A NOTE ON FINANCIAL RATIO ANALYSIS

<<Previous

Earnings per Share:

Calculation of earnings per share:

	1997	1998	1999	2000	2001
Net profits available to equity holders	567.1	806.2	1074.1	1327.8	1640.31
Number of ordinary shares outstanding	1.99	2.19	2.19	2.2	2.2
Earnings per share	284.97	368.13	490.46	603.54	745.6

EPS as a measure of the profitability of a company from the owner's point of view should be used cautiously as it does not recognize the effect of an increase in the networth of the company (caused by retention of earnings).

Dividend Pay-out Ratio

The Dividend pay-out ratio can be calculated by dividing the earnings per share by the market value per share. This ratio is also known as the earnings price ratio. The calculation of the dividend pay-out ratio is as follows:

Non-operating Income Ratio

This ratio indicates the extent to which a firm is dependent on its non-operating income to pay dividends. A rising trend in this ratio suggests that the company is relying more on its non-operating income than its operating income to pay dividends.

Calculation of non-operating income ratio:

	1997	1998	1999	2000	2001
Non-operating income	165.2	183.9	269.3	305.9	283.14
Profit before tax	837.1	1099.2	1392.1	1682.8	2042.73
Non-operating income ratio	0.197	0.167	0.193	0.181	0.138

Interest Incidence Ratio

This ratio shows how much of the operating profit is used to meet interest obligations:

Calculation of interest incidence:

	1997	1998	1999	2000	2001
Interest	33.8	29.2	22.3	13.1	7.74
Operating profit	928.8	1229.4	1543.1	1826.8	2195.13
Interest incidence ratio	0.036	0.024	0.014	0.007	0.003

The interest incidence ratio shows a downward trend indicating that the interest obligations are met not depending on the operating profit solely. The low interest incidence ratio may be due to a low proportion of debt in the firm's capital structure.

Credit Strength Ratio

The unsecured lenders of a firm (such as suppliers) examine the networth of the company to assess the risk of default. Hence, a firm must take the required action if current liabilities increase beyond a certain multiple of networth. A high credit strength ratio indicates a firm's increasing dependence on current liabilities, which may prove fatal if the firm does not have enough current assets to finance current liabilities. A credit strength ratio of 2:1 is considered satisfactory.
Calculation of credit strength ratio:

	1997	1998	1999	2000	2001
Operating current liabilities	2093.01	2503.92	2966.85	3252.71	3559.52
Networth	1261.5	1713.03	2103.25	2488.24	3043.69
Credit strength ratio	1.659	1.46	1.41	1.3	1.169

In the case of HLL, the credit strength ratio shows a downward trend.
 

More>> Page8

---

2010, ICMR (IBS Center for Management Research).All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means - electronic or mechanical, without permission.

To order copies, call +91- 8417- 236667 or write to ICMR,
Survey No. 156/157, Dontanapalli Village, Shankerpalli Mandal,
Ranga Reddy District,
Hyderabad-501504. Andhra Pradesh, INDIA. Mob: +91- 9640901313, Ph: +91- 8417- 236667,
Fax: +91- 8417- 236668
E-mail: info@icmrindia.org
Website: www.icmrindia.org.