project of hdfc bank
DESCRIPTION
this is a small project on hdfc bank and its ratio analysis.TRANSCRIPT
DECLARATION
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ACKNOWLEDGEMENT
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CONTENTS
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Performance analysis based on “Ratio Analysis” by using the financial
statements of HDFC Bank
EXECUTIVE SUMMARY
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OBJECTIVES OF THE STUDY
The major objectives of the resent study are to know about financial strengths
and weakness of HDFC BANK through FINANCIAL RATIO ANALYSIS.
The main objectives of resent study aimed as:
To evaluate the performance of the company by using ratios as a yardstick to
measure the efficiency of the company. To understand the liquidity, profitability and
efficiency positions of the company during the study period. To evaluate and analyze various
facts of the financial performance of the company. To make comparisons between the ratios
during different periods.
OBJECTIVES
1. To study the present financial system at HDFC.
2. To determine the Profitability, Liquidity Ratios.
3. To analyze the capital structure of the company with the help of Leverage ratio.
4. To offer appropriate suggestions for the better performance of the organization.
5. To analyze and evaluate the performance values of the bank with the help of ratios.
6. To measure how efficiently the bank has been performing over a period of 3years.
7. To understand how did the profitability, capital structure and other factors change by
comparing different financial years’ financial figures.
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RESEARCH METHODOLOGY
The methodology adopted in this project is Exploratory Research Design as the data used is
mostly the data which is already available in the form of financial information of the bank.
This design helps us to
Understand the financial status of the bank.
Credit worthiness of the bank.
Primary Data:
The information collected from the employees of the bank, finance managers and the internal
guide.
Secondary Data:
The information collected from the Financial Statements and Audit Reports.
LIMITATIONS OF THE STUDY
Although ratio analysis is very important tool to judge the company's performance following
are the limitations of it.
1. Ratios are tools of quantitative analysis, which ignore qualitative points of view.
2. Ratios are generally distorted by inflation.
3. Ratios give false result, if they are calculated from incorrect accounting data.
4. Ratios are calculated on the basis of past data. Therefore, they do not provide complete
information for future forecasting.
5. Ratios may be misleading, if they are based on false or window-dressed accounting
information.
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CHAPTER 1
INTRODUCTION TO RATIO ANALYSIS
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RATIO ANALYSIS
FINANCIAL ANALYSIS
Financial analysis is the process of identifying the financial strengths and
weaknesses of the firm and establishing relationship between the items of the balance sheet
and profit & loss account.
Financial ratio analysis is the calculation and comparison of ratios, which are
derived from the information in a company’s financial statements. The level and historical
trends of these ratios can be used to make inferences about a company’s financial condition,
its operations and attractiveness as an investment. The information in the statements is used
by
Trade creditors, to identify the firm’s ability to meet their claims i.e. liquidity position
of the company.
Investors, to know about the present and future profitability of the company and its
financial structure.
Management, in every aspect of the financial analysis. It is the responsibility of the
management to maintain sound financial condition in the company.
RATIO ANALYSIS
The term “Ratio” refers to the numerical and quantitative relationship between
two items or variables. This relationship can be exposed as
Percentages
Fractions
Proportion of numbers
Ratio analysis is defined as the systematic use of the ratio to interpret the
financial statements. So that the strengths and weaknesses of a firm, as well as its historical
performance and current financial condition can be determined. Ratio reflects a quantitative
relationship helps to form a quantitative judgment.
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STEPS IN RATIO ANALYSIS
The first task of the financial analysis is to select the information relevant to the
decision under consideration from the statements and calculates appropriate ratios.
To compare the calculated ratios with the ratios of the same firm relating to the pas6t
or with the industry ratios. It facilitates in assessing success or failure of the firm.
Third step is to interpretation, drawing of inferences and report writing conclusions
are drawn after comparison in the shape of report or recommended courses of action.
BASIS OR STANDARDS OF COMPARISON
Ratios are relative figures reflecting the relation between variables. They
enable analyst to draw conclusions regarding financial operations. They use of ratios as a tool
of financial analysis involves the comparison with related facts. This is the basis of ratio
analysis. The basis of ratio analysis is of four types.
Past ratios, calculated from past financial statements of the firm.
Competitor’s ratio, of the most progressive and successful competitor firm at the same
point of time.
Industry ratio, the industry ratios to which the firm belongs to
Projected ratios, ratios of the future developed from the projected or pro forma
financial statements
NATURE OF RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial
statements. It is the process of establishing and interpreting various ratios for helping in
making certain decisions. It is only a means of understanding of financial strengths and
weaknesses of a firm. There are a number of ratios which can be calculated from the
information given in the financial statements, but the analyst has to select the appropriate data
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and calculate only a few appropriate ratios. The following are the four steps involved in the
ratio analysis.
Selection of relevant data from the financial statements depending upon the objective
of the analysis.
Calculation of appropriate ratios from the above data.
Comparison of the calculated ratios with the ratios of the same firm in the past, or the
ratios developed from projected financial statements or the ratios of some other firms
or the comparison with ratios of the industry to which the firm belongs.
INTERPRETATION OF THE RATIOS
The interpretation of ratios is an important factor. The inherent limitations of
ratio analysis should be kept in mind while interpreting them. The impact of factors such as
price level changes, change in accounting policies, window dressing etc., should also be kept
in mind when attempting to interpret ratios. The interpretation of ratios can be made in the
following ways.
Single absolute ratio
Group of ratios
Historical comparison
Projected ratios
Inter-firm comparison
GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS
The calculation of ratios may not be a difficult task but their use is not easy.
Following guidelines or factors may be kept in mind while interpreting various ratios are
Accuracy of financial statements
Objective or purpose of analysis
Selection of ratios
Use of standards
Caliber of the analysis
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IMPORTANCE OF RATIO ANALYSIS
Aid to measure general efficiency
Aid to measure financial solvency
Aid in forecasting and planning
Facilitate decision making
Aid in corrective action
Aid in intra-firm comparison
Act as a good communication
Evaluation of efficiency
Effective tool
LIMITATIONS OF RATIO ANALYSIS
Differences in definitions
Limitations of accounting records
Lack of proper standards
No allowances for price level changes
Changes in accounting procedures
Quantitative factors are ignored
Limited use of single ratio
Background is over looked
Limited use
Personal bias
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CLASSIFICATIONS OF RATIOS
The use of ratio analysis is not confined to financial manager only. There are
different parties interested in the ratio analysis for knowing the financial position of a firm for
different purposes. Various accounting ratios can be classified as follows:
1. Traditional Classification
2. Functional Classification
3. Significance ratios
1. Traditional Classification
It includes the following.
Balance sheet (or) position statement ratio: They deal with the relationship between
two balance sheet items, e.g. the ratio of current assets to current liabilities etc., both
the items must, however, pertain to the same balance sheet.
Profit & loss account (or) revenue statement ratios: These ratios deal with the
relationship between two profit & loss account items, e.g. the ratio of gross profit to
sales etc.,
Composite (or) inter statement ratios: These ratios exhibit the relation between a
profit & loss account or income statement item and a balance sheet items, e.g. stock
turnover ratio, or the ratio of total assets to sales.
2. Functional Classification
These include liquidity ratios, long term solvency and leverage ratios, activity
ratios and profitability ratios.
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3. Significance ratios
Some ratios are important than others and the firm may classify them as
primary and secondary ratios. The primary ratio is one, which is of the prime importance to a
concern. The other ratios that support the primary ratio are called secondary ratios.
IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE
1. Liquidity ratio
2. Leverage ratio
3. Activity ratio
4. Profitability ratio
Liquidity Ratio
A financial ratio indicating a company’s ability to meet its short term financial
obligations
It’s a ratio between Liquid Assets (that can be converted to cash) to short term
liabilities
Greater the coverage the more likely is that a business will able to pay its debt and
vice-versa
Commonly used liquidity ratios are
o Current Ratio:
i. This ratio explains the relationship between current assets and current liabilities of a business.
ii. Current Assets:- ‘Current assets’ includes those assets which can be converted into cash with in a year’s time.
iii. Current Assets = Cash in Hand + Cash at Bank + B/R + Short Term Investment + Debtors(Debtors – Provision) + Stock(Stock of Finished Goods + Stock of Raw Material + Work in Progress) + Prepaid Expenses.
iv. Current Liabilities :- ‘Current liabilities’ include those liabilities which are repayable in a year’s time.
v. Current Liabilities = Bank Overdraft + B/P + Creditors + Provision for Taxation + Proposed Dividend + Unclaimed Dividends + Outstanding Expenses + Loans Payable within a Year.
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Significance: - According to accounting principles, a current ratio of 2:1 are supposed to be an ideal ratio.
It means that current assets of a business should, at least, be twice of its current liabilities. The higher ratio indicates the better liquidity position; the firm will be able to pay its current liabilities more easily. If the ratio is less than 2:1, it indicates lack of liquidity and shortage of working capital.
The biggest drawback of the current ratio is that it is susceptible to “window dressing”. This ratio can be improved by an equal decrease in both current assets and current liabilities.
o Quick Ratio:
i. It measures the ability of a company to use its near cash or quick assets to
extinguish or retire its current liabilities immediately
ii. Include those current assets that presumably can be quickly converted to
cash
iii. Quick Ratio = (Cash Equivalents + Short term investments + Accounts
receivable )/ current liabilities
Significance :- An ideal quick ratio is said to be 1:1. If it is more, it is
considered to be better. This ratio is a better test of short-term financial
position of the company.
Leverage Ratio
Leverage or Capital Structure Ratio is the ratio discloses the firm’s ability to meet the interest costs regularly and Long term indebtedness at maturity.
These ratios include the following ratios:
a. Debt Equity Ratio:- This ratio can be expressed in two ways:
First Approach : According to this approach, this ratio expresses the relationship between long term debts and shareholder’s fund.
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Formula:
Debt Equity Ratio=Long term Loans/Shareholder’s Funds or Net Worth
Long Term Loans:- These refer to long term liabilities which mature after one year. These include Debentures, Mortgage Loan, Bank Loan, Loan from Financial institutions and Public Deposits etc.
Shareholder’s Funds :- These include Equity Share Capital, Preference Share Capital, Share Premium, General Reserve, Capital Reserve, Other Reserve and Credit Balance of Profit & Loss Account.
Second Approach : According to this approach the ratio is calculated as follows:- Formula:
Debt Equity Ratio=External Equities/internal Equities
Debt equity ratio is calculated for using second approach.
Significance :- This Ratio is calculated to assess the ability of the firm to meet its long term liabilities. Generally, debt equity ratio of is considered safe.If the debt equity ratio is more than that, it shows a rather risky financial position from the long-term point of view, as it indicates that more and more funds invested in the business are provided by long-term lenders.The lower this ratio, the better it is for long-term lenders because they are more secure in that case. Lower than 2:1 debt equity ratio provides sufficient protection to long-term lenders.b. Debt to Total Funds Ratio : This Ratio is a variation of the debt equity ratio and gives the same indication as the debt equity ratio. In the ratio, debt is expressed in relation to total funds, i.e., both equity and debt.Formula:Debt to Total Funds Ratio = Long-term Loans/Shareholder’s funds + Long-term Loans
Significance :- Generally, debt to total funds ratio of 0.67:1 (or 67%) is considered satisfactory. In other words, the proportion of long term loans should not be more than 67% of total funds.
A higher ratio indicates a burden of payment of large amount of interest charges periodically and the repayment of large amount of loans at maturity. Payment of interest may become difficult if profit is reduced. Hence, good concerns keep the debt to total funds ratio below 67%. The lower ratio is better from the long-term solvency point of view.
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c. Proprietary Ratio:- This ratio indicates the proportion of total funds provide by owners or shareholders.
Formula:
Proprietary Ratio = Shareholder’s Funds/Shareholder’s Funds + Long term loans
Significance :- This ratio should be 33% or more than that. In other words, the proportion of shareholders funds to total funds should be 33% or more.
A higher proprietary ratio is generally treated an indicator of sound financial position from long-term point of view, because it means that the firm is less dependent on external sources of finance.
If the ratio is low it indicates that long-term loans are less secured and they face the risk of losing their money.
d. Fixed Assets to Proprietor’s Fund Ratio :- This ratio is also know as fixed assets to net worth ratio.
Formula:
Fixed Asset to Proprietor’s Fund Ratio = Fixed Assets/Proprietor’s Funds (i.e., Net Worth)
Significance :- The ratio indicates the extent to which proprietor’s (Shareholder’s) funds are sunk into fixed assets. Normally , the purchase of fixed assets should be financed by proprietor’s funds. If this ratio is less than 100%, it would mean that proprietor’s fund are more than fixed assets and a part of working capital is provided by the proprietors. This will indicate the long-term financial soundness of business.
e. Capital Gearing Ratio:- This ratio establishes a relationship between equity capital (including all reserves and undistributed profits) and fixed cost bearing capital.
Formula:
Capital Gearing Ratio = Equity Share Capital+ Reserves + P&L Balance/ Fixed cost Bearing Capital
Whereas, Fixed Cost Bearing Capital = Preference Share Capital + Debentures + Long Term Loan
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Significance:- If the amount of fixed cost bearing capital is more than the equity share capital including reserves an undistributed profits), it will be called high capital gearing and if it is less, it will be called low capital gearing.
The high gearing will be beneficial to equity shareholders when the rate of interest/dividend payable on fixed cost bearing capital is lower than the rate of return on investment in business.
Thus, the main objective of using fixed cost bearing capital is to maximize the profits available to equity shareholders.
f. Interest Coverage Ratio :- This ratio is also termed as ‘Debt Service Ratio’. This ratio is calculated as follows:
Formula:
Interest Coverage Ratio = Net Profit before charging interest and tax / Fixed Interest Charges
ACTIVITY RATIO OR TURNOVER RATIO
(C) Activity Ratio or Turnover Ratio :- These ratio are calculated on the bases of ‘cost of sales’ or sales, therefore, these ratio are also called as ‘Turnover Ratio’. Turnover indicates the speed or number of times the capital employed has been rotated in the process of doing business. Higher turnover ratio indicates the better use of capital or resources and in turn lead to higher profitability.
It includes the following :
a. Stock Turnover Ratio:- This ratio indicates the relationship between the cost of goods during the year and average stock kept during that year.
Formula:
Stock Turnover Ratio = Cost of Goods Sold / Average Stock
Here, Cost of goods sold = Net Sales – Gross Profit
Average Stock = Opening Stock + Closing Stock/2
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Significance:- This ratio indicates whether stock has been used or not. It shows the speed with which the stock is rotated into sales or the number of times the stock is turned into sales during the year.
The higher the ratio, the better it is, since it indicates that stock is selling quickly. In a business where stock turnover ratio is high, goods can be sold at a low margin of profit and even than the profitability may be quit high.
b. Debtors Turnover Ratio :- This ratio indicates the relationship between credit sales and average debtors during the year :
Formula:
Debtor Turnover Ratio = Net Credit Sales / Average Debtors + Average B/R
While calculating this ratio, provision for bad and doubtful debts is not deducted from the debtors, so that it may not give a false impression that debtors are collected quickly.
Significance :- This ratio indicates the speed with which the amount is collected from debtors. The higher the ratio, the better it is, since it indicates that amount from debtors is being collected more quickly. The more quickly the debtors pay, the less the risk from bad- debts, and so the lower the expenses of collection and increase in the liquidity of the firm.
By comparing the debtors turnover ratio of the current year with the previous year, it may be assessed whether the sales policy of the management is efficient or not.
c. Average Collection Period :- This ratio indicates the time with in which the amount is collected from debtors and bills receivables.
Formula:
Average Collection Period = Debtors + Bills Receivable / Credit Sales per day
Here, Credit Sales per day = Net Credit Sales of the year / 365
Second Formula :-
Average Collection Period = Average Debtors *365 / Net Credit Sales
Average collection period can also be calculated on the bases of ‘Debtors Turnover Ratio’. The formula will be:
Average Collection Period = 12 months or 365 days / Debtors Turnover Ratio
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Significance :- This ratio shows the time in which the customers are paying for credit sales. A higher debt collection period is thus, an indicates of the inefficiency and negligency on the part of management. On the other hand, if there is decrease in debt collection period, it indicates prompt payment by debtors which reduces the chance of bad debts.
d. Creditors Turnover Ratio :- This ratio indicates the relationship between credit purchases and average creditors during the year .
Formula:-
Creditors Turnover Ratio = Net credit Purchases / Average Creditors + Average B/P
Note :- If the amount of credit purchase is not given in the question, the ratio may be calculated on the bases of total purchase.
Significance :- This ratio indicates the speed with which the amount is being paid to creditors. The higher the ratio, the better it is, since it will indicate that the creditors are being paid more quickly which increases the credit worthiness of the firm.
d. Average Payment Period :- This ratio indicates the period which is normally taken by the firm to make payment to its creditors.
Formula:-
Average Payment Period = Creditors + B/P/ Credit Purchase per day
This ratio may also be calculated as follows :
Average Payment Period = 12 months or 365 days / Creditors Turnover Ratio
Significance :- The lower the ratio, the better it is, because a shorter payment period implies that the creditors are being paid rapidly.
d. Fixed Assets Turnover Ratio :- This ratio reveals how efficiently the fixed assets are being utilized.
Formula:-
Fixed Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets
Here, Net Fixed Assets = Fixed Assets – Depreciation
Significance:- This ratio is particular importance in manufacturing concerns where the investment in fixed asset is quit high. Compared with the previous year, if there is increase in
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this ratio, it will indicate that there is better utilization of fixed assets. If there is a fall in this ratio, it will show that fixed assets have not been used as efficiently, as they had been used in the previous year.
e. Working Capital Turnover Ratio :- This ratio reveals how efficiently working capital has been utilized in making sales.
Formula :-
Working Capital Turnover Ratio = Cost of Goods Sold / Working Capital
Here, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct Expenses - Closing Stock
Working Capital = Current Assets – Current Liabilities
Significance :- This ratio is of particular importance in non-manufacturing concerns where current assets play a major role in generating sales. It shows the number of times working capital has been rotated in producing sales.
A high working capital turnover ratio shows efficient use of working capital and quick turnover of current assets like stock and debtors.
A low working capital turnover ratio indicates under-utilisation of working capital.
Profitability Ratios or Income Ratios
(D) Profitability Ratios or Income Ratios:- The main object of every business concern is to earn profits. A business must be able to earn adequate profits in relation to the risk and capital invested in it. The efficiency and the success of a business can be measured with the help of profitability ratio.
Profitability ratios are calculated to provide answers to the following questions:
i. Is the firm earning adequate profits?ii. What is the rate of gross profit and net profit on sales?ii. What is the rate of return on capital employed in the firm?
iii. What is the rate of return on proprietor’s (shareholder’s) funds?iv. What is the earning per share?
Profitability ratio can be determined on the basis of either sales or investment into business.
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(A) Profitability Ratio Based on Sales :
a) Gross Profit Ratio : This ratio shows the relationship between gross profit and sales.
Formula :
Gross Profit Ratio = Gross Profit / Net Sales *100
Here, Net Sales = Sales – Sales Return
Significance:- This ratio measures the margin of profit available on sales. The higher the gross profit ratio, the better it is. No ideal standard is fixed for this ratio, but the gross profit ratio should be adequate enough not only to cover the operating expenses but also to provide for deprecation, interest on loans, dividends and creation of reserves.
b) Net Profit Ratio:- This ratio shows the relationship between net profit and sales. It may be calculated by two methods:
Formula:
Net Profit Ratio = Net Profit / Net sales *100
Operating Net Profit = Operating Net Profit / Net Sales *100
Here, Operating Net Profit = Gross Profit – Operating Expenses such as Office and Administrative Expenses, Selling and Distribution Expenses, Discount, Bad Debts, Interest on short-term debts etc.Significance :- This ratio measures the rate of net profit earned on sales. It helps in determining the overall efficiency of the business operations. An increase in the ratio over the previous year shows improvement in the overall efficiency and profitability of the business.(c) Operating Ratio:- This ratio measures the proportion of an enterprise cost of sales and operating expenses in comparison to its sales.
Formula:
Operating Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales *100
Where, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct Expenses - Closing Stock
Operating Expenses = Office and Administration Exp. + Selling and Distribution Exp. + Discount + Bad Debts + Interest on Short- term loans.
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‘Operating Ratio’ and ‘Operating Net Profit Ratio’ are inter-related. Total of both these ratios will be 100.
Significance:- Operating Ratio is a measurement of the efficiency and profitability of the business enterprise. The ratio indicates the extent of sales that is absorbed by the cost of goods sold and operating expenses. Lower the operating ratio is better, because it will leave higher margin of profit on sales.
(d) Expenses Ratio :- These ratio indicate the relationship between expenses and sales. Although the operating ratio reveals the ratio of total operating expenses in relation to sales but some of the expenses include in operating ratio may be increasing while some may be decreasing. Hence, specific expenses ratio are computed by dividing each type of expense with the net sales to analyse the causes of variation in each type of expense.
The ratios may be calculated as:
(a) Material Consumed Ratio = Material Consumed/Net Sales*100
(b) Direct Labour cost Ratio = Direct labour cost / Net sales*100
(c) Factory Expenses Ratio = Factory Expenses / Net Sales *100
(a), (b) and (c) mentioned above will be jointly called cost of goods sold ratio.
It may be calculated as:
Cost of Goods Sold Ratio = Cost of Goods Sold / Net Sales*100
(d) Office and Administrative Expenses Ratio = Office and Administrative Exp./ Net Sales*100
(e) Selling Expenses Ratio = Selling Expenses / Net Sales *100
(f) Non- Operating Expenses Ratio = Non-Operating Exp./Net sales*100
Significance:- Various expenses ratio when compared with the same ratios of the previous year give a very important indication whether these expenses in relation to sales are increasing, decreasing or remain stationary. If the expenses ratio is lower, the profitability will be greater and if the expenses ratio is higher, the profitability will be lower.
(B) Profitability Ratio Based on Investment in the Business:-
These ratio reflect the true capacity of the resources employed in the enterprise. Sometimes the profitability ratio based on sales are high whereas profitability ratio based on investment
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are low. Since the capital is employed to earn profit, these ratios are the real measure of the success of the business and managerial efficiency.
These ratio may be calculated into two categories:
I. Return on Capital Employed
II. Return on Shareholder’s funds
I. Return on Capital Employed :- This ratio reflects the overall profitability of the business. It is calculated by comparing the profit earned and the capital employed to earn it. This ratio is usually in percentage and is also known as ‘Rate of Return’ or ‘Yield on Capital’.
Formula:
Return on Capital Employed = Profit before interest, tax and dividends/
Capital Employed *100
Where, Capital Employed = Equity Share Capital + Preference Share Capital + All Reserves + P&L Balance +Long-Term Loans- Fictitious Assets (Such as Preliminary Expenses OR etc.) – Non-Operating Assets like Investment made outside the business.
Capital Employed = Fixed Assets + Working Capital
Advantages of ‘Return on Capital Employed’:-
Since profit is the overall objective of a business enterprise, this ratio is a barometer of the overall performance of the enterprise. It measures how efficiently the capital employed in the business is being used.
Even the performance of two dissimilar firms may be compared with the help of this ratio.
The ratio can be used to judge the borrowing policy of the enterprise. This ratio helps in taking decisions regarding capital investment in new projects. The
new projects will be commenced only if the rate of return on capital employed in such projects is expected to be more than the rate of borrowing.
This ratio helps in affecting the necessary changes in the financial policies of the firm. Lenders like bankers and financial institution will be determine whether the enterprise
is viable for giving credit or extending loans or not. With the help of this ratio, shareholders can also find out whether they will receive
regular and higher dividend or not.
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II. Return on Shareholder’s Funds :-
Return on Capital Employed Shows the overall profitability of the funds supplied by long term lenders and shareholders taken together. Whereas, Return on shareholders funds measures only the profitability of the funds invested by shareholders.
These are several measures to calculate the return on shareholder’s funds:
(a) Return on total Shareholder’s Funds :-
For calculating this ratio ‘Net Profit after Interest and Tax’ is divided by total shareholder’s funds.
Formula:
Return on Total Shareholder’s Funds = Net Profit after Interest and Tax / Total Shareholder’s Funds
Where, Total Shareholder’s Funds = Equity Share Capital + Preference Share Capital + All Reserves + P&L A/c Balance –Fictitious Assets
Significance:- This ratio reveals how profitably the proprietor’s funds have been utilized by the firm. A comparison of this ratio with that of similar firms will throw light on the relative profitability and strength of the firm.
(b) Return on Equity Shareholder’s Funds:-
Equity Shareholders of a company are more interested in knowing the earning capacity of their funds in the business. As such, this ratio measures the profitability of the funds belonging to the equity shareholder’s.
Formula:
Return on Equity Shareholder’s Funds = Net Profit (after int., tax & preference dividend) / Equity Shareholder’s Funds *100
RATIO ANALYSIS
Where, Equity Shareholder’s Funds = Equity Share Capital + All Reserves + P&L A/c
Balance – Fictitious Assets
Significance:- This ratio measures how efficiently the equity shareholder’s funds are being used in the business. It is a true measure of the efficiency of the management since it shows
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what the earning capacity of the equity shareholders funds. If the ratio is high, it is better, because in such a case equity shareholders may be given a higher dividend.
(c) Earning Per Share (E.P.S.) :- This ratio measure the profit available to the equity shareholders on a per share basis. All profit left after payment of tax and preference dividends are available to equity shareholders.
Formula:
Earning Per Share = Net Profit – Dividend on Preference Shares / No. of Equity Shares
Significance:- This ratio helpful in the determining of the market price of the equity share of the company. The ratio is also helpful in estimating the capacity of the company to declare dividends on equity shares.
(d) Dividend Per Share (D.P.S. ) :- Profits remaining after payment of tax and preference dividend are available to equity shareholders.
But of these are not distributed among them as dividend . Out of these profits is retained in the business and the remaining is distributed among equity shareholders as dividend. D.P.S. is the dividend distributed to equity shareholders divided by the number of equity shares.
Formula:
D.P.S. = Dividend paid to Equity Shareholder’s / No. of Equity Shares *100
(e) Dividend Payout Ratio or D.P. :- It measures the relationship between the earning available to equity shareholders and the dividend distributed among them.
Formula:
D.P. = Dividend paid to Equity Shareholders/ Total
Net Profit belonging to Equity Shareholders*100
OR
D.P. = D.P.S. / E.P.S. *100
(f) Earning and Dividend Yield :- This ratio is closely related to E.P.S. and D.P.S. While the E.P.S. and D.P.S. are calculated on the basis of the book value of shares, this ratio is calculated on the basis of the market value of share
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(g) Price Earning (P.E.) Ratio:- Price earning ratio is the ratio between market price per equity share & earnings per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company & is widely used by investors to decide whether or not to buy shares in a particular company.
Significance :- This ratio shows how much is to be invested in the market in this company’s shares to get each rupee of earning on its shares. This ratio is used to measure whether the market price of a share is high or low.
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CHAPTER 2
ABOUT BANKING INDUSTRY AND HDFC BANK
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ABOUT THE BANKING INDUSTRY:
A bank is a financial institution who acts as a payment agent to customers and to borrow and
lend money. Banking in India originated in the last decades of the 18 thcentury. The first bank
was the General Bank of India, which started in the year 1786, and The Bank of Hindustan.
The banking regulation act of India, 1949 regulates the Indian banking industry, and it has
classified the banks into two major categories, namely, scheduled banks and non- scheduled
banks.
The banking industry is one of the huge sectors of banking and finance that has existed in
human civilization in some form for thousands of years. There are many banks in the world
and they all are usually regulated by the world’s governments so as to curb corruption and
also protect the money of the general public. In today’s world, the banking industry plays a
major part in financial dealings, as it is one of the most biggest and popular means for
investing, borrowing, and storing money.
The oldest bank still in existence is the State Bank of India, which originated in the Bank of
Calcutta in June 1806.
Private Banks:
Private Banks in India is a part of Indian banking sector which are owned by either an
individual or a general partner. Private Banks are usually not incorporated. These are the
banks in which the greater part of stake or equity is held by the private shareholders and not
by the government. The word “private” denotes that the customer service is rendered in a
more personalized manner.
Public Banks:
Public banks are the banks wherein the majority stake is held by the government. Therefore,
the banks in which more than 50% of stake is held by the government are called the public
sector banks. In India there are 21 public sector banks in total. A public bank is a bank or a
financial institution in which state or the public actors are the owners. Thus, it is a company
under the state control.
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Therefore, to conclude, the major difference between the two banks is that the private banks
are the banks in which the government interference is less, whereas government holdings are
more than 50% in the public banks.
Contribution of HDFC bank in the economy:
HDFC Bank has won award for offering products which are new and innovative. It thus
contributes towards the economy. The bank has also reduced the poverty by providing more
employment opportunities. It provides better and speedy services to the customers also.
History of HDFC bank:
HDFC Bank popularly named as Housing Development Finance Corporation Limited was
founded by Hasmukh Bhai Parakh in the year 1977. In the year 1994, the HDFC Bank was
incorporated. The bank was promoted by The Housing Development Finance Corporation
which is the India's largest housing finance company. The Bank started operations as in
January 1995. On 26 February 2000, Times Bank Limited owned by The Times Group
(Bennett, Coleman & Co.) was merged with HDFC Bank Ltd. This was the first merger of
two private banks in India. Shareholders of Times Bank received 1 share of HDFC Bank for
every 5.75 shares of Times Bank. On 23 May 2008, HDFC Bank acquired Centurion Bank of
Punjab taking its total branches to more than 1,000. The amalgamated bank emerged with a
base of about Rs. 1, 22,000 crore and net advances of about Rs. 89,000 crore. The balance
sheet size of the combined entity is more than Rs. 1, 63,000crore.
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BUSINESS ENVIRONMENT FACTORS AFFECTING BANKING INDUSTRY
Business environment includes the internal as well as external factors that affect the operation
of a business. Therefore, business environment is the sum total of the forces or the
surroundings that have an influence on the business operations. The internal environmental
factors are usually controllable because the management has control over it. Whereas the
external environmental factors are difficult to control by the company. There are two types of
external environment: Microenvironment and Macro environment.
It is important for every company to do environment analysis that is scanning the
environment so that it may identify its threats and opportunities and improve its planning
process.
Rebound in the housing market -
According to the recent reports, there have been some improvements in the national
housing market this year. The average sale price for existing homes in June 2012
showed an increase of 7.9% when compared to the last year according to the National
Association of REALTORS (NAR) reported that The median home sale price in York
County for August was $142,000 down from $142,500 in 2011 according to a report
by The REALTORS Association of York and Adams Counties (RAYAC) . There
were around 349 properties sold in August 2012 compared to 322-sold last year. In
August 2012, Adams County’s median home sale price was $162,000 with a total of
73 properties sold compared to 2011 when the median home sale price was $163,000
and 58 properties sold according to the report by RAYAC
Competitors -
The mortgage and banking industries have always been very competitive. (In York
County alone, there are 275 banking and lending institutions.) The historically low
interest rates are fuelling buyers to shop around for the best possible deals, while it is
believed that new federal regulations will make it harder for small community banks
to compete with the larger regional and national banks.
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Interest rates -
The interest rates for a 30 year fixed rate mortgage at the end of August 2012 was
3.55% while a 15 year fixed rate mortgage was 2.86% according to Freddie Mac,
Presidential election -
Undoubtedly the economy is the center of attention in the future presidential election.
Whoever the next president may be will have a huge effect on the future of real estate
and mortgages. Economic and employment policies will help drive the affordability
and sustainability of the real estate market while applying or revoking the Dodd-Frank
Act will largely impact the mortgage market.
Supply and demand -
The increase in average sale price nationwide is mainly due to a tightening in housing
supply in markets across the nation. The shortage of inventory is limiting the buying
opportunities and therefore is driving prices up. Even though, average prices are
raising some, many homeowners are still upside down on their mortgages (they owe
more than their home is currently worth). This is the main cause for the tightening in
the housing supply. Demand for housing is being fueled by historically low mortgage
interest rates. Buyers are starting to get back out there and take advantage of the
interest rates while they last.
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Role of private sector bank in Indian economy:
The private sector banks play a very important role in the Indian economy. The contribution
of private sector banks in the Indian economy over the last 15 years has been incredible.
Skilled Management:
The private sector banks help in introducing a high level of qualified administration and
marketing thought into banking system. It aids the public sector banks to develop similar
expertise and knowledge.
Product improvement :
The private sector banks always introduce some innovative new products avenues (new
schemes, services, etc.) and help the industries to attain proficiency in their particular areas
by providing quality service and control.
They introduce new technology in the banking service. Thus, they lead the other banks in
various new fields. For example, introduction of computerized operations, credit card busi-
ness, ATM service, etc.
Competition:
The private sector banks helps in creating a healthy competition and also increases the
efficiency levels of the banking industries.
Foreign Investment:
The private sector banks encourage foreign investment. The foreign banks have influence on
the foreign investment in the country.
Helps to access foreign capital markets:
The foreign banks in the private sector help the Indian companies and the government
agencies to meet out their financial requirements from international capital markets. This
service becomes easier for them because of the presence of their head offices/other branches
in important foreign centres. In this way they help a large extent in the promotion of trade and
industry in the country.
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Customer service:
Earlier, the government enterprises ruled the Indian market but today the situation has
been changed. With the rise of Indian private sector companies, the customer’s needs
have got more personalized and they are given speedy services.
Employment:
The importance of private sector in Indian economy has been very commendable in
generating employment and thus reducing the poverty. It thus increases the quality of life
of the people, also it leads to increased access to essential commodities and also the value
of human capital has been increased due to this.
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About HDFC BANK
HDFC bank is a private bank which was promoted by Housing Finance Development
Corporation. It was incorporated in the year 1994 and it started its commercial operations in
1995. HDFC Bank’s philosophy is based on customer focus, operational excellence, product
leadership, and human values. HDFC bank limited is an Indian financial service company
based in Mumbai, Maharashtra
The first two private banks in India which merged are Times Bank Limited (owned by Bennett, Coleman and The Co./ Times Group ) and HDFC bank limited on February 26, 20000. It would be interesting to know that the first bank in India who launched an International Debit Card in association with VISA and issues the Master Cared Maestro debit card as well
.
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HDFC VISION AND MISSION
Vision :
To be customer driven best managed enterprise that enjoys market leadership
in providing housing related finance.
Mission :
To provide a package of attractive financial services for housing purposes
through a competed and motivated team of employees using the state of the
art technology to maintain financial stability and growth of the organization
whilst contributing to the national goal of providing descent housing to all.
The business strategies of HDFC Bank Limited are:
Increasing market share in India’s expanding banking.
Delivering high quality customer service.
Delivering more products to more customers.
Maintaining current high standards for asset quality through disciplined credit risk
management.
Develop innovative products and services that attract targeted customers and address
inefficiencies in the Indian financial sector.
Thus, HDFC Bank is always trying to develop some new innovative product which can
satisfy the customers. It aims not only to deliver more products to customer but also makes
sure that it is delivering a quality service to its customers. By doing this, HDFC Bank is
contributing towards the Indian economy. Future plan of HDFC is to launch 250 new
branches. It also aims to set up NBFC. The HDFC Bank is the second largest private sector
bank in India and it has won the NASSCOM CNBC-TV 18 IT innovation award for the
BEST IT DRIVEN INNOVATION IN BANKING (COMMERCIAL) in the
VERTICAL category.
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ORGANIZATIONAL STRUCTURE
THE BOARD OF DIRECTORS OF THE BANK ARE :
Name Designation
A.N. Roy Director
Aditya Puri CEO
Bobby Parikh Director
CM Vasudev Chairman
Kaizad Bharucha Additional and Executive Director
Partho Datta Director
Renu Karnad Director
Pandit Palande Director
Keki Mistry Director
Paresh Sukthankar Deputy Managing Director
Sanjay Dongra Company Secretary
PRODUCTS
HDFC Bank offers the following core products:
NRI banking
Under NRI Banking, HDFC offers:
Accounts & Deposits
Money Transfer
Investments & Insurance
Research Reports
Payment Services
SME banking
Under SME Banking, HDFC offers:
Accounts & Deposits
Business Financing
Trade Services
Payments & Collections
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Cards
ATM
Wholesale banking
HDFC offers Wholesale Banking for Corporate and Financial Institutions & Trusts. The
Bank also provides services such as Investment Banking and other services in the
Government sector.
SERVICES
Wholesale banking services
HDFC Bank provides a range of commercial and transactional banking services, including
working capital finance, trade services, transactional services, cash management, etc. to large,
small and mid-sized corporate and agriculture-based businesses in India. The bank is also a
leading provider of these services to its corporate customers, mutual funds, stock exchange
members and banks.
Retail banking services
HDFC Bank was the first bank in India to launch an International Debit Card in association
with VISA (Visa Electron). The bank also issues the MasterCard Maestro debit card. The
Bank launched its credit card business in late 2001. By the end of June 2013, it had a credit
card base of 5.94 million. By March 2012, the bank had a total card base (debit and credit
cards) of over 19.7 million. The Bank is also one of the leading players in the "merchant
acquiring" business with over 240,000 point-of-sale (POS) terminals for debit / credit cards
acceptance at merchant establishments. The Bank is positioned in various net based B2C
opportunities including a wide range of Internet banking services for Fixed Deposits, Loans,
Bill Payments, etc.
Treasury
The bank has three main product areas - Foreign Exchange and Derivatives, Local Currency
Money Market & Debt Securities, and Equities. These services are provided through the
bank's Treasury team. To comply with statutory reserve requirements, the bank is required to
hold 25% of its deposits in government securities. The Treasury business is responsible for
managing the returns and market risk on this investment portfolio.
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CHAPTER 3
COMPARATIVE ANALYSIS
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A Comparison between ICICI Bank and HDFC Bank
ICICI Bank is the Largest Private Sector Bank in India and HDFC Bank is a close second. If you talk to a random stranger on the road, there is a 50-50 chance that he/she has an account with either of these two private sector behemoths. Both ICICI and HDFC Bank are part of the National Stock Indices and are some of the most active stocks in the country. The purpose of this article is to compare these two banks on all possible aspects.
About the Company's:
ICICI Bank is the Second Largest Bank in India and the Largest Private Sector Bank in the country. The bank has a network of 2800+ branches, 10000+ ATMs and has presence in 19 countries. It was founded in the year 1954 and is headed by Ms. Chanda Kochhar (MD & CEO). It offers a variety of financial services like Consumer Banking, Credit Cards, Corporate Banking, Investment Banking, Private Banking, Wealth Management etc. It is one of the members in the 30 stock Sensex and 50 stock Nifty.
HDFC Bank is the Second Largest Private Sector Bank in India and one of the top 5 banks in the country. The bank has a network of 2700+ branches and 10000+ ATMs across India. It also has numerous branches across the globe. It was founded in the year 1994 and is headed by Mr. Aditya Puri (MD). It offers a variety of financial services like Consumer Banking, Credit Cards, Corporate Banking, Investment Banking, Private Banking, Wealth Management etc. It is one of the members in the 30 stock Sensex and 50 stock Nifty.
Shareholding Pattern:
The following table illustrates the % holding of shares of these two companies by the different categories of investors.
Criteria ICICI Bank HDFC Bank
Indian Promoters Holding (%) 0 23.2
Indian Institutions/Mutual Funds (%) 26.6 10.5
Foreign Institutional Investors (FIIs) (%) 35.9 30.7
ADR & GDR (%) 26.9 17.3
Free Float (Public Holding) (%) 10.6 18.4
Approx No. of shareholders 7 lakh+ 4.5 lakh+
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Key Financial Data:
The following table illustrates the key financial data/numbers for both the banks. As you can see below, both these banks are high profitable and have solid assets and customer base.
Criteria ICICI Bank HDFC Bank
P/E 16 24.6
P/BV 2.2 5.5
Average Divident Yield (%) 1.9 0.9
Earnings Per Share (EPS) Rs. 66.3 Rs. 22.4
Income Per Share Rs. 329.6 Rs. 117.6
Book Value Per Share Rs. 531.6 Rs. 128.6
Outstanding Shares 1153 million 2347 million
Average Market Capitalization (Approx) Rs. 1.02 Lakh Crores Rs. 1.13 Lakh Crores
Number of Employees (Approx) 58000 66000
Profits Before Tax Rs. 10,866 Crores Rs. 7,624 Crores
Profits After Tax Rs. 7,643 Crores Rs. 5,247 Crores
Net Profit Margin (%) 20.1 19
Advances/Loans (Approx) 2.92 Lakh Crores Rs. 1.98 Lakh Crores
Deposits (Approx) 2.81 Lakh Crores 2.46 Lakh Crores
Credit/Deposit Ratio (%) 103.6 80.7
Net Fixed Assets (Approx) Rs. 5,432 Crores Rs. 2,378 Crores
Total Assets (Approx) Rs. 6 lakh Crores Rs. 3.4 lakh Crores
Debt/Equity Ratio 7.2 9
Net NPA's (%) 0.007 0.002
Terms Used above:
ADR – American Depository Receipts
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GDR – Global Depository Receipts ADR & GDR are used by private organizations to raise funds from foreign investors.
P/E – Price to Earnings RatioP/BV – Price to Book Value EPS – Earnings Per Share P/E, P/BV, EPS etc are all Market Ratios that are used to gauge the financial health of a company. They were covered in one of our earlier article titled “Market Ratios”. You can revisit the article and learn more about them by Clicking Here
NPA – Non Performing
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CHAPTER 4
DATA ANALYSIS
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LIQUIDITY RATIO
1. CURRENT RATIO
FORMULA:
Current Ratio = Current Assets/ Current Liabilities
Current Ratio
Year Ratio
2012 0.40
2013 0.38
2014 0.33
Interpretation
The current ratio is a financial ratio that helps to measure the liquidity of the firm. It tells us
about the company ability to meet its obligation. It shows that whether the firm has enough
resource to pay off its debts or liabilities. It compares a firm's current assets to its current
liabilities.
As a rule, the current ratio with 2:1 (or) more is considered as satisfactory
position of the firm.
If we compare with the current ratio of 2012 which was 0.40, there was a
steady decline in the current ratio. And the ratios for the years 2012 through 2014 are less
compared to the 2:1 rule.
So we can say that the company is not performing good in the aspects of
financial strength and it can be understood that they have a weak financial strength.
HDFC is not working towards the good ratios in terms of liquidity. This can
be understood by observing the steady decline in their current ratios.
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HDFC should try to decrease their current liabilities gradually in order to
increase the current ratio which will help in achieving their short term obligations.
GRAPHICAL REPRESENTATION
2012 2013 20140
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.4 0.380.33
Current Ratio
Current Ratio
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2. QUICK RATIO
FORMULA:
Quick Ratio = Quick or liquidity asset/ Current Liabilities
Quick Ratio
Year Ratio
2012 9.67
2013 11.14
2014 10.74
INTERPRETATION
Quick assets are those assets which can be converted into cash within a short
period of time, say to six months. So, here the sundry debtors which are with the long period
does not include in the quick assets.
Compare with 2012, the Quick ratio is increased because the sundry debtors
are increased due to the increase in the corporate tax and for that the provision created is also
increased. So, the ratio is also increased with the 2012 by 2013.
But the firm again saw a decline in 2014 in terms of Quick ratio because the
sundry debtors slightly came down as compared to 2013; but the difference is very minimal.
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GRAPHICAL REPRESENTATION
2012 2013 20148.5
9
9.5
10
10.5
11
11.5
9.67
11.1410.74
Quick Ratio
Quick Ratio
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3. ABOSULTE LIQUIDITY RATIO
FORMULA:
Absolute Liquid Ratio = Absolute Liquid Assets/ current liabilities.
Absolute Liquidity Ratio
Year Ratio
2012 0.56
2013 0.78
2014 0.95
INTERPRETATION
The current assets which are ready in the form of cash are considered as
absolute liquid assets. Here, the cash and bank balance and the interest on fixed assets are
absolute liquid assets.
The ideal condition for Absolute Liquidity Ratio of any company is 0.5:1,
meaning that they are maintaining good cash balances.
It can be observed that there has been a steady increase in the Absolute
liquidity ratio from 2012 through 2014 closing to 1:1 which is a good sign indicating that
HDFC has been increasing their cash balances both at hand and at bank while reducing their
current liabilities.
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GRAPHICAL REPRESENTATION
2012 2013 20140
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.56
0.780.95
Absolute Liquidity Ratio
Absolute Liquidity Ratio
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LEVERAGE RATIO
4. PROPRIETARY RATIO
Formula:
Proprietory Ratio = Shareholder’s Funds/ Total Assets
Proprietary Ratio
Year Ratio
2012 0.08
2013 0.09
2014 0.08
INTERPRETATION
The proprietary ratio establishes the relationship between shareholders funds
to total assets. It determines the long-term solvency of the firm. This ratio indicates the extent
to which the assets of the company can be lost without affecting the interest of the company.
Though there was a significant increase in the capital since 2012, the
Proprietary Ratio stands almost same at 0.08-0.09.
It was 0.08 in 2012 and then increased slightly due to the increase in the
capital in the company, reached 0.09 in 2013. But due to the increase in the total assets of the
company, though there was significant increase in the shareholder’s funds the proprietary
ratio came down to 0.08 in 2014.
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GRAPHICAL REPRESENTATION
2012 2013 20140.074
0.076
0.078
0.08
0.082
0.084
0.086
0.088
0.09
0.08
0.09
0.08
Proprietary Ratio
Proprietary Ratio
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ACTIVITY RATIOS
5. WORKING CAPITAL TURNOVER RATIO
FORMULA:
Working Capital Turnover Ratio = Sales/ Net working capital
Working Capital Turnover Ratio
Year Ratio
2012 1.61
2013 1.75
2014 1.84
INTERPRETATION
Income from services is greatly increased due to the extra invoice for
Operations & Maintenance fee and the working capital is also increased greater due to the
increase in from services because the huge increase in current assets.
The income from services was raised gradually from 2012 through 2014 to
maintain a steady increase in the Working capital turnover ratio.
The Sales were increased more than proportionately to the increase in the Net
working capital. This has made way for the increase of working capital turnover ratio from
1.61 to 1.84.
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GRAPHICAL REPRESENTATION
2012 2013 20141.45
1.5
1.55
1.6
1.65
1.7
1.75
1.8
1.85
1.61
1.75
1.84
Working Capital Turnover Ratio
Working Capital Turnover Ratio
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6. FIXED ASSETS TURNOVER RATIO
FORMULA:
Fixed Assets Turnover Ratio = Sales/ Net Fixed Assets
Fixed Assets Turnover Ratio
Year Ratio
2012 14.2
2013 6.8
2014 12.6
INTERPRETATION
Fixed assets are used in the business for producing the goods to be sold. This
ratio shows the firm’s ability in generating sales from all financial resources committed to
total assets. The ratio indicates the account of one rupee investment in fixed assets.
The income from services is greatly increased in the current year due to the
increase in the Operations & Maintenance fee due to the increase in extra invoice and the net
fixed assets are reduced because of the increased charge of depreciation. Finally, that affected
a huge increase in the ratio compared with the previous year’s ratio. Though this value is less
compared to the value of 2012, this is a good shift from 2013 where it was a huge decline.
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GRAPHICAL REPRESENTATION
2012 2013 20140
2
4
6
8
10
12
14
16
14.2
6.8
12.6
Fixed Assets Turnover Ratio
Fixed Assets Turnover Ratio
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7. CAPITAL TURNOVER RATIO
FORMULA:
Capital Turnover Ratio = Sales/ Capital Employed
Capital Turnover Ratio
Year Ratio
2012 0.90
2013 0.94
2014 0.99
INTERPRETATION
This is another ratio to judge the efficiency and effectiveness of the company
like profitability ratio.
The income from services is greatly increased compared with the previous
year and the total capital employed includes capital and reserves & surplus. Due to huge
increase in the net profit the capital employed is also increased along with income from
services. Both are affected in the increment of the ratio of current year.
As a result, the Capital Turnover Ratio has been increased from 0.90 in 2012
to 0.99 in 2014.
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GRAPHICAL REPRESENTATION
2012 2013 20140.84
0.86
0.88
0.9
0.92
0.94
0.96
0.98
1
0.9
0.94
0.99
Capital Turnover Ratio
Capital Turnover Ratio
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8. CURRENT ASSETS TO FIXED ASSETS RATIO
FORMULA:
Current Assets to Fixed Assets Ratio = Current Assets/Fixed Assets
Current Assets to Fixed Assets Ratio
Year Ratio
2012 6.95
2013 7.16
2014 9.26
INTERPRETATION
Current assets are increased due to the increase in the sundry debtors and the
net fixed assets of the firm are decreased due to the charge of depreciation and there is no
major increment in the fixed assets.
The increment in current assets and the decrease in fixed assets resulted in an
increase in the ratio compared with the previous year.
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GRAPHICAL REPRESENTATION
2012 2013 20140
1
2
3
4
5
6
7
8
9
10
6.95 7.16
9.26
Current Assets to Fixed Assets Ratio
Current Assets to Fixed Assets Ratio
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PROFITABILITY RATIOS
GENERAL PROFITABILITY RATIOS
9. NET PROFIT RATIO
FORMULA:
Net profit ratio = (net profit/ net sales)*100
Net Profit Ratio
Year Ratio
2012 18.9
2013 19.1
2014 20.6
INTERPRETATION
The net profit ratio is the overall measure of the firm’s ability to turn each
rupee of income from services in net profit. If the net margin is inadequate the firm will fail
to achieve return on shareholder’s funds. High net profit ratio will help the firm service in the
fall of income from services, rise in cost of production or declining demand.
The net profit is increased because the income from services is increased. The
increment resulted in a slight increase in 2014 ratio compared with the year 2013.
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GRAPHICAL REPRESENTATION
2012 2013 201418
18.5
19
19.5
20
20.5
21
18.9 19.1
20.6
Net Profit Ratio
Net Profit Ratio
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10. OPERATING PROFIT RATIO
FORMULA:
Operating ratio = [(cost of goods sold + operating expenses)/net sales]*100
Operating Profit Ratio
Year Ratio
2012 0.58
2013 0.77
2014 0.92
INTERPRETATION
The operating profit ratio is used to measure the relationship between net
profits and sales of a firm. Depending on the concept, it will decide.
The operating profit ratio is increased compared with the last year. The
earnings are increased due to the increase in the income from services because of Operations
& Maintenance fee. So, the ratio is increased slightly compared with the previous year.
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GRAPHICAL REPRESENTATION
2012 2013 20140
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.58
0.770.92
Operating Profit Ratio
Operating Profit Ratio
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11. RETURN ON TOTAL ASSETS RATIO
FORMULA:
Return on total assets = (net profit after tax/total assets)*100
Return on Total Assets Ratio
Year Ratio
2012 11.7
2013 12.2
2014 13.8
INTERPRETATION
This is the ratio between net profit and total assets. The ratio indicates the
return on total assets in the form of profits.
The net profit is increased in the current year because of the increment in the
income from services due to the increase in Operations & Maintenance fee. The fixed assets
are reduced due to the charge of depreciation and no major increments in fixed assets but the
current assets are increased because of sundry debtors and that affects an increase in the ratio
compared with the last year i.e. 2013.
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GRAPHICAL REPRESENTATION
2012 2013 201410.5
11
11.5
12
12.5
13
13.5
14
11.712.2
13.8
Return on Total Assets Ratio
Return on Total Assets Ratio
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12. RESERVES & SURPLUS TO CAPITAL RATIO
FORMULA:
Reserves & Surplus to Capital Ratio = Reserves & Surplus/Capital
Reserves & Surplus To Capital Ratio
Year Ratio
2012 19.03
2013 23.17
2014 27.28
INTERPRETATION
The ratio is used to reveal the policy pursued by the company a very high ratio
indicates a conservative dividend policy and vice-versa. Higher the ratio better will be the
position.
The reserves & surplus is increased gradually. The capital is also increasing
gradually but not proportionate to reserves & surplus. So the increase in the reserves &
surplus caused a greater increase in the current year’s ratio compared with the older taking
the Reserves & Surplus to Capital ratio to 27.28.
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GRAPHICAL REPRESENTATION
2012 2013 20140
5
10
15
20
25
30
19.0323.17
27.28
Reserves & Surplus to Capital Ratio
Reserves & Surplus to Capital Ratio
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OVERALL PROFITABILITY RATIOS
13. EARNINGS PER SHARE
FORMULA:
Earnings per share = net profit after tax and preference dividend
Number of Equity shares
Earnings Per Share Ratio
Year Ratio
2012 22.02
2013 28.27
2014 35.34
INTERPRETATION
Earnings per share ratio are used to find out the return that the shareholder’s
earn from their shares. After charging depreciation and after payment of tax, the remaining
amount will be distributed by all the shareholders.
Net profit after tax is increased due to the huge increase in the income from
services. That is the amount which is available to the shareholders to take. Due to the huge
increase in net profit the earnings per share is greatly increased in 2014.
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GRAPHICAL REPRESENTATION
2012 2013 20140
5
10
15
20
25
30
35
40
22.0228.27
35.34
Earnings Per Share
Earnings Per Share
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14. PRICE EARNINGS (P/E) RATIO
FORMULA:
Price earnings ratio = Market price per equity share
Earning per share
Price Earnings Ratio
Year Ratio
2012 23.62
2013 22.08
2014 21.19
INTERPRETATION
The ratio is calculated to make an estimate of application in the value of share
of a company.
The market price per share is increased due to the increase in the reserves &
surplus. The earnings per share are also increased greatly compared with the last year because
of increase in the net profit. So, the ratio is decreased compared with the previous year.
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GRAPHICAL REPRESENTATION
2012 2013 201419.5
20
20.5
21
21.5
22
22.5
23
23.5
24
23.62
22.08
21.19
Price Earnings Ratio
Price Earnings Ratio
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15. RETURN ON INVESTMENT
FORMULA:
RETURN ON INVESTMENT = (Profit after tax/Shareholder’s fund)*100
Return on Investment Ratio
Year Ratio
2012 0.178
2013 0.179
2014 0.182
INTERPRETATION
This is the ratio between net profits and shareholders’ funds. The ratio is
generally calculated as percentage multiplying with 100.
The net profit is increased due to the increase in the income from services ant
the shareholders funds are increased because of reserve & surplus. So, the ratio is increased
in the current year.
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GRAPHICAL REPRESENTATION
2012 2013 201417.6
17.7
17.8
17.9
18
18.1
18.2
17.817.9
18.2
Return on Investment
Return on Investment
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CHAPTER 5
FINDINGS, SUMARRY & CONCLUSION
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FINDINGS OF THE STUDY
1. The current ratio of HDFC bank has seen a gradual decline from 2012 through 2014,
starting from 0.40 to 0.33 by the end of 2014.
2. The Quick ratio was at an increase in 2013 from 2012, taking the value to 11.14 from
9.67. But it again had a decline slightly by the end of 2014 making it 10.74.
3. The Absolute Liquidity Ratio was at a gradual increase starting with 0.56 in 2012 to
0.78 in 2013 and finally, 0.95 in 2014.
4. The Proprietary Ratio of HDFC did not have many changes during these years and
just was in the range of 0.08-0.09.
5. The Working Capital Turnover Ratio was again at a steady increase from 1.61 in 2012
to 1.75 in 2013 and reached 1.84 by 2014.
6. The Fixed Assets Turnover Ratio showed a fluctuating trend from 2012-2014. It
decreased in 2013 than that of 2012 but again increased in 2014 though it is less than
the value in 2012.
7. The Capital Turnover Ratio increased from 2012-2014. From 0.90 to 0.94 and finally
0.99 which is almost equal to 1.
8. The Current Assets to Fixed Assets Ratio showed a gradual trend of increment, it
started with 6.95 and finally peaked at 9.26. It shows that the current assets are
increased than fixed assets.
9. Net Profit Ratio also was showing a gradual increasing trend. Starting with 18.9,
increasing to 19.1 and reached 20.6 by 2014.
10. The Operating Profit Ratio also increased from 2012 to 2014. Where it was 0.58 in
2012, 0.77 in 2013 and 0.92 in 2014.
11. The Return on Total Assets Ratio was 11.7 in 2012, 12.2 in 2013 and 13.8 in 2014
which means it increased from 2012 to 2014.
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12. The Reserves and Surplus to Capital Ratio increased greatly from 19.03 to 27.28. The
capital was increased but at the same time reserves and surplus was increased more
than proportionately leading to an increase in the ratio.
13. The Earnings Per Share also increased from 2012 to 2014 for HDFC bank from 22.02
to 35.34. In the current year the net profit is increased due to the increase in operating
and maintenance fee. So the earnings per share value is increased.
14. Price Earnings ratio is reduced when compared with the last years. It is reduced from
23.62 to 21.19, because the earnings per share is increased.
15. The Return on Investment has increased from 2012 to 2014. It was 0.178 in 2012 and
reached 0.182 in 2014. Both the profit and shareholders’ funds increase cause an
increase in the ratio.
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SUMMARY
1) After the analysis of Financial Statements, the company status is better, because the
Net working capital of the company increased from the last year’s position.
2) The company profits are huge in the current year; it is better to declare the dividend to
shareholders.
3) The company is utilising the fixed assets, which majorly help to the growth of the
organisation. The company should maintain that perfectly.
4) The company fixed deposits are raised from the inception, it gives the other income
i.e., Interest on fixed deposits.
CONCLUSION
The company’s overall position is at a good position. Particularly the current
year’s position is well due to raise in the profit level from the last year position. It is better for
the organization to diversify the funds to different sectors in the present market scenario.
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