FINANCIAL RATIOS

Financial ratios are comparisons of important financial data used to evaluate business
performance. The financial data used to calculate ratios comes from the company’s financial
statements.

RATIO ANALYSIS
Ratio analysis is the study of relationships in a company’s finances in order to understand and
improve financial performance. Ratio analysis includes comparing relationships in current
performance, making comparisons between current and past performance and comparing the
financial performance of the business with competitors performance.

1. Liquidity ratios, that look at the availability of cash for operations.

2. Asset management ratios evaluate the efficient utilization of the resources.
3. Debt management ratios keep track of debt to be within reasonable bounds, and keep the
debt level at its optimal level.
4. Profitability ratios measure the degree of accounting profits.
5. Market value ratios help investors discriminate between overvalued and undervalued
securities while making investment decisions.
The details of these ratios are given below:

Ratio analysis of ENGRO corporations

ENGRO corporations:
Engro Corporation, earlier known as Esso Fertilizers, is a Pakistani multinational conglomerate
company with subsidiaries involved in production of fertilizers, foods, chemicals, energy and
petrochemicals. Its major subsidiaries, Engro Fertilizers, which is one of the largest fertilizer
manufacturers of the world.
Liquidity Ratios:
A liquidity ratio is a type of financial ratio that is used to determine the company’s ability to pay
its’s Short-term Debts. Liquidity Ratios are of two types:
1)Current Ratios 2) Quick Ratio
Current Ratios:
The current ratio (CR) is the most common liquidity measure and provides an indication of a
firm’s ability to pay short-term claims with short-term assets. We define the current ratio as:
 Current Ratio = Current Assets/Current Liabilities

In principal we would like to see the CR > 1 because it suggests that the CA to be liquidated this
year are sufficient to cover the CL that will come due this year. If the CR < 1, then the CA will
be unable to service the maturing obligations as measured by CL.
Current Ratios of ENGRO corporation
YEAR CURRENT CURRENT CURRENT
ASSETS LIABILITIES RATIO

2017 66,993,485 5,262,123 12.73

2018 67,300,802 7,422,193 9.06

2019 65,872,364 8,265,343 7.9

Quick Ratios:
Quick ratios also know as the acid-test ratio, measures the ability of business to pay its short-
term liability by assets that are readily convertible to cash.

Quick Ratio = Current Assets- Inventories /Current Liabilities

The QR is very similar to the CR except that inventories are subtracted from CA. This is done
because inventories are often the least liquid of the current assets and their liquidation value is
often the most uncertain. In some businesses, if a firm were liquidated today, inventory would
have little or no value. Thus the QR provides a stricter measure of a firm’s liquidity than the CR.
Quick Ratios of OGDCL

YEAR CURRENT INVENTORIES CURRENT QUICK

ASSETS IABILITIE RATIO
S

2017 66,993,485 20704 5,262,123 12.72

2018 67,300,802 24916 7,422,193 9.06

2019 65,872,364 27550 8,265,343 6.75

Assets Management Ratio:
Assets management ratio are the key ratios for analyzing how efficiently and effectively business
is managing its assets to produce sales ultimately means profit. There are four types of asset
management ratio.:
 Inventory turnover ratio
 Total Asset turnover ratio
 Accounts receivable ratios
 Average collection period ratio
Inventory turnover ratio:
It measures the efficient use of inventories. A firm should have a high turnover ratio which is
managed through a small amount of inventories.
Inventory turnover Ratio = Net Sales /Average Inventories

This means that a firm should have a small inventory and try to sell it as quickly as possible.
Unfortunately, a small inventory also means lower sales.
Inventory turnover Ratios of OGDCL
YEAR NET SALES AVERAGE INVENTORY
INVENTORIES TURNOVER
RATIO

2017 261,481,188 18819237 13.8

2018 261,481,188 18331354 14.2

2019 261,481,188 19198435 13.61

Total Asset turnover ratio:

The asset turnover ratio measures the value of a company's sales or revenues relative to
the value of its assets. The asset turnover ratio can be used as an indicator of the
efficiency with which a company is using its assets to generate revenue.

Total Asset Turnover Ratio = Sales /Average total Assets

Average total assets is the sum of opening and closing assets divided by 2.

YEAR OPENING CLOSING AVERAGE

ASSETS ASSETS TOTAL
 ASSETS

2017 589,565,539 627,287,973 608,426,756

2018 627,287,973 666,477,197 646,882,585

2019 666,477,197 766,597,190 716,537,194

Total Assets turnover Ratios of OGDCL

YEAR SALES AVERAGE TOTAL ASSET
TOTAL TURNOVER
ASSETS RATIO

2017 261,481,188 608,426,756 0.4

2018 261,481,188 646,882,585 0.1

2019 261,481,188 716,537,194 0.3

Debt Management Ratio:

A measure of the extent which a firm uses borrowed funds to finance its operations.
The debt management ratio measures how much of a company's operations comes from debt inst
ead of other forms of financing, such as stock or personal savings. Debt management ratio is of
two types
 Debt Ratio
 Total interest earned ratio
Debt Ratio:
The corporations borrow money to do their business because debt capital is cheaper than the
equity capital. On the other hand, excessive amount of debt can create problems for the
company. To see the debt level of a company, we define its debt ratio, or leverage ratio as
follows

Debt ratio = Total debt /Total assets

Debt Ratios of OGDCL

YEAR TOTAL TOTAL DEBT
ASSETS DEBTS RATIO
 2017 627,287,973 114,303,636 0.18

2018 666,477,197 115,890,775 0.17

2019 766,597,190 141,231,942 0.18

Total interest earned ratio:
Total interest earned ratio measures a company’s ability to honor its debt payments. Total
interest earned is a great tool when measuring a company’s ability to meet its debt obligation.

Total interest earned ratio = Operating Income/Total interest charges

Total Interest Earned Ratios of OGDCL

Year OPERAING TOTAL TOTAL
INCOME INTEREST INTEREST
CHARGES EARNED
RATIO

2017 38418972 6,717,574 5.7

2018 61266283 7,598,534 8.06

2019 103605719 1,530,575 67.01

Profitability Ratio:
The next set of ratios measure the ability of a company to generate profits. These ratios are of
interest to investors who would like to invest in the most profitable companies around.
Profitability ratios are given below:
 Profit Margin on Sales Ratio
 Return on Total Asset Ratio
 Return on Equity Ratio
Profit Margin on Sales Ratio:
Different profit margins are used to measure a company’s profitability at various cost level,
including gross margin, operating margin, pretax margin and net profit.

Profit Margin Ratio = Net Profits/ Net Sales

In this ratio, net income is defined to be the income after taxes, available to the stockholders of
the company.
Profit margin on sales ratios of OGDCL
YEAR NET PROFIT NET SALES PROFIT
MARGIN
RATIO

2017 63,803,402 261,481,188 0.24

2018 78,736,295 261,481,188 0.30

2019 118,385,788 261,481,188 0.45

Return on Total asset ratio:

Profitability is assessed relative to cost and expenses and analyzed in comparison to assets to see
how effective a company is developing assets to generate sales and profits.

Profit Margin Ratio = Net Income/ Total Assets

The more assets a company has amassed, the more sales and potential profits the company may
generate. As economics of scales help lower costs, improve margins, return may grow at a faster
rate than assets, ultimately increasing ROA.
Return on Total Assets Ratios of OGDCL
YEAR NET TOTAL PROFIT
INCOME ASSETS MARGIN
RATIO

2017 63,803,402 627,287,973 0.1

2018 78,736,295 666,477,197 0.11

2019 118,385,788 766,597,190 0.15

Return on Equity:
Return on equity is a key ratio for shareholders, as it measures a company’s ability to earn a
return on its equity investments.

Return on Equity Ratio = Net Profit / Average Stakeholders equity

ROE is net income divided by shareholder’s equity. ROE may increase without additional equity
investments as the ratio can rise due to higher net income due to larger asset base funded with
debt.
Return on Equity Ratios of OGDCL

YEAR NET PROFIT AVERAGE RETURN ON

STAKEHOLDERS EQUITY
EQUITY RATIO

2017 63,803,402 495808452 0.12

2018 78,736,295 531770380 0.14

2019 118,385,788 587960835 0.20

Market performance ratio:

Market value ratios are used to evaluate the current share price of a publicly-held company's
stock. These ratios are employed by current and potential investors to determine whether a
company's shares are over-priced or underpriced. The most common market value ratios are as
follows:
 Earnings per share ratio
 Price earnings ratio
 Market to book ratio
Earnings per share ratio:
Calculated as the reported earnings of the business, divided by the total number of shares issued
(there are several variations on this calculation). This measurement does not reflect the market
price of a company's shares in any way, but can be used by investors to derive the price they
think the shares are worth.

EPS Ratio = Net Profit / No of shared issues

A higher EPS indicates greater value because investors will pay more for a company’s share if
they think the company has higher profits relative to its share price.
Earnings per Share Ratios of OGDCL

YEAR NET PROFIT NO OF SHARED EPS

ISSUED RATIO

2017 63,803,402 634,036,502 0.100

2018 78,736,295 634,189,237 0.124 Price

earnings
Ratio:
2019 118,385,788 634,098,322 0.18
Calculated
as the
current market price of a share, divided by the reported earnings per share. The resulting multiple
is used to evaluate whether the shares are over-priced or underpriced in comparison to the same
ratio results for competing companies.

Price to earnings Ratio = Market Stock Price / Earning per

share issues
Companies that have no earnings or that are losing money do not have a P/E Ratio since there is
nothing to put in the denominator.
Price Earnings Ratios of OGDCL
YEAR MARKET EARNING PER PRICE TO
STOCK PRICE SHARE EARNING
RATIO

2017 162 14.38 11.26

2018 130 18.31 7.09

2019 139 27.53 5.04

Common Sized Analysis:

Common size, or vertical analysis, is a method of evaluating financial information by expressing each
item in a financial statement as a percentage of a base amount for the same time period. A company can
use this analysis on its balance sheet or its income statement.

A balance sheet summarizes the company's assets, which are things that it owns that have value;
its liabilities, which are the amounts it owes to others; and its equity, which is an owner's
investment in the business. An income statement shows the company's revenues, which is the
 amount of money it made by selling its goods and services, and its expenses, which is the
amount of money it spent to earn its revenues.

Vertical common sized analysis of OGDCL

Particulars 2019 2018 2017 2019 2018 201
7
SHARE CAPITAL AND
RESERVES
Share capital
Reserves
Unappropriated
profit

NON-CURRENT
LIABILITIES payables
Deferred taxation
Deferred employee
Provision-for
decommissioning
cost

CURRENT LIABILITIES
Trade and other
Unpaid dividend
Unclaimed dividend

Total Liabilities
and Equity

NON-CURRENT
ASSETS
Property, plant and
equipment
Development&
production assets
Exploration&
evaluation assets

Long-term
investments
Long-term loans and
receivable
Long-term
prepayments

CURRENT ASSETS
Stores, spare parts
and loose tools
Stock in trade
Trade debt
Loans and advances
Deposits and short
term prepayments
Other receivables
Income tax - advance
Current portion of
long-term
investments
Other financial assets
Cash & bank
balances

TOTAL ASSETS

Common sized analysis of Income statement

Particulars 2019 2018 2017 2019 2018 2017

Sales - net 205,335,000 171,829,364

(21,970,947)
(18,518,982)
Operating
expenses 27
(60,213,460)
(56,585,214)
Transportation
charges
(1,670,850)
(1,720,982)
(83,855,257)
(76,825,178)
Gross profit
121,479,743
95,004,186
Other income
28 16,008,118
16,020,333
Exploration
and
prospecting
expenditure
29
(16,190,496)
(13,268,575)
General and
administration
expenses 30
(4,087,862)
(4,239,642)
Finance cost
31 (1,729,886)
(1,514,634)
Workers’
profit
participation
fund
(5,927,724)
(4,691,445)
Share of profit
in associate -
net of taxation
16.1 3,074,868
1,827,239
Profit before
taxation
112,626,761
89,137,462
Taxation 32
(33,890,466)
(25,334,060)
Profit for the
year
78,736,295
63,803,402
Earnings per
share - basic
and diluted
(Rupees)