A NOTE ON FINANCIAL RATIO ANALYSIS
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Quick Ratio
Calculation of quick ratio for HLL
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|
1997
|
1998
|
1999
|
2000
|
2001
|
|
Quick assets
|
792.53
|
1126.87
|
1399.13
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1632.7
|
1835.23
|
|
Current liabilities
|
2093.01
|
2503.92
|
2966.85
|
3252.71
|
3559.52
|
|
Quick ratio
|
0.38
|
0.45
|
0.47
|
0.5
|
0.52
|
A quick ratio of 1:1 is usually considered satisfactory. In the case of HLL, a
low quick ratio as well as a low current ratio may indicate poor working capital
management.
Debtors Turnover Ratio
Calculation of debtors' turnover ratio for HLL
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|
1997
|
1998
|
1999
|
2000
|
2001
|
|
Net credit sales
|
8363.3
|
10261.57
|
10978.31
|
11458.3
|
11861.77
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|
Average debtors
|
144.49
|
169.19
|
213.34
|
249.13
|
344.65
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|
Debtors'turnover ratio
|
57.88
|
60.65
|
51.45
|
45.99
|
34.41
|
The debtors' turnover ratio of HLL shows a downward
trend. In this case, the average collection period of HLL must also be
calculated and analyzed.
Average Collection Period
Calculation of average collection period:
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|
1997
|
1998
|
1999
|
2000
|
2001
|
|
Days in a year
|
365
|
365
|
365
|
365
|
365
|
|
Debtors'turnover
|
57.88
|
60.65
|
51.46
|
45.99
|
34.41
|
|
ACP
|
6.3
|
6
|
7
|
7.9
|
10.6
|
Here, the average collection period is gradually
increasing, indicating that an extended line of credit has been allowed. There
was a sharp decline in the debtors' turnover ratio in 1999, and the decline
continued till 2001. The fall in debtors' turnover ratio can be attributed to
any of the following reasons:
-
There might be an increase in the volume of sales
relative to the increase in debtors.
-
The firm might have extended the credit period for
debtors.
-
The firm's debt collection team is not performing well,
as a result rate of which the realization has come down.
Inventory or Stock Turnover Ratio
Calculation of Stock Turnover for HLL:
|
|
1997
|
1998
|
1999
|
2000
|
2001
|
|
Sales
|
8363.3
|
10261.57
|
10978.31
|
11458.3
|
11861.77
|
|
Closing inventory
|
1044.6
|
1145.68
|
1309.8
|
1181.8
|
1240.05
|
|
Stock turnover
|
8
|
8.9
|
8.4
|
9.7
|
9.5
|
The stock turnover ratio of HLL shows a mixed trend.
Generally, a high stock turnover ratio is considered better than a low turnover
ratio. However, as mentioned earlier, a high ratio may indicate low investment
in inventories.
Interest Coverage Ratio
Calculation of interest coverage ratio for HLL:
|
|
1997
|
1998
|
1999
|
2000
|
2001
|
|
PBIT/interest
|
870.9/33.8
|
1128.4/29.2
|
1414.4/22.3
|
1695.9/13.1
|
2050.47/7.74
|
|
Interest coverage
|
25.76
|
38.64
|
63.43
|
129.46
|
264.92
|
This ratio shows the number of times the interest charges
on long-term liabilities have been collected before the deduction of interest
and tax. A high interest coverage ratio implies that the company can easily meet
its interest burden even if profit before interest and taxes suffers a sharp
decline. The interest coverage ratio for HLL is going up every year, implying
that it can meet its interest obligations even if there is a decline in profits.
From the creditors' point of view, the larger the coverage; the greater the
firm's capacity to handle fixed-charge liabilities and the more assured the
payment of interest to the creditors. A low ratio is a warning signal which
indicates that the firm is using excessive debt and does not have the ability to
pay interest to creditors. However, a very high ratio implies an unused debt
capacity.
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