Ratio Analysis 1

Financial Statement Analysis (Accounting Ratios)

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

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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:

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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.
1. Time Series Analysis
2. Cross Sectional Analysis

1. Time Series Analysis:

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

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• Gross Profit Ratio

• Net Profit Ratio With Respect to
Sales
• Operating Profit Ratio.
• Cost of Sales to Sales Ratio.

• Return on Equity Capital

• Return on Share Holder’s Fund.
• Return on Capital Employed
• Earring Yield Ratio. With Respect to
Investment.
• Dividend Yield Ratio.
• Price Earning Ratio.
• Dividend Cover Ratio.

3. Activity Ratios
• Stock Turn over Ratio.
• Debtors Turn Over Ratio.
• Creditors Turn Over Ratio

4. Long Term solvency in Leverage Ratios.

• Debt to Equity Ratio.
• Debt Service / Interest Coverage Ratio.
• Capital Gearing Ratio.
We performed the ratio analysis on BOC Pakistan Ltd which is a listed
company and it deals in Gases, Welding (Gases and Electric), Medical

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and Industrial Gases and Medical Equipments. Following few pages

consist of the Introduction of the Company.
BOC Pakistan Ltd.
HISTORY:

BOC Pakistan Limited (Formerly Pakistan Oxygen Limited) has played a

distinguished role since it was established on 8 June 1949. 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.

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.

It was originally a 100% subsidiary of the British Oxygen Company

Limited (now the BOC Group) which was established in 1886. On 17th
March 1958, the company became a Public Limited Company and its
capital structure was broadened by the offer of 40% shares to Pakistan
Nationals. Since then this equity structure has been maintained.

BOC Pakistan (BOCP) is a portfolio of three businesses - industrial and

special gases, health care and welding products. It is a part of the BOC
Group, one of only a handful of truly global companies based in the
U.K. The market, technology and management of the Group are global
in nature and transcend 60 countries. Our technology, developed in
many different parts of the World, is deployed on every continent. The
40,000 employees serve some two million customers worldwide, many

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of whom themselves operate around the world and expect us to serve

them consistently everywhere they do business.

In Pakistan, the company continues to play a leadership role in adding

strategic value to the nation’s industrial and infrastructure
development since 1949. Through its core business, industrial gases, it
meets the significant and emerging needs in the metal processing,
manufacturing/ fabrication/construction, chemicals, petrochemicals,
pharmaceuticals, petroleum, glass and defense manufacturing market
sectors. In health care, 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.

Business:
The Company's core business is to manufacture and supply industrial
gases to the various industries in the country. The Company also
markets medical gases, welding equipment and consumables and
anesthetic and related medical equipment. From the very inception the
company has been a pioneer and pacesetter in the industrial
development of the country

BOC World Wide

BOC operates in more than 60 countries including Pakistan. BOC

Gases - the Core Business of The BOC Group - is one of the world’s
largest Industrial Gases Companies. BOC gases have over £ 2.6 billion
sales and over 27,600 employees in over 60 countries. BOC Gases
worldwide supplies over 20,000 different gases and mixtures, from
atmosphere gases like oxygen and nitrogen to complicated specialty

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products. Every year about 1000 new products and processes to meet
the evolving needs of worldwide customers are added in the product
range. 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.

BOC Pakistan, 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, profitability,
long term solvency and activities of firm with the help of ratios which
are usually brought under observation by the creditors, investors,
management and other stake holders.
Analysis for Liquidity (Liquidity Ratios)
This analysis is also called analysis for short term solvency of short
term financial position. 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.
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. The

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short term obligations of a firm can be met only when there are
sufficient liquid assets. Therefore, a firm must insure that it does not
suffer from lake of liquidity on the capacity to pay its current
obligations. 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. It will result in a loss of creditors’
confidence in the firm. 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.
Liquidity Ratios:
These are the most important ratios from the lenders’ point of view.
These are the ratios which measure the short term solvency or
financial position of firm. 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.
The various liquidity ratios are current ratio, 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.
Current ratio is basically a relationship between current assets and
current liabilities. This ratio is also known as working capital ratio.
Significance:
Current ratio is a general and quick measure of liquidity of a firm. It
represents the margin of safety to creditors. 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.
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

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become due. On the other hand, 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. Generally current ratio = 1:1 is
considered reliable by the banks which means 1 rupee asset 1 rupee
liability.
Current Assets
Current Ratio = Current Liabilitie s

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

643 ,610 780 ,666
= 533 ,591 = 452 ,250

= 1.21:1 = 1.73:1
Interpretation:
The current ratio of BOC Pakistan Ltd. up to 30th September 2005
shows that it has the ability to meet all its obligations in respect of
financial debts. But the ratio up to December 31st is the indication that
the enterprise has been in good liquid position since last fifteen
months. It is an attractive sign for the stakeholders to keep full
confidence in the operations and policies of the enterprise. 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.

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. 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.
Significance:
The quick ratio is very useful in measuring the liquidity of the firm. It
measures the firm’s capacity to pay off current obligations

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immediately and is a more rigorous test of liquidity then the current

ratio. 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. Generally current ratio = 0.75:1 is considered reliable by the
banks that means Rs. 0.75 liquid asset for Rs. 1 liquidity.

Acid Test Ratio

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)
Liquid Assets
= Current Liabilitie s =

Liquid Assets
Current Liabilitie s

Liquid Assets = Current Assets - (Stock + Prepayments)

643 ,610 − (68 ,408 + 203 )
= =
533 ,591

780 ,666 − (142 ,132 +130 )

4,52 ,250
574 ,999 638 ,404
= 533 ,591 = 4,52 ,250

= 1.08:1 = 1.41:1

Interpretation:
The liquid ratio of BOC Pakistan Ltd. 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. The
stake holders especially creditors can rely on the company because
BOC Pakistan Ltd. has liquid assets to pay the short term liabilities in
time or when they will become due. The liquidity of the enterprise has

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been increased from the last year which is an indication of the better
business operations and policies.

Analysis of Profitability: (profitability Ratios)

Profit earning is considered essential for the survival of the business
and it is primary motive of any business. A business needs profit not
only for its existence but also for expansion and diversification. The
investors want adequate return on their investments creditors want
higher security for their interest and loan and so on. A business
enterprise can discharge its obligations to the various segments of the
society only thorough earning profits. Profit is a useful measure of
overall efficiency of a business. 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.
Profitability is the main base for liquidity as well solvency. Creditors,
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. Owners are interested in profitability to indicate the growth
and also the rate of return on their investments. Generally profitability
ratios are calculated with respect to sales and with respect to
investments.
Following ratios are calculated with respect to sales.

Gross Profit Ratio (Gross Profit Margin):

Gross Profit ratio is a ratio of Gross Profit to Net Sales expressed as
percentage. It expresses the relation ship directly between gross profit
and sales and indirectly between cost of goods sold and sales.

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Significance:
Gross profit ratio may indicate to what extend the selling prices of
goods per unit may be reduced with incurring losses on operation. 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,
higher the gross profit ratio better it is. There is no standard GP ratio
for evaluation. It may vary from business to business. 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.
G.P Ratio
Gross Pr ofit
= ×100
Net Sales

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

735 ,383 948 ,438
= 1,752 ,399 ×100 = 2,381 ,420 ×100

= 41.96% = 39.83%
Interpretation:
The gross profit percentage of BOC Pakistan Ltd. has been reduced
from 41.96% to 39.83%. 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 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.

Net Profit Ratio:

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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. 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. 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.
Net Profit Ratio
Net Pr ofit aftere Taxation
= ×100
Net Sales

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

369 ,924
449 ,761
= 1,752 ,399 = 2,381 ,420

= 21.10% = 18.90%
Interpretation:
Net profit ratio of the company is decreased from 21.10% to 18.90%.
One reason of this decrease is the remarkable increment in some
expenses like deprecation, repairs and maintenance and traveling
expenses due to revision of estimated useful life of assets and rising in
fuel prices. There is a pressure on the profit margin of the company.

Operating Profit Ratio:

Operating ratio is a relationship between operating profit and net
sales. It measures the cost of operations per rupee of sales.

Significance:

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This ratio shows the operational efficiency of the business. Some of the
revenues and expenses of a business is result from activities other
then the company’s basic business operations. This ratio shows a
relationship between revenue earned from customers and expenses
incurred in producing this revenue. 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.
Operating Profit Ratio
EBIT
= ×100
Net Sales

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

518 ,285 583 ,702
= 1,752 ,399 ×100 = 2,381 ,420 ×100

= 29.58% = 24.5%
Interpretation:
It has been observed and mentioned earlier that profit margins of BOC
Pakistan Ltd. are decreasing as we compare them with the previous
years. An operating profit ratio equal to 25% to 30% is considered
normally good and company is needed to raise its profitability to
maintain the confidence of the stake holders through better business
operations.

Cost of goods sold to sales:

This ratio can be defined as a relationship between cost of sales and
sales. It is measured in percentage.
Significance
The profits of any company can be increased only through deduction in
cost or with increase in sales or both. This ratio is important to analyze
the cost of sales with respect to sales. It measures the percentage of
cost to sales. Higher the ratio is an indication of an increase in cost of

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the enterprise’s production and direct cost and vice versa. It can be
helpful for the management to make better purchasing, production and
other direct cost decisions as it related directly sales to the cost of
sales.

Cost of Goods sold to sales

Cost of Good Sold
= ×100
Sales

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

1,017 ,016 1,4
32 ,9
82
= 1,752 ,399 = 2,381 ,420

= 58.03% = 60.17%
Interpretation:
The cost of sales of BOC Pakistan Ltd. in 2006 has been increased which
reduced the GP margin of the company. The company should be cost efficient to
attract the investors. 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.

Profitability Ratios with respect to Investment:

Following ratios are important to find out the profitability of a company with
respect to investment. As investors demand adequate returns to their
investments so with the help 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. Preference share
holders have a preference over ordinary shareholders in the payment
of dividend as well as capital. Preference share holders get a fixed rate
of dividend irrespective of the quantum of the company. The rate of

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dividend varies with the availability of profits in case of ordinary shares

only. 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.
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 ,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. Higher the ratio is higher the return on
capital invested in company.
Return on Equity
Net Pr ofit After Tax −Pr eference Dividend
= ×100
Equilty Share Capital

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

369 ,924 − Nil 449761 − Nil
= = × 100
250 ,387 250387
= 147.74% = 179.63%
Interpretation:
The return on equity capital ratio of BOC Pakistan Ltd. 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.
This is also analysis indication that the operations of the business are
carried on in analysis appropriate manners.
Return on Share Holder’s Fund:
It is a relationship between net profit (After interest and Tax) and
shareholder fund expressed in percentage.
Significance:
This is one of the most important ratios used to measure the overall
efficiency of the firm. As the primary objective of business is to

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maximize its earning. This ratio indicated the extent to which this
primary objective of business is being achieved. 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. 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. 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.
Returns on share holder fund
Net Pr ofit After Tax
= Share Holder Fund ×100

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

369 ,924 449 ,761
= 106 ,3127 ×100 = 121 ,2424 ×100

= 34.79% = 37.09%
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. It is also a
better sign for the stock holders that there investments are being
utilized to give them better returns.
Return on Capital Employed:
It is relation ship between operating profit and capital employed of the
company. There are various methods to calculate the capital
employed. We use the share capital, long term liabilities and reserves
to calculate the capital employed. Capital employed can also be
calculated with the debit side of the balance sheet.
Significance:

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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. Higher the
ratio shows that the management utilized these funds efficiently to
earn operating profit. 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
EBIT
= Capital ×100
Employed

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

51
8 ,28
5 5
83 ,702
= 124 , 404 ,7 = 1232 ,5
17

= 41.66% = 47.36%
Capital Employed = long term liabilities + share Holder’s Fund
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. There is a suitable return to the capital employed
that is 47.36 % which means funds of Rs. 100 are generating profit of
Rs. 47.36. This is good sign for the stake holders especially for the
investors which are interested in the return of the capital employed.
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. It determines the per share earning
in Rupees.
Significance:

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High earning per share usually reflects the rate of profitability,

performance and dividends and when compare with E P S of similar
other companies, it gives a view of comparative earnings or earning
power of firm. 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 After Tax − Pr eference Share Dividend

No .Of Ordinary Shares

In the BOC Pak (Ltd) there is no prefers share holder so the formula will be.
Earning After Tax
= No .Of Ordinary Shares

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

3
69 ,9 2
4 4
49 ,7 6
1
= =
25
039 25
039
= Rs. 14.77/Share = Rs. 17.96/Share
Interpretation:
Earning per share of BOC Pakistan Ltd. 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. As this ratio describes the rate of dividend so it can
be assumed company is distributing high dividends.
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. Generally people purchase the shares of a company from

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stock exchange at market price don’t look for dividend rather they care
about capital gain.
Price Earning Ratio
Dividend Per Share
×100
= Market Value Per Share

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

157 .55 1
41 .15
= =
14 .77 17 .96
= Almost 10 years = Almost 8 years

This ratio is the subject of great fluctuations because market price of

share changes substantially almost every day. This ratio does not give
exact idea but for the purpose of rough estimation it can be used.
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.
Significance:
This ratio helps the investors to determine that how many percent is being
earned with his earning per share. This ratio is the reciprocal of price earning
ratio. Greater this ratio means the greater capital gain and vice versa. The ratio is
subject to great fluctuations as market prices of shares are changed rapidly in
our stock exchange. Earning yield and price earning ratio both are analyzed
before taking the investment decision in any company.
Earning Yield Ratio=
Earning Per Share
×100
Market Value Per Share

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

1 4.7 7 17 .96
= × 100 = ×100
1 5 7.5 5 141 .15
= 9.37% = 12.17%
Dividend Yield Ratio:

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This ratio is relationship between dividend per share paid and the market value
per share expressed in terms of percentage.
Significance:
This ratio is much better tool then the earning yield ratio because it relates
dividends paid with the market value of share. It helps investor assess that how
much return he is going to get on the proposed investment.

Dividend Yield Ratio

Dividend Per Share
= Market Value Per Share ×100

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

12 15
= = ×100
157 .55 141 .15
= 7.60% = 10.60%

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. It is an important ratio because ploughing back of
profits enables a company to grow and pay more dividends in future.
Dividend Pay-out Ratio
Dividend Per Equity Share
= ×100
Earning Per Share

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

12 1
5
= =
14 .77 1
7 .96
= 81.24% = 83.51%
Interpretation:

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BOC Pakistan Ltd. is paying much dividends and its retained earning per share is
lower. The company is paying more dividends and retaining lesser portion of the
profit for its reserves. This policy might be the result that already company’s
reserves are three times greater than the share capital. Investors are going to
have adequate return on their investments because 83 % of the profit is being
paid to them.

Dividend Cover Ratio:

Dividend cover ratio is a relationship between earning after tax and dividend
declared by the company expressed in times.
Significant:
This ratio gives information that how many times the dividend is covered through
the profit. 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. Dividend cover ratio and dividend pay out ratio give almost same type of
information to the investors.
Dividend Cover Ratio

E a rn in ag fte rT a x
= D iv id enDd e cla red

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

396,694 449,761
= 300464 = 375,581

=1.31 times = 1.33 times

The answers of above ratio indicate that BOC Pakistan Ltd. is retaining lesser
portion of the profits in shape of reserves and paying greater portion to the share
holders in shape of dividend.
Analysis of Current Assets Movement (Liquidity Ratios):

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The liquidity ratios generally liquid Ratio and Absolute Liquidity

Ratio generally indicate the adequacy of current assets for meeting
current liabilities. This is one dimensions of liquidity analysis. The other
dimension of liquidity is determination of the rate at which various
short term assets are converted into cash. The efficiency with which
assets are managed directly, affect the volume of sales. The better the
management of assets, the larger is the amount of sales and profits.
Activity ratios measure the efficiency or effectiveness with which a firm
manages its resources or assets. These ratios are also called turnover
ratios because they indicate the speed with which assets are converted
or turned over into sales.
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. But the
level of inventory should neither be too high nor too low. A too high
inventory means higher carrying costs and higher risk of stocks
becoming obsolete whereas too low inventory may mean the loss of
business opportunities. Thus, it is very essential to keep sufficient
stocks in business.
Inventory turnover ratio, also known as stock turnover, is the
relationship between the cost of goods sold during a particular period
of time and the cost of average inventory during that period. It is
expressed in number of times.
Significance:
Inventory turnover ratio measures the velocity of conversion of stock
into sales. Usually, a high inventory turnover/stock velocity indicates
efficient management is required to finance the inventory. A low
inventory turnover ratio indicates an inefficient management of
inventory. A low inventory turnover implies over-investment in
inventories, dull business, poor quality of goods, stock accumulations,

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accumulation of obsolete and slow moving goods and low profits as

compared to total investments.
Stock Turn over Ratio
Cost Of Goods Sold
= Avg . Clo sin g Stock

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

101 ,701 ,6 143 ,298 ,2
= 68 ,408 = 142 ,132

= 14.9 times = 10.08 times

No. of Days (Rotation period)

Avg Clo sin g Stock
= Cost of Goods Sold ×365

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

68 ,408 1,42 ,132
= 101 ,701 ,6 = 143 ,298 ,2 ×365

= 25 days = 36 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. 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 completed in 36 days. BOC Pakistan Ltd. is needed
to be efficient in inventory. One reason of this substantial increase may
be the increased cost of goods sold during this year (increased up to
41%).
Debtors or Receivables Turnover Ratio:

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The volume of sales can be increased by following a liberal credit

policy. But the effect of a liberal credit policy may result in tying up
substantial funds of a firm in the form of trade debtors. Trade debtors
are expected to be converted into cash within a short period and are
included in current assets. The liquidity position of a concern to pay its
short-team obligations in time depends upon the quality of its trade
debtors.
Significance:
Debtor’s turnover ratio indicates the number of times the debtors are
turned over during a year. The higher the value of debtor’s turnover
the more efficient is the management of debtors or more liquid are the
debtors. Similarly, low debtors turnover implies inefficient
management of debtors or less liquid debtors. It is the reliable
measure of the time of cash flow from credit sales.
Debtor Turnover Ratio
Credit Sales
= Avg .Trade Debtors

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

2,008 ,323 2,799 ,870
= 119 ,047 = 169 ,895

= 16.87 times = 16.48 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. It can be calculated as follows:
Significance:
This ratio measures the quality of debtors. A short collection
period implies prompt payment by debtors. It reduces the chances of
bad debts. Similarly a longer collection period implies too liberal and

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inefficient credit collection performance. It is difficult to provide a

standard collection period of debtors.
No. of Days (average collection Period Debtor Turnover Ratio
Avg .Trade Debtors
=
CreditSale s
Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)
119 ,047 169 ,895
= 2,008 ,323 ×365 = 2,799 ,870 ×365

= 22 days = 22 days

Interpretation:
BOC Pakistan Ltd. 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.
Creditors/Payables Turnover ratio:
This ratio is similar to Debtors/Receivable turnover ratio. It
compares the creditors with total credit purchases. It signifies the
credit period enjoyed by the firm in paying creditors. Accounts payable
include both sundry creditors and bills payable. Same as debtor’s
turnover ratio, 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. A higher creditors turn over
ratio or a lower credit period ratio signifies that the creditors being
paid promptly, thus enhancing the creditworthiness of the company.
However, a very favorable ratio to this effect also shows that the
business is not taking full advantage of credit facilities allowed by the
creditors.
Creditors Turn over Ratio

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Credit Purchase
= Avg .Trade Creditors

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

342 ,720 576 ,520
= 4,6633 = 65 ,124

= 7.35 times = 8.85 times

No. of days (Average payment period):

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. 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, a very favorable ratio to this effect also shows that the
business is not taking full advantage of credit facilities allowed by the
creditors.
No. of Days (Average Payment Period)
Avg .Trade Creditors
= ×365
Credit Purchase

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

46 ,633 65 ,124
= 3,42 ,720 ×365 = 576 ,520 ×365

= 50 days = 41 days
Interpretation:
As the credit purchases were not available in the financials of BOC Pakistan Ltd.
so we have calculated the creditors turn over ratio by assuming all the purchases
as credit. BOC Pakistan Ltd. has improved its creditors turn over ratio from the
previous years as in previous years creditors were paid in the span of 50 days

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which has been reduced in the current year to 41 days. It is clear indication that
company has enhanced its credit worthiness. 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.

Analysis of Solvency (Long Term Financial Position):

The long term indebt ness of a firm includes debenture holders, financial
institutions providing medium and long term loan. Short term creditors of a firm
are primarily interested in knowing the firm’s ability to meet its short term
obligations, 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, repayment of the principal amount at the maturity and the security of
the loan. 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. These ratios also used to analyze the capital structure of the
company. They indicate the pattern of financing, whether long term requirements
have been met out of long term funds or not.
Following ratios are generally calculated to test the long term solvency.
Debt-Equity Ratio:
Debt-to-equality 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.
Significance:
The ratio indicates the proportionate claims of owners and the outside
against the firm’s assets. The purpose is to get an idea of the cushion
available to outsider 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 the

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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. The outsiders (creditors) on the
other hand, want that shareholders (owners) should invest and risk
their share of proportionate investments.
Debt Equity Ratio
Total Long Term Debts
= Share Holder Fund

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

368 ,126 303 ,348
= 106 ,312 ,7 = 121 ,242 ,4

= 1:2.9 = 1:4

Interpretation:
Debt equity ratio of the company is being increased from the previous
year from 1:2.9 to 1:4 which is indication that the company now has
more funds to pay out the long term funds. One reason of the
company’s improved debt equity ratio is the payment of the long term
funds. 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. Debt equity ratio = 1:1 (for Rs.1 of
long term debts share holders have Rs.1) is considered satisfactory but
the debt equity ratio of the BOC Pakistan Ltd. 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.
Debt Service or Interest Coverage Ratio:
This ratio relates the fixed interest charges to the income earned by
the business. It is also known as interest Coverage Ratio. It indicates
whether the business has earned sufficient profits to pay periodically
the interest charges.

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Significance:
The interest Coverage Ratio is very important from the lender’s
point of view. It indicates the number of times interest is covered by
the profits available to pay interest charges. It is an index of the
financial strength of an enterprise. A high ratio assures the lender a
regular and periodical interest income. But the weakness of the ratio
may create some problems to the financial manager in raising funds
from debts sources.
Interest Coverage Ratio
Net Pr ofit Before Interest & Tax
= Fixed Interest Ch arg e

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

518285 583 ,702
= =
16126 12661
= 32.14 times = 46.10 times

Interpretation:
The results of the interest coverage ratio of BOC Pakistan Ltd. 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.
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.
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.

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The term capital structure refers to the relationship between the

various long-term forms of financing such as debentures. P.T.C.
preference and equity share capital including reserves and surpluses.
Leverage or capital structure ratios are calculated to test the long-term
financial position of a firm.
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. In other words it is the proportion
between the fixed interest or dividend bearing funds and non fixed
interest or dividend bearing funds. Equity share capital includes equity
share capital and all reserves and surpluses items that belong to
shareholders.
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. It reveals the suitability of company’s capitation.

Capital Gearing Ratio

Share Holder Fund
= Fixed Interest bearing Fund

Sep 30th 2005 (Rs. 000) Dec 31st 2006 (Rs.000)

106 ,3127 121 ,242 ,4
= 368 ,126 =
303348
= 2.89:1 = 4:1
Interpretation:
Capital gearing ratio is just reciprocal of debt to equity ratio. BOC
Pakistan Ltd. is relatively low geared than the previous year. Its results
show that BOC Pakistan Ltd. has Rs. 4 for every Rs. 1 of the long term
borrowings. Again the ratio is the depiction of the better credibility of

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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.

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, investors because
they are interested in adequate return of their investment and
creditors who are interested in on time repayments of loan and
interest.
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.
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. Secondly company revaluated the
useful life of the assets which has substantially increased the

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depreciation charge. But still the company is paying relatively better

returns to the investors. The analysis of profitability ratios is the
depiction that share holders are getting adequate returns. The
company’s performance in many aspects like payment of dividends,
return on equity capital, earning per share, 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.
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.
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.
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.
Before sanctioning the loan the financial institutions analyze the
potential of the company to repay the amount of interest together with
principal. BOC has potential to meet its all to meet its long term and
short term liabilities and obligations.
We conclude that the BOC Pakistan Ltd. is in has potential and
attraction for both the parties i.e. it can pay its liabilities in time and it
can also give the adequate returns to the investors. Investment of the
investors and financing by the creditors both are secured.

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