can be increased by following a liberal credit

policy. But the effect of a liberal credit policy may result in tying up

substantial funds of a firm in the form of trade debtors. Trade debtors

are expected to be converted into cash within a short period and are

included in current assets. The liquidity position of a concern to pay its

short-term obligations in time depends upon the quality of its trade

debtors.

Debtor Turnover Ratio

=

Credit SalesAvg . Trade Debtors

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

2 ,008 ,323119 ,047 =

2 ,799 ,870169 ,895

= 16.87 times = 16.48 times

Average Collection Period Ratio :

The debtors/Receivables Turnover Ratio when calculated in terms of days known as average collection period or debtor’s collection period ratio. The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash. It can be calculated as follows:

No. of Days (average collection Period Debtor Turnover Ratio

=

Avg . Trade DebtorsCreditSales


17

Ratio Analysis

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

119 ,0472 ,008 ,323

×365=

169 ,8952 ,799 ,870

×365

= 22 days = 22 days

Interpretation:

BOC Pakistan Ltd. is working on relatively better debtor turnover ratio

and average debtors collection period showing that debtors are more

liquid and company is much efficient in the management of its debtors.

Creditors/Payables Turnover ratio:

This ratio is similar to Debtors/Receivable turnover ratio. It

compares the creditors with total credit purchases. It signifies the

credit period enjoyed by the firm in paying creditors. Accounts payable

include both sundry creditors and bills payable. Same as debtor’s

turnover ratio, creditor’s turnover ratio can be calculated in two forms.

Creditors Turnover Ratio

=

Credit PurchaseAvg . Trade Creditors

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

342 ,7204 ,6633 =

576 ,52065 ,124

= 7.35 times = 8.85 times

No. of days (Average payment period):

This ratio gives the average credit period enjoyed from the creditors.

No. of Days (Average Payment Period)

=

Avg . Trade CreditorsCredit Purchase

×365

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)


18

Ratio Analysis

=

46 ,6333 ,42 ,720

×365=

65 ,124576 ,520

×365

= 50 days = 41 days


19

Ratio Analysis

Interpretation:

As the credit purchases were not available in the financials of BOC Pakistan Ltd.

so we have calculated the creditor’s turnover ratio by assuming all the purchases

as credit. BOC Pakistan Ltd. has improved its creditor’s turnover ratio from the

previous years as in previous years creditors were paid in the span of 50 days

which has been reduced in the current year to 41 days. It is clear indication that

company has enhanced its credit worthiness. Although the volume of purchases

and creditors is increased during the year 2010 but as the company’s liquidity is

very good and company has made its creditor’s turnover ratio better.

Analysis of Solvency (Long Term Financial Position):

The long term indebtness of a firm includes debenture holders, financial

institutions providing medium and long term loan. Short term creditors of a firm

are primarily interested in knowing the firm’s ability to meet its short term

obligations, the debenture holders and another long term creditors are primarily

interested in knowing the firm’s ability to pay regular interest on long term

borrowings, repayment of the principal amount at the maturity and the security of

the loan. Accordingly long term solvency ratios indicate the firm’s ability to meet

the fixed interest and cost and repayment schedules associated with its long term

borrowings. These ratios also used to analyze the capital structure of the

company. They indicate the pattern of financing, whether long term requirements

have been met out of long term funds or not.

Following ratios are generally calculated to test the long term solvency.


20

Ratio Analysis

Debt-Equity Ratio:

Debt-to-equality ratio indicates the relationship between the external

equities or outsiders funds and the internal equities or shareholders

funds. It is also known as “External – internal equity ratio’. It is

determined to ascertain soundness of the long term financial policies

of the company.

Debt Equity Ratio

=

Total Long Term DebtsShare Holder Fund

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

368 ,126106 ,312 ,7 =

303 ,348121 ,242,4

= 1:2.9 = 1:4

Interpretation:

Debt equity ratio of the company is being increased from the previous

year from 1:2.9 to 1:4 which is indication that the company now has

more funds to pay out the long term funds. One reason of the

company’s improved debt equity ratio is the payment of the long term

funds. On one side the long term debts are being decreased and on

other side there is a substantial increase in the share holders’ fund

which made the credibility better. Debt equity ratio = 1:1 (for Rs.1 of

long term debts share holders have Rs.1) is considered satisfactory but

the debt equity ratio of the BOC Pakistan Ltd. is above standard which

is sign for the financial institutions that the company is in position to

pay back the loans acquired with in time or when they will become

due.


21

Ratio Analysis

Interest Coverage Ratio:

This ratio relates the fixed interest charges to the income earned by

the business. It is also known as interest Coverage Ratio. It indicates

whether the business has earned sufficient profits to pay periodically

the interest charges.

Interest Coverage Ratio

=

Net Pr ofit Before Interest ∧ TaxFixed Interest Ch arge

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)

=

368 ,126106 ,312 ,7 =

583 ,70212661

= 32.14 times = 46.10 times

Interpretation:

The results of the interest coverage ratio of BOC Pakistan Ltd. for both

periods are clear indication of the company’s ability to pay the periodic

interest on long term borrowings and especially in year 2010 the

company’s profit before tax is 42 times greater than its financial costs.

Through the analysis of this solvency ratio the confidence of the

bankers and other financial institutions with respect to the credibility

will definitely increase and they will feel the repayment of their loaned

principal together with interest very safe.

One reason of this improved ratio is that company has repaid a

substantial portion of its long term liabilities which has reduced the

payment of interest.

Capital Gearing Ratio

=

Share Holder FundFixed Interest bearing Fund

Sep 30th 2009 (Rs. 000) Dec 31st 2010 (Rs.000)


22

Ratio Analysis

=

106 ,3127368 ,126 =

121 ,242,4303348

= 2.89:1 = 4:1

Interpretation:

Capital gearing ratio is just reciprocal of debt to equity ratio. BOC

Pakistan Ltd. is relatively low geared than the previous year. Its results

show that BOC Pakistan Ltd. has Rs. 4 for every Rs. 1 of the long term

borrowings. Again the ratio is the depiction of the better credibility of

the company. After analyzing the overall long term solvency ratio the

creditors will finance the company because they will fill their financing

very safe.


23

Ratio Analysis

Critical Analysis from Investor’s Point of View:

Performance of financial analysis is of key importance for many stake

holders especially for management of the company which needs to

analyze the overall operations of the enterprise, investors because

they are interested in adequate return of their investment and

creditors who are interested in on time repayments of loan and

interest.

As we go through the ratio analysis of BOC Pakistan Ltd. with investor’s

point of view then it is found that the company has potential to pay

back the relatively better and attractive returns to the investors.

Although the company has profit pressures from the last year because

the cost of sales has been substantially increased this is mainly subject

to rising of fuel prices in year 2010. Secondly company revaluated the

useful life of the assets which has substantially increased the

depreciation charge. But still the company is paying relatively better

returns to the investors. The analysis of profitability ratios is the

depiction that share holders are getting adequate returns. The

company’s performance in many aspects like payment of dividends,

return on equity capital, earning per share, return to share holder’s

fund, price earnings ratio and dividend yield ratio all reveal that the

company is paying attractive returns and have better liquidity and

solvency position to pay back the loans and dividends to the share

holder.

There seems a policy in BOC that greater portion of the profits are

distributed among share holders in form of dividends and lesser

portion is retained for the reserves.

Company is also managing long term funds like (share holder fund long

term liabilities) and current assets (like debtors and other assets)

efficiently and in such manners that for the payment of short term and

long term liabilities the company has better liquidity and solvency

position.


24

Ratio Analysis

If we analyze the liquidity and solvency ratios then it will be clear the

creditors are being paid promptly and company has sufficient funds to

pay it liabilities on time or when they will become due.

Before sanctioning the loan the financial institutions analyze the

potential of the company to repay the amount of interest together with

principal. BOC has potential to meet its all to meet its long term and

short term liabilities and obligations.

We conclude that the BOC Pakistan Ltd. is in has potential and

attraction for both the parties i.e. it can pay its liabilities in time and it

can also give the adequate returns to the investors. Investment of the

investors and financing by the creditors both are secured.


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boc financial ratio analysis 234343434

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