A NOTE ON FINANCIAL RATIO ANALYSIS

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Direct Marketing Expenses Ratio (DMER)

The direct marketing expenses include salaries and allowances for marketing and sales people, forwarding expenses, sales commission, traveling and expenditure on advertisements. The DMER indicates whether the manufacturing and marketing functions of a company are moving hand in hand. The marketing department of a firm must always be in a position to convert production into sales as soon as possible, whenever there is a capacity addition in the manufacturing department. If it cannot do so, the firm may have to incur additional overheads.
Calculation of direct marketing expenses ratio for HLL

	1997	1998	1999	2000	2001
Direct marketing expenses	490.6	676.8	746.5	709.2	835.75
Net sales	7736.75	9426.13	10116.45	10588.18	10941.11
Direct marketing expenses ratio	0.063	0.071	0.073	0.066	0.076

The mixed trend in the ratio implies that HLL may have gone for a major capacity expansion in 1998-2001.

Sales Assets Turnover Ratio

Trade debtors and finished goods are important assets of marketing department in any organization. These two assets are together called 'sales assets.' A marketing department is regarded as an efficient department when its sales assets turnover is high. Calculation of sales assets turnover ratio:
 

	1997	1998	1999	2000	2001
Gross sales	8363.3	10261.5	10978.3	11458.3	11861.77
Trade debtors + finished goods inventory	666.6	741.57	907.5	854.2	1012.78
Sales assets turnover ratio	12.54	13.83	12.09	13.41	11.71

The downward trend in this ratio may have been caused by an extended product line and liberal credit terms for debtors.

Value Coverage Ratio

This ratio measures the value of the output in relation to the relative value of input materials. It also shows the extent to which a company is technology driven. A technology intensive firm has greater economies of scale. A downward trend in this ratio indicates an increase in the economies of scale. While an upward trend implies the wastage of materials and the use of obsolete technology, with a low level of skills.
Calculation of value coverage ratio:

	1997	1998	1999	2000	2001
Consumption of materials	7258.89	8552.74	9276.74	9142.43	9033.58
Value added	524.26	865.49	968.23	1361.9	1902.9
Value coverage ratio	13.85	9.88	9.58	6.71	4.75

A downward trend in the ratio indicates that the firm has been investing highly in introducing the latest technology available.

Over Trading Ratio

A company intending to increase its sales should ensure that it has sufficient net working capital to fall back on in the event of creditors becoming due for payment or else the company may have to face a severe liquidity crisis. An increase in the net working capital along with an increase in sales will help the company avoid a liquidity crisis.
Calculation of over trading ratio:

	1997	1998	1999	2000	2001
Net working capital	147.98	249.41	328.23	68.64	152.54
Credit sales	8363.3	10261.57	10978.31	11458.3	11861.77
Over trading ratio	0.017	0.024	0.029	0.006	0.013

The over trading ratio for HLL shows an upward trend till 1999, which indicates an increase in the net working capital, along with an increase in sales. But in 2000 and 2001, the company's net working capital did not increase in proportion to the increase in sales.

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