Ratio Analysis

Profitability Ratios
1) Gross profit Margin
This ratio shows the profit relative to sales after deduction of production
cost. A high gross profit margin ratio is a good sign of management.

Formula:
Gross Profit Ratio = Gross Profit  100
Sales
Ratio:
HBL MCB
23227773  100 13830409  100
50481021 17756232
46.01% 77.89%
Comment:
The Gross profit margin for 1999 is 23.98% and 17.85% for 1998.
The ratio has been increased.

2) Net Profit Margin

This is the ratio of net profit before interest & Tax (minus taxes) to sales.
This is a very useful ratio for the proprietors because it is used to measure the
over all profitability of the company. This indicates the management’s efficiency
in manufacturing, administering and selling the products.

Formula:
Net Profit Ratio = Net income  100
Sales
Ratio:
HBL MCB
10084037  100 8922415  100
50481021 17756232

19.97% 50.24%
Comment:
The net profit of HBL is 19.97% and MCB is 50.24%.

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3) Return on Capital Employed
This ratio, expressed as a percentage, complement the return on equity
ratio by adding a company’s debt liabilities. This measure narrow the focus to
gain a better understanding of a company’s ability to generate returns from its
available capital base.

Formula:
Return on Capital Employed= Net profit after tax x 100
Capital Employed

Ratio:
HBL MCB
10084037 x 100 8922415 x 100
63237429 23307763

15.94% 38.28%
Comment:
The return on capital employed for HBL is 15.94% and for MCB is
38.28%.

4) Operating expense to Sales Ratio

Formula:
Operating Expense to Sales Ratio= Operating Expense x 100
Sales

Ratio:
HBL MCB
18106320 x 100 6565591 x 100
50481021 17756232

35.86% 36.97%

Comment:
The operating expense to sales ratio for HBL is 35.86% and for MCB is
36.97%.

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5) Fixed Asset turnover ratio
The fixed assets turnover measures the efficiency, with which the firm has
been using its fixed, or earning, assets to generate sales. It is calculated with the
following formula.

Formula:

Fixed Assets turnover Ratio = Net Sales

Net fixed Asset
Ratio:
HBL MCB
50481021 17756232
13780555 8182454
3.66 times 2.17 times
Comment:
The fixed asset turnover ratio for HBL is 3.66 times and for MCB is 2.17
times.

6) Net Asset turnover ratio

Formula:

Net Assets turnover Ratio = Net Sales

Net Asset
Ratio:
HBL MCB
50481021 17756232
63237429 23307763
0.79 times 0.76 times
Comment:
The net asset turnover ratio for HBL is 0.79 times and for MCB is 0.76
times.

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Capital Investment Structure
1) Gearing Ratio:
This ratio shows the relationship between long term liabilities and
capital employed being in shareholders favour.

Formula:

Gearing Ratio = Long term liabilities

Long term equity
Ratio:
HBL MCB
3100000 1598080
66337429 24905843

4.67% 6.41%

Comment:
The gearing ratio for HBL is 4.67% and for MCB is 6.41%.

2) Debt-Equity Ratio
This ratio indicates that what proportion of equity and debt that the
company is using to finance its assets.

Formula:
Debt-Equity Ratio = Long Term loans x 100
Equity
Ratio:
HBL MCB
3100000 x 100 1598080 x100
63237429 23307763

4.67% 6.85%

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Comment:
The debt- equity ratio for HBL is 4.67% and for MCB is 6.85%.

3) Investment Structure Ratio

Formula:
Investment Structure Ratio = Long term loans + Equity
Fixed Asset
Ratio:
HBL MCB
66337429 24905843
13780555 8182454

4.81 times 3.04 times

Comment:
The investment structure ratio for HBL is 4.81times and for MCB is 3.04
times.

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Working Capital Ratio
1) Current Ratio
Current Ratio shows the ability of the business to meet its short-term
obligations. It is an index of the firm’s financial stability. It is also an index of
technical solvency and an index of the strength of working capital.

Formula
Current Ratio = Current Assets
Current Liabilities
Ratio:

HBL MCB
671597594 290402376
625654092 273870954

1.07:2 1.06:2

Comment:
HBL has Rs1.07 is current assets for every Rs1 in current liabilities and
MCB has Rs 1.06 in current assets for everyRs1 in current liabilities.

2) Quick Ratio
A measure of a company’s liquidity and ability to meet its obligation. Quick
Ratio is viewed as a sign of company’s financial strength or weaknesses.
Formula:
Quick Ratio = Current Asset – Stock – Prepayments
Current Liabilities
Ratio:

HBL MCB
671597594 290402376
625654092 273870954

1.07:2 1.06:2

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Comment:
HBL has Rs1.07 is current assets for every Rs1 in current liabilities and
MCB has Rs1.06 in current assets for everyRs1 in current liabilities.
Security Ratio
1) Earning per Share:
Earning per Share is a good measure of profitability; it gives a view of the
comparative earnings or earning power of the company.

Formula:
Earning per Share = Profit after tax
No. Of Shares

HBL MCB
10084037
690000
Rs14.61 Rs21.36

Comment:
It shows the profitability of the firm on pre-share basis. The earning profit
of HBL is Rs14.61 and MCB is Rs 21.36 per share.

2) Interest Coverage Ratio:

This ratio is used to determine how easily a company can pay interest on
outstanding debt. The lower the ratio the more the company is burdened by debt
expense. When a company’s interest coverage ratio is 1.5 or lower, its ability to
meet interest may be questionable. An interest coverage ratio below 1 indicates
the company is generating sufficient revenues to satisfy interest expense.

Formula:
Interest Coverage ratio = Profit before interest & tax
Interest
Ratio:
HBL MCB
60504185 23169303
37260277 9347059

1.623 2.47

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Comment
The interest coverage ratio of HBL is 1.623 and MCB is 2.47. Both ratios
are more than 1 and this is not a good condition to pay the interest expense.
3) Dividend Payout Ratio:
The percentage of earning paid to shareholder in dividend.

Formula:
Dividend Payout Ratio = Dividend
Profit after Tax
Ratio:
HBL MCB
1380000 x 100 426533 x 100
10084037 8922415

13.68% 4.78%

Comment
The dividend payout ratio of HBL is 13.68% and for MCB is 4.78%.

4) Dividend Cover Ratio:

Dividend cover ratio is an important indicator to shareholder and investor
of the performance of the company

Formula:
Dividend Cover Ratio = Profit after Tax
Dividend
Ratio:
HBL MCB
10084037 8922415
1380000 426533

7.30 20.91

Comment
The dividend payout ratio of HBL is 13.68% and for MCB is 4.78%.

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 FINANCIAL CONCLUSION

The financial analysis of the company has been performed. Apparently the
company’s debt position is not satisfactory as it is relying too much on debt and
on the other hand current ratios is not up to the required standard.

The following are the important points:

 The company’s sales are increasing than the last year. The increase is
about 11%.

 The company’s net profit margin ratio has increased to 9.78 than the last
year due to:
 50 % increase in trading profit while only 16 % increase in selling
expenses.
 15 % decrease in financial charges.

 The current ratio has reduced than the last year, which is also not
up to the standard. So the company is facing a minor problem in meeting
its short-term obligations.

 The company is relying more on debts as 69 %of its total assets are
financed through debt and only 31 % are financed through equity.

 Inventory problem as the company is maintaining higher inventory.

The inventory age is 50 days in the year 1999, which is too much.

 The company is able to control its CGS as with the increase in sales
the CGS is also increasing but with less proportion. However CGS is 76 %
of its sales that is too much.

 The company has good control over operating expenses.

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The company should focus on decreasing inventory, and take necessary steps to
control its cost even more and reduce it. The most important thing is that the
company should not rely more on debt, as the debt equity ratio is 95.53 %.

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