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Introduction to Working Capital

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Introduction to Working Capital

The term working capital is commonly used for the capital required for day-today working in a business concern, such as for purchasing raw material, for meeting day-to-day expenditure on salaries, wages, rents rates, advertising etc. But there is much disagreement among various financial authorities

(Financiers, accountants, businessmen and economists) as to the exact meaning of the term working capital. Need for Working Capital Working capital is needed till a firm gets cash on sale of finished products. It depends on two factors: i. Manufacturing cycle i.e. time required for converting the raw material into finished product; and ii. Credit policy i.e. credit period given to Customers and credit period allowed by creditors. Thus, the sum total of these times is called an Operating cycle

Significance of Working Capital Management:

In a typical manufacturing firm, current assets exceed one-half of total assets. Excessive levels can result in a substandard Return on Investment. Current liabilities are the principal source of external financing for small firms. Requires continuous day-to-day managerial supervision. Working Capital management affects the companys risk, return and share price.

The Factors Influencing Working Capital Requirements: Nature of Business:-Trading and financial firm has very small investment. In fixed assets, but require a large sum of money to be

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invested in working capital. Retail stores must carry large stocks of a variety of goods to satisfy varied and continues demands for their customers. Some manufacturing business, also have to invest substantially in working capital and a nominal amount of fixed assets Production policy: The production cycle refer to the time involve in manufacture of goods. It covers the time-span between the procurement off raw material and completion of the manufacturing process leading to the production of finished goods. There is sometime gap before raw material become finished good to sustain such activities the need for W.C. is obvious. The longer the time span (production cycle) the larger will be the tied up funds and therefore, the larger is the W.C. needed and vice-versa. Market and demand conditions:-The working capital needs of a firm are related to its sales. However, it is difficult to precisely determine the relationship between volume of sales and working capital needs. In practice, current assets will have to employ before growth takes place. It is, therefore necessary to make advance planning of working capital for growing firm on a continuous basis. Sales depend on demand conditions. The variations in business condition may be in two directions (i) upward phase when boom conditions prevail-the need of working capital is likely to grow to cover the lag between increased sales and receipt of cash as well as to finance purchases of additional material to cater to expansion of the level of activity. Additional fund may be required to invest in plant and machinery to meet the increased demand. and (ii)downswing phase when the economic activity is marked by decline. The decline in the economy is associated with a fall in the volume of sales which in turn, leads to a fall in the level of inventory and book debts. Page No.34

Growth and expansion:-As a company grows it is logical to expect that a larger amount of W.C. is required. It is off course, difficult to determine precisely the relationship between the growth in the volume of the business of a company and the increased in its W.C.The critical fact however is that the need for increased W.C. fund does not follow the growth of business activity but precedes it. Advance planning of W.C. is therefore a continuing necessity for a growing concern. Or else the company may have substantial earning but little cash

Credit Policy:-The credit policy of the firm affects the working capital by influencing the level of debtors. The credit terms to be granted to customers may depend upon the norms of the industry to which the firm belongs. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practices.








requirements of a firm are also affected by credit terms granted by its suppliers. Firms will needless W.C. if liberal credit term is available to it from suppliers .Suppliers credit finances the firms inventories and reduces the cash conversion cycle. Operating Efficiency:-The operating efficiency of the firm relates to the optimum utilization of resources at minimum cost. The efficiency in controlling operating cost and utilizing fixed and current assets leads to operating efficiency. Price Level Changes:-The increasing shifts in price level make functions of financial managers difficult. She should anticipate the effect of price level changes on W.C. requirement of the firm. Generally, changing price level will require a firm to maintain higher amount of W.C.

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Effects of Inadequate and excess working capital:

To maintain an adequate amount of working capital in the business, the management has to plan the requirements of working capital properly. If it fails to do so, there may be some occasions when it faces inadequate working capital, and other occasions when it has excess working capital.

A business firm may have inadequate working capital mainly due to the following reasons: Shortage of liquid funds. Under investment in inventories. Under deployment of funds in receivables. No or under-investment in marketable securities.

The immediate effects of inadequate working capital are: Poor liquidity. Low profitability. Higher interest charges. Under utilization of production capacity.

Inadequate working capital particularly shortage of funds can threaten the solvency of the firm if it fails to meet its current obligations. If actual investment of working capital is more than the actual required amount, it is termed as excess working capital, which is mismanagement of working capital funds. A business firm may have excess working capital mainly due to the following reasons: Page No.36

Excess idle cash. Over investment in inventories. Over investment in receivables. Over-investment in marketable securities.

The immediate effects of excess working capital are: Low inventory turnover. Low working capital turnover. Higher cost of inventory. Higher bad debts losses.

Excess working capital is dangerous as it tempts the management to invest more funds in slow moving assets particularly inventories. It thus impairs firms profitability, as idle investment in firms current assets earns nothing.

Why should working capital be analyzed?

Analysis of working capital is very important to find out proper answers to the following questions: Is the amount of working capital adequate, inadequate or more than required? Is the management using working capital efficiently and effectively? Will the firm be able to pay its short-term obligations as and when they mature? Does the firm have a favorable credit rating? Is the current financial situation improving? What sources of funds have been applied to finance working capital? Is the business running smoothly as well as gainfully?

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Thus management of working capital requires a watchful look into the current assets, current liabilities and trend in the items that are included in the working capital.

Issues in Working Capital Management:

There are many aspects of working capital management that make it an important function for any financial manager. They are namely Time, Investment, Criticality, Growth etc. But the three most important issues regarding Working Capital Management are Profitability, Liquidity and Risk. A firm has to identify an effective mixture of the above three components so as to meet its requirements under varied situations. For the above we will discuss three different policies adopted by a firm namely Conservative policy, Average Policy and Aggressive Policy.

Policy A Policy B A S S E T Current Assets Policy C

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The firm would make just enough investment in current assets if it were possible to estimate working capital needs exactly. Under perfect certainty current assets holding would be at the minimum. A larger investment in current assets would imply a low rate of return and hence lower risk. Conversely a smaller investment in current assets would mean a higher return but interrupted production and sales because of frequent stock outs and inability to pay creditors in time. Thus it is up to the firm to choose the level of investment in current assets depending upon circumstances. To have higher profitability a firm may sacrifice its solvency and maintain a relatively low level of current assets. On the other hand there is another situation where a firm wants to maintain an average level of all the three factors profitability, risk and liquidity. Policy A is the conservative policy with a higher level of investment in current assets whereas Policy C is the aggressive policy where it maintains a smaller level of current assets to increase its profitability hence assumes greater risk. The illustration of the policies is provided hereunder: Policy A B C Type Conservative Average Aggressive Liquidity High Average Low Profitability Low Average High Risk Low Average High

Two points to note here: Profitability varies inversely with liquidity. Profitability and risk go hand in hand i.e. risk and return.

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These are the primary issues a firm may face while determining its working capital requirements. It is up to the firm to decide which policy it will adopt depending upon circumstances. It may adopt all the three different kinds of policies throughout a financial year depending on financial situation in every quarter.

The Cost Trade-off:

There are two types of costs involved: cost of liquidity and cost of illiquidity. If the firms level of current assets is very high, it has excessive liquidity. Its return on assets will be low, as funds tied up in idle cash and stock earn nothing and high level of debtors reduce profitability. Thus, the cost of liquidity (through low rate of return) increases with the level of current assets. The cost of illiquidity is the cost of holding insufficient current assets. This will also adversely affect the credit-worthiness of the firm and it will face difficulties in obtaining fund in the future. All this may force the firm into insolvency. Similarly, the low level of stocks will result in loss of sales and customers may shift to competitors. Also, low level of debtors may be due to tight credit policy, which would impair sales further. Thus, the low level of current assets involves costs that increase at this level falls.

Total Cost Cost

Cost of liquidity

Cost of illiquidity

Optimum level of Current assets

Level of current assts

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TYPES OF WORKING CAPITAL NEEDS Another important aspect of working capital management is to analyze the total working capital needs of the firm in order to find out the permanent and temporary working capital. Working capital is required because of existence of operating cycle. The lengthier the operating cycle, greater would be the need for working capital. The operating cycle is a continuous process and therefore, the working capital is needed constantly and regularly. However, the magnitude and quantum of working capital required will not be same all the times, rather it will fluctuate. The need for current assets tends to shift over time. Some of these changes reflect permanent changes in the firm as is the case when the inventory and receivables increases as the firm grows and the sales become higher and higher. Other changes are seasonal, as is the case with increased inventory required for a particular festival season. Still others are random reflecting the uncertainty associated with growth in sales due to firm's specific or general economic factors.

Classification Working Capital

Permanent or fixed working capital is minimum level of current asset. It is the same way as the firms fixed assets are. Depending upon the change in production and sales the need for working capital over and above permanent working capital will fluctuate. Fluctuating or variable working capital is the extra working capital needed to support the changing production and sales activities of the firm.

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Amount of working capital Time

Fluctuating Permanent

In the above figure the permanent working capital is stable over time, while temporary working capital is fluctuating-sometimes increasing and some times decreasing. However the permanent working capital line need not be horizontal if the firms requirement for permanent capital is increasing or decreasing over period. For a growing firm, the difference between permanent and temporary working capital can be depicted following figure.


Permanent Amount of working capital


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Working Capital Component

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Analysis Of Working Capital Component The first part of this report deals with the analysis of the working capital of Indian Oil Corporation Limited (Marketing Division), over four financial years i.e. 2007-08 ,2008-09,2009-2010 and 2010-2011. The comparative positions of the various components of the working capital over the last five years have been compiled and the reasons for such variance have been analyzed. Suggestions to improve upon the current position have been provided. Later, the relevant ratios to determine the financial health of a company have been determined and the relation between them had been found out. An attempt has also been made to find the relation between liquidity and profitability and that between the level of working capital and profitability of IOCL and also to analyze the working capital policy of IOCL. The various components of working capital are:

Current Assets Inventories Book debts Cash and Bank Loans, Advances, Claims and Deposits

Current Liabilities Sundry Creditors Deposits Other Liabilities

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Inventory Analysis

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Introduction of Inventory:Inventory refers to the stockpile of the product a firm is offering for sale and components make up the product. In short Inventory is such type of assets which will be disposed of in the future in the ordinary course of the business. In other words Inventory is used to designate the aggregate of those items of tangible assets which are: 1) Raw Materials & Stores (Consumable):It contains items which are purchased by the firm from others. 2) Work-in-Progress (Convertible):It consists of the items which are currently used in the production process. These are the semi finished goods that are held at various stage of the production in multi stage production process. 3) Finished Goods sale. (Saleable):It represents final or completed products which are available for

Need to hold Inventories:There are three general motives for holding of inventories: A. The Transaction motives: It expresses the need to maintain inventories to facilitate production and sale operation smoothly. B. The Precautionary motive: It expresses the need to holding inventories to guard against the risk of unpredictable changes in demand and supply forces. C. The Speculative motive: It influences the decision to increase or reduction inventory levels to take advantages of price fluctuations.

Objectives of Inventory Management:Efficient inventory management should result in the maximization of the owners wealth. For this purpose a firm should neither hold excessive inventories nor hold inadequate inventories,i.e. it should hold the optimum level of inventory. The

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optimum level of inventory investment lies between the point of excessive and inadequate levels. The dangers of over-investment in inventories are: i) Funds of the firm are tied-up unnecessarily. ii) It creates loss of profit iii) Excessive carrying cost and risk of liquidity increase. Inadequate level of inventories is not also free from snags. The consequences are: i) ii) iii) iv) Production may shut-down Commitment for the delivery may not be possible Inadequate raw material and work-in-progress will create frequent production interruption. Customers may shift to the competitor if their demands are met up regularly. Thus the objective of inventory management is to maintain its optimum level in the following manner: a) To ensure a continuous supply of materials to facilitate uninterrupted production. b) To maintain sufficient stocks of raw materials during short-supply c) To maintain sufficient finished goods for efficient customer service. d) To maintain the carrying cost e) To maintain the optimum level of investment in inventories. INVENTORY MANAGEMENT TECHNIQUE:The major problem to be restored is how much the inventory should be when inventory is replenished. If the firm is buying raw material, it has to decided lots in which it has to purchase on replenishment. If the firm is planning a production run, the issue is how much production to schedule. This problem is called order quantity problem and the tasks of the firm is to determine the optimum or economic lot size. Determine and optimum level involves two types of costs; Ordering Cost- This term is used in case of raw material and includes all the cost of acquiring raw materials. They include the cost in the following activities: Requisition Page No.47

Purchase ordering Transporting Receiving Inspecting Storing Ordering cost increase with the number of orders placed, thus the more frequently inventory is acquired, the higher the firms ordering costs. On the other hand if the firm maintains large inventory levels, there will be few orders placed and ordering costs will be relatively small. Thus, ordering costs decrease with the increasing size of inventory. Carrying Costs: Costs are incurred for maintaining a given level of inventory are called carrying costs. These include the following activities: Warehousing Cost Handling Administrative cost Insurance Deterioration and obsolescence Carrying costs are varying with inventory size. This behavior is contrary to that of ordering costs which decline with increase in inventory size. The economic size of inventory would thus depend on trade-off between carrying costs and ordering cost.

Total Cost Carrying Cost Cost

Ordering Cost Unit

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Inventories of IOCL (M.D.) ER consist of:

Finished Products:The products produced by IOCL may be broadly classified into classes as follows: Class A Liquefied Petroleum Gas (LPG)

Class B Erstwhile APM Superior Kerosene Oil (SKO) High Speed Diesel (HSD)

Class C Major Bulk Light Diesel Oil (LDO) Furnace Oil (FO) Bitumen Naphtha Aircraft Turbine Fuel (ATF)

Lubes Others Petrochemicals & Specialties like MTO, RPC, Sulphur, CPC, and Propylene etc.

Raw Materials Stores in process Other Stores (including barrels & tins):- Stores and Spares are basically those inventory items, which augment the production process i.e. they Page No.49

are the ancillary items used to support the main activity of production of finished goods. It includes stock of "loose tools", "power and fuel", "moulds and dies", etc. This data field captures the value of the stock of stores and spares lying with the company at the end of the accounting period.

Packing material:-Packing material is the substance in which the finished goods are packed for making them ready for dispatch / sale. This data field captures the value of the stock of packing materials lying with the company at the end of the accounting period.

Amount in Rs. (Cr.) March-11
In Hand: Stores, Spares etc Less: Provision for Losses Raw Materials Finished Products Stock in Process Barrels and Tins In Transit: Stores & Spares Raw Materials Finished Products




1,975.94 1,578.45 1,516.69 97.48 82.20 78.40 1,878.46 1,496.25 1,438.29 13,853.91 20,278.52 4,012.42 27.25 40050.56 10,440.94 16,777.07 2,802.71 17.42 31,534.39 5,109.04 13,159.63

1,177.07 66.76 1,110.31 8,001.02 13,455.81 2,179.46 15.98 24,762.58

17.53 21,310.87

135.92 8,497.12 60.92 9,233.96

104.25 4,426.29 339.15 4,869.69 36,404.08

110.81 3,599.25 128.67 3,838.73 25,149.60

77.89 5,695.95 405.06 6,178.90 30,941.48



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60,000.00 50,000.00 40,000.00 30,000.00 20,000.00 10,000.00 0.00
Year 2011 Year 2010 Year 2009 Year 2008


From the above table and the graph it is showing that the in 2008 the amount of inventories 30,941.48 but in 2009 the inventories decreased by 579.188.In 2010 the inventories further increased by 11254.48 than 2009.Inventories is continuously increasing & in 2011 the inventories also increased by 12880.44.

Stores in sprats are continuously increasing year and year. The provision for losses of the Stores in sprats also increasing. In 2009 holding of raw material is declined than 2008.Afterthat the holding of raw material is rising in 2010 and also increased in 2011. In 2009 stock in process is declined than 2008.Afterthat stock in process is increasing in 2010 which is also increased in 2011. Holding of finished product also increasing during yearbyyear.

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Analysis of Inventory over the years:

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its product. It is calculated by dividing the cost of goods sold by the average inventory: Cost of Goods Sold Inventory Turnover = Average Inventory

Average inventory= (Opening inventory + closing inventory)/2

The inventory turnover shows how rapidly the inventory is turning into receivables through sales. Generally, a high inventory turnover is indicative of good inventory management. A low inventory turnover implies excessive inventory levels than warranted by production and sales activities, or a slowmoving or obsolete inventory. A high level of sluggish inventory amounts to unnecessary tie-up of funds reduced profit and increased costs. If the obsolete inventories have to be written off, this will adversely affect the working capital and liquidity position of the firm. However, a relatively high inventory turnover should be carefully analyzed. A high inventory turnover may be the result of a very low level of inventory, which results in frequent stock outs; the firm may be living from hand-to-mouth. The turnover will also be high if the firm replenishes its inventory in too many small lot sizes. The situations of frequent stock outs and too many small inventory replacements are costly for the firm. Thus, too high and too low inventory turnover ratios should be investigated further. The computation of inventory turnovers for individual components of inventory may help to detect the imbalance investments in the various inventory components.

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The importance of low inventory turnover or larger number of days of inventory holding is due to the fact that low inventory turnover means less inventory turning into receivables through sales. As a result of which working capital of the organization gets blocked. This results in the increase in the cost of capital. So in order to control the increase in the cost of capital, measures should be taken that more and inventory are turned into receivables through sales, and thus increasing the inventory turnover ratio. To judge whether Indian Oil's inventory management is good or not, it should be analyzed through which trend the organization is following for the last three years.

Cost of Goods Sold

Amount in Rs. (Cr.)

Cost of Production Add: Opening Finished Product Less: Closing Finished Product Cost of Goods Sold

137,424.34 13,288.30 17,116.22 134,717.70

159,012.71 13,860.87 13,288.30

116720.79 12,505.67 13,860.87

166,136.92 17,116.22 20,879.44 162,373.70

159,585.28 115,365.59

Cost of Goods Sold Average Inventory Inventory Turnover Days of Holding Inventory

133,596.42 15,202.26 8.78

159,585.28 13,574.585 11.76 30.61

115,365.59 13,183.27 8.75 41.13

162,373.70 18,997.83



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45 40 35 30 25 20 15 10 5 0 Year 2011 Year 2010 Year 2009 Year 2008

Inventory Turnover Days of Inventory Holding

Inventory turnover is maximum in the 2009.Because of cost of goods sold is maximum to the other year & amount of holding inventory is lowest. Inventory Turnover 11.76 means inventory of finished goods is turning into sales 11.76 times in a year. So; high inventory turnover is fast inventory movement which implies more efficient position. In 2008, 2010 and 2011 the inventories turnovers is comparatively same. The inventories turnovers are 8.75, 8.78 & 8.55, i.e. that are decreased by 25.5%, 25.3% & 27.2% from inventory turnover of 2009. In 2009 the days of holding the inventories is only 30.61 days it signifies that the inventories are sold in 30.61 days. In 2008, 2010 & 2011 the days of holding the inventories are 41.13, 41, 42.12 that are more than holding days of inventory of 2009. A slow inventory movement has the following disadvantages: 1. Blocking of scarce funds which could be gainfully employed elsewhere; 2. Requiring more strong space resulting in higher maintenance and handling costs; 3. Chances of product being outdated or out of fashion especially in case of consumer goods; 4. During storage for excessive period quality may deteriorate due to inherent factors like rusting loss of potency etc. Page No.54

Product wise inventory analysis:Product for March 2010:

Finishing Products Opening Quantity (MTs in lakh) Opening Value ( crore) Closing Quantity (MTs in lakh) Closing Value ( crore) Sale Quantity (MTs in lakh) Sale value ( crore) Purchase Quantity (MTsin lakh) Purchase Value ( crore)

Petroleum Products Lubricants Greases: LAB: PX/PTA: Gas: Cry containers/ Cry vessels:









0.46 0.08 0.18 1.49

348.91 32.1 51.74 4.3

0.42 0.07 0.21 0.60 0.05

299.03 31.94 89.74 1.59

5.02 1.24 5.28 875.06 0.17

5656.69 1098.02 2636.36 2659.75









Petroleum Products Lubricants Greases: LAB: PX/PTA: Gas: Cry containers /Cry vessels:

Cost of Goods Sold

143702.3851 559.880952 565.7942857 2256.32 2.3585 24.004

Average Inventory
14766.48 323.97 32.02 70.74 2.945 5.995

Inventory Turnover
9.73 10.98 17.67 31.90 0.80 4.00

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Product for March 2011:

Finishing Products Opening Quantity (MTs in lakh) Opening Value ( crore) Closing Quantity (MTs in lakh) Closing Value ( crore) Sale Quantity (MTs in lakh) Sale value ( crore) Purchase Quantity (MTs in lakh) Purchase Value ( crore)

Petroleum Products Lubricants Greases: LAB: PX/PTA: Gas: Cry containers









0.42 .07 .21 .60 .05

299 31.94 89.75 1.59 7.06

0.37 .09 0.05 .40 .02

310.12 50.05 25.71 1.37 4.14

4.82 1.24 4.47 851.73 .18

6138.68 1181.37 2530.11 2830.11 34.22

.02 0.00 0.00 851.53 0.00

25.01 0.00 0.00 2737.27 0.00

Petroleum Products Lubricants Greases: LAB: PX/PTA: Gas: Cry containers/ Cry vessels:

Cost of Goods Sold

165687.6233 4023.178378 689.5777778 2298.474 0.685 37.26

Average Inventory
18326.76 304.56 40.995 57.73 1.48 5.6

Inventory Turnover
9.04 13.21 16.82 39.81 0.46 6.65

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45 40 35 30 25 20 15 10 5 0 Petroleum Lubricants Products Greases: LAB: PX/PTA: Gas: Cry containers YEAR 2011 YEAR 2010

Petroleum Product: Though in 2011 the sale of Petroleum product is increased by 3.28% than the previous year but because of price hike 17.41% from the previous year the Petroleum product remain more unsold than the production. So, holding of petroleum product is increased due to unsold of the product. Lubricants Greases: The quantity Lubricants Greases are sold in 2011 is less than 3.98% from 2010 but because of increasing the price the value of the Lubricants Greases is increased by 8.52% .But because of demand in the market the Lubricants Greases is more sold in 2011 than the 2010 as per production. Lab: The Lab turnover of 2011 is almost same as 2010. PX/PTA: Though the sale quantity PX/PTA is decreased by 15.34% at the current year from the previous year but the value of PX/PTA is increased by 13.48% from the 2010, and the more PX/PTA is sold in 2011 from the 2010 as per production so in 2011 the holding PX/PTA is less than 2010. Gas: Both in 2011 and 2010 IOCL incurring loss.
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Cry Container: The sale of Cry Container is increased in 2011 by 5.88% from the 2010 and also value is increased by 11.75% from the previous year.So,the turnover of Cry Container in 2011 is higher than 2010.

Components of Inventory:The manufacturing firms inventory consists of two more components (i) Raw materials and (ii) work-in-progress. An analyst may also be interested in examining the efficiency with which the firm converts raw materials into work-in-process and work-in-process into finished goods. That is, the analyst would like to know the levels of raw materials inventory and work-in-process inventory held by the firm on an average. The raw material; inventory should related to materials consumed and work-in-process to the cost of production.

Raw Material Inventory Turnover

Material consumed Raw Material Inventory Turnover = Raw Material Average Inventory

Raw Materials Consumed:

March-11 14,867.23 0.00 150,484.12 165,351.35 22,351.03 143,000.32 March-10 8,708.29 0.00 123,704.72 132,413.01 14,867.23 117,545.78 March-09 13,696.97 575.90 131,482.60 145,755.47 8,708.29 1 137,047.18 March-08 9,520.32 0.00 105,525.48 115,045.80 13,696.97 101,348.83

Opening Balance Add: Transferred from BRPL Add: Purchases Less: Closing Stock Consumption:

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Raw Material Consumption: Raw Material Average Inventory Raw Material Inventory Turnover Days of raw material holding

117,545.78 11,787.76 9.97

137,047.18 11,202.63 12.23

101,348.83 11,608.645 8.73

143,000.32 18,609.13 7.68





50 45 40 35 30 25 20 15 10 5 0 YEAR 2011 YEAR 2010 YEAR 2009 YEAR 2008 Raw Material Inventory Turnover Days of Raw Material holding

In 2009 the raw material inventory turnover is maximum that is 12.23 times in a year. That means in 2009 IOCL holds less days of inventory of raw material that is 29.43 which is less than 2008, 2010 and 2011.

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Details of Raw Material Consumption:March-11 Qty (MTs in Lakh) 1. 2. 3. 4. 5. Crude Oil Base Oil Ethanol BENZENE Natural Gas/RLNG 6. Additives 7. Packing Materials 8. Consumed Steel Coils / Sheets / Stores / Component and Spare Parts 9. Raw Material for Explosives 10. Others March-11 Value (Rs. In crore) March10 Qty (MTs in Lakh) March-10 Value (Rs. In crore) March09 Qty (MTs in Lakh) March-09 Value (Rs. In crore)

529.61 4.32 0.68 0.00 2.83 .48 9.38

140,841.42 1,950.94 212.48 2.48 522.37 500.47 324.91

506.94 4.23 0.33 0.17 5.50 0.49 10.13

115,529.75 1,485.97 85.56 4.15 741.01 402.72 300.61

513.77 4.27 1.05 0.06 5.25 0.39 9.40

135,096.42 1721.21 334.72 4.05 679.89 334.94 292.94

.08 .58

1,191.18 101.18 28.88

0.08 0.49

815.97 77.21 20.13

0.07 0.42

689.39 75.48 26.36

Value of Crude Oil

140 120 100 80 60 40 20 0 May-06 May-07 May-08 May-09 May-10 May-11 Value









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Stock in Progress Turnover

Cost of Production Stock in progress = Average Stock in Progress Inventory Inventory Turnover

Cost of Production Average Stock in Progress Inventory Stock In Process Turnover
Days of Stock In

137,424.34 2,194.545

159,012.71 1,882.92

116720.79 1878.015

166,136.92 3,407.57

48.76 7.38

62.62 5.74

84.45 4.26

62.15 5.80


Stock In Process Turnover

90 80 70 60 50 40 30 20 10 0
Year 2011 Year 2010 Year 2009 Year 2008

Stock In Process Turnover

In 2009 the stock in process inventory turnover is maximum that is 84.45 times in a year. That means in 2009 IOCL holds less days of inventory of stock in process that is only 4.26 days which is less than 2008, 2010 and 2011. Page No.61

Finished goods turnover Work-in-process turnover Material turnover Sales to total inventory Inventory to Sales

March-11 8.55
48.76 7.68 6.75 14.80%

8.78 62.62 9.97

11.76 84.45 12.23 11.44 8.73%

8.75 62.15 8.73 8.072 12.38%


16 14 12 10 8 6 4 2 0 Year 2011 Year 2010 Year 2009 Year 2008

Sales to total inventory Inventory to Sales

Inventory to sale
Inventory to Sales is the percentage of cost of sales attributable to average inventory. A decreasing number indicates higher efficiency in use of resources; an increasing number suggests potential cash flow problems due to greater sums tied up in inventory. In 2009 IOCL use its resources very efficient way because in 2009 inventory to sale is minimum but from 2010 inventory to sale is continuously rising so it is significant inefficient condition for IOCL. An increasing Inventory to Sales ratio is generally a negative sign, showing the company may be having trouble keeping inventory down and/or Net Sales have slowed, and can sometimes indicate larger financial problems the company may be facing. Viewing this ratio over several periods reveals the Page No.62

important aspect of the company's ability to manage inventory while attempting to increase sales. Sales to total inventory A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales. This measure is one part of the cash conversion cycle, which represents the process of turning raw materials into cash. The days sales of inventory is the first stage in that process. The other two stages are days sales outstanding and days payable outstanding. The first measures how long it takes a company to receive payment on accounts receivable, while the second measures how long it takes a company to pay off its accounts payable. From graph it is showing that sales to inventory ratio is maximum in 2009 and from 2010 it is continuously decreasing this signify the Days of sale Inventory(DSI)is increasing ,i.e. IOCL is taking longer period to turn its inventory into sales.So,it take delay on converting the raw material into cash. Conclusion: IOCLs efficiency is turning its inventories has risen i n 2009 from 2008 and then it is continuously deteriorating from 2009.The companys companys utilization of inventories in generating sales is poor from 2009; the yearly holding of all types of inventories is increasing.

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Receivables Analysis

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A sound managerial control requires proper liquid management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress. Receivables result from credit sales. A concern is required to allow credit sales in order to expand its sales volume; it is not always possible to sell goods on cash basis. Sometime other concern in that line might establish a practice of selling goods on credit basis. Under these circumstances it is not possible to avoid credit sales without adversely affecting sales. The increase in sales is also essential to increase profitability. After a certain level of sales this increase in sales will not proportionately increase production costs. The increase in sales will bring in more profits. Receivables constitute a significant portion of current assets of a firm. But for investment in receivable a firm has to incur certain costs. Further there is a risk of bad debts also. It is therefore very necessary to proper control and management of receivables. Cash is the most important component of current assets; therefore the firm basic strategies are to reduce the operating cash requirement. The companys aim is to accelerate the collection of receivables so as to reduce the average collection period. The receivables represent an important component of current assets of a firm. The purpose of this analysis is the important dimension of efficient management of receivables within the framework of a firm objective of value maximization. The term receivables are defined as debt owed to the firm by customer arising from sale of goods or services in the ordinary courses of business. Receivable management is also called trade credit management. Thus account receivables represent an extension of credit to customers allowing them a reasonable period of time in which to pay for the good received.

OBJECTIVE OF DEBTORS MANAGEMENT It is not always possible to sell goods on cash basis only, sometimes other firms in that line might have establish a practice of selling goods on credit under these circumstances, it is not possible to avoid credit sales without adversely affecting the sales. Hence the firm is required to allow the credit sale in order to expand its sales volume. The increase in sales is also essential to increase profitability. The sales of goods have become an essential part of the modern Page No.65

competitive economic system. In fact credit sales and receivables are treated as a marketing tool to aid the sale of goods. Credit sale is generally made in an open account in the sense that there is no formal acknowledgement of debt obligation through a financial instrument. As a marketing tool they are indene to promote sales and thereby profits. However extension of credit involves risk and cost. Management should weigh the benefits as well as the costs to determine the goals of receivable management. Thus the objective of receivable management is: To promote sales and profit until that point is reached where the return on investment in further funding of receivable is less than the cost of funds raised to finance that additional credit(i.e. cost of capital) The objective of receivable management is to promote sales and profit until that point is reached where return on investment in further funding receivables is less than cost of funds raised to finance that an additional credit, i.e. cost of capital. The specific costs and benefits which relevant to the determination of receivables management are examined below. NEED FOR GRANTING TRADE CREDIT: Trade credit is an important marketing tool. A policy of trade credit is followed nearly in all capital intensive industries either for sales expansion and /or sales retention. Under any circumstances investment in receivable is growth oriented. Various factors that favors credit Market factor: Market factors like price, forces accompany to grant credit in order to maintain sale. Competition: In view of stiff competition from both domestic and international players, the company is left with no option then to grant credit. Competition is another vital factor, which affects the credit policy of a firm, and IOCL is not an exception. Customer Requirements: As the market has changed to the buyers market, the customers have become kings. If the customer expects credit and is worthy of it, he gets it. Marketing Tools: T o push up sales of slow moving products and encourage bulk purchase of fast moving products, credit plays an effective role in this context. Page No.66

Recessionary Economic Conditions: Liquidity crunch forces the company to grant credit.

DETERMINANT OF SIZE OF RECIEVABLES:Beside sales, a number of factors also influence the size of receivables. The following factors directly or indirectly determine the size accounts receivables. 1) Level of sales: The most important factor in determining the volume of receivable is the level of firms credit sales. With an increase in the size of the sales, it may bring about a proportional increase in the magnitude of receivable. 2) Credit policies: The firm with the liberal credit policy will have a higher level of receivable than with a conservative or rigid credit policy. 3) Terms of trade: The size of receivables also depends upon the term of trade. 4) The period of credit allowed and rates of discounts given are linked with receivables. If the credit period allowed is more, the receivable will also be more similarly if the rate of discount are reasonable, then also the size of the receivable will increase.

5) Profit: The level of receivables increases as a result of increase in sales. 6) When sales increase beyond a certain level, the additional cost incurred are less than the increase in revenue. It will be beneficial to increase sales beyond a point because it will bring more profit. The increase in profit will be followed by an increase in the size of the receivable. 7) Market: It may be necessary for the firm to explore a new market for its 8) Products/services. One of the attractive way in which a firm enters a new market is by giving incentives to the customers in the form of credit facilities. In doing so, the size of receivable will increase. 9) Grant of credit: Size of the receivable depends upon the policies and practices of the firm in determining which customer are to be granted credit.

Page No.67

10) Paying habit of the customer: The paying habits of the customers also have a bearing on the size of receivables. The customers may be in habit of delaying payments even though they are financially sound. In such case, the firm should remain in constant touch with its customers. 11) Collection policies: The vigor with which affirm collects its dues from the customers also affects its receivables, for if the amounts due are not collected timely; a firm suffers some financial difficulties, if not losses. 12) Operating efficiency: The degree of operating efficiency in billing, record keeping and other function also exercise some influence on a firms credit policy which in turn influences its receivables. 13) Credit collection: The collection of credit should be streamlined. Efficient credit collection machinery will reduce the size of receivable. Individual firm of tern set up their own well organized credit collection department COSTS: The major categories of cost associated with the extension of credit and account receivables are: 1) Collection cost 2) Capital cost 3) Delinquency cost 4) Default cost Collection Cost: These are administrative cost incurred in collecting the receivables from the customer to whom credit sales have been made. Capital Cost: The increased level of accounts receivables is an investment in assets. There is time lag between the sale of goods to, and payment by the customer. Meanwhile the firm has to pay employees and suppliers of raw materials. Thereby implying that firm should arrange for additional funds to meets its own obligation while waiting for payments from its customers. The cost on the use of additional capital to support credit sales, which alternatively could be profitability employed elsewhere, is , therefore a part of extending credit or receivables or capital cost. Delinquency Cost: This cost arise out of the failure of the customers to meet their obligation when payment of credit sales become due after the expiry of credit period, the cost Page No.68

are (i) blocking of funds for extending period, (ii) cost associated with steps that have to be initiated to collect the overdue, such as reminders and other collection efforts, legal charges etc. Default Cost: The firm may not be able to recover the over dues because of the inability of the customers. Such debts are treated as bad debts these cost associated with credit sales and accounts receivables.

Apart from the cost, another factor that has a bearing on accounts receivable is the benefit emanating from credit sales. The benefits are: The increased sale and thereby profits. However, the benefits would depend upon the credit policy adopted by the firm, i.e., a conservative or liberal credit policy. The impact of liberal credit policy is likely to have two forms:i. Sales expansion ii. Sales retention In sales expansion a firm may grant credit either to increase sales or to attract new customer. This motive is growth oriented; on the other hand the sales retention the firm may grant credit to protect its current sales against emerging competition. No matter whatever is the motive, the result the result of increased sales is the increase the profit of the firm.

What are Debtors?

Debtors are people or other firms who owe money to the firm. This will usually happen where the firm has sold goods with a period of credit. The firm sells the good or service but allows the purchaser a period of credit to pay - usually a month. During this month the purchaser owes the firm the money and is therefore a debtor. If the firm has debts these are considered an asset, because when the debtors pay the firm will have converted the debt into cash in the bank. Because most debts are relatively short-term they are considered current assets. The other current assets are stocks and cash. The amount of debtors a firm has depends on the line of business they are in. If most of their business is with trade customers where they have to offer credit then the level of debtors may be high. For many retail businesses, however, the level of debtors will tend to be relatively low as most of their sales are cash sales.

Page No.69

Ways to manage debtors - credit policy and collection procedure:A sale is not a sale until the money is in your bank account. Having an effective credit policy and collection procedure in place is one of the most important facets of owning your own business. When it comes to dealing with customers who seem unwilling to pay on time it can mean the difference between prosperity and failure

Credit policy: Credit policy effects debtor management because it guides management about how to control debtors and how to make balance between liberal and strict credit. If company does not restrict to sell the products on credit after a given limit of sale. This liberated credit policy will increase the amount of sale and profitability. But risk will also increase with increasing of sale. If we sell the good to those debtors whose capability to pay is not good, then it is possible that some amount will become bad debts. Company can increase the time limit for paying by such debtors. On the other hand, if companys credit policy is strict, then it will increase liquidity and security, but decrease the profitability. So, finance manager should make credit policy at optimum level where profitability and liquidity will be equal. We can show it graphically.


Security Level


Risk Level




Page No.70

Credit terms refer to the terms and conditions on which the trade credit will be made available. Thus the stipulations under which the goods are sold on credit are referred to as credit terms. These relate to the repayment of the amount under the credit sale. These terms can be finalalized after the scrutiny of number of factors. The various factors which must be taken into account are: The Seller Companys place in the market and the credit terms on which it is buying from its own suppliers. The availability of the capital it needs to finance its own credit sales and whether this is to be borrowed and if so at what cost; also the availability of capital to finance the payment of other overheads. The existence of buyer and sellers market The volume of sales planned and how these will be spread over the range of customers. The profit margin to be obtained. The competitive factors. The character of the market

A. The period the buyer will have the goods i.e. the buying companys inventory turnover and average collection period will ultimately decide the selling companys credit terms. B. The condition of the customer finances and the degree of the credit risk, which the credit sale will involve. CREDIT TERMS HAS THREE COMPONENTS :i. Credit period ii. Credit limit iii. Cash discount CREDIT PERIOD: is the duration of time for which trade credit is extended. During this period the customers must pay the overdue amount. CREDIT LIMIT: is decided by the top management and varies according to the market condition. This total amount is broken up into regional limits, which is further segregated into monthly limits within which the different parties have to accommodate. This function is performed by the credit control committee as discussed above. Page No.71

CASH DISCOUNT: is offered to induce the customers to make prompt payments. The customers can take advantage of discount if they pay the amount within the tipulated time.

DETAILS OF DEBTORS:Amount in Rs. (Cr.)

Over Six Months: a) b) i) ii) iii) From Subsidiary Companies Unsecured, Considered Good From Others Secured Considered Good Unsecured, Considered Good Unsecured, Considered Doubtful




1.22 0.00 819.41 372.82 1,193.45

7.10 1.38 130.51 419.97 558.96

28.69 8.18 53.77 499.61 590.25

162.19 0.00 43.70 540.30 746.19

Other Debts : a) b) i) ii) ii) From Subsidiary Companies Unsecured, Considered Good From Others Secured Considered Good Unsecured, Considered Good Unsecured, Considered Doubtful

2,084.19 50.00 5,914.83 55.21 8,104.23 9,297.68 428.03 8,869.65

770.56 45.44 4,844.29 48.76 5,709.05 6,268.01 468.73 5,799.28

1,553.15 139.93 4,154.14 41.81

1,950.22 138.31 4,526.12 3.07 6,617.72 7,363.91 543.37 6,820.54

6,479.28 541.42 5,937.86

Total Less : Provision for Doubtful Debts TOTAL

Page No.72

A debtor is an entity that is indebted to the company. Typically, customers who have not paid up for goods and services taken from the company are the company's debtors. Sundry debtors are the amount that the company's customers owe it for goods and services provided by it. IOCL distinguish sundry debtors by the period for which such payments from customers have been outstanding. 1. Sundry debtors, outstanding less than six months: - This data field captures sundry debtors that have been outstanding for less than six months. It includes subsidiary companies and others and all secured and unsecured good debtors and unsecured doubtful debtors outstanding for less than six months. 2. Sundry debtors, outstanding over six months: - This data field captures sundry debtors that have been outstanding for more than six months. It includes all secured and unsecured debtors outstanding for more than six months. IOCLreports the net amount of Sundry Debtors in this field i.e. reduced by the amount of provision made if any for Doubtful Sundry Debtors (Secured or Unsecured and outstanding for a period more than six months). In case the annual report is not specific as to whether the "provision for bad / doubtful debtors" is in respect of " Debtors outstanding for a period Less than six months" or in respect of " Debtors outstanding for a period more than six months", we consider the provision to be in respect of " Debtors Outstanding for a period more than six months"

Page No.73

10,000.00 9,000.00 8,000.00 7,000.00 6,000.00 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 0.00 Year 2011 Year 2010 Year 2009 Year 2008

Other Debts Over Six Months

IOCL maintain three types of debtors Secured, Considered Good Unsecured Considered Good Unsecured, Considered Doubtful

10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Year 2011 Year 2010 Year 2009 Year 2008

Unsecured Considered Doubtful Secured Considered Good Unsecured Considered Good

Page No.74

DEBTORS (ACCOUNT RECEIVABLE) TURNOVER:A firm sells goods for cash and credit. Credit is used as a marketing tool by a no. of companies. When the firm extends credit to its customer debtors (account receivable) are created in the firms account. Debtors are convertible into cash over a short period and, therefore are included into current assets. The liquidity position of the firm depends on the quality of debtors to a greater extent.Finanacial analysis apply two ratios to judge the quality or liquidity of debtors: a) Debtors Turnover b) Collection Turnover

Net Sale Debtors Turnover= Average Debtors

Average Debtors= (Opening Debtors+ Closing Debtors)/2

Net Sale Average Debtors Debtors Turnover Days of Collection




262,715.31 6,379.2

224,405.38 6,778.30

302,954.37 7,334.465

249,271.35 5,868.57









Analysis of the Debtors over the years:

Debtors Turnover:Debtors turnover indicates the number of times debtors turnover each year, i.e. how rapidly receivables are collected. A high ratio is indicative of shorter time-lag between credit sales and cash collection. A low ratio

Page No.75

shows that debts are not being collected rapidly. Generally, the higher the value of debtors turnover, the more efficient is the management of credit. Collection Period:-The average collection period measures the quality of debtors since it indicates the speed of their collection. The shorter the average collection period, the debtors the quality of debtors, since a short collection period implies the prompt payments by debtors. The average collection period should be compared against the firms credit terms and policy to judge its credit and collection efficiency.

Debtors Turnover
50 40

12 10 8

Collection Period

30 20 10 0 Year 2011 Year 2010 Year 2009 Year 2008

Debtors Turno

6 4 2 0 Year 2011 Year 2010 Year 2009 Year 2008

Collec tion Period

The above graphs show that the higher debtors turnover ratio and the shorter the average collection period, the better is the trade credit management and the better is the liquidity of debtors. On the other hand, low turnover ratio and longer collection period reflect delayed payment by debtors. In IOCL debtors turnover ratio and as well as collection period moreorless same. 1. In 2011 debtors turnover ratio of 41.36 signifies that debtors get converted in to cash 41.36 times. Debtors turnover ratio is decreased by 2.63% from 2010 years. As in 2010 debtors turnover ratio of 42.48 signifies that debtors get converted in Page No.76

to cash 42.48 times. So, in 2010 credit management is more efficient than 2011.In 2009 the ratio is 41.18 which is declined by 3.06% from the 2010. So, in 2010 debtors turnover ratio is highest to the 2011 and 2009s turnover ratio which signifies that in 2010 debtors get fastly converted in to cash comparatively other two years debtors. 2. In 2011 collection period of 8.71 days implies that debtors on an average are collected in 8.71 days. In 2010 collection period of 8.48 days implies that debtors on an average are collected in 8.48 days. In 2010 the debtors are collected faster than 2.64% from 2011. In 2009 collection period of 8.74 days implies that debtors on an average are collected in 8.74 days. In 2010 the debtors are collected faster than 2.96% from 2009.

Page No.77

Cash & Bank Analysis

Page No.78

How much cash should a company keep on hand or "on short call" at a bank? The more cash which is on hand, the easier it will be for the company to meet its bills as they fall due and to take advantage of discounts. However, holding cash or near equivalents to cash has a cost in terms of the loss of earning which otherwise have been obtained by using the funds in another way. The financial manager must try of balance liquidity with profitability. How much cash should a organization keep on hand? Enough cash to make payments when needed. (transactions motive) (Daily or Weekly Cash Budget helpful) Additional cash may be held for unexpected requirements. (precautionary motive) The size of the minimum cash balance depends on: How How How quickly and cheaply a organization can raise cash when needed. accurately managers can predict cash requirements. (Cash Budget helpful) much precautionary cash the managers need for emergencies.

The organizations maximum cash balance depends on: Available (short-term) investment opportunities e.g. money market funds, CDs, commercial paper Expected return on investment opportunities. e.g. If expected returns are high, organizations should be quick to invest excess cash Transaction cost of withdrawing cash and making an investment Demand for Cash for daily transactions (Cash Budget helpful)

Page No.79

Cash & Bank Details:Amount in Rs. (Cr.)

Cash Balances: a) b) Cash balances, including imprest Cheques in hand

2.13 435.66 437.79

2.07 498.73


2.26 159.92 162.18

746.96 500.80 749.44

Bank Balances with Scheduled Banks : a) b) c) Current Account Fixed Deposit Account Blocked Account

480.34 650.50 0.17 1131.01

477.36 398.55 0.17 876.08

294.23 1.46 0.16

64.57 9.38 0.16

295.85 74.11

Bank Balances with Non-Scheduled Banks : Bank of Commerce & Development, Libya [Maximum balance during t he year Rs. 0.50Crore] Myanmar Economic Bank Branch(5), Rangoon [Maximum balance during the year Rs. 0.88Crore] Total


0.44 0.80 1.23 1.24

0.49 0.88 1.37

0.00 0.88 0.88






Page No.80

Cash & Bank Balance

1400 1200 1000 800 600 400 200 0

Cash & Bank Balance

Year 2011 Year 2010 Year 2009 Year 2008

Interpretation: Cash balance for the year 2008 is 749.44 and bank balance is 74.99.But in 2009 cash balance is reduced but bank balance is increased but all over cash and bank balance decreased by 3.20% from 2008. From 2008 the cash balance is continuously decreasing and bank balance continuously increasing. Overall cash and bank balance is maximum in 2011 furthermore overall cash and bank balance is decreased by 4.995% from 2010.


As observed, large amounts of cheques remain outstanding as at the year-end. This is because of the facts that, a significant amount of cheques are collected from the debtors in the month of March and these are not deposited to the bank before the annual closing of accounts. Hence, these cheques should be ideally collected much before closing of accounts and deposited in the bank for collection.

Page No.81

This would also result in accurate preparation of The Bank Reconciliation Statement as well as proper maintenance of debtors balances at the year-end. It is also observed that IOCL keeps a very low amount of cash in hand as compared to the size of its operations. Thus it should try to release most of the capital blocked in various investment projects at the year-end and maintain a healthy cash balance so as to meet any contingencies.

Loans &Advances, Claims & Deposits

Page No.82

Loans and advances made by the company to other business enterprises and
of the same business group that are outstanding at the end of the balance sheet date. It includes all loans and advances whether with or without interest and whether to group or other business enterprises. It includes all loans and advances whether with or without interest. Loan & advances considered good & secured: - This data field captures the value of all those loans that the company considers as good in terms of their being serviced or likely to be serviced as expected in the future and those that are secured with appropriate collaterals or guarantees. This is a subset of the total loans and advances of the company as at the balance sheet date. Loan & advances considered good & but not secured:- This data field captures the value of all those loans that the company considers as good in terms of their being serviced or likely to be serviced as expected in the future. But, these loans are not secured with appropriate collaterals or guarantees. etc. This is a subset of the total loans and advances of the company as of the balance sheet date. Loan & advances considered doubtful & not secured: - This data field captures the value of all those loans that in the company's view not being serviced or are not likely to be serviced as expected in the future. The loans are unlikely to be repaid or the interest on them is unlikely to be paid on time. This is a subset of the total loans and advances of the company as of the balance sheet date. Sometimes, Companies fail to report doubtful loans and advances. In such a case, the Auditors' Report provides information about the amount of doubtful loans and advances and the amount of provision, the company was supposed to make. The amount of such doubtful advances identified, will be reported in this field.

Page No.83


Advance recoverable in cash or in kind or for value to be received: a) From Subsidiary Companies Unsecured, Considered Good b) From Others i) Secured, Considered Good ii) Unsecured, Considered Good iii) Unsecured, Considered Doubtful








728.80 5,288.09 46.72 6,063.61 6,056.09 46.72 6,019.37

792.31 1,693.97 46.78 2,533.06 2,533.90 46.78 2,487.12

949.07 1,667.74 5.48 2,622.29 2,622.74 5.48 2,617.26

866.13 2,037.92 3.86 2,907.91 2,909.65 3.86 2,905.79

Less : Provision for Doubtful Advances

Amount Recoverable from Govt. Of India: Unsecured, Considered Good Advances for Investments Finance Lease Receivables Claims Recoverable : a) From Subsidiary Companies Unsecured, Considered Good b) Others i) Secured, Considered Good ii) Unsecured, Considered Good iii) Unsecured, Considered Doubtful Less : Provision for Doubtful Claims Balance with Customs, Port Trust and

10,959.16 23.03 11.72

8,105.14 61.56 14.81

6,320.61 17.59 19.62





0.00 1,047.37 51.56 1,099.54 1,099.54 51.56 1,047.98

0.00 997.74 43.26 1,041.00 1,041.32 43.26 998.06

0.10 1,172.22 40.58 1,212.90 1,212.90 40.58 1,172.32

0.10 900.51 41.16 941.77 941.77 41.16 900.61

Page No.84

Excise Authorities: Unsecured, Considered Good Deposits for Leave Encashment Fund Advance Tax(net) Materials given on loan: To Others: i) ii) Secured, Considered Good Unsecured, Considered Good

39.78 1,483.72 8,055.00

33.75 1,262.76 0.00

37.17 0.00 0.00



0.00 0.81 0.81 0.08 0.09 (0.01) 0.80 9.14 1,705.51 0.14 1714.65 428.85 1285.80 22,666.56

0.04 0.00 0.04 0.00 0.00 0.00 0.04 9.14 1,756.45 0.12 1,765.71 0.12 1,765.59 14,728.83

0.00 0.20 0.20 0.00 0.00 0.00 0.20 9.02 1,681.32 0.08 1,690.42 0.08 1,690.34 11,875.11

0.38 0.38 0.00 0.00 0.00 0.00

To subsidiary Companies : Secured, considered Goods Less: Deposits received Sundry Deposits (including amount Adjustable on receipt of Final bills ): i) Secured, Considered Good ii) Unsecured, Considered Good iii) Unsecured, Considered Doubtful Less : Provision for Doubtful Deposits

9.00 1,669.13 0.03 1,678.16 0.03 1,678.13 13,554.71


Loan and Advances

25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00 Year 2011 Year 2010 Year 2009 Year 2008

Loan and Advances

From graph it is showing that though in 2008 the amount of loan and advances is Page No.85

high but it declined in 2009 and again from 2010 the tendency of loan and advances are upwarding. IOCL maintain advances in the following terms: 1. Advance recoverable in cash or in kind or for value to be received: 2. Amount Recoverable from Govt. Of India: 3. Advances for Investments 4. Finance Lease Receivables 5. Claims Recoverable : 6. Balance with Customs, Port Trust and Excise Authorities 7. Deposits for Leave Encashment Fund 8. Advance Tax(net) 9. Sundry Deposits (including amount 10. Adjustable on receipt of Final bills ) Increased loan & advances increase the benefit of received cash in future. When the loan & advances increased it also signify that the amount of getting interest also high which will be profitable for the company. It also maintain to increase the working capital


Amount in Rs. (Cr.)
Interest Accrued on Investments/ Bank Deposits Gold Coins in Hand (at Cost)

March-11 184.40

March-10 March-09 March-08 214.92 393.04 184.80





Receivable from IBP Trust 1840.99 Less : Provision for Diminution 971.99

1,840.99 1,840.99 1840.99 1,068.85 1,334.76 971.99 869.00 772.14 506.23 869.00 178.79 148.79 1,141.50 148.79 1,051.58 148.79 1,206.03

Receivable from BRPL Trust Total


Page No.86

Payable Analysis

Page No.87

INTRODUCTION:Trade credit refers to the credit extended by the supplier of goods and services in the normal course of transaction/business/sale of the firm. According to trade practices, cash is not paid immediately for purchase but after an agreed period of time. Thus, deferral of payment (trade credit) represents a source of finance for credit purchase.

ADVANTAGES:Trade credit, as a source of short-term/working capital finance, has certain advantages. It is easily almost automatically, available. Moreover, it is a flexible and spontaneous source of finance. The availability and magnitude of trade credit is related to the size of operations of the firm in terms of sales/purchase.

COSTS:Trade credit does not involve any explicit interest charge. However; there is an implicit cost of trade credit. It depends on the credit terms offered by the supplier of goods. Cash discount:-Cash discount implies a percentage deduction from the purchase price if the buyer pays within a specified time that is shorter than the credit period. Trade credit period: - Trade credit period is the number of days until full payment of an account payable is required. Cash discount period: - Cash discount period implies the number of days after the beginning of the credit period during which the discount is available. Cost of trade credit: - Cost of trade credit is the implicit cost of not availing cash discount.

Page No.88

The Details of Current Liabilities & Provision:Amount in Rs.Crore March-11

Current Liabilities Sundry Creditors: i) Total Outstanding Dues of Micro Enterprises and Small Enterprises ii) Total Dues of creditors other than Micro Enterprises and Small Enterprises Other Liabilities Dues to Subsidiary Companies Investor Education & Protection Fund Shall be credited by the following amount namely :








34,427.50 19,750.59 19,659.00 19,348.83 34,453.16 19,766.68 19,681.03 19,365.37 6,951.78 1,592.37 5,553.40 695.26 5,010.35 864.43 5,103.07 1,582.29

5.89 6.66 6.81 0.08 0.05 0.01 5.97 6.71 8.15 6.82 6,468.92 6,938.21 Security Deposits 9,008.86 7,954.97 0.04 0.04 Less : Investments and Deposits with Banks 0.00 0.01 6,468.88 6,938.17 9,008.66 7,954.96 lodged by outside parties 8.14 0.01
Liability on Foreign Currency Contracts Less Foreign Currency Receivables Interest accrued but not due on loans Total Current Liabilities

- Unpaid Dividend - Unpaid Matured Deposits

3028.58 2965.90 62.68 472.94

1,628.94 1,587.21 41.73 461.32



172.84 732.65 168.16 62.64 202.59 378.84 32,942.17 32,896.39

52,549.94 34,480.17

Provisions Provision for Taxation: Provision for Current Tax Less : Advance payments Provision for Fringe Benefit Tax Less : Advance payments Total Provisions for Taxation(Net of Adv tax)

8,134.08 8,207.12 (73.04) 44.52 53.03 (7.51) 0.00

12,043.30 9,887.13 2,156.17 80.58 88.04 (7.46) 2,148.71

7,330.72 7,053.34 277.38 111.53 111.93 (0.40) 276.98

7,369.47 7,369.47 0.00 126.12 126.12 0.00 0.00

Page No.89

Proposed Dividend Corporate Dividend Tax Provision for Employee Benefits Provision for Contingencies Total Provisions

2306.55 359.14 2605.09

3,156.34 508.83 3,191.54

910.48 154.74 363.28

655.81 76.48 310.96


1492.68 1,266.14 904.07 641.34 6763.48 10,271.56 2,609.55 1,684.59 59,313.40 44,751.73 35,551.72 34,580.98

What Does Accounts Payable Turnover Ratio Mean? A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Creditors turnover ratio indicates the speed with which the payments are made to the trade creditors. The average payment period ratio represents the number of days by the firm to pay its creditors. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. Net Purchase Creditors Turnover= Average Creditors

Average Creditors = (Opening Creditors + Closing Creditors)/2

Raw Material Purchase Purchase of Products & Crude for resale Total Purchase
Average Creditors Creditors Turnover Deferral Period


131,482.60 136,245.71

105,525.48 121,056.61

150,484.12 155,648.10


306,132.22 27109.92 11.29 31.88

245,788.87 19723.855 12.46 28.88

267,728.31 19,523.2 13.71 26.25

226,582.09 19,365.37 11.70 30.77

Page No.90

35 30 25 20 15 10 5 0 Year 2011 Year 2010 Year 2009 Year 2008

Creditors Turnover Deferral Period

In the graph it is showing that creditors turnover ratio is decline & average payment period is increasing year by year. It shows slowly with the payments are made to the suppliers for the purchase made from them. In 2011 the credit turnover ratio of 11.29, indicate that the creditors are being turned over 11.29 times during the year. It indicates the number of rounds taken by the credit cycle of payables during the year. But in 2010 the credit turnover ratio of 12.46, indicate that the creditors are being turned over 12.46 times during the year and in 2009 the credit turnover ratio of 13.71, indicate that the creditors are being turned over 13.71 times during the year. T his means the company has settled the creditors dues very slowly than the previous year. Longer average payment period or smaller payable turnover ratio may indicate more period of credit enjoyed by the business it may be due to the fact that either business has not better liquidity position; & may be not believe in availing cash discount .The company cannot consequently enjoys better credit standing in the market or business credit rating among suppliers is not good and therefore they do not allow reasonable period of credit. The above two

Page No.91

alternative conclusions are contradictory of each other therefore the ratio should be interpreted with caution.


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Operating Cycle:The firm has to invest in a fund in current assets for generating sales. Current assets is needed because sales do not convert into cash insatnteneously.There is allows an operating cycle involve in the conversion of sale into cash. There is a difference between current and fixed assets in terms of their liquidity.



Credit Sale


RMCP+WIPCP+FGCP Inventory conversion Period Receivable conversion Period

Gross Operating Cycle


Net Operating Cycle

The firms Gross operating cycle (GOC) can be determined as inventory conversion period (ICP) plus debtors conversion period (DCP). GOC=ICP+DCP The diagram above shows in a simplified form the chain of events in a manufacturing firm. 1 ) The chain starts with the firm buying raw materials on credit. 2) In due course this stock will be used in production, work will be carried out on the stock, and it will become part of the firms work-in-progress. 3) Work will continue on the WIP until it eventually emerges as the finished product. 4) As production progresses, labor costs and overheads need have to be met. Page No.93

5) Of course at some stage trade creditors will need to be paid. 6) When the finished goods are sold on credit, debtors are increased. 7) They will eventually pay, so that cash will be injected into the firm

Inventory conversion period: ICP is the sum of raw material conversion

period (RMCP), work-in-process conversion period (WIPCP) and finished goods conversion period (FGCP) Raw material conversion period (RMCP): RMCP is the average time taken to convert the raw material into work-in-progress.RMCP depends on: a) raw material conversion per day b) raw material inventory.

Raw material

Raw material inventory [Raw material consumption]/360

conversion period

Work-in-process conversion period (WIPCP): WIPCP is the average time taken to complete the semi finished or work-in-progress. Work-in-process conversion period = Work-in-process inventory [cost of production]/360

Finished goods conversion period (FGCP): FGCP is the average time taken to sell the finish goods.

Finished goods

Finished goods inventory [cost of goods sold]/360

conversion period

Debtors conversion period (DCP): DCP is the average time taken to convert
debtors into cash.DCP represents the average collection period. Page No.94

Debtors conversion period

Debtors Credit sales/360

Creditors (payables) deferral period (CDP): CDP is the average time taken by the firm in paying its suppliers (creditors). Credit deferral period = Creditors Credit purchases/360

Cash Conversion or Net operation cycle (NOC): NOC is the difference between
gross operation cycle and payables deferral period NOC=GOC CDP





1.Inventory Conversion Period 30.61 41.13 41 42.12 i) Finished Goods 5.80 5.74 7.38 4.26 ii) Work-in-progress 41.23 36.10 46.85 29.43 88.16 82.84 iii) Raw Material 96.35 64.3

2.Debtors Conversion Period 3.Gross Operating Cycle(1+2) 4.Payment Deferral Period NET OERATING CYCLE(3-4)


8.48 91.32 28.88 62.44

8.74 73.04 26.25 46.84

10.87 99.03 30.77 68.26

31.88 73.18

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Net Operating Cycle

80 70 60 50 40 30 20 10 0 Year 2011 Year 2010 Year 2009 Year 2008

Net Operating Cycle

The Operating cycle definition, also known as cash operating cycle or cash conversion cycle or asset conversion cycle, establishes how many days it takes for a company to turn purchases of inventory into cash receipts from its eventual sale. This means that on average it takes 73.18 days for a company to turn purchasing inventories into cash sales. In regards to accounting, operating cycles are essential to maintaining levels of cash necessary to survive. Maintaining a beneficial net operating cycle ratio is a life or death matter. The operating cycle concept indicates a companys true liquidity. By tracking the historical record of the operating cycle of a company and comparing it to its peer groups in the same industry, it gives investors investment quality of a company. A short company operating cycle is preferable since a company realizes its profits quickly and allows a company to quickly acquire cash that can be used for reinvestment. A long business operating cycle means it takes longer time for a company to turn purchases into cash through sales. In general, the shorter the cycle, the better a company is since less time capital is tied up in the business process. A short cash cycle reflects sound management of working capital. On the other hand, a long cash cycle denotes that capital is occupied when the commercial entity is expecting its clients to make payments. There is always a probability that a commercial enterprise can face negative cash conversion cycle, in which case they are getting payments from the clients before any payment is made to the suppliers. The more the manufacturing procedure is extended, the higher the amount of cash should be kept engaged in inventories by the company. Likewise, the more Page No.96

time is taken for the clients for the purpose of bill payment, the more is the accounts receivable amount. From another viewpoint, if a company is able to detain the payment for its internal inputs, it can decrease the amount of money required. Put differently, the net working capital is diminished by accounts payable. Thus, Operating cycle and cash cycle determine the efficiency of a firm regarding working capital management.

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Comparative position of Working Capital:

Amount in Rs. Crore March-11 Current Assets 83,321.18 March-10 59,388.80 March-09 44,812.17 March-08 52,931.30

Current Liabilities Provisions Working Capital







9,260.45 18,350.32

Current Assets, Current Liabilities and Working Capital

90000 80000 70000 60000 50000 40000 30000 20000 10000 0 Year 2011 Year 2010 Year 2009 YEAR 2008 CURRENT ASSET CURRENT LIABILITIES WORKING CAPITAL

In March 2009,there was 49.53 % decrease in working capital over the previous year, which was mainly due to increase in current liabilities and decrease in all the current assets In March 2010, there was 58.069 % increase in working capital over the previous year, which was mainly due to increase all the current assets In March 2011, there was 64.02 % increase in working capital over the previous year, which was mainly due to increase all the current assets

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So, there is a trend of increasing of working capital from 2010.It signifies that: 1. It means have sufficient cash or possibility of it. 2. It means no liquidity risk. 3. If a company's current assets exceed its current liabilities, then it may run into smooth of paying back creditors in the short term. But a declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller. 4. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. 5. An increase in working capital means that IOCL have done working capital management efficiently.

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RATIO ANALYSIS:A ratio is an arithmetical expression of relationship between two related or Inter-dependent items. Ratio analysis is a technique of analyzing the financial statements and refers to analysis of financial statements by computation of ratios. In other words, ratio analysis is a process of determini ng a nd i nterpreti ng relatio ns hip between the i tems of fi na ncia l sta tements to provi de a mea ni ngf ul unders ta ndi ng of the performa nce a nd fi na ncia l position of an enterprise. OBJECTIVE:Ratios are regarded as the true test of earning capacity, financial soundness and operating effi ciency of a b usi ness organi zatio n. I n o ther words , the ob jecti ves of usi ng rati os i n accounting and financial management analysis are to test the Profitability, Financial position (Liquidity and Solvency) and Operating efficiency of an enterprise. ADVANTAGES AND USES: Ra tio a na lysis i s a n i mporta nt technique o f f i n a n c i a l a n a l y s i s . I t i s a n a c c o u n t i n g t o o l t o present accounting variables in simple concise intelligible and understandable form. It is m eans for judging the financial health of the concern. The advantages derived by an enterprise by the use of accounting ratios are: Useful in analysis of financial statements. Useful in simplifying accounting figures. Useful in judging the operating efficiency of business. Useful for forecasting purposes Useful in locating the weak spots of the business. Useful in Inter-firm and Intra-firm comparison.

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LIMITATIONS: Except in a few cases ratios by themselves are not significant they assume significance only when compared with the relevant ratios of other firms or of previous periods. The profit of affirm to sales is 5%: whether is satisfactory or not will depend upon the figures for previous y e a r s o r f i g u r e s f o r o t h e r f i r m s . I f o t h e r f i r m s e a r n 6 % t h i s f i r m i s d o i n g n o t a s w e l l a s i t should: if the firm earned 4.5% of sales on profit in the previous year it must be considered to have done better this year by earning 5% if other firms earn 6% this firm is not doing as well as it should. Thus to get the correct interpretation from the ratios relating to an enterprise they m u s t b e s e t a g a i n s t r a t i o s o f t h e p r e v i o u s p e r i o d o r o f o t h e r f i r m s . T h e f o l l o w i n g a r e t h e limitations of ratios: False result. Different meanings are put on different terms. Not comparable if different firms follow different accounting policies. Affect of price level changes. Results may be misleading in the absence of absolute data. Ignores qualitative factors. Difficult to forecast future on the basis of past facts. Difficult to evolve a standard ratio. Ratios may be worked out for insignificant and unrelated figure. Window dressing. Personal bias.

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FINANCIAL ANALYSIS:Financial analysis is the process of identifying the financial strengths and weaknesses of the firm and establishing relationship between the items of the balance sheet and profit & loss account. Financial ratio analysis is the calculation and comparison of ratios, which are derived from the information in a companys financial statements. The level and historical trends of these ratios can be used to make inferences about companys financial condition, its operations and attractiveness as an investment. The information in the statements is used by Trade creditors, to identify the firms ability to meet their claims i.e. liquidity position of the company. Investors, to know about the present and future profitability of the company and its financial structure.

1. Management, in every aspect of the financial analysis. It is the responsibility of the management to maintain sound financial condition in the company. RATIO ANALYSIS:The term Ratio refers to the numerical and quantitative relationship between two items or variables. This relationship can be exposed as Percentages Fractions Proportion of numbers Ratio analysis is defined as the systematic use of the ratio to interpret the financial statements. So that the strengths and weaknesses of a firm, as well as its historical performance and current financial condition can be determined. Ratio reflects a quantitative relationship helps to form a quantitative judgment.

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1. Working Capital Ratio (WCR): This ratio shows the proportion of

working capital to the quantum of total capital employed by the firm and is a measure of the working capital policy of the firm.

Working Capital Ratio= Working Capital / Net assets (or Capital employed)

This ratio varies depending on the size of the firm and the nature of business of the firm. Hence, it varies from industry to industry and a comparative analysis of this ratio with other firms on the same industry would provide the accurate indication of this ratio. DETAILS OF WORKNG CAPITAL OF IOCL March-11 Current Assets, Loans and Advances: Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans and Advances Current Assets Less: Current Liabilities and Provisions Current Liabilities Provisions 49,284.52 8,869.65 1,294.42 1,206.03 22,666.56 83,321.18 36,404.08 5,799.28 1,315.11 1,141.50 14,728.83 59,388.80 25,149.60 5,937.86 798.02 1,051.58 11,875.11 44,812.17 30,941.48 6,820.54 824.43 790.14 13,554.71 52,931.30 March-10 March-09 March-08

52,549.94 6,763.46 59,313.40 24,007.78

34,480.17 10,271.56 44,751.73 14,637.07

32,942.17 2,609.55 35,551.72 9,260.45

32,896.39 1,684.59 34,580.98 18,350.32

Working Capital

Page No.105

DETAILS OF WORKNG CAPITAL OF BPCL March-10 Current Assets, and Advances: Loans 10,603.84 1,608.61 961.59 4,932.87 1,600.45 19,707.36 March-09 March-2008

12,028.86 Inventories 2,662.68 Sundry Debtors 342.36 Cash and Bank Balances 3,785.69 Other Current Assets 4,764.34 Loans and Advances 23,583.93 Current Assets Less: Current Liabilities and Provisions Current Liabilities Provisions

6,823.92 1,425.67 441.55 3,094.51 3,502.77 15,288.42

14,550.56 2,580.59 17,131.15 6,452.78

11,118.87 1,712.44 12,831.31 2,457.11

13,594.11 986.26 14,580.37 5,126.99

Working Capital

DETAILS OF WORKNG CAPITAL OF HPCL March-10 Current Assets, and Advances: Loans March-09 March-08

12,579.22 Inventories 2,437.34 Sundry Debtors 243.17 Cash and Bank Balances 123.74 Other Current Assets 5,258.47 Loans and Advances 20,641.94 Current Assets Less: Current Liabilities and Provisions Current Liabilities Provisions

8,793.03 2,240.91 608.64 181.15 4,180.62 16,004.35

12,020.28 1,710.66 294.01 49.46 5,222.96 19,297.37

14,449.90 2,105.21 Page No.106

10,510.26 1,256.87

11,742.22 691.47 12,433.69

16,555.11 Working Capital 4,086.83

11,767.13 6,863.68 4,237.22

Net Current Assets Net working Capital ratio = Net Total Assets

March-11 IOCL:
Net Current Assets

March-10 14,637.07 99,875.29 .14

March-09 9,260.45 94,448.95 .098

March-08 18,350.32 81,994.24 0.22

Net Total Assets

24,007.78 114,402.72 .21

Net working Capital ratio BPCL:

Net Current Assets

Net Total Assets

6,452.78 36,141.21 0.18

2,457.11 34,538.76 0.07

6,863.68 28,180.58 .24

Net working Capital ratio HPCL:

Net Current Assets

Net Total Assets

4,086.83 34,668.31 0.117

4,237.22 35,089.51 0.12

5,126.99 28,945.97 .177

Net working Capital ratio

Page No.107

Net working Capital ratio

0.3 0.25 0.2

0.15 0.1 0.05 0 Year 2011 Year 2010 Year 2009 YEAR 2008


From the graph in IOCL it is showing that in 2008 there is highest net working capital ratio. That means in 2008 IOCL has the greatest ability to meet current obligations. Next year as current assets has decreased and total net asset also increased so the ratio is decreased.But, from 2009 current asset is rapidly increasing and in 2011 the current asset is maximum, so from 2009 this ratio is also started for increasing. Like IOCL in BPCL in 2008 the ratio is maximum and due to decreasing in current asset this ratio has fallen, but in 2010 BPCL has recovered its failure. In HPCL net working capital ratio is not fluctuate so much because HPCL maintain a constant current assets among total assets. Though in 2008 the ratio is maximum because of maximum current asset.

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2. Current Ratio:This ratio shows the relationship between current assets and current liabilities of a company. It indicates the availability of current assets in rupees for every one rupee of current liability. It is an important measure of analyzing the firm's ability to payoff its current obligations out of its short-term resources. Current ratio, CR = Current Asset/ Current Liabilities March-11 IOCL: Current Assets Current Liability Current Ratio BPCL: Current Assets Current Liability Current Ratio HPCL: Current Assets Current Liability Current Ratio 83,321.18 59,313.40 1.40 March-10 59,388.80 44,751.73 1.33 March-09 44,812.17 35,551.72 1.26 March-08 52,931.30 34,580.98 1.53

23,583.93 17,131.15 1.38

15,288.42 12,831.31 1.19

19,707.36 14,580.37 1.35

20,641.94 16,555.11 1.25

16,004.35 11,767.13 1.36

19,297.37 12,433.69 1.55

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1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Year 2011



Year 2010

Year 2009

YEAR 2008

A ratio of greater than one means that the firm has more current assets than current claims against them. The higher the CR, the higher is the amount available per rupee of current obligations and accordingly, the higher is the feeling of safety and security. The rule of thumb about the CR is 2: 1. This rule is based on the logic that in the worse situation even if the possibility of 50% shrinkage in the value of current assets, the firm will be in position to payoff its current obligations. This rule, however, cannot be treated as a general guide applicable to all types of businesses. Each firm should develop its own standard for CR from past experience.

INTERPRETATION:When compared, IOC and HPCL have almost similar ratio although the five years with small changes. But the current ratio of all three companies is not seemed satisfactory. In IOC, Inventories and Loans & Advances are higher in 2008 than that in 2000, 2010& 20011. The sundry debtors have increased due to the increase to corporate taxes. And provisions and current liabilities is also very less in 2008 which makes its liabilities lesser than 2009, 2010&11. From 2010, the current assets increase due to increase in inventories and loans & advances, which again increases current ratio. In HPCL and BPCL, the current ratio follows the same pattern as of IOC. It increased in 2008and then decrease again in 2009. It is due to rise in inventories and loans & advances in 2008 in both companies. In case of BPCL, Page No.110

the current assets are increasing more than liabilities and hence, the current ratio increases. But incase of HPCL the current ratio is declining due to not increasing current assets as much as increasing of current liabilities.

3. Quick Ratio (QR): This ratio is yet another widely used parameter of

judging the short-term repaying ability of a firm in the near future. This ratio a refinement over CR as it considers the quality of current assets. This ratio excludes inventories, which is considered slow moving assets in relation to other current assets, thus it can assess the liquidity position of a company more effectively. The rule of thumb about QR is 1:1. Quick Ratio, QR = (Current assets Inventories) / Current Liabilities

March-11 IOCL: Current Assets Inventories Current Liabilities Quick Ratio 83,321.18 49,284.52 59,313.40 .57

March-10 59,388.80 36,404.08 44,751.73 .51

March-09 44,812.17 25,149.60 35,551.72 .55

March-08 52,931.30 30,941.48 34,580.98 .63

BPCL: Current Assets Inventories Current Liabilities Quick Ratio HPCL: Current Assets Inventories Current Liabilities Quick Ratio

23,583.93 12,028.86 17,131.15 .674

15,288.42 6,823.92 12,831.31 .66

19,707.36 10,603.84 14,580.37 .62

20,641.94 12,579.22 16,555.11 .49

16,004.35 8,793.03 11,767.13 .61

19,297.37 12,020.28 12,433.69 .59

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0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Year 2011



Year 2010

Year 2009

YEAR 2008

NTERPRETATION Quick assets are those assets which can be converted into cash with in a short period of time, say to six months. So, here the inventories which are with the long period does not include in the quick assets. In IOC, the ratio is increasing in 2008 and then again decreasing in next consequent years. In 2011 the quick ratio is trying to get back its goods position. It is due to increase of the sundry debtors and loans and advances n year 2008 and these are decreasing in 2009 & 2010. Only Inventory had increased in 2009 and 2011.But in 2011 inventories, sundry debtors, cash, load and advances increased and at the same time current liabilities also increased. But current asset is increased more than current liabilities. And Because of this ratio is showing such pattern. In HPCL, the ratio keeps on increasing till 2009 and decreases in 2010, but very less increment is there in year 2009. There is decrease in the liabilities, but the quick assets increase very little that keeps the ratio high in 2009. I n BPCL, due decrease in current liabilities in 2009 the quick ration is increased. But in 2010 the current assets and current liabilities both increased but as current assets increased more than current liabilities the ratio instead of decrease it slightly increased.

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4. Cash Position Ratio (CPR): This ratio is also known as Super Quick

Ratio. This is still a more rigorous test of liquidity position of a concern. Absolute liquid assets (cash in hand, cash at bank and marketable securities) are divided by current liabilities for computation of this ratio. CPR is interpreted in respect of current obligations. Hence,

Cash Position ratio, CPR = Absolute Liquid Assets / Current Liabilities A high CPR is good from the creditors point of view whereas from the management point of view it indicates poor investment policy.

March-11 IOCL: Cash & Bank Balance Current Liabilities Cash Position ratio BPCL: Cash & Bank Balance Current Liabilities Cash Position ratio HPCL: Cash & Bank Balance Current Liabilities Cash Position ratio 1,294.42 59,313.40 .022

March-10 1,315.11 44,751.73 .029 342.36 17,131.15 0.020 243.17 16,555.11 0.015

March-09 798.02 35,551.72 .022 441.55 12,831.31 0.034 608.64 11,767.13 0.05

March-08 824.43 34,580.98 0.024 961.59 14,580.37 0.066 294.01 12,433.69 0.024

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0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 Year 2011 Year 2010 Year 2009 YEAR 2008


INTERPRETATION:The current assets which are ready in the form of cash are considered as absolute liquid assets. Here, the cash and bank balance and the interest on fixed assets are absolute liquid assets. In IOC, the absolute liquid ratio in the year 2008 & 2009, the cash and bank balance is decreased due to decrease in the deposits. This decreases the ratio. In 2010, again the liquidity increases due to availability of cash in hand. But n 2011 the ratio decrease because cash is decrease and current liabilities increased. In HPCL, there is increased in the ratio due to huge increase in the cash and bank balances and also the current liabilities decrease which shoots up its absolute liquid ratio in2009.But in 2010 cash decreased in a large amount and side by side current liabilities is increased a large amount so ratio again decreased. And in BPCL, the ratio in year 2008 touches the sky and then continuously decreases due to the fluctuation in the absolute assets i.e., cash and bank balance.

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The ratio of the net current asset to the fixed ones is an indicator as to the liquidity position of the firm. This ratio has declined for the firm compared to the previous year. There could be an argument as to whether the increased ratio of working capital to net block is a conservative policy and whether it would be detrimental to the interest of the company. Or, whether it would have been proper if the company invested more into the capital expenditure in the form of plant and machinery or invested in any other form that would have got them an internal rate of return. What has to be kept in mind before coming to a conclusion as to the policy of the company is the fact that the firm being primarily into assembling, its investment in the fixed asset segment need not be high. A look into the capacity utilization of the plant would reaffirm this point. It would be ideal for the firm to continue in the same line and not have excessive investment in the fixed asset as they can easily add onto this part. Current asset to fixed Asset=Net Current Asset/Net Blocked Fixed Asset March-11 IOCL: Net Current Assets Net Total Assets Current asset to fixed asset BPCL:
Net Current Assets

March-10 14,637.07 41,132.99 .366

March-09 9,260.45 34,392.45 .27

March-08 18,350.32 32,558.56 .56

24,007.78 57,189.02 .49

Net Total Assets

6,452.78 13,669.35 .47

2,457.11 11,965.79 .21

6,863.68 11,968.67 .57

Current asset to fixed asset HPCL:

Net Current Assets

Net Total Assets

4,086.83 15,306.67 .27

4,237.22 11,654.75 .36

5,126.99 11,929.28 .43

Current asset to fixed asset

Page No.115

Current asset to fixed Asset

0.6 0.5 0.4

0.3 0.2 0.1 0 Year 2011 Year 2010 Year 2009 YEAR 2008


Page No.116

. Working Capital Turnover Ratio (WTR): It is a very important ratio and

throws light on the overall management of the firm. It shows how efficient a firm is to convert its working capital to sales. Working Capital Turnover Ratio, WTR = Net Sales / Working Capital Higher WTR shows greater efficiency in conversion of working capital to sales

March-11 IOCL: Working Capital Net Sale Working Capital Turnover Ratio BPCL: Working Capital Net Sale Working Capital Turnover Ratio HPCL: Working Capital Net Sale Working Capital Turnover Ratio 24,007.78 302954.37 12.62

March-10 14,637.07 249,271.35 17.03

March-09 9,260.45 262,715.31 28.37

March-08 18,350.32 224,405.38 12.23

6,452.78 122,275.95 18.95

2,457.11 135,237.70 55.03

6,863.68 110,546.76 16.1

4,086.83 101,347.51 24.8

4,237.22 109,377.60 25.81

5,126.99 96,442.92 18.81

Page No.117

Working Capital Turnover Ratio

60 50 40

30 20 10 0 Year 2011 Year 2010 Year 2009 YEAR 2008


INTERPRETATION:In this graph it is clearly shown that the working capital turnover ratio of all the three companies is least in the year 2008. A high WC T Ratio reflects the better utilization of the working capital of the company. The working capital is also increased greater due to the increase in from services because the huge increase in current assets. In IOC, there is a high net sale but the working capital is very high which keeps the ratio low. In HPCL, the working capital is very less in 2008 which increases the ratio in 2009, but the working capital decreases and net sales increases. In the next years both net sale and working capital decreases so, WCT ratio drastically declined.. In BPCL, the net sales are increasing in 2008 and 2009 but net sales decreased in 2010. And working capital is decreasing continuously every year. But there is huge increase in the working capital in 2008 which lower down the ratio. But again it increases in 2009 and again decreased in 2010.

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II. LEVERAGE RATIOS 1. Proprietary/Equity Ratio:

This ratio relates the shareholder's funds to total assets. Proprietary / Equity ratio indicates the long-term or future solvency position of the business. Proprietary or Equity Ratio = Shareholders funds / Total Assets 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 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. Shareholders fund=Share Capital + Reserve & Surplus Total Asset=Total Fixed Asset + Total Current Asset March-2011 IOCL: Shareholders funds Fixed Asset Current Asst Total Assets Proprietary Ratio March-10 March-09 43,998.18 52,918.41 44,812.17 97730.58 .45 March-08 41,086.25 41,942.04 52,931.30 94873.34 .43

55332.32 50,552.93 70,835.09 62,849.70 83,321.18 59,388.80 154156.27 122238.5 .36 .41

BPCL: Shareholders funds Fixed Asset Current Asst Total Assets Proprietary Ratio HPCL: Shareholders funds Fixed Asset Current Asst Total Assets Proprietary Ratio

13,086.71 12,128.11 11,676.83 16,187.10 14,003.27 12,735.38 23,583.93 15,288.42 19,707.36 39771.03 29291.69 32082.74 .33 .41 .36 11,557.97 10,730.63 10,563.29 19,194.26 16,655.82 15,245.23 20,641.94 16,004.35 19,297.37 39,836.20 32,660.17 34,542.60 .29 .33 .30

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Proprietary Ratio
0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 Year 2011 Year 2010 Year 2009 YEAR 2008


Page No.120

2. Debt to Equity Ratio: Debt-to-Equity ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds. It is also known as external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company. Debt to Equity Ratio =Total Long Term Debts / Shareholders Funds Debt to equity ratio indicates the proportionate claims of owners and the outsiders against the firms assets. The purpose is to get an idea of the cushion available to outsiders 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 maximum of outsider's funds in order to take lesser risk of their investment and to increase their earnings (per share) by paying a lower fixed rate of interest to outsiders. The outsiders (creditors) on the other hand, want that shareholders (owners) should invest and risk their share of proportionate investments. A ratio of 1:1 is usually considered to be satisfactory ratio although there cannot be rule of thumb or standard norm for all types of businesses. Theoretically if the owners interests are greater than that of creditors, the financial position is highly solvent. In analysis of the long-term financial position it enjoys the same importance as the current ratio in the analysis of the short-term financial position. March-2011 IOCL: Equity Debt Debt-Equity ratio BPCL: Equity Debt Debt-Equity ratio HPCL: Equity Debt Debt-Equity ratio 55332.32 52733.87 .95 March-10 50552.93 44566.25 .88 13,086.71 22,195.20 1.7 March-09 43998.18 44972.06 1.02 12,128.11 21,171.41 1.75 March-08 41086.25 35523.17 0.86 11,676.83 15,022.38 1.29

11,557.97 34,668.31 3

10,730.63 35,089.51 3.27

10,563.29 28,945.97 2.74

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Debt-to-Equity ratio
3.5 3 2.5 2 1.5 1 0.5 0 Year 2011 Year 2010 Year 2009 YEAR 2008 IOCL BPCL HPCL

INTERPRETATION:The debt- equity ratio compares the total debts with the total assets. Higher liabilities imply greater financial risk. It measures the degree of indebtedness of the firm out of the total financing of the firm.IOC has the low DE Ratio. It implies a low risk to lenders and creditors of the firm and also non-existence of trading on equity. Its Debt as well as equity is increasing every year which increases its ratio. But in 2010, the debt portion decreases. In HPCL, the ratio is increasing year after year as the company is incorporating more debt from outside. But the debt decreases too much extent in 2010 same as IOC.BPCL has high DE Ratio. There is huge increase in debt in year 2008 which increases its ratio and the debt decreases again in 2009 and 2010 and so as the debt-equity ratio

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1. Net Profit Ratio = (Net profit / Net sales) 100 NP ratio is 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 shall 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. But while interpreting the ratio it should be kept in mind that the performance of profits also be seen in relation to investments or capital of the firm and not only in relation to sales March-11 IOCL: Net profit Net sales Net Profit Ratio BPCL: Net profit Net sales Net Profit Ratio HPCL: Net profit Net sales Net Profit Ratio 7,445.48 302,954.37 2.45% March-10 10,220.55 249,271.35 4.1% 1,537.62 122,275.95 1.26% 1,301.37 101,347.51 1.28% March-09 2,949.55 262,715.31 1.12% 735.90 135,237.70 0.544% 574.98 109,377.60 .53% March-08 6,962.58 224,405.38 3.1% 1,580.56 110,546.76 1.42% 1,134.88 96,442.92 1.17%

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4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Year 2011

Net Profit Ratio


Year 2010

Year 2009

YEAR 2008

INTERPRRETATION: The net profit ratio is the overall measure of the firms ability to turn each rupee of income from services in net profit. If the net margin is inadequate the firm will fail to achieve return on shareholders funds. High net profit ratio will help the firm service in the fall of in Come from services, rise in cost of production or declining demand. The net profit of IOC is the highest among the three oil companies because the income from services is more to much extent. In 2009 is minimum because smallest net profit and 2nd highest net sales among 4 year. And the next consequent year profit increased by 246.51% and net sales decreased, so overall net profit margin increased by 266.07 from 2009. In HPCL net profit ratio is very less in 2009 as the net profit of the company is very low & it fluctuates in the following years. In BPCL the net profit after tax is increasing and decreasing after every alternate year due to corporate taxes, which makes the ratio fluctuating every year.

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2. EARNINGS PER SHARE:Earnings per share (EPS) Ratio = Net profit after tax / No. of equity shares (common shares) The earnings per share is a good measure of profitability and when compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm. EPS ratio calculated for a number of years indicates whether or not the earning power of the company has increased. IOCL: Earnings per share BPCL: Earnings per share HPCL: Earnings per share March-11 30.67 March-10 42.10 42.53 38.43 March-09 24.30 20.35 16.98 March-08 58.39 43.72 33.51

Earnings per share

70 60 50 40 30 20 10 0 Year 2011 Year 2010 Year 2009 YEAR 2008

INTARPRETATION:Earnings per share ratio calculating indicate whether or not the firms earning power on per-share. After charging depreciation and after payment of tax, the remaining amount will be distributed by all the shareholders.EPS of IOC is a appreciable and it has been increasing continuously every year as the net sales of the company is increasing and the number of shares is same. But in 2009 it decreased due to decrease in the net profit. In HPCL, both the net sale and the number of shares are fluctuating every year, due to which the EPS is fluctuating & in BPCL there is not much fluctuation in no. of shares, but net profit after tax is changing every year which is fluctuating their earning per share ratio.Net profit after tax is decreased due to the huge decrease in the income e from services. That is the amount which is available to the shareholders to take.

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3. Price-Earnings Ratio - P/E Ratio:Price-Earnings Ratio = Market Value per Share Earnings per Share (EPS) In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

March-11 IOCL: MarketValueperShare Earnings per Share (EPS) Price-Earnings Ratio (times) BPCL: MarketValueperShare Earnings per Share (EPS) Price-Earnings Ratio (times) HPCL: MarketValueperShare Earnings per Share (EPS) Price-Earnings Ratio (times) 238.88 30.67 7.79

March-10 208.21 42.10 4.94

March-09 362.43 24.30 14.91

March-08 344.58 58.39 5.9

404.75 42.78 9.46

361.97 42.53 8.51

335.48 20.36 16.47

323.01 43.72 7.39

386.76 45.45 8.5

341.32 38.43 8.88

316.88 16.98 18.66

311.59 33.48 9.3

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Price-Earnings Ratio
20 18 16 14 12 10 8 6 4 2 0 Year 2011 Year 2010 Year 2009 YEAR 2008


INTERPRETATION:The ratio is calculated to make an estimate of application in the value of share of a company. This ratio is widely used by the security analysis to value of the firms performance are expected by the investors. The investors expectations are reflected in the market price of the shares. The graph shows that price-earning ratio of IOC is increasing from 2008 to 2009 due to increase in the market price of the share and EPS is decreasing. In 2010 and 2011 the market price is falling as well as EPS is raising so P/E ratio is decreasing. So, in 2009 a high P/E usually indicates that the market will pay more to obtain the company's earnings because it believes in the firm's ability to increase its earnings. And in 2008, 2010 and 2011 a low P/E indicates the market has less confidence that the company's earnings will increase. In HPCL and BPCL in year 2009 it increased at rapid because of decrease in EPS due to less earnings after tax. But HPCL and BPCLs ratio shows the different pattern because its EPS has increased as the net sales of the company increased.

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Return on Equity Capital:Return on Equity Capital = (Net profit after tax / Shareholders Funds) 100 In real sense, ordinary shareholders are the real owners of the company. They assume the highest risk in the company. (Creditors have a preference over ordinary shareholders in the payment of dividend as well as capital. Creditors get a fixed rate of dividend irrespective of the quantum of profits of the company). The rate of dividends varies with the availability of profits in case of ordinary shares only. Thus ordinary shareholders are more interested in the profitability of a company and the performance of a company should be judged on the basis of return on equity capital of the company. Return on equity capital which is the relationship between profits of a company and its equity. March-11 IOCL: Net profit after tax Shareholders Funds Return on Equity BPCL: Net profit after tax Shareholders Funds Return on Equity HPCL: Net profit after tax Shareholders Funds Return on Equity 7445.48 55,332.32 13.46 March-10 10,220.55 50,552.93 20.21 March-09 2,949.55 43,998.18 6.73 March-08 6,962.58 41086.25 16.95

1,537.62 13,086.71 11.75

735.90 12,128.11 6.07

1,580.56 11,676.83 13.54

1,301.37 11,557.97 11.25

574.98 10,730.63 5.36

1,134.88 10,563.29 10.74

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Return on Equity
25 20 15 10 5 0 Year 2011 Year 2010 Year 2009 YEAR 2008


ROE indicates how well. In fact this ratio is one of the most important relationships in financial analysis. The earning of a satisfactory return is the most desirable objectives of a business. The ratio of great interest to the present as well as the prospective shareholders and also of great concern to management which has responsibility of maximizing the owners welfare. From the graph it is showing that ROE of IOCL is overall maximum from HPCL and BPCL though in 2009 ROE is lowest because of falling net profit. So, this reveals that the relative performance and strength of IOCL is maximum is attracting future investment than HPCL and BPCL

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FINDINGS OF THE STUDY: The Current Ratio of IOC is almost same compare to other companies over three years. And the companies are having the highest ratio in year 2008 due to more acquisition of current assets in that year. Quick asset ratio is highly affected by the sundry debtors. BPCL is more capable over others in the current year to convert its assets quickly into cash and is more efficient to meet its short-term liabilities. The absolute liquidity ratio analysis shows that IOCL is having strong position of holding ready cash in the 2010. HPCL & BPCL are more or less having the same capability of absolute liquidity. But in 2008 BPCL have highest position of holding cash over than other three companies and also other three years. The proprietary ratio in three years shows that IOCL is more capable in long-term solvency. It has more shareholders capital as well as total assets. The Debt-Equity ratio of IOC is low as the company is more dependent on shareholders rather than borrowing from outside. BPCLs DE Ratio is high and hence having high degree of financial leverage. The working capital turnover ratio of IOC is the least as its current assets are high. The ratio of BPCL is appreciable. It means there is high profitability in the company. The analysis of current assets to fixed assets depicts that the IOC has the higher ratio. IOC has current as well as fixed ratio in large quantity which provides the company to make more profits by utilizing them. The net profit ratio of IOC shows that the company is efficient in manufacturing, administrative, selling and distributing the product. And there is high increase in corporate taxes every year. EPS of companies is fluctuating every year due change in net sales. The Price Earning ratio of IOC is low, indicating that the share has high risk and investor expect low dividend growth. The shareholders of BPCL are getting high returns on their funds in the company. Page No.131

IOCL has the highest ROE over all three companies & over three years i.e. the firm has used the resource of owners very well.

CONCLUSION: The short term solvency of IOC is fine but that of BPCL is quite low. But no company is touching the general standard of 2:1 of current ratio. The quick ratio of firms are not good enough far away from the normal standard of 1:1. So all the Liquidity Ratios indicate not well enough short term solvency/liquidity position of the firm. All the Leverage Ratio depict that none of the company has a sound financial position. These are more in debt. But IOC position is better than that of the two in terms of leverage. The shareholders funds are satisfactory. The firms are paying high interest on the outstanding debts which makes unfavorable trading on equity due to high debt, which increases risk for shareholders. As far as the Activity and Turnover ratios are concerned, nothing concrete can be said as the results of three companies are very fluctuating every year in term of sales. In the year 2008 all three companies are showing good results and the turnover is satisfactory. But it decrease in 2009 due to decrease in working capital, the fixed assets of the companies which affected their sales. And IOC is very strong in acquisition of the fixed assets as well as current assets. On the basis of various profitability ratios the sales of the firms is found to be increasing in the last year.IOCL has managed well to maintain its net profit. The share value of HPCL is better. This analysis shows that the companies were in strong position in year 2008, but the recession in 2009 has highly affected the companies growth and their profit came down and they are more in debts.

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