Ratio Analysis 1

Financial Statement Analysis (Accounting Ratios)

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 it self 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
statement analysis is the process of identifying of financial strength
and the weakness of the firm by properly establishing a relation ship
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.
Meaning and Nature of Accounting Ratios:
Ratio simply means one number expressed in terms of another. A ratio is the
statistical yard stick by means of which relationship between two or various
figures can be compared and measured. The term “Accounting Ratio” is used to
describe significant relationship between figures shown on a balance sheet and
profit and loss account of a company. Thus accounting ratios show the
relationship between accounting data. It may be expressed in the form of
percentage, coefficient, proportion and rate.
Who is Interested in Financial Analysis of Company?
Ratio analysis of a firm’s financial statements is of interest to share holders,
creditors and the firm’s own management. Both current and prospective share
holders are interested in the firm’s current and future level of risk and return,
which directly affect the share price. The firm’s creditors are interested in the
short term liquidity of the company and its ability to make interest and principal

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payments. A secondary concern of creditors is the firm’s profitability: they want

assurance that the business is healthy. Management like stake holders is
concerned with all aspects of the firm’s financial situation, and its attempts to
produce financial ratios that will be considered favorable by both owners and
creditors. In addition management uses ratios to monitor the firm’s performance
from period to period.
Advantages of Ratio Analysis:
Ratio analysis is analysis important and age old technique of financial analysis.
The followings are some of the advantages of ratio analysis.
 Simplifies Financial Statements:
It simplifies the comprehension of financial statements. Ratio tells the
whole story of changes in the financial condition of the business.
 Facilitates Inter Firm Comparison:
It provides data for inter firm comparison. Ratio highlights the factors
associated with the successful and unsuccessful firm. They also reveal
strong firms and weak firms, overvalued and under valued firms.
 Helps in Planning:
it helps in planning and forecasting. Ratios can assist management in its
basic function of forecasting, learning, coordination, control and
communication.
 Helps in Investment Decisions.
It helps in investment decisions in the case of investors and the landing
decisions in the case bankers and other financial institution.
Types of ratio Comparison:
Ratio analysis is not merely the calculation of a given ratio. More important is the
interpretation of the ratio value. Two types of ratio comparison can be made.
1. Time Series Analysis
2. Cross Sectional Analysis

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1. Time Series Analysis:

This analysis is concerned with the evaluation of the firm’s financial
performance over time using financial ratio analysis. Comparison of current to
past performance, using ratios, enables analyst to asses the firm’s progress. For
time series analysis of BOC Pakistan Ltd. we used the data for 2 years i.e. 2005
and 2006.
2. Cross Sectional Analysis
Cross sectional analysis involves the comparison of the firm’s financial
ratios at the same point in time and involves comparing the firm’s ratios to those
of other firms in its industry or to industry averages. Analysts are often
interested in how well a firm has performed in relation to other firms in its
industry. Frequently a firm will compare its ratios values to those of key
competitor or group of competitors that it wishes to emulate. This type of cross
sectional analysis called bench marking has become popular.
Classification of Accounting Ratios:
Followings are the main ratios which are commonly used by the financial
analysts, management of the company, investors, lenders, creditors and other
stake holders. There detail definitions and explanations are given in next pages
1. Liquidity Ratios
 Current Ratio.
 Acid Test Ratios
2. Profitability Ratios
 Gross Profit Ratio
 Net Profit Ratio With Respect to Sales
 Operating Profit Ratio.
 Cost of Sales to Sales Ratio.

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 Return on Equity Capital

 Return on Share Holder’s Fund.
 Return on Capital Employed
 Earring Yield Ratio. With Respect to Investment.
 Dividend Yield Ratio.
 Price Earning Ratio.
 Dividend Cover Ratio.

3. Activity Ratios
 Stock Turn over Ratio.
 Debtors Turn Over Ratio.
 Creditors Turn Over Ratio

4. Long Term solvency in Leverage Ratios.

 Debt to Equity Ratio.
 Debt Service / Interest Coverage Ratio.
 Capital Gearing Ratio.
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.
BOC Pakistan Ltd.
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.

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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 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.

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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 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.

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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.
Analysis for Liquidity (Liquidity Ratios)
This analysis is also called analysis for short term solvency of short term financial
position. Liquidity simply means how quickly a company can convert its
current assets I into cash to pay off its current obligations in time or
when they will become due. The short term creditors of a company like
supplier of goods of goods on credit and commercial banks providing short term
loans are primarily interested in knowing the company’s ability to meet its
current or short term obligations as and when these become due. The short term
obligations of a firm can be met only when there are sufficient liquid assets.
Therefore, a firm must insure that it does not suffer from lake of liquidity on the
capacity to pay its current obligations. If a firm fails to meet such current
obligations due to lack of good liquidity position its good will in the market is
likely to be affected beyond the repair. It will result in a loss of creditors’
confidence in the firm. Even a very high liquidity is not good for a firm because
such a situation represents unnecessarily excessive funds of the firm being tied
up in current assets.
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.

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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.
Significance:
Current ratio is a general and quick measure of liquidity of a firm. It represents
the margin of safety to creditors. It is an index of the firm’s financial stability. It
is also an index of technical solvency and an index of the strength of working
capital.
A relatively high current ratio is an indication that the firm is liquid and has the
ability to pay its current obligations in time as and when they become due. On
the other hand, a relatively low current ratio represents that the liquidity of the
company is not good and firm shall not be able to pay its current liabilities.
Generally current ratio = 1:1 is considered reliable by the banks which means 1
rupee asset 1 rupee liability.
Current Assets
Current Ratio = Current Liabilitie s

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

643,610 780,666
= 533,591 = 452,250

= 1.21:1 = 1.73:1
Interpretation:
The current ratio of BOC Pakistan Ltd. up to 30 th September 2005 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

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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.
Significance:
The quick ratio is very useful in measuring the liquidity of the firm. It measures
the firm’s capacity to pay off current obligations immediately and is a more
rigorous test of liquidity then the current ratio. Usually a high liquid ratio is an
indication that the firm is liquid and has ability to meet its current liabilities in
time and on other hand a low liquidity ratio represents that the firm’s liquidity
position is not good. Generally current ratio = 0.75:1 is considered reliable by
the banks that means Rs. 0.75 liquid asset for Rs. 1 liquidity.

Acid Test Ratio

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)
Liquid Assets
= Current Liabilities =

Liquid Assets
Current Liabilities

Liquid Assets = Current Assets - (Stock + Prepayments)

643,610  (68,408  203)
= 533,591
=

780,666  (142,132  130)

4,52,250
574,999 638,404
= 533,591 = 4,52,250

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= 1.08:1 = 1.41:1

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 asses 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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Gross Profit Ratio (Gross Profit Margin):

Gross Profit ratio is a ratio of Gross Profit to Net Sales expressed as percentage.
It expresses the relation ship directly between gross profit and sales and
indirectly between cost of goods sold and sales.
Significance:
Gross profit ratio may indicate to what extend the selling prices of goods per unit
may be reduced with incurring losses on operation. It reflects the efficiency with
which a firm produces its products. As the gross profit is form by deducting cost
of goods sold from net sales, higher the gross profit ratio better it is. There is no
standard GP ratio for evaluation. It may vary from business to business. However
the gross profit earned should be sufficient to recover all operating expenses and
to build up reserves after paying all fixed interest charges and dividends.
G.P Ratio
Gross Pr ofit
= Net Sales
 100

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

735,383 948,438
= 1,752,399  100 = 2,381,420  100

= 41.96% = 39.83%
Interpretation:
The gross profit percentage of BOC Pakistan Ltd. has been reduced from 41.96%
to 39.83%. Although there is increase in Gross Profit (28%) and sales (36%) but
this increment is not relatively equal to the increase in cost of sales which is
41%. 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.

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Net Profit Ratio:

This is the ratio of net profit (before tax) to net sales expresses as percentage:
Significance:
This used to measure the overall profitability and hence it is very useful to
proprietors. The ratio is very useful as if the net profit is not sufficient the firm
should not be able to achieve a satisfactory return on its investment. This ratio
also indicates the firm’s capacity to face adverse economic conditions such as
price competition low demand etc. obviously, higher the ratio the better is the
profitability.
Net Profit Ratio
Net Pr ofit aftere Taxation
=  100
Net Sales

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

369,924
449,761
= 1,752,399 = 2,381,420

= 21.10% = 18.90%
Interpretation:
Net profit ratio of the company is decreased from 21.10% to 18.90%. 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.

Operating Profit Ratio:

Operating ratio is a relationship between operating profit and net sales. It
measures the cost of operations per rupee of sales.

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Significance:
This ratio shows the operational efficiency of the business. Some of the revenues
and expenses of a business is result from activities other then the company’s
basic business operations. This ratio shows a relationship between revenue
earned from customers and expenses incurred in producing this revenue. In
effect operating profit ratio measures the profitability of a company’s basic or
core business operations and leaves out other types of revenues and expenses
are excluded.
Operating Profit Ratio
EBIT
=  100
Net Sales

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

518,285 583,702
= 1,752,399  100 = 2,381,420  100

= 29.58% = 24.5%
Interpretation:
It has been observed and mentioned earlier that profit margins of BOC Pakistan
Ltd. are decreasing as we compare them with the previous years. An operating
profit ratio equal to 25% to 30% is considered normally good and company is
needed to raise its profitability to maintain the confidence of the stake holders
through better business operations.

Cost of goods sold to sales:

This ratio can be defined as a relationship between cost of sales and sales. It is
measured in percentage.
Significance

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The profits of any company can be increased only through deduction in cost or
with increase in sales or both. This ratio is important to analyze the cost of sales
with respect to sales. It measures the percentage of cost to sales. Higher the
ratio is an indication of an increase in cost of the enterprise’s production and
direct cost and vice versa. It can be helpful for the management to make better
purchasing, production and other direct cost decisions as it related directly sales
to the cost of sales.

Cost of Goods sold to sales

Cost of Good Sold
=  100
Sales

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

1,017,016 1, 432,982
= 1,752,399 = 2,381,420

= 58.03% = 60.17%
Interpretation:
The cost of sales of BOC Pakistan Ltd. in 2006 has been increased which
reduced the GP margin of the company. The company should be cost efficient to
attract the investors. Although there is not a substantial increase but
management is needed to reduce the cost to make better profitability. And if the
company is running already at low cost then there is need to increase the sales
of its products.

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

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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.
Significance:
This ratio is more meaning full to equity share holders who are interested to
know profits earned by the company and those profits which can be ,made
available to pay dividend to them. This ratio directly relates the net profit
available for appropriations to the capital invested by the share holders. Higher
the ratio is higher the return on capital invested in company.
Return on Equity
Net Pr ofit After Tax  Pr eference Dividend
=  100
Equilty Share Capital

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

369,924  Nil 449761  Nil
= =  100
250,387 250387
= 147.74% = 179.63%
Interpretation:
The return on equity capital ratio of BOC Pakistan Ltd. is a clear cut indication for
the investors that the company is managing its capital in a very efficient way and
is earring Rs 179 for each Rs 100 of its capital and company is in position to give
better returns to the share holders. This is also analysis indication that the
operations of the business are carried on in analysis appropriate manners.
Return on Share Holder’s Fund:
It is a relationship between net profit (After interest and Tax) and shareholder
fund expressed in percentage.
Significance:

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This is one of the most important ratios used to measure the overall efficiency of
the firm. As the primary objective of business is to maximize its earning. This
ratio indicated the extent to which this primary objective of business is being
achieved. It is calculated for net profit after interest and tax because share
holders are interested in the profit which is available for them in respect of
dividends. This is better measure then the return on equity capital because it
includes not only capital but also the reserves which are maintained for several
financial purposes. Inter firm caparison of this ratio determines whether the
investment in the firm is attractive or not as investors would like to invest only
where the return is higher.
Returns on share holder fund
Net Pr ofit After Tax
= Share Holder Fund  100

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

369,924 449,761
= 106,3127  100 = 121,2424  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 there investments are being utilized to give them better returns.
Return on Capital Employed:
It is relation ship 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.
Significance:

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The return on capital employed is the most important ratio because it answers
how well the management has utilized the share holder’s fund and the
borrowings which were taken from the creditors. Higher the ratio shows that the
management utilized these funds efficiently to earn operating profit. This ratio is
calculated with EBIT because investors are interested to know that how the
management has utilized the funds and long term borrowings because a
business borrows to conduct its operations and to enhance profitability.
Return on capital Employed
EBIT
= Capital Employed  100

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

518,285 583,702
= 124, 404,7 = 1232,517

= 41.66% = 47.36%
Capital Employed = long term liabilities + share Holder’s Fund
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.
Earning per Share:
Earning 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 earning in Rupees.
Significance:
High earning per share usually reflects the rate of profitability, performance and
dividends and when compare with E P S of similar other companies, it gives a

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view of comparative earnings or earning power of firm. However high EPS is not
an authentic and scientific tool to assume high performance but high EPS is
considered high rate of dividends.
Earning After Tax  Pr eference Share Dividend
Earning Per Share = No.Of Ordinary Shares

In the BOC Pak (Ltd) there is no prefers share holder so the formula will be.
Earning After Tax
= No.Of Ordinary Shares

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

369,924 449,761
= =
25039 25039
= Rs. 14.77/Share = Rs. 17.96/Share
Interpretation:
Earning 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.
Price Earning Ratio:
Price earning is the ratio between Market Value per Share to Earning per Share
and it is expressed in number of years.
Significance:
This ratio helps the new investors to determine that how many years it will take
to recover the market price paid for one year. Higher ratio results in greater
number of years and of course discourages the new investors. Generally people
purchase the shares of a company from stock exchange at market price don’t
look for dividend rather they care about capital gain.
Price Earning Ratio
Dividend Per Share
 100
= Market Value Per Share

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

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157.55 141.15
= =
14.77 17.96
= Almost 10 years = Almost 8 years

This ratio is the subject of great fluctuations because market price of share
changes substantially almost every day. This ratio does not give exact idea but
for the purpose of rough estimation it can be used.
Earning Yield Ratio:
Earning yield is ratio of earning per share to the market value per hare and it is
expressed in terms of percentage.
Significance:
This ratio helps the investors to determine that how many percent is being
earned with his earning per share. This ratio is the reciprocal of price earning
ratio. Greater this ratio means the greater capital gain and vice versa. The ratio is
subject to great fluctuations as market prices of shares are changed rapidly in
our stock exchange. Earning yield and price earning ratio both are analyzed
before taking the investment decision in any company.
Earning Yield Ratio=
Earning Per Share
 100
Market Value Per Share

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

14.77 17.96
=  100 =  100
157.55 141.15
= 9.37% = 12.17%
Dividend Yield Ratio:
This ratio is relationship between dividend per share paid and the market value
per share expressed in terms of percentage.
Significance:
This ratio is much better tool then the earning yield ratio because it relates
dividends paid with the market value of share. It helps investor assess that how
much return he is going to get on the proposed investment.

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Dividend Yield Ratio

Dividend Per Share
= Market Value Per Share  100

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

12 15
= =  100
157.55 141.15
= 7.60% = 10.60%

Dividend Pay out Ratio:

Dividend pay out ratio is the relationship between dividend per equity share and
the earring per share expressed in percentage:
Significance:
Dividend pay out ratio is calculated to find the extent to which earning per share
have been used for paying dividend and to know what portion of earning has
been retained in the business. It is an important ratio because ploughing back of
profits enables a company to grow and pay more dividends in future.
Dividend Pay-out Ratio
Dividend Per Equity Share
=  100
Earning Per Share

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

12 15
= =
14.77 17.96
= 81.24% = 83.51%
Interpretation:
BOC Pakistan Ltd. is paying much dividends and its retained earning per share is
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.

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Dividend Cover Ratio:

Dividend cover ratio is a relationship between earning after tax and dividend
declared by the company expressed in times.
Significant:
This ratio gives information that how many times the dividend is covered through
the profit. Greater the ratio means the company is retaining greater portion of
profit for future purposes and paying lesser portion to the share holders and vice
versa. Dividend cover ratio and dividend pay out ratio give almost same type of
information to the investors.
Dividend Cover Ratio
Earning after Tax
= Dividend Declared

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

396,694
= 300464 =

449,761
375,581

=1.31 times = 1.33 times

The answers of above ratio indicate that BOC Pakistan Ltd. is retaining lesser
portion of the profits in shape of reserves and paying greater portion to the share
holders in shape of dividend.
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

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because they indicate the speed with which assets are converted or turned over
into sales.
Stock 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.
Significance:
Inventory turnover ratio measures the velocity of conversion of stock into sales.
Usually, a high inventory turnover/stock velocity indicates efficient management
is required to finance the inventory. A low inventory turnover ratio indicates an
inefficient management of inventory. A low inventory turnover implies over-
investment in inventories, dull business, poor quality of goods, stock
accumulations, accumulation of obsolete and slow moving goods and low profits
as compared to total investments.
Stock Turn over Ratio
Cost Of Goods Sold
= Avg . Clo sin g Stock

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

101,701,6 143,298,2
= 68,408 = 142,132

= 14.9 times = 10.08 times

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No. of Days (Rotation period)

Avg Clo sin g Stock
= Cost of Goods Sold  365

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

68,408 1,42,132
= 101,701,6 = 143,298,2  365

= 25 days = 36 days
Interpretation:
The results of the stock turn over 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 turn over ratio of BOC Pakistan 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 2006 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-team obligations in time depends upon the quality of
its trade debtors.
Significance:
Debtor’s turnover ratio indicates the number of times the debtors are turned
over during a year. The higher the value of debtor’s turnover the more efficient
is the management of debtors or more liquid are the debtors. Similarly, low
debtors turnover implies inefficient management of debtors or less liquid debtors.
It is the reliable measure of the time of cash flow from credit sales.

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Debtor Turnover Ratio

Credit Sales
= Avg .Trade Debtors

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

2,008,323 2,799,870
= 119,047 = 169,895

= 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:
Significance:
This ratio measures the quality of debtors. A short collection period
implies prompt payment by debtors. It reduces the chances of bad debts.
Similarly a longer collection period implies too liberal and inefficient credit
collection performance. It is difficult to provide a standard collection period of
debtors.
No. of Days (average collection Period Debtor Turnover Ratio
Avg.Trade Debtors
=
CreditSale s
Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)
119,047 169,895
= 2,008,323  365 = 2,799,870  365

= 22 days = 22 days

Interpretation:

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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.
Significance:
The average payment period ratio represents the number of days taken
by the firm to pay its creditors. A higher creditors turn over ratio or a lower
credit period ratio signifies that the creditors being paid promptly, thus
enhancing the creditworthiness of the company. However, a very favorable ratio
to this effect also shows that the business is not taking full advantage of credit
facilities allowed by the creditors.
Creditors Turn over Ratio
Credit Purchase
= Avg .Trade Creditors

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

342,720 576,520
= 4,6633 = 65,124

= 7.35 times = 8.85 times

No. of days (Average payment period):

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

Significance:

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The average payment period ratio represents the number of days taken by the
firm to pay its creditors. A higher creditor’s turn over ratio or low credit period
ratio signifies that the creditors being pair promptly, thus enhancing the credit
worthiness of the company however, a very favorable ratio to this effect also
shows that the business is not taking full advantage of credit facilities allowed by
the creditors.
No. of Days (Average Payment Period)
Avg .Trade Creditors
=  365
Credit Purchase

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

46,633 65,124
= 3,42,720  365 = 576,520  365

= 50 days = 41 days
Interpretation:
As the credit purchases were not available in the financials of BOC Pakistan Ltd.
so we have calculated the creditors turn over ratio by assuming all the purchases
as credit. BOC Pakistan Ltd. has improved its creditors turn over 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 2006 but as the company’s liquidity is
very good and company has made its creditors turn over ratio better.

Analysis of Solvency (Long Term Financial Position):

The long term indebt ness 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

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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.
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.
Significance:
The ratio indicates the proportionate claims of owners and the outside against
the firm’s assets. The purpose is to get an idea of the cushion available to
outsider on the liquidation of the firm. However, the interpretation of the ratio
depends upon the financial and business policy of the company. The owners
want to do the business with the maximum of outsiders funds in order to take
lesser risk of their investments and to increase their earnings (per share) by
paying a lower fixed rate of interest to outside. The outsiders (creditors) on the
other hand, want that shareholders (owners) should invest and risk their share of
proportionate investments.
Debt Equity Ratio
Total Long Term Debts
= Share Holder Fund

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

368,126 303,348
= 106,312,7 = 121,242,4

= 1:2.9 = 1:4

Interpretation:

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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.
Debt Service or 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.
Significance:
The interest Coverage Ratio is very important from the lender’s point of
view. It indicates the number of times interest is covered by the profits available
to pay interest charges. It is an index of the financial strength of an enterprise. A
high ratio assures the lender a regular and periodical interest income. But the
weakness of the ratio may create some problems to the financial manager in
raising funds from debts sources.
Interest Coverage Ratio
Net Pr ofit Before Interest & Tax
= Fixed Interest Ch arg e

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

518285 583,702
= =
16126 12661
= 32.14 times = 46.10 times

Interpretation:

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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 2006 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:
Closely related to solvency ratios is the Capital Gearing Ratio which is
mainly used to analyze the capital structure of a company. The term capital
structure refers to the relationship between the various long-term forms of
financing such as debentures. P.T.C. preference and equity share capital
including reserves and surpluses. Leverage or capital structure ratios are
calculated to test the long-term financial position of a firm.
The term ‘capital garaging’ or leverage normally refers to the proportion
or relationship between equity share capital including reserve and surpluses to
preference share capital and other fixed interest bearing funds or loans. In other
words it is the proportion between the fixed interest or dividend bearing funds
and non fixed interest or dividend bearing funds. Equity share capital includes
equity share capital and all reserves and surpluses items that belong to
shareholders.
Significance:
The ratio is important to the company and the prospective investors. It
must be carefully planned as it affects the company’s capacity to maintain a
uniform divided policy during difficult trading periods. It reveals the suitability of
company’s capitation.

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Capital Gearing Ratio

Share Holder Fund
= Fixed Interest bearing Fund

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

106,3127 121,242,4
= 368,126 =
303348
= 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 over all
long term solvency ratio the creditors will finance the company because they will
fill their financing very safe.

Review Report With respect to Investors and Creditors

Performance of financial analysis is of key importance for many stake holders
especially for management of the company which needs to analyze the overall

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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 2006. 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 earning 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.
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.

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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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