This ratio refers to the sources through which the debtors
of a firm are financed. A company can finance its debtors through its trade
creditors or its advance payments from customers.
Calculation of working capital performance ratio:
A working capital ratio of 2:1 is desirable. The ratio more
than 2 indicates a better ability to meet ongoing and unexpected bill payments.
The ratio less than 2 indicates that the company may have difficulties meeting
its short-term commitments and that additional working capital support is
required. In HLL's case, though this ratio is well below the desirable 2:1
ratio, it is increasing every year.
Debt Replacement Ratio:
This ratio shows how a company is replacing the debt that it has raised for
expansion either through borrowed funds or through an equity issue. The debt is
usually replaced through the retained earnings. Replacement from retained
earnings increases the firm's networth as well as its ability to raise further
debt.
Calculation of debt replacement ratio:
|
1997 |
1998 |
1999 |
2000 |
2001 |
|
Retained earnings |
194.27 |
274.9 |
363.1 |
385.5 |
482 |
|
Long term debt |
183.2 |
173.74 |
66.3 |
56 |
59.03 |
|
Debt replacement ratio |
1.062 |
1.582 |
5.476 |
6.883 |
8.16 |
An upward trend in this ratio suggests that the firm has been using a
larger proportion of its retained earnings to replace its debt, instead of
paying dividends.
Plant Turnover Ratio
This ratio is an indication of the plant utilization capacity of a firm. An
increasing trend in this ratio is a sign of timely replacement of equipment. A
declining trend indicates a decrease in production levels due to falling
demand for the product.
Calculation of plant turnover ratio:
|
1997 |
1998 |
1999 |
2000 |
2001 |
|
Cost of production |
5926.78 |
7029.11 |
7516.25 |
7416.59 |
7467.44 |
|
Depreciated plant and machinery |
578.59 |
733 |
757.25 |
864.46 |
1005.97 |
|
Plant turnover ratio |
10.24 |
9.58 |
9.92 |
8.57 |
7.42 |
DUPONT ANALYSIS
The overall profitability of a firm can be measured on the basis of two
ratios: net profit margin and investment turnover. These two ratios when
combined are known as 'earning power.'
The DuPont analysis is used to arrive at the overall performance of a firm and
to identify the factors that contributed to it.
Earnings Power of HLL for the years 2000 and 2001
|
2000
|
2001
|
Net sales
|
10588.18
|
10941.11
|
Net profits
|
1327.33
|
1640.3
|
Total assets
|
5797.03
|
6765.37
|
Profit margin ratio
|
12.5
|
14.99
|
Investment turnover
|
1.826
|
1.6172
|
ROI ratio
|
22.825
|
24.24
|
In 2000, a slight increase in the profit margin could have
led to an increase in the profitability of the firm. Similarly, in 2001, a
marginal improvement in its investment turnover, which is an indication of the
efficient use of assets, might have increased its earning power.
COMMON SIZE INCOME STATEMENT OF HLL
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