Professional Documents
Culture Documents
Project Report
On
Submitted to
Undertaken at
ACADEMIC SESSION
2007-09
Faculty of Jaipur
PREFACE
In today’s highly competitive corporate world a student only having theoretical
knowledge stands nowhere. An exposure to the field and practical acknowledgement
gives an extra edge so as to come up with high performance.
The efforts in this report have been aimed at the financial performance analysis with the
help of working capital management, credit management and ratio analysis.
ACKNOWLEDGEMENT
The beatitude, bliss and euphoria that accompany the successful completion of any task
would not be complete without the expression of appreciation of simple virtues to the
people who had made it possible.
First and foremost I would like to thank my supervisor Mr SHYAM BOHRA (Sr. Divisional
Retail Sales Manager). His attitude towards excellence, his helping nature and
enthusiasm has been force of constant inspiration. I do not think this endeavor would be
as structured as it is now without his valuable guidance and timely suggestions. I am
grateful to all the members of finance department for providing all the facilities, inputs
and co-operation during the project work.
I would like to express my heart-felt and deep sense of gratitude to the faculty members
for their unhitching support during my work. They were the true driving force behind me
throughout, constantly encouraging me to do my best and inspiring to aim higher.
MEENAL SHARMA
Acknowledgement
Table of Contents
Chapter Particular
1. INTRODUCTION
Introduction to industry
Introduction to IOCL
2. PROJECT PROFILE
Research Methodology
3. CONCISED CONCEPTS
BIBLIOGRAPHY
ANNEXURE
CHAPTER
ONE
The oil industry began over five thousand years ago. In the Middle East, oil seeping up
through the ground was used in waterproofing boats and baskets, in paints, lighting and
even for medication.
Whale oil has been used in more recent times as a source of light in houses. However,
the high premium for whale oil decimated whale populations and as their numbers
dropped the prices rose further.
The demand for oil was now far higher than the supply. Many companies and
individuals were looking for an alternative and longer lasting source of what would later
become known as black gold. Apart from a brief period of coal oil, the answer came with
the development of drilling for crude oil. Land oil wells were first and as demand
continued to grow exploration companies began to look below the sea bed.
The first oil well structures to be built in open waters were in the Gulf of Mexico. They
were in water depths of up to 100m and constructed of a piled jacket formation, in which
a framed template has piles driven through it to pin the structure to the sea bed. To this,
a support frame was added the working parts of the rig such as the deck and
accommodation. These structures were the fore-runners for the massive platforms that
now stand in very deep water and in many locations around the world, including the
North Sea. How did they know to look for oil beneath the North Sea? In 1959 the
massive Groningen land gas field was discovered in the Netherlands. Geologists
estimated that the same rock formations might be found beneath the southern North
Sea basin in UK waters. They were right and gas was discovered of the English East
Coast in the 1960s.
Clues around the coast of Greenland gave Geologists the idea that there may be oil and
gas around Scottish waters. There have been land oil wells in Europe since the 1920s.
It wasn't until the 1960s that exploration in the North Sea really begun, without success
in the early years. They finally struck oil in 1969 and have been discovering new fields
ever since. The subsequent development of the North Sea is one of the greatest
investment projects in the world.
The development of the offshore oil industry in hostile waters has been made possible
by many achievements comparable with the space industry. Many fields are located far
from land and they are getting further away. New fields are being explored in ever
deeper and wilder waters, like the Atlantic Ocean west of Scotland.
After the North Sea UK disaster in 1988 when on 6 July, the North Sea Piper Alpha oil
platform caught fire and exploded killing 167 of the 228 on board. The industry and the
government waited until 1990 for the publication of the Cullen report. Lord Cullen
discovered that the main cause of the explosion was the failure in the operation of the
permit to work system, for which there are now very strict guidelines. This system is
used to over-sea work, preventing potentially dangerous work being carried out. It also
prevents dangerously conflicting work being carried out by a combination of workers
and it ensures that proper laid down procedures are adhered to.
Today the industry is very safety conscious. It has to be for its very survival. For
example, the safety record of an exploration rig can make a big difference to whether or
not an oil company will want to hire it. Oil companies cannot afford to have their name
associated with accidents.
Everyone attends weekly safety meetings and daily pre "tour" meetings. The weekly
meeting is an in-depth look at industry wide safety news and other safety related issues
on the rig. Companies share safety information with other companies throughout the
industry. This helps to avoid repeated incidents. A fire and boat drill is often held on the
same day which involves a mock fire and a mock abandon the rig exercise.
Petroleum or crude oil is an oily, flammable liquid that occurs naturally in deposits, most
often found beneath the surface of the earth. Over millions of years, plant and animal
remains fall to the floor of shallow seas. As the seas recede, the plant material is
covered by sediment layers, such as silt, sand, clay, & other plant material. Buried deep
beneath layers of rock, the organic material partially decomposes, under an absence of
oxygen, into petroleum that eventually seeps into the spaces between rock layers. As
the earth's tectonic plate’s move, the rock is bent or warped into folds or it "breaks"
along fault lines, allowing the petroleum to collect in pools.
Future of Oil
The Hubbert peak theory (also known as peak oil) is a proposition which predicts that
future world petroleum production must inevitably reach a peak and then decline as
these reserves are exhausted. It also suggests a method to calculate mathematically
the timing of this peak, based on past production rates, past discovery rates, and
proven oil reserves.
Controversy surrounds the theory for numerous reasons. Past predictions regarding the
timing of the global peak have failed, causing a number of observers to disregard the
theory. Further, predictions regarding the timing of the peak are highly dependent on the
past production and discovery data used in the calculation.
Proponents of peak oil theory also refer as an example of their theory, that when any
given oil well produces oil in similar volumes to the amount of water used to obtain the
oil, it tends to produce less oil afterwards, leading to the relatively quick exhaustion
and/or commercial inviability of the well in question.
Hubbert's prediction for when US oil production would peak turned out to be correct,
and after this occurred in 1971 - causing the US to lose its excess production capacity -
OPEC was finally able to manipulate oil prices, which led to the 1973 oil crisis. Since
then, most other countries have also peaked: the United Kingdom's North Sea, for
example in the late 1990s. China has confirmed that two of its largest producing regions
are in decline, and Mexico's national oil company, Pemex, has announced that Cantarell
Field, one of the world's largest offshore fields, is expected to peak in 2006, and then
decline 14% per annum.
It is difficult to predict the oil peak in any given region (due to the lack of transparency in
accounting of global oil reserves[9]). Based on available production data, proponents
have previously (and incorrectly) predicted the peak for the world to be in years 1989,
1995, or 1995-2000. A new prediction by Goldman Sachs picks 2007 for oil and some
time later for natural gas. Just as the 1971 U.S. peak in oil production was only clearly
recognized after the fact, a peak in world production will be difficult to discern until
production clearly drops off.
Many proponents of the Hubbert peak theory expound the belief that the production
peak is imminent, for various reasons. 2005 saw a dramatic fall in announced new oil
projects coming to production from 2008 onwards - in order to avoid the peak, these
new projects would have to not only make up for the depletion of current fields, but
increase total production annually to meet increasing demand.
2005 also saw substantial increases in oil prices due to a number of circumstances,
including war and political instability. Oil prices rose to new highs. Analysts such as
Kenneth Deffeyes[10] argue that these price increases indicate a general lack of spare
capacity, and the price fluctuations can be interpreted as a sign that peak oil is
imminent.
Pricing
Overnight gas price hike shown at a Chicago area BP-Amoco station (background). The
Shell station (foreground) has not yet posted the 12 cent price hike.
References to the oil prices are usually either references to the spot price of either
WTI/Light Crude as traded on New York Mercantile Exchange (NYMEX) for delivery in
Cushing, Oklahoma; or the price of Brent as traded on the Intercontinental Exchange
(ICE, which the International Petroleum Exchange has been incorporated into) for
delivery at Sullom Voe. The price of a barrel (which is 42 gallons) of oil is highly
dependent on both its grade (which is determined by factors such as its specific gravity
or API and its sulphur content) and location. The vast majority of oil will not be traded on
an exchange but on an over-the-counter basis, typically with reference to a marker
crude oil grade that is typically quoted via pricing agencies such as Argus Media Ltd
and Platts. For example in Europe a particular grade of oil, say Fulmar, might be sold at
a price of "Brent plus US$0.25/barrel" or as an intra-company transaction. IPE claim
that 65% of traded oil is priced off their Brent benchmarks. Other important benchmarks
include Dubai, Tapis, and the OPEC basket. The Energy Information Administration
(EIA) uses the Imported Refiner Acquisition Cost, the weighted average cost of all oil
imported into the US as their "world oil price".
It is often claimed that OPEC sets the oil price and the true cost of a barrel of oil is
around $2, which is equivalent to the cost of extraction of a barrel in the Middle East.
These estimates of costs ignore the cost of finding and developing oil reserves.
Furthermore the important cost as far as price is concerned, is not the price of the
cheapest barrel but the cost of producing the marginal barrel. By limiting production
OPEC has caused more expensive areas of production such as the North Sea to be
developed before the Middle East has been exhausted. OPEC's power is also often
overstated. Investing in spare capacity is expensive and the low oil price environment in
the late 90s led to cutbacks in investment. This has meant during the oil price rally seen
between 2003-2005, OPEC's spare capacity has not been sufficient to stabilise prices.
A recent low point was reached in January 1999, after increased oil production from Iraq
coincided with the Asian financial crisis, which reduced demand. The prices then rapidly
increased, more than doubling by September 2000, then fell until the end of 2001 before
steadily increasing, reaching US $40 to US $50 per barrel by September 2004. In
October 2004, light crude futures contracts on the NYMEX for November delivery
exceeded US $53 per barrel and for December delivery exceeded US $55 per barrel.
Crude oil prices surged to a record high above $60 a barrel in June 2005, sustaining a
rally built on strong demand for gasoline and diesel and on concerns about refiners'
ability to keep up. This trend continued into early August 2005, as NYMEX crude oil
futures contracts surged past the $65 mark as consumers kept up the demand for
gasoline despite its high price. Crude oil futures peaked at a close of over $77 a barrel
in July 2006, and in December 2006 at about $63. That is just about where they began
the year 2006. Individuals can now trade crude oil through online trading sites margin
account or their banks through structured products indexed on the Commodities
markets.
Vision
To foster a culture of participation and innovation for employee growth and contribution.
To cultivate high standards of business ethics and Total Quality Management for a
strong corporate identity and brand equity.
To help enrich the quality of life of the community and preserve ecological balance and
heritage through a strong environment conscience.
History
Indian Oil Corporation Ltd. (Indian Oil) was formed in 1964 through the merger of Indian
Oil Company Ltd. (Estd. 1959) and Indian Refineries Ltd. (Estd. 1958). It is currently
India’s largest company by sales with a turnover of Rs. 2,47,479 crore and profits of
Rs. 6,963 crore after Tax for fiscal 2007-2008.
Indian Oil is also the highest ranked Indian company in the prestigious Fortune ‘Global
500’ listing, having moved up 17 places to the116th position this year based on fiscal
2007 performance. It is also the 21st largest petroleum company in the world and the #
1 petroleum trading company among the National Oil Companies in the Asia-Pacific
region.
Indian Oil and its subsidiaries account for 47% petroleum products market share among
public sector oil companies, 41% national refining capacity and 74% petroleum products
pipeline capacity.
For the year 2007-08, the Indian Oil group sold 59.29 million tonnes of petroleum
products, including 3.33 million tonnes through product exports.
The Indian Oil Group of companies owns and operates 10 of India’s 18 refineries with a
combined refining capacity of 60.2 million tonnes per annum (1.2 million barrels per
day). These include two refineries of subsidiary Chennai Petroleum Corporation Ltd.
(CPCL) and one of Bongaigaon Refinery and Petrochemicals Limited (BRPL).
The Company’s cross-country crude oil and product pipelines network spanning over
9,000 km meets the vital energy needs of the country.
To maintain its competitive edge and leadership status, Indian Oil is investing Rs.
24,400 crore (US $ 5.5 billion) during the X Plan period (2002-07) in integration and
diversification projects, besides refining and pipeline capacity augmentation, product
quality upgradation and expansion of marketing infrastructure.
As the flagship national oil company in the downstream sector, Indian Oil, together with
its marketing subsidiary, IBP Co. Ltd., reaches precious petroleum products to millions
of people everyday through a countrywide network of over 30,000 sales points. They
are backed for supplies by 183 bulk storage terminals and depots, 97 aviation fuel
stations and 88 Indane LPG bottling plants.
Indian Oil, together with IBP, operates the largest and the widest network of petrol &
diesel stations in the country, numbering over 15,000. It reaches Indane cooking gas to
the doorsteps of 43.4 million customers in 2,546 markets through a network of 4,856
Indane distributors.
Indian Oil’s ISO-9002 certified Aviation Service commands a 64% market share in
aviation fuel business, meeting the fuel needs of domestic and international flag
carriers, private airlines and the Indian Defence Services. Indian Oil also enjoys a
dominant share of the bulk consumer business, encoding that of railways, state
transport undertakings, industrial, agricultural and marine sectors.
Indian Oil’s world class R&D Centre is perhaps Asia’s finest. Besides pioneering work in
lubricants formulation, refinery processes, pipeline transportation and alternative fuels
such as bio-diesel, the Centre is also the nodal agency of the Indian hydrocarbon sector
for ushering in Hydrogen fuel in the country.
Customer First
At Indian Oil, customers always get the first priority. New initiatives are launched round-
the-year for the convenience of the various customer segments. Exclusive XTRACARE
petrol & diesel stations unveiled in select urban and semi-urban markets offer a range of
value-added services to enhance customer delight and loyalty. Similarly, large format
Swagat brand outlets cater to highway motorists, with multiple facilities such as food
courts, first aid, rest rooms and dormitories, spare parts shops, etc. Specially formatted
Kisan Seva Kendra outlets meet the diverse needs of rural populace, offering a variety
of products and services such as seeds, fertilisers, pesticides, farm equipment,
medicines, spare parts for trucks and tractors, tractor engine oils and pumpset oils,
besides auto fuels and kerosene.
Widening Horizons
Indian Oil has set its sight to reach US$ 60 billion revenues by the year 2011-12 from
current earnings of US$ 41 billion. The road map to attain this milestone has been laid
through vertical integration – forward into petrochemicals and backwards into
exploration & production of oil – and diversification into natural gas business, besides
globalization of its marketing operations.
In exploration & production (E&P), Indian Oil has bagged nine blocks in the first three
rounds of bids under NELP (New Exploration Licensing Policy) in India, in consortium
with other companies. It has also acquired participating interest in on-shore blocks in
Assam and Arunachal Pradesh region. Overseas ventures include two gas blocks in
Sirte Basin of Libya, the Farsi Exploration Block in Iran and onshore farm-in
arrangements in Gabon. The business Corporation is also exploring opportunities to
acquire a suitable medium-sized E&P company to quickly consolidate its upstream
portfolio.
In natural gas, Indian Oil is already marketing 1.43 million tonnes of gas per annum. To
augment its business in the sector, it has signed an MOU for import of 1.75 million
tonnes of LNG per annum with Iran for supplies from the year 2009 onwards. The
Corporation has also proposed partnering Petropars, a subsidiary of National Iranian Oil
Company, in jointly developing gas blocks in the North Pars fields of Iran.
To emerge as a transnational energy major, Indian Oil has set up subsidiaries in Sri
Lanka, Mauritius and UAE and is simultaneously scouting new opportunities in energy
markets in Asia and Africa.
CHAPTER
TWO
TITLE
OBJECTIVE
To evaluate the financial health and performance of IOCL with the help of financial
ratios and working capital management.
This project helps the firm in determining its strength and weaknesses as well as its
historical performance and current financial conditions.
To the Researcher-
Researcher came to know about the various tools of financial management can be used
to increase profitability.
The researcher had not only fulfilled his requirement of the MBA degree program but
also gained a significant knowledge about the petroleum industry, which may prove
useful in future.
The study was confined to the study of financial performance analysis of IOCL with the
help of analytical tools – Ratios and Working Capital Management.
RESEARCH METHODOLOGY
Research Type
Data Type
The researcher has taken the help of secondary data available from the finance
department of IOCL.
Data Source
Balance sheets, Profit & Loss accounts, annual reports and experts of the finance
department.
Ratios of various types, i.e., liquidity ratio, leverage ratios, Activity ratios and Profitability
ratios, are used.
Ratios of sales method is used to determine the projected working capital requirement.
Certain calculations have been taken as per static view, which might not match with real
situations.
Research has been conducted on the basis of secondary data so any misinterpretation
from these data might effect on research.
Limited information, on the part of inventories, has been adversely affected the analysis
of working capital management.
CHAPTER
THREE
FINANCIAL ANALYSIS
Financial Analysis is the starting point for making plans, before using any sophisticated
forecasting and planning procedures.
Management always interested in knowing financial strengths of the firm to make their
best use and to be able to spot out financial weaknesses of the firm to take suitable
corrective actions.
Financial Analysis is the process of identifying the financial strengths and weaknesses
of the firm with the help of proper financial information.
The basis for financial planning, analysis and decision-making is the financial
information. Financial information is needed to predict, compare and evaluate the firm's
earning ability. It is also required to aid in economic decision-making- investment and
financing decision-making. Financial information of an enterprise is contained in the
financial statements and financial reports.
Ratio Analysis
Ratio analysis is a powerful tool of financial analysis. Ratios are used as a benchmark
for evaluating the financial position and performance of a firm in financial analysis.
It helps to summarize large quantities of financial data and to make qualitative
judgement about the firm's financial performance, because absolute accounting figures
reported in financial reports do not provide a meaningful understanding of the
performance and financial position of a firm.
Ratios can be grouped into various classes according to financial activity or function to
be evaluated. The four important classes of ratios are as follows: -
2. Leverage Ratios: - It shows the proportion of debt equity in financing the firm's assets.
4. Profitability Ratios: -
It measures the overall performance and effectiveness of the firm.
Effective financial management is the outcome, among other things, of proper
management of investment of funds in business. Funds can be invested for long-term or
permanent purposes and also for short-term or current operations of the firm.
WORKING CAPITAL
Working Capital refers to a firm's investment in short-term assets, i.e., cash, short-term
securities, bank balance, bill receivables, debtors' etc.
2. Net Working Capital: - It refers to the difference between current assets and current
liabilities.
Both the concepts of Working Capital are equally important for the efficient
management of Working Capital. Firms differ in their requirement of the Working Capital
to run the day-to-day operations and business activities.
• Investment in Current Assets should just adequate neither more nor less to the
needs of the firm.
• Executive investment in Current Assets should be avoided, because it impairs
firm's profitability, as idle investment earns nothing.
• On the other hand, inadequate amount of Working Capital can threaten solvency
of the firm because of its liability to meet its current obligations.
A firm has to invest enough funds in current assets for generating sales. There is, thus,
always a Working Capital requirement involved in the conversation of sales into cash.
Here, the Ratio of Sales method is applied to calculate the working capital requirement
of the firm.
LIQUIDITY
It refers to the firm's ability to meet its liabilities. The risk of financial manager in
managing working capital efficiently is to ensure sufficient liquidity in the operations.
• Current Ratio
• Acid Test Ratio
• Net Working Capital Ratio
Working Capital management also refers to the administration of all the aspects of
Current Assets.
Time, Investment, Critically and Growth are some aspects of working capital, which
should be taken into consideration by the financial manager as challenges as well as
operations.
Another aspect, which effects the firm's decision about the level of Current Assets, is
Trade-off between Risk & Returns.
Therefore, the firm is required to strike a balance between profitability and risk. A firm's
profit or risk bearing capacity is determined by the Current Assets to Total Assets ratio
and Current Liabilities to Total Assets ratio respectively.
CHAPTER
FOUR
Risk-Return Trade-off
A firm's Current Assets holding depend upon its Working Capital Policy, i.e., either
conservative or an aggressive policy. These policies involve 'risk-return trade-off'. Thus,
a firm must decide about the level of Current Assets to be carried.
CA-FA Ratio
The level of the Current Assets can be measured by relating Current Assets to Fixed
Assets.
A low CA / FA Ratio indicate a low level of current assets holding of the firm. Thus the
firm has an aggressive policy assuming other factors to be constant. Its profitability can
be increased as fewer funds are tied up in idle current assets, but its solvency could be
threatened and could be exposed to the greater risk of cash shortage and cash-outs.
Further, a firm's profit earning capacity and risk bearing capacity is determined by CA –
TA and CL – TA Ratios respectively.
CA – TA Ratio
CL – TA Ratio
Both the CA – TA and CL – TA Ratios are very low, which indicates that the firm is weak
on both the sides, profit earning as well as risk bearing capacity.
A. LIQUIDITY RATIOS
1. Current Ratio
The current ratio of a firm measures its short-term solvency, i.e., its ability to meet short-
term obligations.
Above table shows that the level of both, Current Assets as well as Current Liabilities
are increasing from 02-03 to 05-06.
While, Current ratio is showing ups, it indicates that the firm is quite liquid and has
sufficient ability to pay its current obligations in time.
2. Quick Ratio
Quick Ratio is a refined measure of the short-term debt paying ability by measuring
short-term liquidity. It is also known as Liquid Ratio or Acid Test Ratio.
Quick Assets and Current Liabilities are falling in the year of 03-04 then rise in 04-05 but
Quick Assets again declined in the year 05-06.
3. Cash Ratio
Cash Ratio assesses a firm's ability to meet its regular cash expenses in time or
immediately. It is also known as Absolute Liquid ratio.
Here the ratio is indicating ups in the year 03-04 and downs from 04-05 to 05-06.
Further, the low ratio represents the low cash position of the firm; on the other hand the
firm also has reserve borrowing power.
The firm has credit limit sanctioned from the bank and can easily draw cash.
Absolute Liquid Assets (ALA) are showing a great change of percentage. ALA
increased in 04-05 by 14.71% and decreased by 25.12% in 06-07.
It is considered that the firm having larger Net Working Capital has the greater ability to
meet its current obligations.
Here, the firm has the potential reservoir of funds, as the Net Working Capital Ratio is
satisfactory.
Both Net Working Capital and Net Assets are increasing in comparison to the previous
years.
B. LEVERAGE RATIOS
1. Debt Ratio
Debt Ratio is used to analyze long-term solvency of a firm. It implies that how much
finance is provided by owner and how much by the lenders.
The Debt Ratio here increased from 2002-2003 to 2006-2007. This means that lenders
have financed 27%, 33%, 37%, & 44% in the years 02-03, 04-05, 05-06, & 06-07
respectively.
Further it obviously implies that owner has provided the remaining finances. They have,
thus, financed 73%, 67%, 63%, & 56% in the years 02-03, 04-05, 05-06 & 06-07
respectively. This indicates that claims of creditors are lesser than those of owners.
Both TD & CE are increasing from 02-03 to 06-07, but percentage increase in Total
Debt, is more than percent increase in Capital Employed.
The relationship describing the lender's contribution for each rupee of the owner's
contribution is known as Debt Equity Ratio.
The ratio indicates the proportionate claims of the owner and the outsiders against the
firm's assets.
The ratio is increasing from 0.46 in the year 02-03 to 0.98 in the year 06-07 but it is still
below one and according to the rule of thumb it cannot be considered satisfactory.
Both the TD and NW are increasing but percentage increase in Total Debt is much
higher as compared to the percentage increase in Net Worth.
This ratio implies that how much funds are being contributed together by lenders and
owners for each rupee of the owner's contribution.
Ratio = Capital Employed / Net Worth
As the Net Assets equals Capital Employed, this ratio also called as Net Assets to Net-
Worth Ratio. This ratio is continuously increasing from 1.73 to 2.21.
Both the CE and NW are increasing but percentage increase in Capital Employed is
more than percentage increase in Net Worth.
This ratio may be calculated to assess the proportion of total funds (i.e. short-term and
long-term) provided by outsiders to finance Total Assets.
The lower ratio is considered to be satisfactory and the firm's ratio has slightly increased
but still low.
Both the Total Liabilities and Total Assets increased therefore, as a result the ratio also
increased.
5. Long-term Debts to Long-term Funds(LTD - LTF) Ratio
It is also known as Funded Debt to Total Capitalization Ratio. This ratio helps firms to
calculate leverage ratios in terms of the long-term funds.
This ratio establishes a link between the long-term funds raised from the outsiders and
total long-term funds available in the business.
The smaller the ratio, the better it will be. The ratio may not be tolerable beyond 50%.
In 2002-2003, the firm had utilized its own sources to a great extent for raising long-term
funds, as the ratio is comparatively low.
In 2006-2007, the ratio increased to the level of 24.1%, which implies that the firm had
relied on outside sources to some extent for raising long-term funds, as the ratio is
comparatively high.
Yet there is enough scope for the firm to raise long-term funds from outsiders.
This ratio helps firms to calculate leverage ratios in terms of capitalization. It shows a
link between the long-term funds raised from the outsider and net worth available in the
business.
This ratio is also known as shareholder's funds to total equities or net worth to total
assets ratio, which establishes the relationship between proprietors funds and total
assets of the firm for determining long-term solvency of the firm.
This ratio indicates the extent to which the assets of the company can be lost without
affecting the interest of the creditors of the company.
The percentage of owner's capital to total assets of the firm decreased to 37% in 2006-
07 due to more percentage increase in Total Assets as compared to Net Worth.
This ratio indicates the extent to which shareholder's funds are sunk into the fixed
assets. This is also known as fixed assets to proprietor's funds.
The ratio here (i.e. more than 100% from 02-03 to 04-05) indicates that owner's funds
are not sufficient to finance the fixed assets and the firm has to depend upon outsiders
to finance the fixed assets.
Fixed Assets and Net Worth are increasing from the year 02-03 to 06-07. The ratio has
been declining from the year 02-03 to 06-07 because the percentage increase in Net
Worth is more than the percentage increase in Fixed Assets.
This ratio indicates the extent to which the total of fixed assets is financed by long-term
funds of the firm. It is also known as Fixed Assets Ratio.
Generally the ratio should be 100% or say the total of fixed assets should be equal to
the total of long-term funds. But as the ratio is less than 100% from 2003-04 to 2006-07,
it implies that the firm does not need extra finance for fixed assets and it can use its
current funds or working capital elsewhere, which is a good financial policy.
This ratio indicates the extent to which proprietor's funds are invested in Current Assets.
The ratio or say the proprietor's funds in Current Assets had firstly decreased from 1.40
to 1.20 in the year 03-04 due to fall in Current Assets. Then the ratio increased from
1.20 to 1.30 in the year 04-05 due to rise in Current Assets. It remained constant in the
year 06-07 to 1.30 as the percentage rise in Current Assets has been equalized by the
percentage rise in Net Worth for the same period.
C. ACTIVITY RATIOS
It indicates the number of times the stock has been turned over during the period and
evaluates the efficiency with which a firm is able to manage its inventory.
It indicates the efficiency of the firm in producing and selling its product or how rapidly
the inventory is turning into receivables through sales.
The firm turns out its inventory from 3.9 to 4.8 times approximately; this is considered to
be satisfactory.
COGS show the continuous rise from the period 2002-03 to 2006-07. The holding
Average Inventory is also increased in the period and hiked rapidly in 2006-07.
This ratio indicates the velocity of debt collection of a firm or the number of times the
debtors are turned over during a year.
The liquidity portion of a firm depends on the quality of debtors to a large extent. A high
ratio is an indication of shorter time lag between credit sales and cash collection.
DTR increased from 28.40 times to 34.70 times in 2003-2004 because the Sales
increased for the period while there is a decline in Debtors. The ratio then decreased to
29.6 times in 2004-2005 because percentage rise in sales is less than percentage rise
in debtors.
It can be obtained by dividing number of working days by Debtors turn over Ratio.
Collection period varies between 11 to 13 days in the year of 365 days, which is very
less and indicates that the debtors are outstanding for a shorter period than warranted
by the firm under its credit policy, terms and standards. This implies the efficient credit
and collection performance of the firm.
The ratio indicates the velocity with which the creditors are turned over in relation to
purchases and also helps in finding out that how much time the firm is likely to take in
repaying its trade creditors.
A low ratio reflects liberal credit terms granted by suppliers, while a high ratio shows
that accounts are to be settled rapidly.
CTR decreased from 5.46 times to 3.75 times from the year 02-03 to 06-07, because
Creditors increased more rapidly than Purchases made during the year.
The firm's payment proficiency lies between 2 months 7 days to 3 months 7 days
approximately, which is considered to be satisfactory, as far as the liquidity is
concerned.
It indicates the velocity of the utilization of net working capital or the number of times the
working capital is turned over in the course of a year.
As the firm has moderate ratio, it indicates that the working capital has been utilized
efficiently.
The ratio deteriorated from 15.14 in the year 2004-2005 to 9.34 in the year 2005-2006
because the percentage increase in sales is less than percentage increase in NWC.
The ratio increased in the year 2006-2007 as the percentage increase in Sales is more
than the percentage increase in Net Working Capital.
The firm is producing Rs. 2.92 of sales for one rupee of capital employed in Net Assets
in the year 2002-2003. This level is decreased to Rs. 2.63 in the year 2006-2007 for
each rupee of capital employed in Net Assets.
In 2005-2006 the sales and Net Assets showed an upward movement and both gained
similar increment but NA is slightly greater than Sales, therefore this ratio decreased. In
2006-2007 both gained increment but NA is greater than Sales, therefore this ratio
further decreased to Rs. 2.63.
This ratio shows the firm’s ability in generating sales from all financial resources
committed to total assets.
The firm’s Total Assets Turn-over Ratio is increased to 1.85 times in 2006 from 1.75
times in 2003. This implies that the firm generates a sale of Rs.1.85 for one rupee
investment in Total Assets.
Both Sales and Total Assets are moving upward from the year 2003 to 2007. The
percentage increase in Sales is less than percentage increase in Total Assets,
therefore, Total Assets Turn-over Ratio decreased.
This ratio helps firm to know its efficiency of utilizing fixed assets.
Firm’s Fixed Assets Turn-over Ratio was 3.92 times in 2004 which has increased to
5.04 times in 2007 because increase in sales is more than increase in fixed assets.
The percentage increase in sales is higher than the percentage increase in fixed assets.
This ratio tells about the firm’s efficiency in utilizing its current assets.
Both sales and current assets are increasing but percentage increase in current assets
is lower than the percentage increase in sales.
D. PROFITABILITY RATIOS
It indicates the extent to which selling price of goods per unit may decline without
resulting in losses on operations of a firm.
Yet there is no standard norm for the GP ratio, but higher the ratio, better the results,
because the Gross Profit should be adequate to cover the operating expenses and
accumulation of reserves.
Both Gross Profit and Sales have increased from the year 2003-04 to 2006-07 but the
percentage increase in Sales is more than Gross Profit therefore the GP ratio
decreased during the period.
Net Profit Margin Ratio = (Earnings Before Interest & Tax / Sales) * 100
The ratio is very useful as if the net profit is not sufficient, the firm shall not be able to
achieve a satisfactory return on its investment. Hence, higher the ratio, the better it is.
The firm had a moderate net profit margin in 2003-04, which declined in 2004-05 and
further declined to a low net profit margin of 6.39% in the year 2005-06 but it increased
in the last year of 2006-07 which shows that the firm is started improving its operating
ability and efficiency.
It is the measurement of the cost of operations per rupee os Sales and explains the
changes in the profit margin ratio. It is considered to be a yard-stick of operating
efficiency.
The operating ratio of the firm was above average in the year 2003-04 and it is
continuously increasing since then. This should be checked by the firm as it indicates
the percentage of Sales consumed by operating cost is increasing which shows the less
favorability of ratio.
The firm is required to manage its operating expenses in the near future before it
crosses the boundary of sales.
This ratio indicates the relationship of cost of goods sold to net sales, which further
helps in analyzing the cause of variation of the operating expense ratio.
Both the COGS and Sales had increased from the year 2003-04 to the year 2006-07.
And the ratio as an effect had also increased but the ratio increased more in the year
2005-06 & 2006-07 because the percentage increase in COGS is more than the
percentage increase in Sales during the given period.
It will be more beneficial for the firm to manage its Cost of Goods Sold, as the ratio is
increasing, therefore the firm should try to check the increment and keep the ratio under
control.
5. Return on Investment
This ratio is also known as return on Capital Employed or Return on Assets. IT is the
primary ratio and is most widely used to measure the overall performance, profitability
and efficiency of a firm.
Since, taxes are not controllable by management and since firm’s opportunities for
availing tax incentives differ, it is more appropriate to use one of the following measures
of Return on Investments on before tax basis.
Return on Total Assets Ratio = (Earnings Before Interest & Tax / Total Assets) * 100
Return on Net Assets Ratio = (Earnings Before Interest & Tax / Net Assets) * 100
The higher the ratio the better it is, as it helps in providing fair remuneration to various
factors of production.
CHAPTER
FIVE
The object of the financial study is to find out the profitability and to provide information
regarding the financial position of the firm.
The basic financial statements reveal the net effect of the various transactions on the
operational and financial position of the firm.
The role of financial analysis has changed radically n recent times. From a near
estimation of cost and revenue it has changed to one of active help to management in
the discharge of its functions. Financial analysis is at best only for a sort of postmortem
of the affairs of the business in the past. What is needed, then, is a constant flow of
relevant information, so those problems are satisfactorily solved and action taken.
IOCL has also been given valuable information and output, so that people can take best
use of the petroleum products. But IOCL is led by responsibilities that have
handicapped performance-
RECOMMENDATIONS
• IOCL must maintain its present liquidity position and should make efforts to
enhance it.
• IOCL should maintain its current reservoir of funds.
• IOCL should use the scope to raise the funds from outsiders but within a limit
between 5%-6%.
• IOCL should have to increase its sales, as its assets turnover ratios are not much
satisfactory.
• IOCL must control its operating expenses as they lead to the losses made.
BIBLIOGRAPHY
BIBLIOGRAPHY
• www.iocl.com
ANNEXURE
BALANCE SHEET
(Rs. In Crore)
Total Loans
Others 5644.51 6110.42 6762.18 6966.27
Grand Total 35992.28 45008.05 54541.98 67670.82
Fixed & Intangible Assets 28160.30 32770.58 37781.95 40279.57
Investments 2008.81 2701.71 2719.46 12292.26
Working Capital 17428.37 17164.92 23237.83 28639.73
2. Current Liabilities