case study-Ratio Anaylsis

The Hindustan Manufacturing Company is a leading

producer and exporter of engineering items such as steel
pipes. ingots, billets, etc. It has also recently added a
chemical plant and a paper plant as part of its
diversification strategy. The company started with a share
capital of Rs 25 lakh in the early sixties, which has now
increased to Rs 225 lakh. The number of shares outstanding
is 22.50 lakh. The average market price (AMP) of the
company's share during 2011-2013 has been: Rs 26.38 in
2011, Rs 34.50 in 2012 and Rs 29.25 in 2013. l
2011 2012 2013
O/S Shares 22.5 22.5 22.5
Market Price 26.38 34.5 29.25
Table 25.1: Hindustan Manufacturing Company

Profit and Loss Account

for the year ending on 31 March (Rs
2011 2012 Iakh )
2013
A.Net sales* 2,338.90 2,825.69 3,717.23
B.Cost of goods sold** 1,929.04 2,322.80 3,053.66
C.Gross profit (A - B) 409.86 502.89 663.57
D.Less: Selling and adm. expenses 239.72 262.10 357.87
E.Operating income (C - D) 170.14 240.79 305.70
F.Add: Other income 15.24 25.38 36.91
G.Earning before int. and tax (EBIT) (E + F) 185.38 266.17 342.61
H.Less: Interest 59.84 124.98 143.46
I.Profit before tax , 125.54 141.19 199.15
(PBT) (G H)for tax
J.Provision 41.79 30.00 64.29
K.Profit after tax (PAT) (I - J) 83.75 111.19 134.86
L.Effective tax rate*** 33% 21% 32%
M.Dividend distributed 33.75 39.38 45.00
N.Retained earnings 50.00 71.81 89.86

***Net of excise duty.

***Depreciation included.
***Provision for tax divided by profit before tax.
Table.25.2: Hindustan Manufacturing Company

Statement of Cost of Goods Sold for the year ending on March 31 (Rs lakh)
__- 2011 2012 2013
Raw material 1587.34 2019.54 2751.52
Direct labour 138.13 170.86 228.94
Depreciation 23.07 38.64 41.59
Other mfg. expenses 205.34 255.72 329.44
1953.88 2484.76 3354.49
Add: Opening stock in process 57.09 85.74 150.55
2010.97 2570.50 3502.04
Less: Closing stock in process 85.74 150..55 230.83 12.94440511.8698458.649737278
Cost of Production 1.925.23 2419.95 3271.21
Add: Opening finished stock 150.93 147.12 244.26
2076.16 2567.07 3515.47
Less: Closing finished stock 147.12 244.26 461.81
Cost of Goods Sold 1929.04 2322.81 3053.66
8.649737278
 BALANCE SHEET as on 31 March
2011 2012 2013
A. Net Worth
Share capital 225.00 225.00 225.00
Reserve 286.13 357.95 447.81
Net worth 511.13 582.95 672.81

B. Borrowings
Long-term: Debentures - 75.75 76.46
Others 199.87 285.90 312.73
Long-term debt 199.87 361.65 389.19
Short-term: Bank borrowings 442.92 641.39 839.87
Borrowings 642.79 1003.04 1229.06

C. Capital Employed
(A + B) 1153.92 1585.99 1901.87
D. Fixed Assets
Gross block 653.49 841.64 921.55
Less: Depreciation 159.55 194.46 235.44
Net block 493.94 647.18 686.11
Other non-current assets 52.76 16.44 60.72
Net Fixed Assets 546.70 663.62 746.83

E. Current Assets
Inventories:
Raw material 243.42 384.06 457.74
Stock in process 85.74 150.55 230.84
Finished goods 147.12 244.28 461.81
Inventories 476.28 778.89 1150.39
Debtors 253.16 340.61 483.18
Cash and bank balance 8.37 98.84 26.08
Others 128.27 186.21 211.27
Current assets 866.08 1404.55 1870.92

F. Less: Current Liabilities*

 Trade creditors 35.99 211.21 339.35
Provision and others 222.87 270.97 376.53
Current liabilities 258.86 482.18 715.88

G. Net Current Assets (E - F) 607.22 922.37 1155.04

H. Net Assets (D + G) 1153.92 1585.99 1901.87

* If bank borrowings are considered. then the current liabilities

for 2011 through 2013 will be: Rs 701.78 lakh: Rs 1123.57 lakh,
and Rs 1555.75 lakh.
 LIQUIDITY RATIOS Formula 2011

Current Ratio Current Assets/Current Liabilities 3.35

Quick Ratio Quick Assets/Current Liabilities 1.51
Cash Ratio Cash+Marketable Securities/Current Liabilities 0.032
Interval Measure CA - Inventory/Average Daily Operating cash outflows
Net Working Capital Ratio Net Working Capital/Capital Employed 0.41

LEVERAGE RATIOS

Debt Ratio Total Debt/Capital Employed 0.17

Debt-Equity Ratio Debt/Equity 0.39
Capital gearing Ratio Interest+Dividend/Shareholder's Fund 59.91
Interest Coverage Ratio EBIDTA/Interest 185.94

ACTIVITY RATIOS

Stock(Inventory) Turnover Ratio COGS/Average Stock 4.05

Days of Inventory Holding(DIH) 360/STR or 12/ STR 88.88
Debtor Turnover Ratio Net Credit Sales/Receivables 9.24
Average Collection Period 360/DTR 38.97
Debtors/Sales
Creditor Turnover Ratio Net credit Purchases/Payables 44.11
Net Assets Turnover Ratio Sales/Net Assets 2.03
Total Assets Turnover Ratio Sales/Total Assets
Fixed assets turnover ratio sales/Net fixed assets 4.28
Current Assets Turnover Ratio Sales/Current Assets 2.70
Working capital turnover ratio COGS/Working Capital 3.18

PROFITABILITY RATIOS

Gross Profit Ratio Gross Profit/Net Sales (%) 17.52%

Net Profit Ratio Net Profit/Net sales (%) 3.58
Operating Profit Ratio Operating Profit/Net Sales (%) 7.27

VALUATION RATIOS

Return on capital employed EBIT/Capital Employed (%) 16.07%

Return on equity PAT/Networth (%) 16.39%
Dividend per share(DPS) Total Dividend paid/No. of outstanding shares (%) 1.50
Earning Per Share(EPS) PAT/No. of outstanding shares (%) 3.72
Price Earning Ratio Market price of share/EPS (%) 7.09
Dividend payout ratio DPS/EPS (%) 40.30%
 2012 2013 Interpretation

2.91 2.61
1.30 1.01
0.205 0.036

0.71 0.86

0.23 0.20
0.62 0.58
125.05 143.53
266.49 342.92

2.98 2.65
120.72 135.62
8.30 7.69
43.39 46.79

9.56 8.11
1.78 1.95

4.26 4.98
2.01 1.99
2.52 2.64

17.80% 17.85%
3.93 3.62
8.52 8.22

16.78% 18.01%
19.07% 20.04%
1.75 2.00
4.94 5.99
6.98 4.88
35.42% 33.37%