PROJECT REPORT
ON
“ RATIO ANALYSIS ”
IN
HDFC BANK.
For the Partial Fulfillment of degree of B.Com.III (Prof.) of the deptt of commerce & Bussian Management of Guru Nanak Dev University Amritsar 2007-2008.
Guided By : Submitted By :
Dr. K. K. Chawla Sunil
Kuram Duggal
HOD B.Com.(Prof.) Final
( Deptt. Of Commerce & College Roll No.:-1803
Bussiness Management ) Univ.
:-Submitted To :
Guru Nanak College , Sukhchainana Sahib,Phagwara
A
CKNOWLEDGEMENT
I wish to acknowledge a deep sense
of gratitude to all those who have made a
major contribution and helped me a lot in
the preparation of this project.
First, of all I acknowledge with a
deep sense of gratitude towards my guide
Dr. K. K. Chawla who has guided me a
lot right from the beginning towards the
end of the project report.
I sincerely, thanks HDFC BANK
whole staff, who have helped a lot in
providing relevant information for this
report with their co-operative behaviour.
B. COM (PROF.) Final
CONTENTS
A.Introduction to Ratio
Analysis
B.Objective of study,
Research Methodology
&data source
C.
Ratio Analysis & Interpretation
D.
Findings & Conclusion
E.
Suggestion
&
Introduction to Ratio
Analysis
CHAPTER - 1
Objective of study, Research
Methodology & data source
OBJECTIVE OF STUDY,
RESEARCH METHODOLOGY
AND DATA SOURCE
OBJECTIVE OF STUDY
The main objective of Ratio Analysis is to get knowledge about financial position of HDFC BANK Phagwara.
Specially, objectives of study are as
follows :
To know about ratios prevailing at the end of different
financial years.
To form opinion about financial position of HDFC
BANK Phagwara, we have to find the trend of ratios.
DATA SOURCE
In order to complete this project report the data is collected through primary as well as secondary sources of the bank. The primary source includes the discussion with clerk-cum-cashier of
J&K Bank, Phagwara.
The secondary source include reports of Balance Sheet & Profit & Loss a/c of the bank.
Ratio Analysis & Interpretation
INTRODUCTION TO RATIO ANALYSIS
Ratio is numerical relationship between two variables which are connected with each other in some way or the other. Ratios may be expressed in any one of the following manners:
As a number between 500 and 100 may be expressed
as 5(500 divided by 100)
As a fraction may be expressed as former being 5 times of the later.
As a percentage the relationship between 100 and 500 may be expressed as 20% of the later.
As a proportion relationship between 100 and 500 may
be expressed as 1:5.
Ratio analysis facilitate the presentation of information of financial statements in simplified and concise and summarized form.
In the words of Hund, William,” Ratios are simply a means of highlighting in arithmetical terms the relationship between figures drawn from financial statements.”
NATURE OF RATIO ANALYSIS
Ratio analysis is basically a technique of :
1. Establishing meaningful relationship between
significant variables of financial statement.
2. Interpreting the relationship to form judgement
regarding the financial affairs of the unit.
Usefulness of ratio analysis depends upon identifying
objective of analysis;
selection of relevant data;
deciding appropriate ratios to be calculated;
comparing the calculated ratios with norms of
standards or forecasts;
Interpretation of ratios.
INTERPRETATION OF RATIOS
Ratios are interpreted in following different ways:
individual ratio may be studied with reference to
group ratio may be interpreted by considering group of
several related ratios. comparison with past.
comparison with projections.
Findings & Conclusion
RATIO ANALTSIS
FINANCIAL RATIOS»current »debt-equity » Debtor » Net profit ratio ratio turnover ratio
»liquid »reserve to »net working »operating ratio capital ratio capital ratio profit ratio »absolute »capital »fixed assets »earning ratio gearing turnover per share ratio ratio »dividend »solvency »inventory payment Ratio turnover ratio
»total ratio »fixed assets Indebted- to net worth ness ratio »return on »proprietary shareholders’ Ratio investment »interest coverage ratio Solvency ratio turnover ratio Profitabi lity ratio
LIQUID RATIO
Liquid ratio measures the ability of the unit to meet its short term obligations and reveals the short – term financial strength or weakness. This ratio is used to determine whether the unit is: » capable to meet short-term obligations
» the working capital being properly utilized » the current financial position improving
Current ratio » this ratio is also known as working
capital or 2:1 ratio. This ratio reveals the adequacy of current assets to pay off all current liabilities. Formula to calculate this ratio is:
Current
as a t as at
as at
as at
31-3-04 31-3-05 31-3-06 31-3-07 Rs.’000’omitted Rs. 000 omitted Rs.000 omt. Rs.000 omt. C.A. 206527918 237846420 257643531 280858957 C.L. 31269359 39098622 41762693 49226764 C.R. (current ratio) 4.1 5.1:1 6.2:1 5.7:1
0 1 2 3 4 5 6 7
2004 yr. 2005 yr. 2006 yr. 2007 yr.
current ratio
INTERPRETATION
The current ratio is very popular and good indicator of liquidity position of the enterprise. Very high current ratio is not desirable as it shall mean less efficient use of funds. The current ratio of HDFC BANK is high as standard specify, but as the ratio analysis revealed this ratio has been improved as compared to earlier years.
SOLVENCY RATIO
The long-term financial soundness of any business can be judge by its long-term creditors with the help of solvency ratio. This ratio helps to interpreting the capacity of business to:
make periodic payment of interest ,
repay long-term debt as per installments stipulated in
the contract.
Debt-equity ratio» Debt-equity ratio measures the
relationship between borrowed funds and internal owners’ funds. Higher equity shall mean a higher stake of owners and may be a healthy sign.
Debt Equity
As at as at As at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. 000
omt. Rs. 000 omt. Rs. 000 omt. Rs. 000 omt. Debt 16782094 2 19224378 3 20737176 1 223353073 Equity 15937365 16654021 17994715 20087338 Ratio 11.53:1 12.54:1 12.52:1 12.11:1
11 11.2 11.4 11.6 11.8 12 12.2 12.4 12.6
2004 yr. 2005 yr. 2006 yr. 2007 yr.
debt-equity ratio
INTERPRETATION
In the year 2004 debt-equity ratio of
HDFC BANK is low as compared to subsequent years. As,
in subsequent years this ratio is decreasing after the year 2005 which indicate higher owners’ stake and indicate healthy sign of bank’s position.
Reserve to capital ratio» This ratio establishes between reserves and capital. Higher proportion of reserves shows financial soundness because
I. Unit shall be able to meet future losses as and when
suffered.
II. Unit can expand, grow, diversify as it may desire.
Reserve Capital
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs 000’
omt Rs 000’ omt Rs 000’ omt Rs 000’ omt Reserv e 1545491 0 1616910 0 1750979 4 19602417 Capital 482455 484921 484921 484921 Ratio 33:1 34.3:1 35.1:1 41.4:1
0 5 10 15 20 25 30 35 40 45
2004 yr. 2005 yr. 2006 yr. 2007 yr.
reserve to capital ratio
INTERPRETATION
The upward trend of ratio reveals higher
proportion of reserves. It shows that HDFC BANK has sufficient safety margin to meet its future losses in contingency and may also utilize its funds/reserves for expansion and diversification.
Capital gearing ratio»it is the ratio between capital plus reserves and fixed cost bearing securities. This ratio measures the extent of capitalization by the funds raised by the issue of fixed cost bearing securities. This ratio is interpreted by the use of two terms. Highly geared means lower proportion of equity, low geared means high proportion of equity. Higher capital gearing ratio reveals equity shareholders gain on the strength of their equity. This ratio is calculated as under:
Equityfixed cost bearing securities
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Equity 1593736 5 1665402 1 1799471 5 20087338 F.C.B.S . 2970103 3194819 2639347 6201895
(fixed cost bearing securities)
0 1 2 3 4 5 6 7
2004 yr. 2005 yr. 2006 yr. 2007 yr. capital gearing ratio
INTERPRETATION
As the chat reveals that in earlier years till 2006 capital gearing ratio was increasing & indicate equity shareholders’ strength to gain on their investment, but, in the year 2007 ratio comes down fastly because of much more increase in fixed cost bearing securities as compare to earlier & indicate less return to shareholders.
Solvency ratio» solvency is the term which is used to describe the financial position of any business which is capable to meet outside obligations in full out of its own assets. Solvency ratio is computed
as under:
Debt total assets
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs.
‘000’omt. Rs. ‘000’ omt. Rs. ‘000’omt. Rs. ‘000’ omt. Debt 16782094 2 19224378 3 20737176 1 223353073 Total assets 21205756 3 24480160 7 26448982 2 286465280 Ratio 89.1% 88.5% 88.4% 87%
85.50% 86.00% 86.50% 87.00% 87.50% 88.00% 88.50% 89.00% 89.50%
2004 yr. 2005 yr. 2006 yr. 2007 yr. solvency ratio
INTERPRETATION
Lower solvency ratio is always desirable because lower ratio means more the bank is able to meet its debt obligations out of its own funds and the bank has no need to depend on outsiders and to pay fixed interest on borrowings.
Total indebtedness ratio» this ratio differs slightly from debt-equity ratio as instead of term liabilities only, we take total outside liabilities i.e. term and current both. This may reflect the solvency position in a better way. As it indicates the adequacy of firm’s equity in making payment of outside liabilities. This ratio is computed as:
Total outsider’s liability Tangible net
worth
as at as at as at as at 31-3-04 31-4-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. T.O.L. 19612019 8 22814758 6 24649510 7 266377942 (Total outsider’s liability) T.N.W. 15937365 16654021 17994715 20087338 (Tangible net worth) Ratio 13.3:1 14.7:1 14.6:1 14.2:1
12.5 13 13.5 14 14.5 15
2004 yr. 2005 yr. 2006 yr. 2007 yr. total indebtedness ratio
INTERPRETATION
The capability of bank to pay outsiders’ liability was decreasing in the year 2005 as the chat’s upward trend indicate, but afterwards it starts slopping downward and indicate improvement in bank’s position, to pay its obligations.
Proprietary ratio» This ratio establishes relationship
between proprietor’s funds to total resources of the unit. This ratio highlights that what is the proportion of proprietors and outsiders in financing the total business. Formula to calculate ratio is:
Proprietors’ funds Total assets
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. P.F. 15937365 16654021 17994715 20087338 (proprietors’ funds) Total assets 20848866 6 23987040 6 25959069 9 282693408 Ratio 8.64% 7.94% 7.93% 8.11%
7.40% 7.60% 7.80% 8.00% 8.20% 8.40% 8.60% 8.80%
2004 yr. 2005 yr. 2006 yr. 2007 yr. proprietary ratio
INTERPRETATION
More proprietary ratio is always desirable as it represents the funds financed by proprietors’ and outsiders. HDFC BANK proprietary ratio is very low & indicates only 7.11% of funds are financed by owners in the year 2007 remaining by outsiders.
Interest coverage ratio» this ratio measures debt servicing capacity of a business so far as interest on long-term loans is concerned. This ratio shows how many times the interest charges are covered by the earnings. This ratio is calculated with the formula:
Earning before int & tax
Fixed interest charges
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. E.B.I.T. 4838403 189418 4 310180 0 3428131 (earning before interest & tax)
F.I.C. 712963 692812 127897 4 588522 (fixed interest charges) Ratio 2.73:1 6.78:1 2.42:1 5.82:1
0 1 2 3 4 5 6 7 8
2004 yr. 2005 yr. 2006 yr. 2007 yr. interest coverage ratio
INTERPRETATION
The chart shows fluctuations in interest coverage ratio HDFC BANK As more interest coverage ratio is desirable in the year 2006 this ratio falls at increasing rate which was not good sign but in the year 2007 its rate/trend again gone upward & indicate improvement in coverage capacity.
EFFICIENCY/TURNOVER RATIO
Efficiency ratios are concerned with measuring the efficiency in asset management. Efficiency implies effective utilization of available resources in the process of business activity, in relation to sales or cost of goods sold.
Net working capital ratio» This ratio states as how
efficiently or actively working capital is being used. This ratio is useful when inter-firm or inter-period comparison is being done. Formula to calculate this ratio is:
Net salesNet working capital
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Net sales 18229464 16312577 18171054 20595369 Net 17525855 9 19874779 8 21588083 8 231632193 working capital Ratio 0.104:1 0.082:1 0.084:1 0.088:1
0 0.02 0.04 0.06 0.08 0.1 0.12
2004 yr. 2005 yr. 2006 yr. 2007 yr. net working capital ratio
INTERPRETATION
Increasing ratio indicates that working capital is more active, it is supporting, comparatively, higher level of production and sales, it is being more intensively. Chart shows HDFC BANK working capital ratio decreased in 2005 but afterwards, it starts increasing, which is good indication.
Fixed assets turnover ratio» this ratio
establishes relationship between sales and fixed assets. The purpose is to judge whether firm is generating adequate sales for the investment in fixed assets of the firm. The formula of this ratio is as under:
Annual sales Fixed assets
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Annual sales 1822946 4 1631257 7 1817105 4 20595369 Fixed assets 1960748 2023986 1947168 1834451
0 2 4 6 8 10 12
2004 yr. 2005 yr. 2006 yr. 2007 yr. fixed assets turnover ratio
INTERPRETATION
Fixed assets turnover ratio of HDFC
BANK falls during the year 2005 as indicated by chart. But
after 2005 chart shows upward trend of this ratio, indicate firm is generating adequate sales for investment in fixed assets and the ratio is satisfactory.
PROFITABILITY RATIO
In general terms efficiency, in business is measured by profitability. Low profitability may arise due to lack of control over expenses. Bankers and other financial institutions looks at the profitability ratio as an indicator whether or not firm earns substantially more than it pays interest for use of borrowed funds and whether ultimate repayment of their debt appears reasonably certain. This ratio also indicates return which owners get on their investment.
Net profit ratio» this ratio expresses relationship between net profit and sales. This ratio indicates what proportion of net sales is left for owners after all expenses have been met. It is calculated as follows:
Net profit * 100 Sales
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Net profit 4063300 1150690 1768434 2744863 Sales 1822946 4 1631257 7 1817105 4 20595369
0% 5% 10% 15% 20% 25%
2004 yr. 2005 yr. 2006 yr. 2007 yr. net profit ratio
INTERPRETATION
Net profit ratio of HDFC BANK falls at increasing rate in the year 2005, but after year 2005 upward trend shows increasing profitability of bank.
Operating net profit ratio» This ratio establishes relationship between operating net profits and sales. This ratio helps in determining the ability of the management in running the business. It is calculated as:
Operating net profit * 100 Sales
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Operating net profit/ loss 85289(P) 2407655(L) 2344014(L) 2122286(L) Sales 8122946 4 16312577 18171054 20595369 Ratio 0.47% 14.7% 13% 10.3%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00%
2004 yr. 2005 yr. 2006 yr. 2007 yr. operating profit operating loss
INTERPRETATION
The ratio analysis and graph indicates that
HDFC BANK management is not efficient to operate its
business as after year 2004 it’s operating ratio falls and bear huge losses in the year 2005, but after this its position starts improving & recovering from losses, which is good indication for its financial health/position.
Earning per share» This ratio indicates earning
power of business and gives view of comparative earning of firm, inter-firm. In case of intra-firm comparison it gives view of increase or decrease in earning power of firm over the period of time. Ratio is calculated with following formula:
Net profit after tax & preference
dividend Number of shares
as at as at as at as at
31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. N.P.A.T
&D 4063300 1150690 1768434 2744863 (N.P. after tax & pref.
dividend) Number of shares 482455/10 484921/10 484921/10 484921/10 Ratio 86:1 25.7:1 38.48:1 58.62:1
0 20 40 60 80 100
2004 yr. 2005 yr. 2006 yr. 2007 yr. earning per share
INTERPRETATION
The chart indicates that in the year 2005 HDFC BANK. earning power decreases/goes down but afterwards upward trend of ratio reveals progress in the earning ratio/power of the bank.
Dividend pay-out ratio»
dividend pay-out ratio is calculated to find the extent to which earning per share have been retained in the business. It is an important ratio because ploughing back of profits enable a unit to grow & pay more dividends in future. This ratio is calculated as:Dividend per share Earning per share
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Dividend per share 5.02 7.99 7.99 11.49 Earning per share 84 23.7 36.48 56.62 Ratio 5% 33% 21% 20%
0% 5% 10% 15% 20% 25% 30% 35%
2004 yr. 2005 yr. 2006 yr. 2007 yr. dividend pay-out ratio
INTERPRETATION
The ratio indicates that dividend payment per share increasing continuously & earning per share also starts increasing after the year 2005. HDFC
BANK dividend pay-out ratio declines after year 2005, as
Fixed assets to long-term funds» this ratio indicates the extent to which the total fixed assets are financed by long-term funds of firm. If fixed assets exceed from long-term funds, it means fixed assets’ part has financed out of current funds, which is not a good financial policy. If fixed assets are less, it means that a part of working capital required is met out of long-term funds of firm. This ratio is calculated as:
Fixed assets Long-term funds
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Fixed assets 1960748 2023986 1947168 1834451 Long term funds 1890746 8 1984884 0 2063406 2 26289233 Ratio 10.37% 10.19% 9.43% 6.97%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%
2004 yr. 2005 yr. 2006 yr. 2007 yr. fixed assets to long-term funds ratio
INTERPRETATION
The ratio indicates that fixed assets proportion is less and coming down gradually as compared to long-term funds, it means that a part of working capital of HDFC BANK is financed by or met out of its long-term funds.
Fixed assets to net worth ratio» the ratio
indicates the extent to which shareholders’ funds are sunk into fixed assets. Generally, purchase of fixed assets should be financed by shareholders’ equity. If ratio is less than 100% it means working capital is provided by shareholders’ funds. If ratio is more than 100% it means that owner’s funds are not sufficient to finance fixed assets & firm has to depend on outsiders. Ratio’s formula is:
Fixedassets Shareholders’ fund
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Fixed assets 1960748 2023986 1947168 1834451 sh.h.F. 1593736 5 1665402 1 1799471 5 20087338 (shareholders’ funds) Ratio 12.3% 12.1% 10.8% 9.1%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%
2004 yr. 2005 yr. 2006 yr. 2007 yr. fixed assets to net worth ratio
INTERPRETATION
The downward trend of ratio indicates that fixed assets proportion is coming down as compared to net worth, & the working capital is provided by shareholders’ funds.
Return on shareholders’ investment» the profitability from the view point of shareholders is judge through this ratio. This ratio is useful in making investment decisions. This ratio is also used in finding out whether the shareholders are getting adequate return on their money or not. Ratio is computed as under:
Net profit after tax Shareholders’
funds
as at as at as at as at 31-3-04 31-3-05 31-3-06 31-3-07 Rs. ‘000’
omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Rs. ‘000’ omt. Net 4063300 1150690 1768434 2744863 profit Sh.h.F. 1593736 5 1665402 1 1799471 5 20087338 (shareholders’ funds) Ratio 25.4% 6.9% 9.82% 13.66%
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%
2004 yr. 2005 yr. 2006 yr. 2007 yr. return on shareholders' investment
INTERPRETATION
The higher the ratio most profitably shareholders’ funds are invested in business. J & K bank’s ratio fall in 2005, but afterwards upward trend shows increase in ratio & indicates improvement in funds effective utilization.
FINDINGS
Findings »
The liquidity ratio, capital gearing ratio, solvency ratio, profitability ratios, Return on shareholders’ funds ratio, all these fall in the year 2005, which express bad impression of financial position/health of HDFCBANK ltd., because these ratios are always desirable to rise
in subsequent years, as these are the main indications of progress of any unit. On the other hand, debt-equity ratio, reserve to capital ratio, interest coverage ratio, dividend pay-out ratio, all these ratios arise in the year 2005 which too is undesirable, increasing Reserve ratio shows increasing need to maintain separate funds to meet prevailing unfavourable conditions, & which may interpret smooth day-to-day functioning of bank. Increasing Dividend pay-out ratio shows undesirable burden to pay even under unfavourable conditions which too/further leads to misery position of business.
CONCLUSION
Conclusion »
The overall analysis of financial position of HDFC BANK Ltd. States that bank’s efficiency decreased in the year 2005 due to the posting of inefficient transactions & bank had to bear losses, especially, the loss of operating profits, but without being too late bank performs carefully & improved its financial position. Now, bank’s position is at recovering stage.SUGGESTIONS
Suggestions »
An analysis of above conditions direct to form serious planning to recover but as year 2006-07 shows progress in bank’s condition, it is at recovering stage. In nutshell, it can be said that Bank shall review the strategies followed in the years 2006 & 2007.BIBLIOGRAPHY
1. Chawla R. K., Juneja C. Mohan,
Saksena K. K. “Finanical
Accounting”
2. Kalyani Publication.
3. Swaroop Gopal, Varshnay P. N. ,
“Banking Law & Practice” Sultan Publication.
4. Gupta Shashi. K. , Sharma R. K.
“Accounting For Managerial Decisions”
