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# Introduction Financial statements are prepared primarily for decision making.

They play a dominant role in setting the frame work of managerial decisions. But information provided in the financial statements is not analysis end in it self as no meaning full conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of the immense use in making decisions through analysis and interpretation of financial statements. Financial statement analysis is the process of identifying of financial strength and the weakness of the firm by properly establishing a relation ship between the items of the balance sheet and the profit and loss account. There are various methods used in analyzing financial statements such as comparative statements, schedules of changes in working capital, common size percentages, funds analysis and the ratio analysis. The ratio analysis is the most powerful tool of financial analysis. Meaning and Nature of Accounting Ratios: Ratio simply means one number expressed in terms of another. A ratio is the statistical yard stick by means of which relationship between two or various figures can be compared and measured. The term “Accounting Ratio” is used to describe significant relationship between figures shown on a balance sheet and profit and loss account of a company. Thus accounting ratios show the relationship between accounting data. It may be expressed in the form of percentage, coefficient, proportion and rate. Who is Interested in Financial Analysis of Company? Ratio analysis of a firm‟s financial statements is of interest to share holders, creditors and the firm‟s own management. Both current and prospective share holders are interested in the firm‟s current and future level of risk and return, which directly affect the share price. The firm‟s creditors are interested in the short term liquidity of the company and its ability to make interest and principal payments. A secondary concern of creditors is the firm‟s profitability: they want assurance that the business is healthy. Management like stake holders is concerned with all aspects of the firm‟s financial situation, and its attempts to produce financial ratios that will be considered favorable

by both owners and creditors. In addition management uses ratios to monitor the firm‟s performance from period to period. Advantages of Ratio Analysis: Ratio analysis is analysis important and age old technique of financial analysis. The followings are some of the advantages of ratio analysis.

Simplifies Financial Statements:

It simplifies the comprehension of financial statements. Ratio tells the whole story of changes in the financial condition of the business.

Facilitates Inter Firm Comparison:

It provides data for inter firm comparison. Ratio highlights the factors associated with the successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and under valued firms.

Helps in Planning:

it helps in planning and forecasting. Ratios can assist management in its basic function of forecasting, learning, coordination, control and communication.

Helps in Investment Decisions.

It helps in investment decisions in the case of investors and the landing decisions in the case bankers and other financial institution. Types of ratio Comparison: Ratio analysis is not merely the calculation of a given ratio. More important is the interpretation of the ratio value. Two types of ratio comparison can be made.

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

Following few pages consist of the Introduction of the Company.· · · · · · · Return on Equity Capital Return on Share Holder‟s Fund. Activity Ratios · · · Stock Turn over Ratio. Long Term solvency in Leverage Ratios. Return on Capital Employed Earring Yield Ratio. Price Earning Ratio. Dividend Yield Ratio. The Company was one of the pioneers of the infant state of Pakistan in the field of Industrial & Medical Gases and Welding Technology and has all along proved a steady partner in the economic development of the Country. Creditors Turn Over Ratio 4. Medical and Industrial Gases and Medical Equipments. Debtors Turn Over Ratio. Debt Service / Interest Coverage Ratio. BOC Pakistan Ltd. . With Respect to Investment. · · · Debt to Equity Ratio. We performed the ratio analysis on BOC Pakistan Ltd which is a listed company and it deals in Gases. Capital Gearing Ratio. 3. HISTORY: BOC Pakistan Limited (Formerly Pakistan Oxygen Limited) has played a distinguished role since it was established on 8 June 1949. Dividend Cover Ratio. Welding (Gases and Electric).

health care and welding products. In health care. Since then this equity structure has been maintained. many of whom themselves operate around the world and expect us to serve them consistently everywhere they do business. technology and management of the Group are global in nature and transcend 60 countries. manufacturing/ fabrication/construction. In Pakistan.It was incorporated in 1949 to acquire the assets in Pakistan of the then Indian Oxygen and acetylene Company Limited which started operations in India in 1935 when the British Oxygen Company Limited acquired and amalgamated a few oxygen and acetylene producing units in the Country to form that Company. On 17th March 1958.K.000 employees serve some two million customers worldwide. Our technology. pharmaceuticals. the company continues to play a leadership role in adding strategic value to the nation‟s industrial and infrastructure development since 1949. is deployed on every continent. It is a part of the BOC Group. welding equipment and consumables and anesthetic and related medical equipment. It was originally a 100% subsidiary of the British Oxygen Company Limited (now the BOC Group) which was established in 1886. petrochemicals. BOCP provides the majority of health care facilities (hospitals) inhaled anesthetic pharmaceuticals. In fact the Group invented and developed these systems on a worldwide basis. developed in many different parts of the World. one of only a handful of truly global companies based in the U. petroleum. BOC Pakistan (BOCP) is a portfolio of three businesses . The market.industrial and special gases. the company became a Public Limited Company and its capital structure was broadened by the offer of 40% shares to Pakistan Nationals. The 40. Through its core business. industrial gases. chemicals. The Company also markets medical gases. it meets the significant and emerging needs in the metal processing. glass and defense manufacturing market sectors. From the very inception the company has been a pioneer and pacesetter in the industrial development of the country BOC World Wide . Business: The Company's core business is to manufacture and supply industrial gases to the various industries in the country.

long term solvency and activities of firm with the help of ratios which are usually brought under observation by the creditors. from atmosphere gases like oxygen and nitrogen to complicated specialty products. Even a very high liquidity is not good for a firm because such a situation represents unnecessarily excessive funds of the firm being tied up in current assets. management and other stake holders.the Core Business of The BOC Group .600 employees in over 60 countries. investors. BOC Gases . It will result in a loss of creditors‟ confidence in the firm. profitability. The short term obligations of a firm can be met only when there are sufficient liquid assets. Liquidity simply means how quickly a company can convert its current assets I into cash to pay off its current obligations in time or when they will become due. BOC Pakistan. The short term creditors of a company like supplier of goods of goods on credit and commercial banks providing short term loans are primarily interested in knowing the company‟s ability to meet its current or short term obligations as and when these become due.BOC operates in more than 60 countries including Pakistan. Every year about 1000 new products and processes to meet the evolving needs of worldwide customers are added in the product range. BOC Gases worldwide supplies over 20.000 different gases and mixtures.6 billion sales and over 27. being a member of the BOC Group can offer customers in Pakistan both the experience to solve local problems and the highest international standards demanded by the industrial leaders of today. ANALYSIS OF ACCOUNTING RATIOS: Now we shall analyze some important factors like liquidity. If a firm fails to meet such current obligations due to lack of good liquidity position its good will in the market is likely to be affected beyond the repair. BOC gases have over £ 2. . Therefore. a firm must insure that it does not suffer from lake of liquidity on the capacity to pay its current obligations. Analysis for Liquidity (Liquidity Ratios) This analysis is also called analysis for short term solvency of short term financial position.is one of the world‟s largest Industrial Gases Companies. BOC Gases constantly review their systems and use their world wide experiences to identify and shares the best operating practices from each market in order to apply them to customer needs in other.

a relatively low current ratio represents that the liquidity of the company is not good and firm shall not be able to pay its current liabilities. It is also an index of technical solvency and an index of the strength of working capital.73:1 = Dec 31st 2006 (Rs. It represents the margin of safety to creditors. Generally current ratio = 1:1 is considered reliable by the banks which means 1 rupee asset 1 rupee liability. Current Ratio Sep 30th 2005 (Rs. These are the ratios which measure the short term solvency or financial position of firm. Significance: Current ratio is a general and quick measure of liquidity of a firm. On the other hand. Current ratio is basically a relationship between current assets and current liabilities. liquid ratio (Acid Test Ratio) and absolute liquid ratio. Current Ratio: Current ratio measures general liquidity and is widely used to make the analysis for a short term financial position or liquidity of a firm.Liquidity Ratios: These are the most important ratios from the lenders‟ point of view. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time as and when they become due. The various liquidity ratios are current ratio. But the ratio up to = = 1. These ratios are calculated to comment upon the short-term paying capacity of a concern or a firm‟s ability to meet its current obligations. up to 30th September 2005 shows that it has the ability to meet all its obligations in respect of financial debts. This ratio is also known as working capital ratio. 000) = = 1. It is an index of the firm‟s financial stability.21:1 Interpretation: The current ratio of BOC Pakistan Ltd.000) .

It measures the firm‟s capacity to pay off current obligations immediately and is a more rigorous test of liquidity then the current ratio. Liquid Ratio (Acid Test Ratio): This ratio shows better liquidity than the current ratio as it is a relationship between liquid assets and current liabilities. 0.75 liquid asset for Rs. It is an attractive sign for the stakeholders to keep full confidence in the operations and policies of the enterprise.000) Interpretation: .75:1 is considered reliable by the banks that means Rs. 1 liquidity.(Stock + Prepayments) Dec 31st 2006 (Rs.08:1 = = = 1. Significance: The quick ratio is very useful in measuring the liquidity of the firm. Generally current ratio = 0. The company can avail easily short term borrowing facility from banks and financial institutions with more reliably than the previous year as its current position is better than the previous year. 000) = Liquid Assets = = = = 1. Acid Test Ratio Sep 30th 2005 (Rs. Liquid assets include all current assets except prepayments and stock because prepayments usually are not converted into cash and stock takes much time to be converted into cash.December 31st is the indication that the enterprise has been in good liquid position since last fifteen months.41:1 = Current Assets . Usually a high liquid ratio is an indication that the firm is liquid and has ability to meet its current liabilities in time and on other hand a low liquidity ratio represents that the firm‟s liquidity position is not good.

A business enterprise can discharge its obligations to the various segments of the society only thorough earning profits. A business needs profit not only for its existence but also for expansion and diversification. Creditors. Profit is a useful measure of overall efficiency of a business. Significance: . Following ratios are calculated with respect to sales. is showing its better liquidity position and its liquid ratio is better than the requirement that is usually observed by the banks and other financial institutions. bankers and financial institutions are interested in profitability ratios since they indicate liquidity of the business to meet interest obligations and regular improved profits to enhance the long term solvency of the business. Gross Profit Ratio (Gross Profit Margin): Gross Profit ratio is a ratio of Gross Profit to Net Sales expressed as percentage. Analysis of Profitability: (profitability Ratios) Profit earning is considered essential for the survival of the business and it is primary motive of any business. Owners are interested in profitability to indicate the growth and also the rate of return on their investments.The liquid ratio of BOC Pakistan Ltd. The investors want adequate return on their investments creditors want higher security for their interest and loan and so on. The liquidity of the enterprise has been increased from the last year which is an indication of the better business operations and policies. has liquid assets to pay the short term liabilities in time or when they will become due. Generally profitability ratios are calculated with respect to sales and with respect to investments. Profitability is the main base for liquidity as well solvency. The stake holders especially creditors can rely on the company because BOC Pakistan Ltd. It expresses the relation ship directly between gross profit and sales and indirectly between cost of goods sold and sales. Profitability ratios are measured by the investors and share holders to asses the management in order to assess how efficiently the business operations are being carried out.

However this GP Margin is still up to the mark GP margin can be made by increasing sales. by decreasing cost and adopting better purchase policies.96% to 39. The ratio is very useful as if the net profit is not sufficient the firm should not be able to achieve a satisfactory return on its investment. 000) = = 41. higher the gross profit ratio better it is. G.96% Interpretation: The gross profit percentage of BOC Pakistan Ltd. It may vary from business to business. has been reduced from 41.83%. Net Profit Ratio = .P Ratio = Sep 30th 2005 (Rs. There is no standard GP ratio for evaluation. = = 39. This ratio also indicates the firm‟s capacity to face adverse economic conditions such as price competition low demand etc. It reflects the efficiency with which a firm produces its products. As the gross profit is form by deducting cost of goods sold from net sales. Although there is increase in Gross Profit (28%) and sales (36%) but this increment is not relatively equal to the increase in cost of sales which is 41%. Management should assess that why their cost has been increased. However the gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends. higher the ratio the better is the profitability.000) Net Profit Ratio: This is the ratio of net profit (before tax) to net sales expresses as percentage: Significance: This used to measure the overall profitability and hence it is very useful to proprietors.Gross profit ratio may indicate to what extend the selling prices of goods per unit may be reduced with incurring losses on operation.83% Dec 31st 2006 (Rs. obviously.

An operating profit ratio equal to 25% to 30% is considered normally good and company is needed to raise its = = 24. Operating Profit Ratio: Operating ratio is a relationship between operating profit and net sales.90% Net profit ratio of the company is decreased from 21.10% to 18. In effect operating profit ratio measures the profitability of a company‟s basic or core business operations and leaves out other types of revenues and expenses are excluded. 000) = = 29.5% Dec 31st 2006 (Rs. Significance: This ratio shows the operational efficiency of the business. There is a pressure on the profit margin of the company.Sep 30th 2005 (Rs. This ratio shows a relationship between revenue earned from customers and expenses incurred in producing this revenue. 000) = = = 21.000) = 18. are decreasing as we compare them with the previous years.58% Interpretation: It has been observed and mentioned earlier that profit margins of BOC Pakistan Ltd.90%. Operating Profit Ratio = Sep 30th 2005 (Rs. Some of the revenues and expenses of a business is result from activities other then the company‟s basic business operations.10% Interpretation: Dec 31st 2006 (Rs. One reason of this decrease is the remarkable increment in some expenses like deprecation. It measures the cost of operations per rupee of sales. repairs and maintenance and traveling expenses due to revision of estimated useful life of assets and rising in fuel prices.000) .

Although there is not a substantial increase but management is needed to reduce the cost to make better profitability. And if the company is running already at low cost then there is need to increase the sales of its products. production and other direct cost decisions as it related directly sales to the cost of sales. in 2006 has been increased which reduced the GP margin of the company. Higher the ratio is an indication of an increase in cost of the enterprise‟s production and direct cost and vice versa.profitability to maintain the confidence of the stake holders through better business operations. It can be helpful for the management to make better purchasing. This ratio is important to analyze the cost of sales with respect to sales. Cost of goods sold to sales: This ratio can be defined as a relationship between cost of sales and sales. Significance The profits of any company can be increased only through deduction in cost or with increase in sales or both. 000) = = 58.000) . As investors demand adequate returns to their investments so with the help = = 60. It measures the percentage of cost to sales. The company should be cost efficient to attract the investors.17% Dec 31st 2006 (Rs. It is measured in percentage.03% Interpretation: The cost of sales of BOC Pakistan Ltd. Profitability Ratios with respect to Investment: Following ratios are important to find out the profitability of a company with respect to investment. Cost of Goods sold to sales = Sep 30th 2005 (Rs.

This is also analysis indication that the operations of the business are carried on in analysis appropriate manners.63% Dec 31st 2006 (Rs.made available to pay dividend to them. This ratio directly relates the net profit available for appropriations to the capital invested by the share holders. Return on Equity = Sep 30th 2005 (Rs.74% Interpretation: The return on equity capital ratio of BOC Pakistan Ltd. Preference share holders get a fixed rate of dividend irrespective of the quantum of the company. Preference share holders have a preference over ordinary shareholders in the payment of dividend as well as capital. Significance: This ratio is more meaning full to equity share holders who are interested to know profits earned by the company and those profits which can be . is a clear cut indication for the investors that the company is managing its capital in a very efficient way and is earring Rs 179 for each Rs 100 of its capital and company is in position to give better returns to the share holders. = = 179.of these ratios they can realize and analyze about the security and returns of their investments. Return on Equity Capital: In real sense ordinary shareholder are the real owners of the company and they assume highest risk in the company.000) . 000) = = 147. The ordinary share holders are more interested in the profitability of a company and its performance should be judged on the bases of return of equity capital of the company. The rate of dividend varies with the availability of profits in case of ordinary shares only. Higher the ratio is higher the return on capital invested in company.

09% Dec 31st 2006 (Rs. Significance: This is one of the most important ratios used to measure the overall efficiency of the firm. There are various methods to calculate the capital employed. As the primary objective of business is to maximize its earning. Capital employed can also be calculated with the debit side of the balance sheet. It is also a better sign for the stock holders that there investments are being utilized to give them better returns.000) . This ratio indicated the extent to which this primary objective of business is being achieved. 000) = = 34. This is better measure then the return on equity capital because it includes not only capital but also the reserves which are maintained for several financial purposes.79% Share Holder Fund = Capital +Reserves Interpretation: There is increase in the return from the last year and it is an indication that the operations of business are good and management efficiently employs the share holders‟ fund in generating the revenues. Returns on share holder fund= Sep 30th 2005 (Rs. We use the share capital.Return on Share Holder’s Fund: It is a relationship between net profit (After interest and Tax) and shareholder fund expressed in percentage. = = 37. long term liabilities and reserves to calculate the capital employed. Return on Capital Employed: It is relation ship between operating profit and capital employed of the company. It is calculated for net profit after interest and tax because share holders are interested in the profit which is available for them in respect of dividends. Inter firm caparison of this ratio determines whether the investment in the firm is attractive or not as investors would like to invest only where the return is higher.

36 % which means funds of Rs.000) Capital Employed = long term liabilities + share Holder‟s Fund . 000) = = 41.36% Dec 31st 2006 (Rs. = = 47. Higher the ratio shows that the management utilized these funds efficiently to earn operating profit.Significance: The return on capital employed is the most important ratio because it answers how well the management has utilized the share holder‟s fund and the borrowings which were taken from the creditors. It determines the per share earning in Rupees. performance and dividends and when compare with E P S of similar other companies. 47.36. This is good sign for the stake holders especially for the investors which are interested in the return of the capital employed. However high EPS is not an authentic and scientific tool to assume high performance but high EPS is considered high rate of dividends. Earning per Share: Earning per share is a small variation of return on equity capital and it is calculated by net profit after tax and preference dividend dived by the total number of equity shares. There is a suitable return to the capital employed that is 47. it gives a view of comparative earnings or earning power of firm.66% Interpretation: As there is remarkable increase in the ratio which is an indication that the management is using efficiently funds provided by the creditors and shareholders and the reserves of previous profits kept for the financial purposes. Significance: High earning per share usually reflects the rate of profitability. This ratio is calculated with EBIT because investors are interested to know that how the management has utilized the funds and long term borrowings because a business borrows to conduct its operations and to enhance profitability Return on capital Employed = Sep 30th 2005 (Rs. 100 are generating profit of Rs.

96/Share Dec 31st 2006 (Rs.000) . 17. 14.000) = = Almost 8 years = = Rs. As this ratio describes the rate of dividend so it can be assumed company is distributing high dividends. Price Earning Ratio = Sep 30th 2005 (Rs.Earning Per Share = In the BOC Pak (Ltd) there is no prefers share holder so the formula will be. is relative increased from the previous years and is satisfactory for the share holders with respect to their return on the shares purchased by them. 000) = = Almost 10 years Dec 31st 2006 (Rs.77/Share Interpretation: Earning per share of BOC Pakistan Ltd. 000) = = Rs. Generally people purchase the shares of a company from stock exchange at market price don‟t look for dividend rather they care about capital gain. = Sep 30th 2005 (Rs. Price Earning Ratio: Price earning is the ratio between Market Value per Share to Earning per Share and it is expressed in number of years. Significance: This ratio helps the new investors to determine that how many years it will take to recover the market price paid for one year. Higher ratio results in greater number of years and of course discourages the new investors.

Greater this ratio means the greater capital gain and vice versa. Earning Yield Ratio= Sep 30th 2005 (Rs.17% This ratio is relationship between dividend per share paid and the market value per share expressed in terms of percentage. This ratio is the reciprocal of price earning ratio. This ratio does not give exact idea but for the purpose of rough estimation it can be used. 000) = = = 9. Earning Yield Ratio: Earning yield is ratio of earning per share to the market value per hare and it is expressed in terms of percentage.37% Dividend Yield Ratio: Dec 31st 2006 (Rs. Significance: This ratio helps the investors to determine that how many percent is being earned with his earning per share.This ratio is the subject of great fluctuations because market price of share changes substantially almost every day. It helps investor assess that how much return he is going to get on the proposed investment. Dividend Yield Ratio . Earning yield and price earning ratio both are analyzed before taking the investment decision in any company. Significance: This ratio is much better tool then the earning yield ratio because it relates dividends paid with the market value of share. The ratio is subject to great fluctuations as market prices of shares are changed rapidly in our stock exchange.000) = 12.

The company is paying more dividends and retaining lesser portion of the profit for its reserves. Dividend Pay-out Ratio = Sep 30th 2005 (Rs.000) = = 10. This policy might be the result that already company‟s reserves are three times greater than the share capital. 000) = = 81. Investors are going to have adequate return on their investments because 83 % of the profit is being paid to them. 000) = = 7.24% = 83.60% Dec 31st 2006 (Rs. It is an important ratio because ploughing back of profits enables a company to grow and pay more dividends in future.51% Interpretation: BOC Pakistan Ltd. Significant: = Dec 31st 2006 (Rs. Dividend Cover Ratio: Dividend cover ratio is a relationship between earning after tax and dividend declared by the company expressed in times.= Sep 30th 2005 (Rs.60% Dividend Pay out Ratio: Dividend pay out ratio is the relationship between dividend per equity share and the earring per share expressed in percentage: Significance: Dividend pay out ratio is calculated to find the extent to which earning per share have been used for paying dividend and to know what portion of earning has been retained in the business. is paying much dividends and its retained earning per share is lower.000) .

Greater the ratio means the company is retaining greater portion of profit for future purposes and paying lesser portion to the share holders and vice versa. This is one dimensions of liquidity analysis. is retaining lesser portion of the profits in shape of reserves and paying greater portion to the share holders in shape of dividend. The other dimension of liquidity is determination of the rate at which various short term assets are converted into cash.This ratio gives information that how many times the dividend is covered through the profit.33 times Dec 31st 2006 (Rs. These ratios are also called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. Activity ratios measure the efficiency or effectiveness with which a firm manages its resources or assets. Analysis of Current Assets Movement (Liquidity Ratios): The liquidity ratios generally liquid Ratio and Absolute Liquidity Ratio generally indicate the adequacy of current assets for meeting current liabilities. The better the management of assets. A too high inventory means higher carrying costs and higher risk .31 times = = 1. Dividend Cover Ratio = Sep 30th 2005 (Rs. Stock Turnover Ratio: Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. The efficiency with which assets are managed directly. Dividend cover ratio and dividend pay out ratio give almost same type of information to the investors. 000) = =1. the larger is the amount of sales and profits.000) The answers of above ratio indicate that BOC Pakistan Ltd. But the level of inventory should neither be too high nor too low. affect the volume of sales.

a high inventory turnover/stock velocity indicates efficient management is required to finance the inventory. is the relationship between the cost of goods sold during a particular period of time and the cost of average inventory during that period. stock accumulations.08 times Dec 31st 2006 (Rs. Usually. It is expressed in number of times.of stocks becoming obsolete whereas too low inventory may mean the loss of business opportunities. of Days (Rotation period) = Sep 30th 2005 (Rs. Stock Turn over Ratio = Sep 30th 2005 (Rs. 000) = = 25 days Interpretation: The results of the stock turn over ratio show that there is a little bit mismanagement of the inventory because rotation period has been increased from 25 to 36 days and stock turn over ratio of BOC Pakistan Ltd. dull business. accumulation of obsolete and slow moving goods and low profits as compared to total investments. Thus. Significance: Inventory turnover ratio measures the velocity of conversion of stock into sales. poor quality of goods. 000) = = 14. Inventory turnover ratio. it is very essential to keep sufficient stocks in business. has been shifted from 14 to 10 times which means last year stock of the company converted 14 times into sale in period of 25 days and in year 2006 it could be converted only 10 times into sales and the whole process was = = 36 days Dec 31st 2006 (Rs. A low inventory turnover implies over-investment in inventories.9 times No.000) = = 10.000) . A low inventory turnover ratio indicates an inefficient management of inventory. also known as stock turnover.

Similarly. low debtors turnover implies inefficient management of debtors or less liquid debtors. Debtors or Receivables Turnover Ratio: The volume of sales can be increased by following a liberal credit policy.87 times Average Collection Period Ratio: The debtors/Receivables Turnover Ratio when calculated in terms of days known as average collection period or debtor‟s collection period ratio. The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash.000) . One reason of this substantial increase may be the increased cost of goods sold during this year (increased up to 41%).48 times Dec 31st 2006 (Rs. Debtor Turnover Ratio = Sep 30th 2005 (Rs. But the effect of a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors. It is the reliable measure of the time of cash flow from credit sales. Significance: Debtor‟s turnover ratio indicates the number of times the debtors are turned over during a year. is needed to be efficient in inventory. 000) = = 16. BOC Pakistan Ltd. The liquidity position of a concern to pay its short-team obligations in time depends upon the quality of its trade debtors. The higher the value of debtor‟s turnover the more efficient is the management of debtors or more liquid are the debtors.completed in 36 days. Trade debtors are expected to be converted into cash within a short period and are included in current assets. It can be calculated as follows: Significance: = = 16.

A short collection period implies prompt payment by debtors.000) . Accounts payable include both sundry creditors and bills payable. It is difficult to provide a standard collection period of debtors. of Days (average collection Period Debtor Turnover Ratio = Sep 30th 2005 (Rs. thus enhancing the creditworthiness of the company. is working on relatively better debtor turnover ratio and average debtors collection period showing that debtors are more liquid and company is much efficient in the management of its debtors. It compares the creditors with total credit purchases. It reduces the chances of bad debts. Similarly a longer collection period implies too liberal and inefficient credit collection performance.000) = = 22 days Dec 31st 2006 (Rs. 000) = = Dec 31st 2006 (Rs. creditor‟s turnover ratio can be calculated in two forms Significance: The average payment period ratio represents the number of days taken by the firm to pay its creditors. 000) = = 22 days Interpretation: BOC Pakistan Ltd. Same as debtor‟s turnover ratio. However. No. a very favorable ratio to this effect also shows that the business is not taking full advantage of credit facilities allowed by the creditors.This ratio measures the quality of debtors. Creditors/Payables Turnover ratio: This ratio is similar to Debtors/Receivable turnover ratio. It signifies the credit period enjoyed by the firm in paying creditors. Creditors Turn over Ratio = Sep 30th 2005 (Rs. A higher creditors turn over ratio or a lower credit period ratio signifies that the creditors being paid promptly.

000) . of days (Average payment period): = 8. financial institutions providing medium and long term loan. No. A higher creditor‟s turn over ratio or low credit period ratio signifies that the creditors being pair promptly. thus enhancing the credit worthiness of the company however. It is clear indication that company has enhanced its credit worthiness. BOC Pakistan Ltd. 000) = = 50 days Interpretation: As the credit purchases were not available in the financials of BOC Pakistan Ltd. a very favorable ratio to this effect also shows that the business is not taking full advantage of credit facilities allowed by the creditors. Analysis of Solvency (Long Term Financial Position): The long term indebt ness of a firm includes debenture holders.= 7. so we have calculated the creditors turn over ratio by assuming all the purchases as credit.35 times No. has improved its creditors turn over ratio from the previous years as in previous years creditors were paid in the span of 50 days which has been reduced in the current year to 41 days.85 times This ratio gives the average credit period enjoyed from the creditors. Significance: The average payment period ratio represents the number of days taken by the firm to pay its creditors. of Days (Average Payment Period) = Sep 30th 2005 (Rs. Short term creditors of a firm are primarily = = 41 days Dec 31st 2006 (Rs. Although the volume of purchases and creditors is increased during the year 2006 but as the company‟s liquidity is very good and company has made its creditors turn over ratio better.

repayment of the principal amount at the maturity and the security of the loan. It is also known as “External – internal equity ratio‟. The outsiders (creditors) on the other hand. These ratios also used to analyze the capital structure of the company. It is determined to ascertain soundness of the long term financial policies of the company. The purpose is to get an idea of the cushion available to outsider on the liquidation of the firm. Debt Equity Ratio = Sep 30th 2005 (Rs. want that shareholders (owners) should invest and risk their share of proportionate investments. The owners want to do the business with the maximum of outsiders funds in order to take lesser risk of their investments and to increase their earnings (per share) by paying a lower fixed rate of interest to outside. They indicate the pattern of financing.000) . However. Accordingly long term solvency ratios indicate the firm‟s ability to meet the fixed interest and cost and repayment schedules associated with its long term borrowings. the debenture holders and another long term creditors are primarily interested in knowing the firm‟s ability to pay regular interest on long term borrowings.9 = 1:4 Dec 31st 2006 (Rs. Following ratios are generally calculated to test the long term solvency. whether long term requirements have been met out of long term funds or not.interested in knowing the firm‟s ability to meet its short term obligations. Significance: The ratio indicates the proportionate claims of owners and the outside against the firm‟s assets. 000) = = = 1:2. the interpretation of the ratio depends upon the financial and business policy of the company. Debt-Equity Ratio: Debt-to-equality ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds.

000) . Debt Service or Interest Coverage Ratio: This ratio relates the fixed interest charges to the income earned by the business. It is an index of the financial strength of an enterprise.9 to 1:4 which is indication that the company now has more funds to pay out the long term funds. It is also known as interest Coverage Ratio.1) is considered satisfactory but the debt equity ratio of the BOC Pakistan Ltd.Interpretation: Debt equity ratio of the company is being increased from the previous year from 1:2. One reason of the company‟s improved debt equity ratio is the payment of the long term funds. is above standard which is sign for the financial institutions that the company is in position to pay back the loans acquired with in time or when they will become due.10 times Dec 31st 2006 (Rs.14 times Interpretation: = = 46. But the weakness of the ratio may create some problems to the financial manager in raising funds from debts sources. On one side the long term debts are being decreased and on other side there is a substantial increase in the share holders‟ fund which made the credibility better. Interest Coverage Ratio = Sep 30th 2005 (Rs. Significance: The interest Coverage Ratio is very important from the lender‟s point of view. A high ratio assures the lender a regular and periodical interest income.1 of long term debts share holders have Rs. 000) = = 32. It indicates the number of times interest is covered by the profits available to pay interest charges. Debt equity ratio = 1:1 (for Rs. It indicates whether the business has earned sufficient profits to pay periodically the interest charges.

One reason of this improved ratio is that company has repaid a substantial portion of its long term liabilities which has reduced the payment of interest Capital Gearing Ratio: Closely related to solvency ratios is the Capital Gearing Ratio which is mainly used to analyze the capital structure of a company.T. It reveals the suitability of company‟s capitation. The term „capital garaging‟ or leverage normally refers to the proportion or relationship between equity share capital including reserve and surpluses to preference share capital and other fixed interest bearing funds or loans. The term capital structure refers to the relationship between the various long-term forms of financing such as debentures. for both periods are clear indication of the company‟s ability to pay the periodic interest on long term borrowings and especially in year 2006 the company‟s profit before tax is 42 times greater than its financial costs. Capital Gearing Ratio = Sep 30th 2005 (Rs. preference and equity share capital including reserves and surpluses. Equity share capital includes equity share capital and all reserves and surpluses items that belong to shareholders. P. Leverage or capital structure ratios are calculated to test the long-term financial position of a firm. In other words it is the proportion between the fixed interest or dividend bearing funds and non fixed interest or dividend bearing funds. Significance: The ratio is important to the company and the prospective investors. It must be carefully planned as it affects the company‟s capacity to maintain a uniform divided policy during difficult trading periods. 000) = = Dec 31st 2006 (Rs.The results of the interest coverage ratio of BOC Pakistan Ltd.C.000) . Through the analysis of this solvency ratio the confidence of the bankers and other financial institutions with respect to the credibility will definitely increase and they will feel the repayment of their loaned principal together with interest very safe.

4 for every Rs. Secondly company revaluated the useful life of the assets which has substantially increased the depreciation charge.89:1 Interpretation: = 4:1 Capital gearing ratio is just reciprocal of debt to equity ratio.= 2. investors because they are interested in adequate return of their investment and creditors who are interested in on time repayments of loan and interest. BOC Pakistan Ltd. Its results show that BOC Pakistan Ltd. The analysis of profitability ratios is the depiction that share holders are getting adequate returns. Although the company has profit pressures from the last year because the cost of sales has been substantially increased this is mainly subject to rising of fuel prices in year 2006. Review Report With respect to Investors and Creditors Performance of financial analysis is of key importance for many stake holders especially for management of the company which needs to analyze the overall operations of the enterprise. has Rs. is relatively low geared than the previous year. . return to share holder‟s fund. price earning ratio and dividend yield ratio all reveal that the company is paying attractive returns and have better liquidity and solvency position to pay back the loans and dividends to the share holder. Again the ratio is the depiction of the better credibility of the company. After analyzing the over all long term solvency ratio the creditors will finance the company because they will fill their financing very safe. earning per share. 1 of the long term borrowings. As we go through the ratio analysis of BOC Pakistan Ltd. with investor‟s point of view then it is found that the company has potential to pay back the relatively better and attractive returns to the investors. return on equity capital. The company‟s performance in many aspects like payment of dividends. Company is also managing long term funds like (share holder fund long term liabilities) and current assets (like debtors and other assets) efficiently and in such manners that for the payment of short term and long term liabilities the company has better liquidity and solvency position. But still the company is paying relatively better returns to the investors. There seems a policy in BOC that greater portion of the profits are distributed among share holders in form of dividends and lesser portion is retained for the reserves.

is in has potential and attraction for both the parties i. Investment of the investors and financing by the creditors both are secured. . We conclude that the BOC Pakistan Ltd. it can pay its liabilities in time and it can also give the adequate returns to the investors. BOC has potential to meet its all to meet its long term and short term liabilities and obligations.e. Before sanctioning the loan the financial institutions analyze the potential of the company to repay the amount of interest together with principal.If we analyze the liquidity and solvency ratios then it will be clear the creditors are being paid promptly and company has sufficient funds to pay it liabilities on time or when they will become due.