ratio analysis project on ongc of year 2010-11 & 2011-12

Ratio Analysis

1.1 Definition of 'Ratio Analysis'

A tool used by individuals to conduct a quantitative analysis of information in a company's

financial statements. Ratios are calculated from current year numbers and are then compared to

previous years, other companies, the industry, or even the economy to judge the performance of

the company. Ratio analysis is predominately used by proponents of fundamental analysis.

There are many ratios that can be calculated from the financial statements pertaining to a

company's performance, activity, financing and liquidity. Some common ratios include the price-

earnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital.

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1.2 Objectives of Ratio Analysis

The main objective of ratio analysis is to show a firm’s relative strengths and weaknesses. Other

objectives of ratio analysis include comparisons for a useful interpretation of financial

statements, finding solutions to unfavorable financial statements and to help take corrective

measures when, in comparison to other similar firms, financial conditions and performance of

the firm are unfavorable. Ratio analysis also determines the financial condition and financial

performance of a firm. Financial ratios are true test of the profitability, efficiency and financial

soundness of the firm. These ratios have following objectives:

Measuring the profitability: Profitability is the profit earning capacity of the business.

This can be measured by Gross Profit, Net Profit, Expenses and Other Ratios. If these

ratios fall we can take corrective measures.

Determining operational efficiency: Operational efficiency of the business can be

determined by calculating operating / activity ratios.

Measuring financial position: Short-term and long-term financial position of the business

can be measured by calculating liquidity and solvency ratios. In case of unhealthy short

or long-term position, corrective measures can be taken.

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Facilitating comparative analysis: Present performance can be compared with past

performance to discover the plus and minus points. Comparison with the performance of

other competitive firms can also be made.

Indicating overall efficiency: Profit and Loss Account shows the amount of net profit

and Balance Sheet shows the amount of various assets, liabilities and capital. But the

profitability can be known by calculating the financial ratios.

Budgeting and forecasting: Ratio analysis is of much help in financial forecasting and

planning. Ratios calculated for a number of years work as a guide for the future.

Meaningful conclusions can be drawn for future from these ratios.

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1.3 Merits of ratio analysis

Simplifies financial statements: Ratio analysis simplifies the comprehension of

financial statements. Ratios tell the whole story of changes in the financial condition

of the business.

Facilitates inter-firm comparison: Ratio analysis provides data for inter-firm

comparison. Ratios highlight the factor associated with successful and unsuccessful

firms. They also reveal strong firms and weak firms, overvalued and undervalued

firms.

Makes intra-firm comparison possible: Ratio analysis also makes possible

comparison of the performance of the different divisions of the firm. The ratios are

helpful in deciding about their efficiency or otherwise in the past and likely

performance in the future.

Helps in planning: Ratio analysis helps in planning and forecasting. Over a period of

time a firm or industry develops certain norms that may indicate future success or

failure. If the relationship changes in firm’s data over different time periods, the ratios

may provide clues on trends and future problems.

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1.4 Demerits of ratio analysis

Accounting ratios are subject to certain limitations. They are:

Comparative study required: Ratios are useful in judging the efficiency of business only

when they are compared with the past results of the business or with the result of a

similar business. Such comparison only provides a glimpse of the past performance and

forecasts for future may not prove correct since several other factors like market

conditions etc may affect the future operations.

Limitations of financial statements: Ratios are based only on the information which has been

recorded in the financial statements. For example: non-financial changes though important

for the business are not revealed by the financial statements. Of the management of the

company changes, it may have ultimately adverse effects on the future profitability of the

company but this cannot be judged by having a glance at the financial statements of the

company.

Ratios alone are not adequate: Ratios are only indicators; they cannot be taken as final

regarding good or bad financial position of the business. “Ratios must be used for what they

are financial tools.” Too often they are looked upon as ends in themselves rather than as a

means to an end. The value of a ratio should not be regarded as good or bad inter se.

Window dressing: The term window dressing means manipulation of accounts in a way so as

to conceal vital facts and present the financial statements in a way to show a better position

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than what it actually is. On account of such a situation, presence of particular ratio may not a

definite indicator of good or bad management.

Problems of price level changes: Financial analysis based on accounting ratios will give

misleading results if the effects of changes in price level are not taken into account. The

financial statements of the companies should, therefore, be adjusted keeping in view the price

level changes if a meaningful comparison is to be made through accounting ratio.

No fixed standards: No fixed standards can be laid down for ideal ratios. For example:

current ratios are considered to be ideal if the current assets are twice the current liabilities. It

is necessary to avoid many rules of thumb. Financial analysis is an individual matter and

value for a ratio which is perfectly acceptable for one company or one industry may not be at

all acceptable in case of another.

Ratios are composite of many figures: Ratios are a composite of many different figures.

Some cover a time period, other are at an instant of time while still others are only averages.

It has been said that “a man who has his head in the oven and his feet in the icebox is on the

average, comfortable”!

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2.1 Short-term Solvency or Liquidity Ratios

Short-term Solvency Ratios attempt to measure the ability of a firm to meet its short-term

financial obligations. In other words, these ratios seek to determine the ability of a firm to avoid

financial distress in the short-run. The two most important Short-term Solvency Ratios are

following

(a) Current Ratio

(b) Quick ratio or acid ratio

2.1 (a) Current Ratio

The Current Ratio is calculated by dividing Current Assets by Current Liabilities. Current Assets

are the assets that the firm expects to convert into cash in the coming year and Current Liabilities

represent the liabilities which have to be paid in cash in the coming year. The appropriate value

for this ratio depends on the characteristics of the firm's industry and the composition of its

Current Assets. However, at a minimum, the Current Ratio should be greater than one.

Current ratio is used extensively in the financial reporting of the companies. Although the

current ratio provide us with the glimpse of the financial strength of a company but this is always

not the case. In some cases the current ratio analysis of two different companies can be

misleading so investors must be careful while evaluating a particular company on the bases of its

current ratio.

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The ratio is mainly used to give an idea of the company's ability to pay back its short-term

liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher

the current ratio, the more capable the company is of paying its obligations. A ratio under 1

suggests that the company would be unable to pay off its obligations if they came due at that

point. While this shows the company is not in good financial health, it does not necessarily mean

that it will go bankrupt - as there are many ways to access financing

Current ratio = current assets/ current liabilities

Table No 2.1- table showing Current assets

(Rs. in Cr)

Particular 2011-12 2010-11

Inventories 5165.44 4118.98

Debtors 6194.82 3845.90

Cash/bank bal. 20124.57 356.55

Loans/adv. 30907.72 64693.91

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Fixed deposited 0 22090

Total current assets 62392.55 95105.34

Table No 2.2- table showing Current liabilities:

(Rs in Cr)

Particulars 2011-12 2010-11

Total current liabilities 54270.87 70159.50

Table No 2.3- table showing Current ratio:

(Rs in Cr)

Particular 2011-12 2010-11

Current assets 62392.55 95105.34

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Current liabilities 117456.73 115,068.69

Current ratio 0.86 0.87

2011-12 2010-110.854

0.856

0.858

0.86

0.862

0.864

0.866

0.868

0.87

0.872

current ratio

current ratio

Figure No 2.1 – figure showing current ratio of 2010-11 and 2011-12

INTERPRETATION-

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This calculation implies that the fluctuation in current ratio. As compared to previous year the

current year’s ratio shows poor liquidity position. In 2010-11 the ratio is 0.87:1 and in 2011-12

the ratio is 0.86:1 which shows decrease in liquidity.

2.1 (b)

Quick Ratio

The Quick Ratio recognizes that, for many firms, Inventories can be rather illiquid. If these

Inventories had to be sold off in a hurry to meet an obligation the firm might have difficulty in

finding a buyer and the inventory items would likely have to be sold at a substantial discount

from their fair market value.

This ratio attempts to measure the ability of the firm to meet its obligations relying solely on its

more liquid Current Asset accounts such as Cash and Accounts Receivable. This ratio is

calculated by dividing Current Assets less Inventories by Current Liabilities.

The reason behind that is emergency requirement cash and business cannot get it from debtors,

so quick assets include cash balance + investment certificate that can be immediately transferable

into cash. The satisfactory ratio is 1:1 but lower limit is 0.5:1. Here quick assets do not include

stock.

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Quick ratio = quick assets (current assets-inventories) / current liabilities

Table No 2.4- table showing Quick assets:

(Rs. In Cr)

Particular 2011-12 2010-11

Total current assets 62392.55 95105.34

inventories 5165.44 4118.98

Quick assets 57227.11 90986.36

Table No 2.5- table showing Quick liabilities:

(Rs. In Cr)


Total quick liabilities 54270.87 70159.50

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Table No 2.6- table showing Quick ratio:

(Rs. In Cr)


Quick assets 57227.11 90986.36

Quick liabilities 54270.87 70159.50

Quick ratio 1.05 1.30

2011-12 2010-20110

0.2

0.4

0.6

0.8

1

1.2

1.4

quick ratio

quick ratio

Figure No 2.2 – figure showing quick ratio of 2010-11 and 2011-12

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INTERPRETATION-

So, as per the current year ratio of the company is up to some extent satisfactory. This ratio

shows the repay ability of the company which is satisfactory as per lower level all over the year.

As compared to previous year in current year it is not good. I 2010-11 it is 1.30:1 and in current

year it is 1.05:1.

Category 1 Category 2 Category 3 Category 40

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2.2 LONG TERM SOLVENCY RATIO

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

testing its ability to pay interest charges regularly and its ability to repay the principal as per

schedule. Thus long-term financial soundness (or solvency) of any business is examined by

calculating ratios popularly, known as leverage of capital structure ratios. These ratios help us

the interpreting repays long-term debt as per installments stipulated in the contract. Following

are the most important solvency ratios:

2.2 (a) Debt-equity ratio:

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of

shareholders' equity and debt used to finance a company's assets. Closely related to leveraging,

the ratio is also known as Risk, Gearing or Leverage. In a general sense, the ratio is simply debt

divided by equity. However, what is classified as debt can differ depending on the interpretation

used. Thus, the ratio can take on a number of forms including: Lower values of debt-to-equity

ratio are favorable indicating less risk. Higher debt-to-equity ratio is unfavorable because it

means that the business relies more on external lenders thus it is at higher risk, especially at

higher interest rates. A debt-to-equity ratio of 1.00 means that half of the assets of a business are

financed by debts and half by shareholders' equity. A value higher than 1.00 means that more

assets are financed by debt that those financed by money of shareholders' and vice versa. An

increasing trend in of debt-to-equity ratio is also alarming because it means that the percentage

of assets of a business which are financed by the debts is increasing.

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Debt-to-Equity Ratio = Total Liabilities

Shareholders' Equity

Table No. 2.7 – table showing Long-term Debt

(Rs. In Cr)


Secured loans 4500 -

Unsecured loans - 17564.26

total 4500 17564.26

Table No. 2.8 – table showing Shareholder’s fund:

(Rs. In Cr)

particulars 2011-12 2010-11

Share capital 4277.76 4277.76

Reserves and surplus 108678.97 93226.67

Total 112956.73 97504.43

Table No. 2.9 – table showing Debt-Equity ratio (Rs. In Cr)

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Total long-term Debt 4500 17564.26

Total shareholder’s fund 112956.73 97504.43

Debt-equity ratio 0. 4 0.18

2011-12

2010-11

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

debt-equit ratio

debt-equit ratio

Figure No 2.3 – figure showing debt-equity ratio of 2010-11 and 2011-12

INTERPRETATION-

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The ONGC has debt equity ratio indicate, numerator is an equity part while

denominator is a debt part. So, we can easily say that equity part is more than debt

part.

2.2 (b) Debts to Total Funds or Solvency Ratio:

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Solvency is the term which is used to describe the financial position of any business which is

capable to meet outside obligations in full out of its own assets. So this ratio establishes

relationship between total liabilities and total assets. Current liabilities are generally excluded

from the computation of leverage ratios. One may like to include them on the ground that they

are important determinants of the firm’s financial risk since they represent obligations and expert

pressure on the firm and restrict its activities.

Formula:

Debts to Total Funds or Solvency Ratio = Total liabilities / Total assets

Table No. 2.10 – table showing Total liabilities:

(Rs. In Cr)


Current liabilities 54270.87 70159.50

Secured loans 4500 -

Unsecured loans - 17564.26

Total 58770.87 87723.76

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Table No. 2.11– table showing Total assets:

(Rs. In Cr)


Fixed assets 68056.97 18639.55

Current assets 62,392.55 95105.34

Total 130449.52 113744.89

Table No. 2.12 – table showing Debt to total fund ratio:

(Rs in Cr)


Total liabilities 58770.87 87723.76

Total assets 130449.52 113744.89

Debt to total fund ratio 0.450 0.771

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2011-122010-11

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

debt to total fund ratio

debt to total fund ratio

Figure No 2.4 – figure showing debt to total fund ratio of 2010-11 and 2011-12

INTERPRETATION-

In the analysis the ratio is continuously increasing and decreasing by year to year. But in 2012

the debt total fund ratio is decreasing than previous year. The reason of fall is Total assets are

less than total liabilities.

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2.2 (c) Proprietary Ratio:

Proprietary ratio (also known as Equity Ratio or Net worth to total assets or shareholder equity to

total equity).Establishes relationship between proprietor's funds to total resources of the unit.

Where proprietor's funds refer to Equity share capital and Reserves, surpluses and Tot resources

refer to total assets. This ratio relates the shareholder's funds to total assets. Proprietary / Equity

ratio indicates the long-term or future solvency position of the business.

Following formula is used to calculate proprietary ratio:

Proprietary ratio = Proprietor's funds / Total assets

Or

Proprietary or Equity Ratio = Shareholders funds / Total Assets

Components:

Shareholder's funds include equity share capital plus all reserves and surpluses items. Total

assets include all assets, including Goodwill. Some authors exclude goodwill from total assets. In

that case the total shareholder's funds are to be divided by total tangible assets. As the total assets

are always equal to total liabilities. The total liabilities may also be used as the denominator in

the above formula. This ratio throws light on the general financial strength of the company. It is

also regarded as a test of the soundness of the capital structure. Higher the ratio or the share of

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shareholders in the total capital of the company better is the long-term solvency position of the

company. A low proprietary ratio will include greater risk to the creditors.

Table No. 2.13 – table showing Shareholder’s fund

(Rs. In Cr)

particulars 2011-12 2010-11

Share capital 4277.76 4277.76

Reserves and surplus 108678.97 93226.67

Total 112956.73 97504.43

Table No. 2.14 – table showing Total assets:

(Rs. In Cr)


Fixed assets 68056.97 18639.55

Current assets 62,392.55 95105.34

Total 130449.52 113744.89

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Table No. 2.15 – table showing Proprietary Ratio

(Rs in Cr)

Particular 2011-12 2010-11

Shareholder’s fund 112956.73 97504.43

Total assets 130449.52 113744.89

Proprietary Ratio 0.86 0.857

2011-122010-11

0.8555

0.856

0.8565

0.857

0.8575

0.858

0.8585

0.859

0.8595

0.86

proprietary ratio

proprietary ratio

Figure No 2.5 – figure showing proprietary ratio of 2010-11 and 2011-12

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INTERPRETATION-

Higher the ratio or the share of shareholders in the total capital of the company better is the long-

term solvency position of the company. In 2010-11 the ratio was 0.857:1 but it improves in

2011-12 to 0.86.

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2.2 (d) Return on Capital Employed (ROCE)

A financial ratio that measures a company's profitability and the efficiency with which its capital is

employed. Return on capital employed (ROCE) is calculated as

ROCE = Earnings Before Income and Tax (EBIT) / Capital Employed

“Capital Employed” as shown in the denominator is the sum of shareholders' equity and debt

liabilities; it can be simplified as (Total Assets – Current Liabilities). Instead of using capital

employed at an arbitrary point in time, analysts and investors often calculate ROCE based on

“Average Capital Employed,” which takes the average of opening and closing capital employed

for the time period.

A higher ROCE indicates more efficient use of capital. ROCE should be higher than the

company’s capital cost; otherwise it indicates that the company is not employing its capital

effectively and is not generating shareholder value. ROCE is especially useful when comparing

the performance of companies in capital-intensive sectors such as utilities and telecoms. This

ratio indicates the efficiency with which management has effectively utilized funds or capital

employed. Higher the rate of return on capital employed, greater will be the efficiency.

ROCE is a useful measurement for comparing the relative profitability of companies. But ROCE

is also an efficiency measure of sorts; it doesn't just gauge profitability as profit margin ratios do.

ROCE measures profitability after factoring in the amount of capital used. To understand the

significance of factoring in employed capital, let's look at an example. Say Company A makes a

profit of $100 on sales of $1,000, and Company B make $150 on $1,000 of sales. In terms of

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pure profitability, B, having a 15% profit margin and is far ahead of A, which has a 10% margin.

Let's say A employs $500 of capital, however, and B employs $1,000. Company A has an ROCE

of 20% [100/500] while B has an ROCE of only 15% [150/1,000]. The ROCE measurements

show us that Company A makes better use of its capital. Like all performance metrics, ROCE

has its difficulties, but it is a powerful tool that deserves attention. Think of it as a tool for

spotting companies that can squeeze a high a return out of the capital they put into their

businesses. ROCE is especially important for capital-intensive companies. Top performers are

the firms that deliver above-average returns over a period of several years and ROCE can help

you to spot them.

Table No. 2.16 – table showing return on capital employed Ratio

(Rs. In Cr)

Particular 2011-12 2010-11

EBIT 9829271514 5785632572

Capital employed 303447217866 27307035284

Return on capital employed 32.39 21.19

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2011-12 2010-110

5

10

15

20

25

30

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return on capital employed

return on capital employed

Figure No 2.6 – figure showing return on capital employed ratio of 2010-11 and 2011-12

INTERPRETATION-

From the table we can see that there is increase in 2011-12 and Higher the rate of return on capital employed, greater will be the efficiency.

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2.2 (e) Earnings per share (EPS)

The term earnings per share (EPS) represents the portion of a company's earnings, net of

taxes and preferred stock dividends, that is allocated to each share of common stock. The

figure can be calculated simply by dividing net income earned in a given reporting period

(usually quarterly or annually) by the total number of shares outstanding during the same

term. Because the number of shares outstanding can fluctuate, a weighted average is

typically used. Financial analyst regards the earning per share as an important measure of

profitability. EPS measures the profit available to the equity shareholders on a per share

basis that is the amount that they can get on every share held. It is computed by dividing

the PAT to the No. of equity share.

Earnings per share=profit after tax / no. of equity share

Table No. 2.17 – table showing Earnings per share ratio

(Rs. In Cr)


PAT 18924 16767.56

equity share 4277.76 2123.89

Earnings per share 4.42 7.83

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2011-12 2010-110

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2

3

4

5

6

7

8

Earnings per share

Earnings per share

Figure No 2.7 – figure showing Earnings per share ratio of 2010-11 and 2011-12

INTERPRETATION-

If we see the table of Earnings per share, we can easily identify that ratio is decreased from 7.83

(2010-2011) to 4.42 (2011-12), which shows less returns from previous year.

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2.2 (f) Net profit ratio

Net profit ratio (NP ratio) is a popular profitability ratio that shows relationship between net

profit after tax and net sales. It is computed by dividing the net profit (after tax) by net sales. For

the purpose of this ratio, net profit is equal to gross profit minus operating expenses and income tax. All

non-operating revenues and expenses are not taken into account because the purpose of this ratio is to

evaluate the profitability of the business from its primary operations. Examples of non-operating

revenues include interest on investments and income from sale of fixed assets. Examples of non-

operating expenses include interest on loan and loss on sale of assets. The relationship between net

profit and net sales may also be expressed in percentage form. When it is shown in percentage form, it

is known as net profit margin. The formula of net profit margin is written as follows:

Net profit ratio = (PAT/sales) X 100

Table No. 2.18 – table showing net profit ratio

(Rs. In Cr)

particulars 2011-12 2010-2011

N.P. 18924 16767.56

Sales 66164.34 60251.77

Net profit ratio 28.60 27.83

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2011-12 2010-1127.4

27.6

27.8

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28.2

28.4

28.6

NET PROFIT RATIO

NET PROFIT RATIO

Figure No 2.8 – figure showing Earnings per share ratio of 2010-11 and 2011-12

INTERPRETATION-

Net profit ratio shows the relationship of PAT with the sales. This ratio is in 2010-11, it is

27.83% and in 2011-2012, it is 28.60%. Because of tax charges is increasing year by year.

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3 Conclusion

It was a great experience to analysis ratios of ONGC ltd because I learned lot of new things

regarding my studies. I also got useful insights regarding financial analysis of this organization

and about their proceeding and also its general background. I also got useful information about

how the theory part of business management is actually practiced. After studying the details of

ONGC ltd I reached at conclusion that ONGC has achieved its entire desire goal with its hard

work and unique idea.

The preponderance of current liabilities over current assets has escalated the net working capital

requirement of ONGC. Thus the company’s short term solvency has got poorer than previous

year, but return on capital employed, net profit ratio, Proprietary Ratio show great signs of

progress of company and its efficiency is increased.

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ratio analysis project on ongc of year 2010-11 & 2011-12

Education

financial ratios

financial performance

financial forecasting

financial conditions

financial soundness

financial tools

companys financial statements

objectives of ratio