PROFITABILITY RATIOS
PROFITABILITY RELATED TO SALES
GP & NP Ratios
The above graph shows the GP, NP and also the operating expenses. In the year 1989-1990, though GP was almost the same as previous year, NP has decreased from 7 .13% to 4.92 %. This signifies high operational costs during that period. In the year 1994, the GP had dropped from 28 % to 19 % but company was able to sustain the NP %. Also, the period from 1995-96 shows high operational efficiency as the gap between GP and NP is corresponding lower. This trend is again reversed when 1998, registered an increase in GP to cross 30 % mark. But Np increased from 15% to 17% only. Off late, both GP & NP have been declining, which is a bad sign for the company and more worse is that fall in NP is more sharper than the fall in GP.
PROFITABILITY RELATED TO INVESTMENTS
Return On Total Assets
The ROA measures the profitability of the total funds / investments of the company. It indicates the net margin available to the owners and creditors against the assets financed by them. It is the measure of how well assets have been employed i.e. the operating responsibility to use the assets efficiently once they have been obtained.
During 1983 to 1985 the company has been able to obtain the return of almost 10% on the total assets, which is positive sign. However the return declined during the period 1986 to 1992 due to the reasons already discussed. After the expansion of its polyster fibre business and diversifying its business into oil and petroleum refinery in the year 1995 the return on assets again took a positive turn and since then average return is maintained at 9.00% and by diversifying its business into the sectors having ample growth opportunities it would be further increased in future.
Return on Net Worth
It measures the profitability from the owners’ point of view. It is used to judge whether the company has earned a satisfactory return for its equity holders or not. The company provides a reasonable compensation of around 15% to the owners for providing their capital at risk. Moreover it would serve as a reliable alternative for the shareholders to invest in such growth oriented company and benefits the company in raising additional funds from the market.
Return on Capital Employed
ROCE provides a test of profitability related to the sources of long term funds. A comparison of this ratio over the period of time provides the sufficient insight into how efficiently the long-term funds (provided by the creditors as well as owners) have been utilized. In the absence of breakup of the interest paid for long term or short term we have considered entire interest to be for long term funds. As a result of this during the periods 1986-1991 the return is comparatively higher where the company resorted to short term loans as compared to long term.
The company is able to at least meet the cost of debt and capital from the returns in terms of operating profit, which provides the economic value added to shareholders and indirectly to other stakeholders.
Sales Per Share
This ratio is significant from the point of view of investors. It signifies the gross revenue generated from investment in one share. Thus a single share of face value of Rs. 10 is able to generate revenue of Rs. 100 & above. Each and every penny invested in the company is used very efficiently and professionally to continuously generate more and more revenue which would help to gain the confidence of the investors and raise more funds from the market.
Cash EPS
The above chart shows us the EPS (Earning Per Share) & Cash EPS (Cash Earning Per Share) for the last 25 Years. As we could see, both EPS & Cash EPS nose-dived in 1986, which was a bad year for the company as we have seen before. However even during that period company resorted to raise money from the open market through public issues and outperformed raising the profits proportionately thereby maintaining EPS around Rs. 20. Also, if we notice during the last 5 years, we can see that Cash EPS growth has out numbered the EPS growth. This is due to increase in the charge of Depreciation. The increasing trend in the EPS indicates higher earnings available for dividend payments as well as basis for any future increase in the value of shares. Thus investors are more interested in investing money into such companies.
Book Value Per Share
This ratio measures the amount that would be distributed to holders of each share if all assets were sold at their balance sheer carrying amounts and if all creditors were paid off. It is entirely based on historical cost concept. The book value per share of the company has been raised from mere Rs. 34 to Rs. 140 prior to the merger with RPL. It would show the increasing trend in future due to increase in the profitability of the company through efficient utilization of monetary and other resources and entering into profitable ventures where there is ample growth opportunity.
Dividend payout ratio
It measures the relationship between the earnings belonging to the shareholders and the dividend paid to them. Dividend payout ratio in case of this company is low and is even showing decreasing trend. The reason is company tends to retain most of the earnings and reinvest them in ample growth oriented ventures and the shareholders are benefited in terms of increase in the market price of shares and high rates of return on investments.
Price Earning ratio
This ratio reflects the price currently being paid by the market for each rupee of currently reported EPS. It measures investors expectations and market appraisal of the performance of the firm. RIL, being the company with ample opportunities for growth has high price earnings ratio. The ratio was very high during the period 1992 to 1994 due to boom in stock market at that time. Even during the recessionary period 2000-2001, the company is able to maintain the P/E ratio at 10 which boast the investor confidence in the stock.
ACTIVITY RATIOS
Finished goods inventory
This ratio indicates how fast the inventory is sold and replaced during the year. A higher ratio is good from the point of liquidity and vice versa. In this case, it depicts positive trend wherein the inventory cycle turn around nearly 18 times a year and minimum fund is blocked in the nonmoving or slow moving items thereby increasing operational efficiency.
Raw Material inventory
This ratio signifies how rapidly the raw materials are consumed / used so that the cost involved in holding inventory is minimum. In the year 2000, even though the raw material consumption has increased, the inventory is falling down which is indicative of prudent management practices as it signals optimum inventory holding for current requirement.
Debtors Turnover ratio
This ratio is indicative of the time lag between credit sales and cash collection. In this case we have considered the entire sales as credit sales in the absence of information. Initially the Company gave fantastic financial support to create demand for its product. Once this positive loop of a supply-led demand creation process became fully operational, the company reverted to right professional asset management strategy. Thus now the company is able to collect the receivables within short span of just 15 days as compared to that of the other industries in this sector. This has increased the ability of the company to meet its obligation and maintain operational efficiency.
Creditors Turnover ratio
This ratio indicates the time required to settle the accounts of the creditors for purchase of materials. The company in the last few years has been able to settle the creditors obligation in just 10-15 days. This depicts the efficient management policies of meeting its obligation at the earliest thereby maintaining the credibility of the company in the long run. Initially the company reduced its requirement of current assets by relying on suppliers credit but now the accounts are settled rapidly whereby the supplier’s loyalty is maintained and expenses reduced due to the advantage of discount.
Fixed Assets Turnover ratio
It measures the efficiency of the company in managing and utilizing its assets. This ratio is showing upward trend during the recent years. In operational terms it implies that the company is able to expand its activity level (in terms of production and sales) without requiring exactly proportional additional capital investments. This depicts how productively and efficiently the assets of the company have been employed in generating revenue and also the effectiveness with which capital budgeting decisions are taken.
PROFITABILITY RELATED TO SALES
GP & NP Ratios
The above graph shows the GP, NP and also the operating expenses. In the year 1989-1990, though GP was almost the same as previous year, NP has decreased from 7 .13% to 4.92 %. This signifies high operational costs during that period. In the year 1994, the GP had dropped from 28 % to 19 % but company was able to sustain the NP %. Also, the period from 1995-96 shows high operational efficiency as the gap between GP and NP is corresponding lower. This trend is again reversed when 1998, registered an increase in GP to cross 30 % mark. But Np increased from 15% to 17% only. Off late, both GP & NP have been declining, which is a bad sign for the company and more worse is that fall in NP is more sharper than the fall in GP.
PROFITABILITY RELATED TO INVESTMENTS
Return On Total Assets
The ROA measures the profitability of the total funds / investments of the company. It indicates the net margin available to the owners and creditors against the assets financed by them. It is the measure of how well assets have been employed i.e. the operating responsibility to use the assets efficiently once they have been obtained.
During 1983 to 1985 the company has been able to obtain the return of almost 10% on the total assets, which is positive sign. However the return declined during the period 1986 to 1992 due to the reasons already discussed. After the expansion of its polyster fibre business and diversifying its business into oil and petroleum refinery in the year 1995 the return on assets again took a positive turn and since then average return is maintained at 9.00% and by diversifying its business into the sectors having ample growth opportunities it would be further increased in future.
Return on Net Worth
It measures the profitability from the owners’ point of view. It is used to judge whether the company has earned a satisfactory return for its equity holders or not. The company provides a reasonable compensation of around 15% to the owners for providing their capital at risk. Moreover it would serve as a reliable alternative for the shareholders to invest in such growth oriented company and benefits the company in raising additional funds from the market.
Return on Capital Employed
ROCE provides a test of profitability related to the sources of long term funds. A comparison of this ratio over the period of time provides the sufficient insight into how efficiently the long-term funds (provided by the creditors as well as owners) have been utilized. In the absence of breakup of the interest paid for long term or short term we have considered entire interest to be for long term funds. As a result of this during the periods 1986-1991 the return is comparatively higher where the company resorted to short term loans as compared to long term.
The company is able to at least meet the cost of debt and capital from the returns in terms of operating profit, which provides the economic value added to shareholders and indirectly to other stakeholders.
Sales Per Share
This ratio is significant from the point of view of investors. It signifies the gross revenue generated from investment in one share. Thus a single share of face value of Rs. 10 is able to generate revenue of Rs. 100 & above. Each and every penny invested in the company is used very efficiently and professionally to continuously generate more and more revenue which would help to gain the confidence of the investors and raise more funds from the market.
Cash EPS
The above chart shows us the EPS (Earning Per Share) & Cash EPS (Cash Earning Per Share) for the last 25 Years. As we could see, both EPS & Cash EPS nose-dived in 1986, which was a bad year for the company as we have seen before. However even during that period company resorted to raise money from the open market through public issues and outperformed raising the profits proportionately thereby maintaining EPS around Rs. 20. Also, if we notice during the last 5 years, we can see that Cash EPS growth has out numbered the EPS growth. This is due to increase in the charge of Depreciation. The increasing trend in the EPS indicates higher earnings available for dividend payments as well as basis for any future increase in the value of shares. Thus investors are more interested in investing money into such companies.
Book Value Per Share
This ratio measures the amount that would be distributed to holders of each share if all assets were sold at their balance sheer carrying amounts and if all creditors were paid off. It is entirely based on historical cost concept. The book value per share of the company has been raised from mere Rs. 34 to Rs. 140 prior to the merger with RPL. It would show the increasing trend in future due to increase in the profitability of the company through efficient utilization of monetary and other resources and entering into profitable ventures where there is ample growth opportunity.
Dividend payout ratio
It measures the relationship between the earnings belonging to the shareholders and the dividend paid to them. Dividend payout ratio in case of this company is low and is even showing decreasing trend. The reason is company tends to retain most of the earnings and reinvest them in ample growth oriented ventures and the shareholders are benefited in terms of increase in the market price of shares and high rates of return on investments.
Price Earning ratio
This ratio reflects the price currently being paid by the market for each rupee of currently reported EPS. It measures investors expectations and market appraisal of the performance of the firm. RIL, being the company with ample opportunities for growth has high price earnings ratio. The ratio was very high during the period 1992 to 1994 due to boom in stock market at that time. Even during the recessionary period 2000-2001, the company is able to maintain the P/E ratio at 10 which boast the investor confidence in the stock.
ACTIVITY RATIOS
Finished goods inventory
This ratio indicates how fast the inventory is sold and replaced during the year. A higher ratio is good from the point of liquidity and vice versa. In this case, it depicts positive trend wherein the inventory cycle turn around nearly 18 times a year and minimum fund is blocked in the nonmoving or slow moving items thereby increasing operational efficiency.
Raw Material inventory
This ratio signifies how rapidly the raw materials are consumed / used so that the cost involved in holding inventory is minimum. In the year 2000, even though the raw material consumption has increased, the inventory is falling down which is indicative of prudent management practices as it signals optimum inventory holding for current requirement.
Debtors Turnover ratio
This ratio is indicative of the time lag between credit sales and cash collection. In this case we have considered the entire sales as credit sales in the absence of information. Initially the Company gave fantastic financial support to create demand for its product. Once this positive loop of a supply-led demand creation process became fully operational, the company reverted to right professional asset management strategy. Thus now the company is able to collect the receivables within short span of just 15 days as compared to that of the other industries in this sector. This has increased the ability of the company to meet its obligation and maintain operational efficiency.
Creditors Turnover ratio
This ratio indicates the time required to settle the accounts of the creditors for purchase of materials. The company in the last few years has been able to settle the creditors obligation in just 10-15 days. This depicts the efficient management policies of meeting its obligation at the earliest thereby maintaining the credibility of the company in the long run. Initially the company reduced its requirement of current assets by relying on suppliers credit but now the accounts are settled rapidly whereby the supplier’s loyalty is maintained and expenses reduced due to the advantage of discount.
Fixed Assets Turnover ratio
It measures the efficiency of the company in managing and utilizing its assets. This ratio is showing upward trend during the recent years. In operational terms it implies that the company is able to expand its activity level (in terms of production and sales) without requiring exactly proportional additional capital investments. This depicts how productively and efficiently the assets of the company have been employed in generating revenue and also the effectiveness with which capital budgeting decisions are taken.