A NOTE ON FINANCIAL RATIO ANALYSIS
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Calculation of Gross Margin for HLL:
|
|
1997
|
1998
|
1999
|
2000
|
2001
|
|
Gross profit/Net Sales * 100
|
928.8 / 7736.75
|
1229.4/ 9426.13
|
1543.1/ 10116.45
|
1826.8/ 10588.18
|
2195.13/ 10941.11
|
|
Gross margin
|
12
|
13.04
|
15.25
|
17.25
|
20.06
|
The gross margin has been increasing steadily since 1997.
The reasons for this increase can be:
-
Higher sales prices but cost of goods sold remaining
constant.
-
Lower cost of goods sold, sales prices remaining
constant.
-
A combination of changes in sales prices and costs,
widening the margin between them.
The high gross margin reported by HLL reflects the company's ability to maintain
a low cost of production.
Net Profit Margin
Calculation of net profit margin for HLL:
|
|
1997
|
1998
|
1999
|
2000
|
2001
|
|
Net Profit/Net Sales ´ 100
|
567.1 / 7736.75
|
806.2 / 9426.13
|
1074.1/ 10116.45
|
1327.8/ 10588.18
|
1640.31/ 10941.11
|
|
Net Margin
|
7.32
|
8.55
|
10.61
|
12.54
|
14.99
|
The net profit margin of HLL has increased significantly.
The high net profit margin implies higher returns to shareholders in the form of
dividends and stock price appreciation.
Investment Turnover Ratio
Calculation of investment turnover for HLL:
|
|
1997
|
1998
|
1999
|
2000
|
2001
|
|
Value of production/ Average total assets
|
7783.15/ 3208.9
|
9418.23/ 3965.85
|
10244.97/ 476382
|
10504.23/ 5465.9
|
10936.48/ 6280.78
|
|
Investment Turnover
|
2.425
|
2.375
|
2.15
|
1.921
|
1.741
|
The investment turnover ratio measures the relationship
between the value of production and average total assets. This ratio measures
the asset utilization efficiency of a firm. In the case of HLL, the investment
turnover shows a downward trend. This trend can be attributed to the increasing
underutilization of the firm's available production capacity.
Debt-Equity Ratio
Calculation of debt-equity ratio for HLL:
|
|
1997
|
1998
|
1999
|
2000
|
2001
|
|
Debt/Networth
|
186.4/1261.2
|
264.31/1713.03
|
177.2/2102.5
|
111.5/2488
|
83.73/3043.69
|
|
Debt-equity Ratio
|
0.148
|
0.154
|
0.084
|
0.045
|
0.028
|
The debt-equity ratio of HLL shows a downward trend. This
implies that the company is relying more on its owner's equity to finance its
assets rather than on borrowed funds. Though the firm is using relatively less
proportion of debt, the returns on equity investments have been profitable. This
can be explained by calculating the average rate of return earned on the capital
employed in assets and comparing that rate with the average interest rate paid
for borrowed funds.
Calculation of rate of return on capital employed:
|
|
1997
|
1998
|
1999
|
2000
|
2001
|
|
Borrowed funds
|
186.4
|
264.31
|
177.2
|
111.5
|
83.73
|
|
Owner's equity
|
1261.2
|
1713.03
|
2102.5
|
2488
|
3043.69
|
|
Total (a)
|
1447.6
|
1977.34
|
2279.7
|
2599.35
|
3127.42
|
|
PBDIT (b)
|
928.8
|
1229.4
|
1543.1
|
1826.8
|
2195.13
|
|
Rate of return (b/a)
|
64%
|
62.20%
|
67.60%
|
70.20%
|
70.10%
|
|
Interest charges
|
30.55%
|
11.07%
|
12.60%
|
11.73%
|
9.24%
|
For each rupee of capital invested in assets, HLL
realized an average return of 66.82%, whereas it paid only 15.04% on an average
as interests.
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