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TYPES OF RATIOS

Several ratios, calculated from the accounting data, can be grouped into
various classes according to financial activity or function to be evaluated.
As started earlier, the parties interested in financial are short and long-
term creditors, owners and management. Short term creditors mainly
interested in the liquidity position or the short-term solvency of the firm.
Long-term creditors, on the other hand, are more interested in
the long term solvency of the firm. Similarly, owners concentrate on the
firm’s profitability and financial condition. Management is interested in
evaluating every aspects of the firm’s performance. They have to protect
the interests of all parties and see that the firm grows profitably. In view
of the requirements of the various users of ratios, we may classify them
into the four important categories-

 Liquidity Ratios.

 Leverage Ratios.

 Activity Ratios.

 Profitability Ratios.

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LIQUIDITY RATIOS:-
It is extremely essential for a firm to be able to
meet its obligations as they become due. Liquidity ratios measure the ability of the
firm to meet its current obligations. In fact, analysis of liquidity needs the
preparation of cash budgets and cash and fund flow statements; but liquidity ratios,
by establishing a relationship between cash and other current assets to current
obligations, provide a quick measure of liquidity. A firm should ensure that it does
not suffer from lack of liquidity, and also that it does not have the excess liquidity.
The failure of a company to meet its obligation due to lack of sufficient liquidity,
will result in a poor creditworthiness, loss of creditor’s confidence, or even legal
tangles resulting in the closure of the company. A very high degree of liquidity also
bad; idle asset earn nothing. The firm’s funds will be unnecessarily tied up in
current assets. Therefore it is necessary to strike a proper balance between high
liquidity and lack of liquidity.

The most common ratios which indicate the extent of liquidity and the
lack of liquidity are:-

o Current Ratio and

o Quick Ratio.

Current Ratio = Current Asset/ Current


Liability
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Current assets include cash and those assets which can be converted into cash within
one year, such as marketable securities, debtors and inventories. Prepaid expenses
are also included in the current assets as they represent the payments that will not be
made by the firm in future. All obligations maturing within a year are included in the
current liabilities. Current liabilities include creditors, bills payable, accrued
expenses, short-term bank loan, income-tax liability and long term debt maturing in
the current year.

Ideal Current Ratio is 2:1.

Quick Ratio = (Current Assets-Inventories) / Current


Liabilities

Quick Ratio establishes a relationship between quick, or liquid, assets and current
liabilities. An asset is liquid if it can be converted into cash immediately or
reasonably soon without a loss of value. Cash is the most liquid asset. Other assets
which are considered to be relatively liquid and included in quick assets are debtors
and bills receivables and marketable securities. Inventories are considered as less
liquid asset, because they require some time for realizing cash; their value also has a
tendency to fluctuate. The quick ratio is found out by dividing quick assets by
current liabilities.

LEVERAGE RATIOS:-
The short time creditors, like bankers and suppliers of raw material, are
more concern with the firm’s current debt-paying ability. On the other hand, long
term creditors, like debenture holders, financial institutions etc. are more the long
term financial concerned with the firm’s long term financial strength. In fact, a firm
should have a strong short as well as long term financial position. To judge the long
term financial position of firm, financial leverage or capital structure ratios are
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calculated. These ratios indicate mix of funds provided by owners and lenders. As a
general rule there should be an appropriate mix of debt and owner’s equity in
financing the firm’s assets.

The manner in which assets are financed has a number of


implications. First, between debt and equity, debt is more risky from the firm’s point
of view. The firm has a legal obligation to interest to debt holders, irrespective of the
profits made by or losses incurred by the firm. If the firm fails to pay debt holders in
time, they can take legal action against it to get payments and in extreme cases, can
force the firm into liquidation.

Second, use of debt is an advantage for shareholders in two ways: (a) they can retain
control of the firm with a limited stake and (b) their earning will be magnified, when
the firm earns a rate of return on the total capital employed higher than the interest
rate on the borrowed funds. Leverage ratios can be calculated from the balance sheet
items to determine the proportion of debt in total financing.

There are different kinds of leverage ratios; we will consider Debt ratio, Debt-equity
ratio and Interest coverage ratio.

DEBT RATIO
Several debt ratios may be used to analyze the long term solvency of the firm. The
firm may be interested in knowing the proportion of the interest bearing debt (also
called funded debt) in the capital structure. It may, therefore, debt ratio can be
computed by dividing total debt by capital employed or net asset. Total debt will
include short and long term borrowings from financial institutions,
debentures/bonds, deferred payment arrangements for buying capital equipments,
bank borrowings, public deposits and any other interest-bearing loan.

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Debt Ratio= Total Debt/ Capital Employed

DEBT-EQUITY RATIO
Debt-Equity ratio can be calculated by dividing total debt by net worth.

COVERAGE RATIOS:-

Debt ratios described above are static in nature, and fail to indicate the firm’s ability
to meet interest and other fixed obligations. The interest coverage ratio is used to test
the firm’s debt servicing capacity. The interest coverage ratio is determined by
dividing earnings before interest and taxes by interest charges.

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Interest Coverage Ratio= EBIT/Interest

ACTIVITY RATIOS:-
Funds of creditors and owners are invested in various assets to generate sales and
profits. The better the management of assets, the larger the amount of sales. Activity
ratios are employed to evaluate the efficiency with which the firm manages and
utilizes its assets. The ratios are also called turnover ratios because they indicate the
speed with which the assets are being converted or turned over into sales. A proper
balance between sales and assets generally reflects that the assets are managed well.

Several ratios can be calculated to judge the effectiveness of asset utilization.

DEBTORS TURNOVER RATIOS:-


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 firm’s accounts. Debtors are expected to be converted into cash over a
short period and, therefore, are included in the current assets. The liquidity position
of the firm depends upon the quality of the debtors to a great extent. Quality of the
debtors can be identified with the analysis of Debtors Turnover & Collection
Period.

Debtors Turnover
Debtors’ turnover is found out by dividing credit sales by average debtors.

Debtors Turnover= Credit Sales/Average

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Debtors

Debtors’ turnover indicates the number of times debtors turned over each year.
Generally the higher the value of debtors turnover, more efficient management of
the credit. To an outside analyst, information about credit sales and opening and
closing balances of debtors may not be available. Therefore debtors’ turnover is
calculated by dividing sales by the year-end balance of debtors.

Collection Period
The average number of days for which debtors remain outstanding is called the
average collection period, and can be calculated as follows:

Collection Period= 360/ Debtors


Turnover

PROFITABILITY RATIOS:
A company should earn profits to survive and grow over a long period of
time. Profits are essential, but it would be wrong to assume that every
action initiated by the management of the company should be aimed at
maximizing profit, irrespective of social consequences. It is unfortunate
the word ‘profit’ is looked upon as a term of abuse since some firms
always wanted to maximize profits at the cost of employees, customers &
society. Except such infrequent cases, it is fact that sufficient profit must
be earned to sustain the operation of the business to be able to obtain
funds from the investors for the expansion and growth and to contribute
towards the social overheads for the welfare of the society.

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Profit is the difference between revenues and expenses over a period of
time (usually one year). Profit is the ultimate output of the company, and
it will have no future if it fails to make sufficient profits. Therefore, the
financial manager should continuously evaluate the efficiency of the
company in terms of profits. The profitability ratios are calculated to
measure the operating efficiency of the firm. Beside management of the
company, the creditors and owners are also interested in the profitability
of the firm. Creditors want to get interest and repayment of principal
regularly. Owners want to get a required rate of return on their
investment. This is possible only when the company earns enough profits.
Generally two major types of profitability ratios are calculated.

 Profitability in relation to sales.

 Profitability in relation to investment.

NET PROFIT MARGIN RATIO:


Net profit is obtained when operating expenses, interest and taxes are
subtracted from gross profit. The net profit margin ratio is obtained by
dividing profit after tax by sales.

Net Profit Margin= Profit After Tax/Sales

Net profit margin ratio establishes a relationship between net profit and
sales and indicates management efficiency in manufacturing,
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administration and selling the products. The ratio is the overall measure
of the firm’s ability to each rupee sales into net profit. If the net margin is
inadequate, the firm will fail to achieve satisfactory return on
shareholders fund.

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COMPANY PROFILE
☼ HISTORY OF ONGC Ltd.

 1947-1960

During the pre-independence period, the Assam Oil Company in


the northeastern and Attock Oil company in northwestern part of the undivided India
were the only oil companies producing oil in the country, with minimal exploration
input. The major part of Indian sedimentary basins was deemed to be unfit for
development of oil and gas resources. After independence, the national Government
realized the importance oil and gas for rapid industrial development and its strategic
role in defense. Consequently, while framing the Industrial Policy Statement of
1948, the development of petroleum industry in the country was considered to be of
utmost necessity. Until 1955, private oil companies mainly carried out exploration of
hydrocarbon resources of India. In Assam, the Assam Oil Company was producing
oil at Digboi (discovered in 1889) and the Oil India Ltd. (a 50% joint venture
between Government of India and Burma Oil Company) was engaged in developing
two newly discovered large fields Naharkatiya and Moran in Assam. In West
Bengal, the Indo-Stave Petroleum project (a joint venture between Government of
India and Standard Vacuum Oil Company of USA) was engaged in exploration
work. The vast sedimentary tract in other parts of India and adjoining offshore
remained largely unexplored. In 1955, Government of India decided to develop the
oil and natural gas resources in the various regions of the country as part of the
Public Sector development. With this objective, an Oil and Natural Gas Directorate
was set up towards the end of 1955, as a subordinate office under the then Ministry
of Natural Resources and Scientific Research. The department was constituted with
a nucleus of geoscientists from the Geological survey of India. A delegation under
the leadership of Mr. K D Malviya, the then Minister of Natural Resources, visited
several European countries to study the status of oil industry in those countries and
to facilitate the training of Indian professionals for exploring potential oil and gas
reserves.

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Foreign experts from USA, West Germany, Romania and erstwhile U.S.S.R visited
India and helped the government with their expertise. Finally, the visiting Soviet
experts drew up a detailed plan for geological and geophysical surveys and drilling
operations to be carried out in the 2nd Five Year Plan (1956-57 to 1960-61). In April
1956, the Government of India adopted the Industrial Policy Resolution, which
placed mineral oil industry among the schedule 'A' industries, the future
development of which was to be the sole and exclusive responsibility of the state.
Soon, after the formation of the Oil and Natural Gas Directorate, it became apparent
that it would not be possible for the Directorate with its limited financial and
administrative powers as subordinate office of the Government, to function
efficiently. So in August, 1956, the Directorate was raised to the status of a
commission with enhanced powers, although it continued to be under the
government. In October 1959, the Commission was converted into a statutory body
by an act of the Indian Parliament, which enhanced powers of the commission
further. The main functions of the Oil and Natural Gas Commission subject to the
provisions of the Act, were "to plan, promote, organize and implement programmes
for development of Petroleum Resources and the production and sale of petroleum
and petroleum products produced by it, and to perform such other functions as the
Central Government may, from time to time, assign to it ". The act further outlined
the activities and steps to be taken by ONGC in fulfilling its mandate.

1961-1990

Since its inception, ONGC has been instrumental in transforming the country's
limited upstream sector into a large viable playing field, with its activities spread
throughout India and significantly in overseas territories. In the inland areas, ONGC
not only found new resources in Assam but also established new oil province in
Cambay basin (Gujarat), while adding new petroliferous areas in the Assam-Arakan
Fold Belt and East coast basins (both inland and offshore).
ONGC went offshore in early 70's and discovered a giant oil field in the form of
Bombay High, now known as Mumbai High. This discovery, along with subsequent

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discoveries of huge oil and gas fields in Western offshore changed the oil scenario of
the country. Subsequently, over 5 billion tones of hydrocarbons, which were present
in the country, were discovered. The most important contribution of ONGC,
however, is its self-reliance and development of core competence in E&P activities
at a globally competitive level.

 After 1990

The liberalized economic policy, adopted by the Government of India in July 1991,
sought to deregulate and de-license the core sectors (including petroleum sector)
with partial disinvestments of government equity in Public Sector Undertakings and
other measures. As a consequence thereof, ONGC was re-organized as a limited
Company under the Company's Act, 1956 in February 1994.

After the conversion of business of the erstwhile


Oil & Natural Gas Commission to that of Oil & Natural Gas Corporation Limited in
1993, the Government disinvested 2 per cent of its shares through competitive
bidding. Subsequently, ONGC expanded its equity by another 2 per cent by offering
shares to its employees. During March 1999, ONGC, Indian Oil Corporation (IOC) -
a downstream giant and Gas Authority of India Limited (GAIL) - the only gas
marketing company, agreed to have cross holding in each other's stock. This paved
the way for long-term strategic alliances both for the domestic and overseas business
opportunities in the energy value chain, amongst themselves. Consequent to this the
Government sold off 10 per cent of its share holding in ONGC to IOC and 2.5 per
cent to GAIL. With this, the Government holding in ONGC came down to 84.11 per
cent. In the year 2002-03, after taking over MRPL from the A V Birla Group,
ONGC diversified into the downstream sector. ONGC will soon be entering into the
retailing business. ONGC has also entered the global field through its subsidiary,
ONGC Videsh Ltd. (OVL). ONGC has made major investments in Vietnam,
Sakhalin and Sudan and earned its first hydrocarbon revenue from its investment in
Vietnam.

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CALCULATION OF CURRENT RATIO

CURRENT CURRENT CURRENT


YEAR
ASSETS LIABILITIES RATIO

2004 248933 89080 2.794488101


2005 285477 108763 2.624762097
2006 326279 105951 3.079527329
2007 387850 139932 2.771703399
2008 434298 176083 2.466439122

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CALCULATION OF QUICK RATIO

CURRENT CURRENT QUICK


YEAR INVENTORY
ASSETS LIABILITIES RATIO

2004 280615 23178 89080 2.889952851


2005 321658 37293 108763 2.614538032
2006 371615 37043 105951 3.15779936
2007 443953 30338 139932 2.955828545
2008 434298 34806 176083 2.268770977

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CALCULATION OF INTEREST COVERAGE RATIO

INTEREST COVERAGE
YEAR EBDIT INTEREST
RATIO
(Receipt)
18123
2004 0 36125 5.016747405
24678
2005 4 20695 11.92481276
28373
2006 1 13278 21.36850429
30646
2007 5 12264 24.98899217
31479
2008 0 11209 28.08368275

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CALCULATION OF DEBT-EQUITY RATIO

NET DEBT-EQUITY Aprox


YEAR DEBT .
WORTH RATIO
(Total Unsecured
Loan)
2004 2118 400024 0.005294682 0.001
2005 1490 463142 0.003217156 0.003
2006 1069 535934 0.001994649 0.002
2007 696 614099 0.001133368 0.001
2008 369 699435 0.000527569 0.001

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CALCULATION OF ASSET TURNOVER RATIO

CAPITAL ASSET TURNOVER


YEAR SALES
EMPLOYED RATIO

32509
2004 395299 0.822405319
6
46709
2005 419926 1.112334078
8
48200
2006 493763 0.976195057
9
56903
2007 540744 1.052322356
7
60137
2008 604844 0.99426133
3

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CALCULATION OF DEBTORS TURNOVER RATIO

YEAR SALES DEBTORS DEBTORS TURNOVER RATIO

32509
2004 23178 14.02605919
6
46709
2005 37293 12.52508514
8
48200
2006 37043 13.01214804
9
56903
2007 27594 20.6217656
7
60137
2008 43604 13.79169342
3

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CALCULATION OF COLLECTION PERIOD

COLLECTION
YEAR SALES DEBTORS
PERIOD(360/SALES/DEBTORS)

2004 325096 23178 26


2005 467098 37293 29
2006 482009 37043 27
2007 569037 27594 17
2008 601373 43604 26

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CALCULATION OF NET MARGIN RATIO

PROFIT AFTER NET MARGIN


YEAR SALES
TAX RATIO
(In %)
32509
2004 86644 26.65181977
6
46709
2005 129830 27.79502374
8
48200
2006 144308 29.93886006
9
56903
2007 156429 27.49012806
7
60137
2008 167016 27.77244738
3

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CALCULATION OF EARNINGS PER SHARE (EPS)

PROFIT AFTER NUMBER OF


YEAR EPS
TAX SHARES
(Rs in million)
2004 86644 N/A N/A
91.049
2005 129830 1425933992
1
101.20
2006 144308 1425933992
24
73.135
2007 156429 2138891502
55
78.085
2008 167016 2138891502
31

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Findings
RELEVANCE OF RATIO ANALYSIS

Ratio analysis is a powerful tool of financial analysis. A ratio is defined


as “the indicated quotient of two mathematical expressions” and as “the
relationship between two or more things”.
In financial analysis a ratio is used as a benchmark for evaluating the
financial position and performance of a firm. The absolute accounting
figures reported in the financial statement do not provide a meaningful
understanding of the performance and financial position of a firm. An
accounting figure conveys meaning when it is related to some other
relevant information. Ratios help to summaries large quantities of
financial data and to make qualitative judgment about the firm’s financial
performance.
After analyzing the key ratios of ONGC Ltd. several important things
about the company has been identified.

CURRENT RATIO:
Current ratios of ONGC Ltd. for last five years state a very good financial condition
of the company itself. It has been found that for last five years ONGC ltd. has
maintained a current ratio of 2.4 to 3. That means the company has been able to
maintain adequate amount of current assets to meet its current obligations. But in the
year 2006, the current ratio of 3.07 says that it has kept extra amount of assets idle,
which could have been utilized to earn more profit.

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QUICK RATIO:
Quick ratio is measured to observe the liquidity position of the firm. ONGC Ltd.
has an extremely well maintained quick ratio over the last five years. It has
maintained a quick ratio of 2.2 to 3.15 during the last five years, which displays a
great liquidity position of the company. The company was able to meet its current
obligation efficiently. A quick ratio of over 2 shows that the firm has maintained a
healthy liquidity even after not including inventories into current assets; as
inventories needs some times to convert into liquid cash. So quick ratios of ONGC
Ltd. state a healthy financial position of the company.

INTEREST-COVERAGE RATIO:
Interest coverage ratios of ONGC Ltd. for the last five years have maintained an
increasing trend, which shows that the firm is becoming too conservative about
using debt.

DEBT-EQUITY RATIO:
Debt-equity ratios of ONGC Ltd. for the last five years show that the company has
been more faithful in equity finance. The ratio states that the company has only
used .1% to .3% of debt financed cost structure for the last five years, which
generally shows the market position of the company was very high during last five
years.

ASSET TURNOVER RATIO:


The average Asset Turnover ratio of the company was approximately 1 during last 5
years. This indicates the firm was able to generate a sale of Re. 1 for its every Re.1
assets. In this field the company is not doing exceptionally well but still the Asset
Turnover ratios state a good position of the company.

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DEBTORS TURNOVER RATIO:
As Debtors turnover ratio indicates the number of times debtors’ turnover each year,
the debtors’ turnover ratio of last five years of ONGC Ltd. shows that the credit
management department of the ONGC Ltd. is very efficient in recovering their
debts. The debtors’ turnover ratio of the company shows that the recovery of credit
is very frequent, which is very good.

COLLECTION PERIOD:
Average Collection period of ONGC Ltd. itself states the excellent credit
management policy of the company. The company is doing exceptionally well
during last five years to recover their debtors. In the year 2007 the sale of the
company was 2nd highest among last five years (Rs. 569037 million) and during that
year their average collection period was 17 days, which says they company’s debtors
did not remain outstanding for more than 17 days, even after having such a huge
sales. So, it can be observed that the credit management of ONGC Ltd. is excellent.

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