financial analysis of indian oil ltd

Financial Analysis of Indian IOCL

KIIT SCHOOL OF MANAGEMENT

1

FINANCIAL STATEMENT ANALYSIS

OF

INDIAN OIL CORPORATION LTD

SUBMITTED TO

PROF.SAROJ ROUTRAY

SUBMITTED BY

Manish Kumar (135)

Sipra Routaray (143)

Nirupama Ghosh Dastidar(153)



2 ACKNOWLEDGEMENT

At the outset we express our most sincere grateful acknowledgement

to the holy sanctum “KIIT school of management” the temple of

learning, for giving us an opportunity to pursue the management course

thus help shaping our career.

We also wish to express our deep sense of gratitude to our

PROJECT GUIDE Prof. S. K. Routray , for his continuous and tireless

support and advice not only during the course of our project but also

during the period of our stay in “KIIT school of management”.



3 Contents

Acknowledgement

Overview of IOCL

Vision, mission and values

Objectives

Financial analysis

- Liquidity ratios

- Solvency ratios

- Profitability ratios

- Market based ratios

- Activity ratios

Bibliography



4 EXECUTIVE SUMMARY

The basic objective of our project was to undertake a detailed financial

statements analysis of Indian Oil Corporation Ltd. from the financial year 2006-

2007 and 2007-2008 using the annual report of the company for the period besides

the data from the database of Centre for Monitoring Indian Economy. To get a

better idea about the trend in the company we did the analysis for 3 years i.e. 2005-

2006 to 2007-2008. This includes studying the financial position of the company to

analysis the performance besides determining the EBIT & EPS Analysis and also

the Economic Value Analysis of the Indian Oil Corporation Ltd . In this project

we have discussed regarding various Liquidity Ratios, Solvency Ratios,

Profitability Ratios, Activity ratios, market capitalization ratios of the company

over a period of three financial years ranging from 2005 to 2008.



5 OVERVIEW OF INDIAN OIL CORPORATION

Indian Oil Corporation is an Indian public-sector petroleum company. It is India’s

largest commercial enterprise, ranking 116th on the Fortune Global 500 listing

(2008). It began operation in 1959 as Indian Oil Company Ltd. The Indian Oil

Corporation was formed in 1964, with the merger of Indian Refineries Ltd. Indian

Oil and its subsidiaries account for a 47% share in the petroleum products market,

40% share in refining capacity and 67% downstream sector pipelines capacity in

India. The Indian Oil Group of Companies owns and operates 10 of India's 19

refineries with a combined refining capacity of 60.2 million metric tons per year.

Indian Oil operates the largest and the widest network of fuel stations in the

country, numbering about 17606 (15557 regular ROs & 2049 Kissan Sewa

Kendra). It has also started Auto LPG Dispensing Stations (ALDS). It reaches

Indane cooking gas to over 47.5 million households through a network of 4,990

Indian distributors.

In addition, Indian Oil's Research and Development Center (R&D) at Faridabad

supports, develops and provides the necessary technology solutions to the

operating divisions of the corporation and its customers within the country and

abroad.

Subsequently, Indian Oil Technologies Limited - a wholly owned subsidiary, was

set up in 2003, with a vision to market the technologies developed at IndianOil's

Research and Development Center. It has been modeled on the R&D marketing

arms of Royal Dutch Shell and British Petroleum.



6 Vision, Mission & Values

Vision

A major diversified, trans-national, integrated energy company, with national

leadership and a strong environment conscience, playing a national role in oil

security & public distribution.

Mission

• To achieve international standards of excellence in all aspects of energy and

diversified business with focus on customer delight through value of products and

services, and cost reduction.

• To maximise creation of wealth, value and satisfaction for the stakeholders.

• To attain leadership in developing, adopting and assimilating state-of-the-art

technology for competitive advantage.

• To provide technology and services through sustained Research and

Development.

• 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.



7 Values - Values we nurture

Care - stands for

Concern

Empathy

Understanding

Cooperation

Empowerment

Innovation - stands for

Creativity

Ability to learn

Flexibility

Change

Passion - stands for

Commitment

Dedication

Pride

Inspiration

Ownership

Zeal & Zest

Trust - stands for

Delivered Promises

Reliability

Dependability



8 Integrity

Truthfulness

Transparency

Objectives of IOCL

• To serve the national interests in oil and related sectors in

accordance and consistent with Government policies.

• To ensure maintenance of continuous and smooth supplies of

petroleum products by way of crude oil refining, transportation

and marketing activities and to provide appropriate assistance to

consumers to conserve and use petroleum products efficiently.

• To enhance the country's self-sufficiency in crude oil refining and

build expertise in laying of crude oil and petroleum product

pipelines.

• To further enhance marketing infrastructure and reseller network

for providing assured service to customers throughout the country.

• To create a strong research& development base in refinery

processes, product formulations, pipeline transportation and

alternative fuels with a view to minimizing/eliminating imports

and to have next generation products.

• To optimise utilisation of refining capacity and maximize distillate

yield and gross refining margin.

• To maximise utilisation of the existing facilities for improving

efficiency and increasing productivity.



9 • To minimise fuel consumption and hydrocarbon loss in refineries

and stock loss in marketing operations to effect energy

conservation.

• To earn a reasonable rate of return on investment.

• To avail of all viable opportunities, both national and global,

arising out of the Government of India’s policy of liberalization

and reforms.

• To achieve higher growth through mergers, acquisitions,

integration and diversification by harnessing new business

opportunities in oil exploration& production, petrochemicals,

natural gas and downstream opportunities overseas.

• To inculcate strong ‘core values’ among the employees and

continuously update skill sets for full exploitation of the new

business opportunities.

Financial Objectives

• To ensure adequate return on the capital employed and maintain

a reasonable annual dividend on equity capital.

To ensure maximum economy in expenditure.

• To manage and operate all facilities in an efficient manner so as to

generate adequate internal resources to meet revenue cost and

requirements for project investment, without budgetary support.

• To develop long-term corporate plans to provide for adequate

growth of the Corporation’s business.



10 • To reduce the cost of production of petroleum products by means

of systematic cost control measures and thereby sustain market

leadership through cost competitiveness.

• To complete all planned projects within the scheduled time and

approved cost.

Shareholding in Indian Oil

Promoters80%

Public3%

FIIs1%

Others16%

Shareholding



11 Share Holding %age

Promoters 80.35

Public 2.73

FIIs 1.37

Others 15.55

Expanding Horizons

Indian Oil is currently metamorphosing from a pure sectoral company with

dominance in downstream in India to a vertically integrated, transnational energy

behemoth. The Corporation is already on the way to becoming a major player in

petrochemicals by integrating its core refining business with petrochemical

activities, besides making large investments in E&P and import/marketing ventures

for oil&gas in India and abroad.

Besides two refining subsidiaries, Chennai Petroleum Corporation Ltd. and

Bongaigaon Refinery& Petrochemicals Ltd., subsidiaries are operational in Sri

Lanka, Mauritius, and UAE.

With a vision to evolve into a major technology provider through excellence in

management of knowledge and innovation, Indian Oil has launched Indian Oil

Technology Ltd. to market the intellectual properties developed by Indian Oil's

R&D Centre



12 Market Share of various Companies in this sector in December 2008

(in ’000 tonnes)

%age Dec-08

IOCL 30.98 4167

BPCL 11.76 1582

HPCL 9.76 1313

RIL 21.62 2908

ESSAR 8.00 1076

OTHERS 17.88 2405

Total 13451

IOCL31%

BPCL12%

HPCL10%

RIL21%

ESSAR8%

OTHERS18%

Market Share



13 Awards and Accolades

Business Super brand 2008

3rd

most valuable company in India

BML Munjal Award 2009 for Excellence in Learning & Development

World Petroleum Congress Excellence Award 2008

2nd

amongst the India’s Top 50 Most Valuable Brands

‘Most Admired Retailer-Rural’ in 2008



14 FINANCIAL ANALYSIS

This is defined as the relationship, or proportion that one amount bears to

another. A ratio may be expressed in percentage in which the base, is taken as

equal to 100 and the quotient is expressed as per hundred of the base. Financial

ratios express relationship between two figures or two groups of figures which are

related to each other.

Liquidity Ratios

These are the indicators of the ability of the company to convert its assets

into cash or to obtain cash to meet short term obligations.

Working Capital

Working capital is a widely used measure of liquidity. This is given by the

following:-

Working Capital = Current Assets – Current Liabilities

It is important as a measure of liquid assets that provide safety cushion to

creditors. It is also important to measure the liquid reserve available to meet

contingencies and uncertainties in a company’s cash inflows.

Working capital is a double edged sword. Companies need working capital

to effectively operate yet working capital is costly as it must be financed and can

entail other operating costs such as credit losses and storage and logistics costs.



15 Trend Analysis:

2005-2006 2006-2007 2007-2008

CA 46962.96

48699.65

67270.45

CL 33598.62

36729.43

44387.72

WORKING

CAPITAL

13364.34 11970.22 22882.73

As can be observed, working capital has decreased in 2006-07 but in 2007-08

working capital has increased and it is due to the increase in current assets . Current

liabilities have also shown an increase. However that has been offset by the

increase in the current assets.

Current Ratio

It is calculated as

Current Ratio = Current Assets / Current Liabilities

Standard Norm: 2:1

Relevance:

• Current Liability coverage: Higher the current ratio, greater is the assurance we

have that current liabilities will be paid.

• Buffer against losses: Current Ratio shows the margin of safety available to

cover shrinkage in non cash current asset values when ultimately disposing off or

liquidating them.



16 • Reserve of liquid funds: It is the measure of margin of safety against

uncertainties and random shocks to the company’s cash flows.

Limitations:

It is static measure of resources available at a point in time to meet the current

obligations. The current reservoir of cash does not have a logical or causal relation

to its future cash flows. These cash flows depend on factor excluded from the ratio

i.e sales, expenditure, cash, profits.

2005-2006 2006-2007 2007-2008

CA 46962.96

48699.65

67270.45

CL 33598.62

36729.43

44387.72

CURRENT

RATIO

1.3978

1.3259

1.5155

Liquid Ratio

It is calculated as follows

Liquid Ratio = Liquid assets / Liquid liabilities

Standard Norm: 1:1

A more stringent test of the liquidity uses the Liquidity ratio, also known as the

Quick or the Acid Test Ratio which includes the assets most quickly convertible to

cash. This is a better test of liquidity as it handles issues of window dressing.



17 2005-2006 2006-2007 2007-2008

Liquid Asset 18323.23

19709.93

30049.38

Liquid Liability 33598.62

36729.43

44387.72

LIQUID RATIO 0.545

0.537

0.677

Absolute Liquid Ratio:

It is calculated as

Absolute Liquid Ratio = Absolute Liquid assets / Absolute Liquid Liabilities

2005-2006 2006-2007 2007-2008

Absolute Liquid

Asset

1052.85

1076.73

1060.22

Absolute Liquid

Liablity

33598.62

36729.43

44387.72

ABSOLUTE

LIQUID RATIO

0.031

0.029

0.024



18 Trend Analysis:

2005-2006 2006-2007 2007-2008

Current ratio

Liquid ratio

Absolute liquid

ratio

1.3978

0.545

0.031

1.3259

0.537

0.029

1.5155

0.677

0.024

As can be observed, the liquidity ratios have been increasing over the years. This

can be mainly attributed to the increase in the current assets over the last 3 years.

The current assets have seen a jump by 43% in the last 3 years. Even though the

current liabilities have gone up by 32%, this increase has been adjusted by the huge

increase in the current assets to give increasing liquidity over the years.

CURRENT ASSETS CURRENT LIABILITIES

2005-2006 2006-2007 2007-2008

46962.96

48699.65

67270.45

33598.62

36729.43

44387.72



19

0.0000

0.2000

0.4000

0.6000

0.8000

1.0000

1.2000

1.4000

1.6000

2005-2006 2006-2007 2007-2008

Liquidity Ratios

CURRENT RATIO

LIQUID RATIO

ABSOLUTE LIQUID RATIO



20 Solvency Ratios

Debt Equity Ratio:

It is a measure of a company's financial leverage calculated by dividing its

total liabilities by stockholders' equity. It indicates what proportion of equity and

debt the company is using to finance its assets.

DER = LTL / Shareholder's Equity

A high debt/equity ratio generally means that a company has been

aggressive in financing its growth with debt. This can result in volatile earnings as

a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity),

the company could potentially generate more earnings than it would have without

this outside financing. If this were to increase earnings by a greater amount than

the debt cost (interest), then the shareholders benefit as more earnings are being

spread among the same amount of shareholders. However, the cost of this debt

financing may outweigh the return that the company generates on the debt through

investment and business activities and become too much for the company to

handle. This can lead to bankruptcy which would leave shareholders with nothing.

The debt/equity ratio also depends on the industry in which the company operates.

2005-2006 2006-2007 2007-2008

DEBT 30063

29473.22

38818.52

SHAREHOLDERS

FUND

30640.94

36544.27

43619.52

DEBT-Equity Ratio

0.981

0.807

0.890



21

Debt Ratio:

It is a ratio that indicates what proportion of debt a company has relative to its

assets. The measure gives an idea to the leverage of the company along with the

potential risks the company faces in terms of its debt-load.

Debt Ratio = Total Debt / Total Assets

A debt ratio of greater than 1 indicates that a company has more debt than assets,

meanwhile, a debt ratio of less than 1 indicates that a company has more assets

than debt. Used in conjunction with other measures of financial health, the debt

ratio can help investors determine a company's level of risk.

2005-2006 2006-2007 2007-2008

DEBT 30063

29473.22

38818.52

TOTAL ASSETS 101556.51

110504.36

135139.31

DEBT RATIO 0.296

0.267

0.287



22 Equity Ratio:

Total assets divided by shareholder equity. Asset/equity ratio is often used as a

measure of leverage

Equity Ratio = Net worth / Total Assets

2005-2006 2006-2007 2007-2008

NET WORTH 30640.94

36544.27

43619.52

TOTAL ASSETS 101556.51

110504.36

135139.31

EQUITY RATIO 0.302

0.331

0.323

Interest Coverage Ratios:

The interest coverage ratio is a measurement of the number of times a company

could make its interest payments with its earnings before interest and taxes; the

lower the ratio, the higher the company’s debt burden.

ICR = EBIT / Total Interest Expense

2005-2006 2006-2007 2007-2008

EBIT 8545.2

13353.82

14291.66

INTEREST 1252.77

1743.01

1803.9

INT. COVERAGE

RATIO

6.821

7.661

7.923



23 Debt Capital Employed Ratio:

It is calculated as

Debt capital Employed Ratio = Debt / Capital Employed

2005-2006 2006-2007 2007-2008

DEBT 30063

29473.22

38818.52

CAPITAL

EMPLOYED

60703.94

66017.49

82438.04

Debt-Total Capital

Ratio

0.495

0.446

0.471

Trend Analysis:

2005-2006

2006-2007

2007-2008

Debt-Total Asset Ratio

0.296

0.267

0.287

Debt Equity Ratio

0.981

0.807

0.890

Equity Ratio

0.302

0.331

0.323

Interest Coverage Ratio

6.821

7.661

7.923

Debt Ratio

0.495

0.446

0.471



24 As can we observed the debt ratio has first decreased and then increased.

This is responsible for the trend of the Debt Equity Ratio. The equity ratio has

increased over the years implies that the net worth of the company as part of total

assets has increased.

The interest coverage ratio has increased 16% in the selected period. This

increase in the ICR can be attributed to the 67% increase in EBIT which is more

than the increase in interest rate (44% increase).

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

0.900

1.000

2005-2006 2006-2007 2007-2008

Solvency ratios

DEBT EQUITY RATIO

DEBT-CAPITAL EMPLOYED RATIO

DEBT TOTAL ASSET RATIO



25 Profitability Ratios

The profitability ratios give an indication of the ability of the company to generate

profits.

Profit Margin Ratios:

The profit margin ratios state how much profit the company makes for every

dollar of sales. The net profit margin ratio is the most commonly used profit

margin ratio.

A low profit margin ratio indicates that low amount of earnings, required to

pay fixed costs and profits, are generated from revenues. A low profit margin ratio

indicates that the business is unable to control its production costs.

The profit margin ratio provides clues to the company's pricing, cost

structure and production efficiency. The profit margin ratio is a good ratio to

benchmark against competitors.

Net Profit Margin Ratio (PAT to Sales):

Net Profit Margin Ratio (After Tax Margin Ratio) = Net profit after tax / sales.



26

2005-2006

2006-2007

2007-2008

PAT (Rs. Crore)

5115.14

8178.44

8549.64

SALES (Rs.

Crore)

192668.86

228938.27

259207.14

NET PROFIT

MARGIN RATIO

0.027

0.036

0.033

Operating Profit Margin (PBIT to Sales): Operating Profit Margin (Operating Margin)

= Net Income before Interest and Taxes / Sales

2005-2006

2006-2007

2007-2008

PBIT (Rs. Crore)

8545.2

13353.82

14291.66

SALES (Rs. Crore) 192668.86

228938.27

259207.14

OPERATING PROFIT MARGIN

0.044

0.058

0.055

Gross Profit Margin Ratio: Gross Profit Ratio = Gross Profit / Net Sales



27

The gross profit ratio is primarily a test of the efficiency of purchases and sales

management. No ideal standard is fixed for this ratio, but the gross profit ratio

must be adequate.

2005-2006 2006-2007 2007-2008

GROSS PROFIT 9931

14339

14622

SALES 192668.86

228938.27

259207.14

GROSS PROFIT

MARGIN RATIO

0.052

0.063

0.056

Trend Analysis:

2005-2006 2006-2007

2007-2008

Net Profit Margin

(%age)

2.7

3.6

3.3

Operating Profit Margin (%age)

4.4

5.8

5.5

Gross Profit

Margin (%age)

5.2

6.3

5.6

As can we observed, the Net Profit Margin Ratio and the Operating Profit Margin

Ratio have both increased over the years. While the former has shown a 22%



28 increase, the later has shown a 25% increase. The gross profit margin also has

increased 7.6% which is a factor for increase in profit margins.

0

100

200

300

400

500

600

700

2005-2006 2006-2007 2007-2008

Axi

s Ti

tle

Capital Market Analysis

Market price per share

Book Value per share

Net Worth per share



29 Return on Investment

The ROI is perhaps the most important ratio of all. It is the percentage of return on

funds invested in the business by its owners. In short, this ratio tells the owner

whether or not all the effort put into the business has been worthwhile. If the ROI

is less than the rate of return on an alternative, risk-free investment such as a bank

savings account, the owner may be wiser to sell the company, put the money in

such a savings instrument, and avoid the daily struggles of small business

management. The ROI can be calculated in three ways:

Return on Investment = Return on Net worth

= Return on Capital Employed

= Return on Total Assets

Return on invested capital is an important indicator of a company’s long term

financial strength. It uses key summary features from both the income statement

and the balance sheet to assess profitability. It can effectively convey the return on

invested capital from varying perspectives of different financing contributors.

Return on Net worth (RONW)

Net after Tax Profit divided by Net Worth, this is the 'final measure' of

profitability to evaluate overall return. This ratio measures return relative to

investment in the company. So to say Return on Net Worth indicates how well a

company leverages the investment in it. It may appear higher for startups and sole

proprietorships due to owner

compensation draws accounted as net profit.

RONW = PAT / Net Worth



30 2005-2006 2006-2007 2007-2008

PROFIT AFTER TAX 5115.14 8178.44 8549.64

NET WORTH 30063 36544.27 43619.52

RETURNS ON NET WORTH 0.170 0.224 0.234

Return on Capital Employed (ROCE)

It is a ratio that indicates the efficiency and profitability of a company's capital

investments. It is calculated as:

ROCE = Profit Before Interest and Taxation / Capital Employed

ROCE should ideally be higher than the rate at which the company borrows,

otherwise any increase in borrowing will reduce shareholders' earnings.

Return on Total Assets (ROTA)

It is a measure of how effectively a company uses its assets. It is calculated by

ROTA = (Income before interest and tax) / (Fixed Assets + Current Assets).

2005-2006 2006-2007 2007-2008

Profit before int. &

taxes (Rs. Crore)

8545.2 13353.82 14291.66

Capital employed 60703.94 66017.49 82438.04

Return on capital

employed

0.141 0.202 0.173



31 It is also an indicator of how profitable a company is relative to its total assets and

how efficient management is at using its assets to generate earnings.

Analysis of Return on Investment

We can see from above tables that overall Return on investments has been

dwindling . Though Return on Net Worth has been increasing over a period of

three years but Return on capital employed & Return on total assets increased in

the year 2006-07 but declined in the year 2007-2008. This can be attributed to the

fact, decline in Earning per share.

Return on Net Worth increased by 31.76% in 2006-07 but there was a substantial

decrease in the growth rate. In 2007-08 it only increased by 4%. Return on capital

employed & return on total assets increased by 43.26% & 44% respectively but

there was a sudden decline in these ratios in the year 2007-08 (14% decline in

ROCE & 12% decline in ROTA) basically due to rise in price of crude petroleum

oil.

2005-2006 2006-2007 2007-2008

Profit before interest &

taxes

8545.2 13353.82 14291.66

Total assets 101556.51 110504.36 135139.31

Return on total assets 0.084 0.121 0.106



32 Earning per share

Companies often use a weighted average of shares outstanding over the reporting

term. EPS can be calculated for the previous year ("trailing EPS"), for the current

year ("current EPS"), or for the coming year ("forward EPS"). Note that last year's

EPS would be actual, while current year and forward year EPS would be estimates.

It is EPS = Total Earnings / Number of shares outstanding.

2005-2006 2006-2007 2007-2008

EPS -14.32 -66.52 -100.93

ANALYSIS

EPS has been constantly & drasticly declining. The basic cause of this is constant

rise in price of crude petroleum in the world market . Sales & cost of production

both are increasing simultaneously , which has led to constant declining in EPS.

-120

-100

-80

-60

-40

-20

0

2005-2006 2006-2007 2007-2008

Axi

s Ti

tle

Year

EARNING PER SHARE

EARNING PER SHARE



33 Market Based Ratios

Price Earning Ratio

It is a valuation ratio of a company's current share price compared to its per-

share earnings. EPS is usually from the last four quarters (trailing P/E), but

sometimes it can be taken from the estimates of earnings expected in the next four

quarters (projected or forward P/E). A third variation uses the sum of the last two

actual quarters and the estimates of the next two quarters. It is also known as "price

multiple" or "earnings multiple". In general, a high P/E suggests that investors are

expecting higher earnings growth in the future compared to companies with a

lower P/E.

P/E Ratio = Market Value per share / Earnings per share

PE Ratio over the Years

2005-2006 2006-2007 2007-2008

Market price per

share (Rs.)

584.15 399.6 445.6

Earning Per Share -14.32 -66.52 -100.93

Price earning Ratio -40.79 -6.01 -4.41

Note –EPS has been for this taken directly from the CMIE database.

19

Analysis

Though the PE ratio is negative but it is increasing due to the reason that Market

price per share is increasing & it is negative because the EPS is negative. PE ratio

in the year 2007-08 has increased by 36.28% due to the rise in market price per

share.

an



34

2002005 2003-24

Market Capitalization

Market capitalization indicates the public’s opinion of the company’s net worth. It

is a determining factor in stock evaluation. It is calculated as follows:

Market Capitalization = Market Value * No of Shares

-45.00

-40.00

-35.00

-30.00

-25.00

-20.00

-15.00

-10.00

-5.00

0.00

2005-06 2006-07 2007-08

PRICE EARNING RATIO

PRICE EARNING RATIO

2005-2006 2006-2007 2007-2008

Market price per

share

584.15 399.6 445.6

No.of shares 1168012200 1168012200 1192374306

Market

capitalisation (Rs.

Crores)

68229.43266 46673.76751 53132.19908



35 Market Capitalization to Net Worth

This is a ratio of market capitalization to net worth of the company. This indicates

how much of the market capitalization is driven by the shareholder’s fund. It is

expressed as follows:

Market Capitalization to Net worth = Market Capitalization / Net worth

Market to book Ratio

2005-2006 2006-2007 2007-2008

Market price 584.15 399.6 445.6

Book value of

shares

250.88 302.22 344.58

Market to book

value

2.328 1.322 1.293

2005-2006 2006-2007 2007-2008

Market capitalisation in

crores

68229.43266 46673.76751 53132.19908

Networth 30640.94 36544.27 43619.52

Market capitalisation to

Networth

2.227 1.277 1.218



36 Activity Ratios

Debtor turnover ratio

Debtors turnover ratio indicates the relation between net credit sales and average

accounts receivables of the year. This ratio is also known as Debtors’ Velocity.

Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivables

Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors

and B/R]/2

Credit Sales = Total Sales – Cash Sales

Objective and Significance: This ratio indicates the efficiency of the concern to

collect the amount due from debtors. It determines the efficiency with which the

trade debtors are managed. Higher the ratio, better it is as it proves that the debts

are being collected very quickly.

Debtor Days

A ratio used to work out how many days on average it takes a company to get paid

for what it sells. It is calculated by dividing the figure for trade debtors shown in its

accounts by its sales, and then multiplying by 365.

Debtor days = (debtors ÷ Sales) ×365

This indicates whether debtors are being allowed excessive credit. A high figure

(more than the industry average) may suggest general problems with debt

collection or the financial position of major customers.



37

Objective and Significance: This ratio indicates how quickly and efficiently the

debts are collected. The shorter the period the better it is and longer the period

more the chances of bad debts. Although no standard period is prescribed

anywhere, it depends on the nature of the industry.

Analysis

With the increase in overall sales the credit sales of the company is also rising

which results in increase in average debtors.The increase in average debtors lead

to increase in debtor turnover ratio.

Creditors' Turnover Ratio

CTR =Net credit prchases/Average payables(creditor + BP)

Net credit purchases = total purchases – cash purchases – purchase return

Creditor Days

A ratio used to work out how many days on average it takes a company to pay its

2005-2006 2006-2007 2007-2008

Sales (Rs. Crore) 192668.86 228938.27 259207.14

Average debtors

(Rs.Crore)

10685.16 11662.78 16461.09

Debtors Turnover

ratio

18.03144361 19.62981982 15.74665712

Debtor days 19.96512358 18.33944495 22.86199524



38 creditors. It is calculated by dividing the trade creditors shown in its accounts by its

cost of sales, or sales, and then multiplying by 365

Creditor Days = (Creditors / Sales ) * 365

Lengthening creditor days may mean that a company is heading for financial

problems as it is failing to pay creditors, on the other hand it may mean that a

company is simply getting better at getting good credit terms out of its suppliers

(improving its working capital management), or that its pattern of purchasing has

changed.

Fixed Assets Turnover Ratio:

Fixed assets turnover ratio establishes a relationship between net sales and

net fixed assets. This ratio indicates how well the fixed assets are being utilised.

Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets

2005-2006 2006-2007 2007-2008

Purchases 84985.45

99462.67

112741.54

Average Creditors 13473.46

14708.76

18019.23

Creditors turnover

ratio

6.30761883

6.762138345

6.256734611

Creditors day 57.07383558

53.23759758

57.53800063



39 In case Net Sales are not given in the question cost of goods sold may also be used

in place of net sales. Net fixed assets are considered cost less depreciation.

Objective and Significance: This ratio expresses the number to times the fixed

assets are being turned over in a stated period. It measures the efficiency with

which fixed assets are employed. A high ratio means a high rate of efficiency of

utilisation of fixed asset and low ratio means improper use of the assets.

2005-2006 2006-2007 2007-2008

Sales (Rs.Crore) 192668.86

228938.27

259207.14

Fixed assets (Rs. Crore) 41949.98

42329.94

46970.47

Fixed assets turnover 4.592823644

5.408424156

5.518512802

Fixed assets turnover is increasing due to implementation high technology

machineries for exploration of oil refineries.

Total Assets turnover Ratio

Total assets turnover ratio establishes relationship between sales and total assets.

Total assets turnover ratio = sales/total assets

2005-2006 2006-2007 2007-2008

Total Asset turnover ratio

Sales 192668.86 228938.27 259207.14

Total Asset 101556.51 110504.36 135139.31

Total Asset turnover ratio 1.897159128 2.071757802 1.918073579



40 Current asset turnover ratio

Current Asset turnover ratio

Sales 192668.86 228938.27 259207.14

Current Asset 46962.96 48699.65 67270.45

Current Asset turnover ratio 4.102570622 4.701024956 3.853209544

Networth turnover ratio

Net worth turnover ratio

Sales 192668.86 228938.27 259207.14

Net Worth 30640.94 36544.27 43619.52

Net Worth turnover ratio 6.287955265 6.264683082 5.942457414

Capital Turnover Ratio:

Capital turnover ratio establishes a relationship between net sales and capital

employed. The ratio indicates the times by which the capital employed is used to

generate sales. It is calculated as follows: -

Capital Turnover Ratio = Net Sales/Capital Employed



41 Where Net Sales = Sales – Sales Return

Capital Employed = Share Capital (Equity + Preference) + Reserves and Surplus +

Long-term Loans – Fictitious Assets.

Objective and Significance: The objective of capital turnover ratio is to calculate

how efficiently the capital invested in the business is being used and how many

times the capital is turned into sales. Higher the ratio, better the efficiency of

utilisation of capital and it would lead to higher profitability.

2005-2006 2006-2007 2007-2008

Sales 192668.86 228938.27 259207.14

Total Capital 60703.94 66017.49 82438.04

Total Capital turnover ratio 3.173910293 3.467842688 3.144266166

Gross fixed asset ratio

2005-2006 2006-2007 2007-2008

Sales 192668.86 228938.27 259207.14

Gross Fixed Asset 41949.98 42329.94 46970.47

Gross Fixed Asset

turnover ratio

4.592823644 5.408424156 5.518512802



42

0.000

0.050

0.100

0.150

0.200

0.250

2005-2006 2006-2007 2007-2008

RETURNS ON NET WORTH

Return on CAPITAL EMPLOYED

RETURN ON TOTAL ASSET



43

0

2

4

6

8

10

12

14

16

18

20

2005-2006 2006-2007 2007-2008

Debtors/Creditors turnover Ratios

Debtors turnover

Creditors Turnover



44 ECONOMIC VALUE ADDED

EVA ANALYSIS

Particulars 2006-2007 2007-2008

BETA 0.376 0.468

NOPAT 7498.56 6961.66

NET WORTH

(Rs. Crore)

34857.29 41086.25

DEBT (Rs.Crore) 27077.88 35520.88

TOTAL CAP. (Rs. Crore)

61935.17 76607.13

Cost of Equity 8.034 8.042

Cost of Debt 3.935 3.221

WACC 6.242 5.807

EVA (Rs. Crore) 3632.764 2513.412

Profit is the output of the GAAP driven accounting assumptions. One of the

important accounting assumptions is that the interest is treated as an expense,

whereas the dividend is treated as distribution of profit. Sometimes, such



45 assumption result in situations where the company show the accounting profit but

may be destroying the wealth of the shareholders. To address such anomaly, the

concept of the residual profit (from the economics literature) has been made

popularized as Economic Value Added by Stern and Stewart EVA measures

whether the operating profit is enough compared to the total costs of capital

employed. Stewart defined EVA as Net operating profit after taxes (NOPAT)

subtracted with a capital charge.

Economic Value Added is calculated as follows:

• EVA = NOPAT – Capital Charge

• NOPAT = Net Operating Profit After Tax (before interest)

• Capital Charge = Cost of both Debt and Equity

• Capital Charge = WACC * CE

• Capital Charge = Ke*Capital + Kd*Debt

EVA = NOPAT - (Cost of Capital * Capital Employed)

Cost of capital = Cost of Equity x Proportion of equity from capital + Cost of debt

x Proportion of debt from capital x (1-tax rate)

Cost of capital or Weighted average cost of capital (WACC) is the average cost of

both equity capital and interest bearing debt. Cost of equity capital is the



46 opportunity return from an investment with same risk as the company has. Cost of

equity is usually defined with Capital asset pricing model (CAPM). The estimation

of cost of debt is naturally more straightforward, since its cost is explicit. Cost of

debt includes also the tax shield due to tax allowance on interest expenses. The

idea behind EVA is that shareholders must earn a return that compensates the risk

taken. In other words equity capital has to earn at least same return as similarly

risky investments at equity markets. If that is not the case, then there is no real

profit made and actually the company operates at a loss from the viewpoint of

shareholders. On the other hand if EVA is zero, this should be treated as a

sufficient achievement because the shareholders have earned a return that

compensates the risk. This approach – using average risk-adjusted market return as

a minimum requirement - is justified since that average return is easily obtained

from diversified long-term investments on stock markets. Average long-term stock

market return reflects the average return that the company generate from their

operations.



47

3632.764

2513.412

0

500

1000

1500

2000

2500

3000

3500

4000

2006-2007 2007-2008

EVA (Rs. Crore)



48 Appendix Executive Summary of the Company:- Indian Oil Corpn. Ltd. Mar 2006 Mar 2007 Mar 2008

Rs. Crore (Non-Annualised) 12 mths 12 mths 12 mths

-

Total income 201908.8 244282.8 274659.63

Sales 199430.9 238498.4 270582.36

Income from financial services 1577.58 5193.82 3239.19

Total expenses 199593.8 236603.5 269656.06

Raw material expenses 74560.17 88482.51 101494.57

Power, fuel & water charges 335.06 415.3 498.76

Compensation to employees 1860.19 2620.86 2914.21

Indirect taxes 19351.37 22545.4 24196.34

Selling & distribution expenses 6040.23 7071.35 7637.44

Other operational exp. of indl. enterprises 24.25 40.31 50.25

Other oper. exp. of non-fin. service enterprises 0 0 0

PBDITA 9886.94 14617.69 14500.44

PBDTA 8916.67 13151.76 13038.99

PBT 6704.74 10448.02 10092.76

PAT 4914.36 7498.56 6961.66

Net worth 29302.67 34857.29 41086.25

Paid up equity capital (net of forfeited capital) 1168.01 1168.01 1192.37

Reserves & surplus 28134.66 33664.92 39893.88

Total borrowings 26403.72 27077.88 35520.88

Current liabilities & provisions 31511.84 34979.13 42251.7

Total assets 91897.74 102643.1 124776.91

Gross fixed assets 53305.23 59195.7 65966.92

Net fixed assets 34669.25 37764.52 41942.04

Investments 14526.39 19997.86 21546.28

Current assets 42382.32 44368.08 60624.06

Loans & advances 5.7 6.27 6.68



49

Bibliography CMIE database

www.iocl.com

www.wikipedia.com

Financial management by I.M.Pandey

www.nseindia.com

http://www.iocl.com/

http://www.wikipedia.com/

http://www.nseindia.com/

financial analysis of indian oil ltd

Documents