PROFITABILITY ANALYSIS OF OIL REFINERIESshodhganga.inflibnet.ac.in/bitstream/10603/41626/14/14_chapter 3.pdf · PROFITABILITY ANALYSIS OF OIL REFINERIES 3.1 Introduction 3.2 DuPont

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PROFITABILITY ANALYSIS

OF OIL REFINERIES

3.1 Introduction

3.2 DuPont Analysis

3.2.1 Return on equity of BPCL

3.2.2 Return on equity of HPCL

3.2.3 Return on equity of IOC

3.2.4 Return on equity of MRPL

3.2.5 Return on equity of NRL

3.2.6 Return on equity of CPCL

3.2.7 Average return on Equity of sample units

3.3 Profitability Analysis

3.3.1 Gross profit margin ratio

3.3.2 Operating profit margin ratio

3.3.3 Net profit margin ratio

3.3.4 Cash flow margin ratio

3.3.5 Operating Expense ratio

3.3.6 Return on fixed Assets

3.3.7 Return on net worth

3.3.8 Return on debt

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3.3.9 Return of Capital employed

3.3.10 Cash Return on Assets

3.4 Co-relation between selected variable and ROI

3.4.1 Correlation between selected variable and ROI of BPCL

3.4.2 Correlation between selected variable and ROI of HPCL

3.4.3 Correlation between selected variable and ROI of IOC

3.4.4 Correlation between selected variable and ROI of MRPL

3.4.5 Correlation between selected variable and ROI of NRL

3.4.6 Correlation between selected variable and ROI of CPCL

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3.1 Introduction

The every business form has a relationship with its stakeholder. The all these

stakeholder interested to improve profitability, return on equity and return on

investment. Present chapter deal with analysis of return of equity of sampled units

using the DuPont model and profitability analysis of sampled units. The profitability

analyses have been done through various ratios and they compare with each other

lastly deal with correlation between selected variable and return on investment.

3.2 DuPont Analysis

The equity shareholder is real owner of the company. The every business

management focuses on improving wealth of equity shareholder. The equity

shareholder also happy with improving their wealth and as well return from

investment has been all ready invested. For this purpose return of equity is financial

ratio that shows how well the management has created value for shareholder. A higher

return of equity means return on shareholders‘ equity is giving up and that the

company doing a good job for improving profit without adding firm. The high and

consistent ROE can give a signal that the company has get competitive advantage

over its competitors. The after discussing the concept about ROE some question arises

to as that is how to define ROE and how to improve ROE by the company? There are

so many financial ratios liquidity ratios, debt or leverage ratios, efficiency or assets

management ratio and profitability ratios. That all ratios often hard to see big financial

picture. Excluding of all these one method that is specially for the business owner

[equity shareholders] called DuPont model. The DuPont model is able to show a

business owner where the component parts of the return of assets comes from as well

as the return on equity Ratio. The DuPont analyses also help to company is achieving

its ROE. The analysis of ROE using DuPont model are done in following two ways:

iii. ROE= Net profit margin * Assets Turnover * Equity multiplier.

− Net profit margin shows operating efficiency.

− Asset turnover shows assets utilization efficiency.

− Equity multiplier shows financial leverage.

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Where, Net profit margin = Net income /Total sales

Assets turnover = Total sales / Total Assets

Equity Multiplier = Total Assets / Shareholder equity

Multiplying these three values resulting in ROE according to three step

DuPont model analysis. Concluded whether a company is increasing ROE through

improved profitability, Assets turnover and financial leverage, In Addition to this

some experts are saying that interest payments on debt effects net profit margin.

According to that one advanced versions was introduced that called advanced five

step DuPont analysis model.

iv. The five steps DuPont formula in an easy to understand form is given as below:

ROE= (Tax Burden) * (Interest Burden) * (operating margin)*(Assets

turnover)* (Equity multiplier)

− Tax Burden is the proportion of profit retained after paying Taxes.

− Interest Burden shows how interest is affecting profit. If company has

no debt the ratio will be 1.

− Operating income margin is the operating income per rupee of sales.

− Assets turnover shows assets utilization efficiency.

− Equity multiplier shows financial leverage

Where

Tax Burden = Net Income / EBT

Interest Burden = EBT / EBIT

Operating income margin = EBIT / Sales

Turnover = Sales / Total Assets

Equity multiplier = Total Assets / Shareholder Equity

When tax Burden, interest Burden and operating margin are multiplied to

gather, it gives us net income margin, and now it has been broken down further to

show how tax and interest effect on ROE.

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3.2.1 Return on equity of BPCL

Table 3.2.1

Return on equity of BPCL

Ratio\ Year 2007-08 2008-09 2009-10 2010-11 2011-12

Tax Burden 0.61 0.73 0.64 0.65 0.70

Interest Burden 0.80 0.31 0.70 0.67 0.51

Operating income Margin 2.96 2.34 2.76 2.35 1.72

Assets turnover 2.61 2.85 2.30 2.71 3.25

Equity multiplier 3.63 3.91 4.07 3.98 4.40

Return on equity (%) 13.53 6.07 11.74 11.00 8.79

Figure 3.2.1(A)

Return on equity of BPCL

Figure 3.2.1(B)

DuPont ratios of BPCL

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The Table and figures 3.2.1 shows the year 2008 and after that rate was

decreased up to 6.07% in the year 2009. The year 2010 rate has been 11.74% and

11.00 % respectively. However in the last year of study period once again rate

decreased up to 8.79%. The rate of return on equity shares mix trend during study

period. The reason for decreasing the ROE in year 2008 and 2012 was lower net

income due to higher Interest expense even the EBIT satisfactory. The figure shows

the operating income margin positively correlated with return on equity.

3.2.2 Return on equity of HPCL

Table 3.2.2

Return on equity of HPCL

Ratio\ Year 2007-08 2008-09 2009-10 2010-11 2011-12

Tax Burden 1.20 0.81 0.61 0.66 0.75

Interest Burden 0.59 0.25 0.70 0.73 0.36


Assets turnover 2.32 2.33 1.97 2.21 2.51


Return on equity 12.913 5.35 11.26 12.61 7.13

Figure 3.2.2(A)

Return on equity of HPCL

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Figure 3.2.2(B)

DuPont ratios of HPCL

The Table and figures 3.2.2 shows return of equity of HPCL using five step

DuPont model under study period. The rate of return of equity has been 12.913%,

5.35%, 11.26%, 12.61%, and 7.13% in the year 2008 to 2012 respectively over all

mix trend shows in rate of return during study period. The highest rate 12.913% in the

year 2008 and lowest rate 5.35 was next year 2009. In the year 2009 and 2012 the

Interest Expense has been higher compared other year under study period due to this

higher Interest Expense lower EBT and net income. The lower net income ultimate

reason for lower equity return. The management of HPCL need to cheaper rate debt

source. So EBT and net profit can be increase.

3.2.3 Return on equity of IOC

Table 3.2.3

Return on equity of IOC

Ratio\ Year 2007-08 2008-09 2009-10 2010-11 2011-12

Tax Burden 0.69 0.68 0.72 0.81 1.05

Interest Burden 0.87 0.52 0.90 0.77 0.4


Assets turnover 2.13 2.20 1.87 1.89 2.07


Return on equity 16.95 6.70 20.22 13.46 6.83

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Figure 3.2.3(A)

Return on equity of IOC

Figure 3.2.3(B)

DuPont ratios of IOC

The table and figures 3.2.3 shows the return of equity on IOC during study

period. In the case IOC also shows lower return on equity in year 2009 and 2012. It

was only 6.70% and 6.83% in year 2009 and 2012 respectively. The year 2008, 2010

and 2012 rate of return on equity was 16.91, 20.21 and 13.46 respectively. This shows

satisfactory return in this three year. In the year 2009, assets turnover ratio is higher

(2.20) than year 2008 and 2010. It means in year 2009 revenue generation capacity

from the total assets was higher. Even though EBIT was is lower because of higher

operational cast. The lower EBIT main causes of lower return of equity. Same

situation happened in year 2012 also.

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3.2.4 Return on equity of MRPL

Table 3.2.4

Return on equity of MRPL

Ratio\ Year 2007-08 2008-09 2009-10 2010-11 2011-12

Tax Burden 0.73 0.66 0.66 0.67 0.69

Interest Burden 0.89 0.94 0.94 0.92 0.90


Assets turnover 2.82 3.57 2.19 2.11 2.06


Return on equity 33.62 25.22 19.85 18.03 12.57

Figure 3.2.4(A)

Return on equity of MRPL

Figure 3.2.4(B)

DuPont ratios of MRPL

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The table and figures 3.2.4 shows return of equity of MRPL during the year

2008 and 2012. The rate of return on equity in the year 2008 was 33.63% and then

after continuously decline up to 12.57% in year 2012.It mean in year 2012

approximately 62.61% rate was decline compare to year 2008. The operating margin

also decline 54.12% in year 2012 compare to year 2008. This shows lower level

operational efficiency under study period. For removing this critical condition

companies need to raise the revenue and control the cost both operating and financing.

So return of equity rate can be boost further.

3.2.5 Return on equity of NRL

Table 3.2.5

Return on equity of NRL

Ratio\ Year 2007-08 2008-09 2009-10 2010-11 2011-12

Tax Burden 0.91 0.73 0.64 0.68 0.64

Interest Burden 0.95 0.94 0.97 0.92 0.88


Assets turnover 1.88 2.23 1.71 1.66 2.59


Return on equity 16.58 9.99 9.47 10.77 6.78

Figure 3.2.5(A)

Return on equity of NRL

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Figure 3.2.5(B)

DuPont ratios of NRL

The table and figures 3.2.5 figure shows the return of equity of NRL under

study period. The rate of return in year 2008 has been 16.58% and after that decline in

year 2009 and 2010. However in year 2011 ratio was increased up to 10.77%.

Unfortunately once again ratio decline by 3.99% [up to 6.78]. It shows fluctuating

condition in return on equity under study period. The proportion of tax Burden and

Interest burden has been decline it mean firm pay higher tax and higher Interest under

study period. So net operating margin ratio decline due to that over all return of equity

has been decline.

3.2.6 Return on equity of CPCL

Table 3.2.6

Return on equity of CPCL

Ratio\ Year 2007-08 2008-09 2009-10 2010-11 2011-12

Tax Burden 0.65 0.67 0.88 0.69 -0.22

Interest Burden 0.89 1.61 0.83 0.75 -1.74

Operating income Margin 6.80 -1.15 3.27 3.07 0.22

Assets turnover 2.93 4.41 2.54 2.71 2.73


Return on equity 32.39 -12.98 17.42 13.58 0.90

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Figure 3.2.6(A)

DuPont ratios of CPCL

Figure 3.2.6(B)

Return on equity of CPCL

The figure3.2.6 shows return of equity of CPCL. The return of equity in year

2008 32.39% but after that in year 2009 rate has been negative because company

incurred less in year 2009. In the year 2009 fixed Interest. Expenses also high that is

more addition in the losses. In the year 2010 and 2011 company further increased

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their return of equity up to 17.42% and 13.58% respect. However again in the year

2011- 2012 EBT was negative. Due to past accumulated profit operating Income

margin ratio has been positive. That is good sign for companies.

3.2.7 Average return on Equity of sample units

Table 3.2.7

Average return on equity of sampled units

Ratio\ Year BPCL HPCL IOC MRPL NRL CPCL

Tax Burden 0.67 0.81 0.79 0.68 0.72 0.53

Interest Burden 0.60 0.53 0.69 0.92 0.94 -0.17

Operating income Margin 2.43 2.36 3.82 4.84 4.50 2.90

Assets turnover 2.74 2.27 2.03 2.55 2.01 3.06

Equity multiplier 3.99 4.65 3.08 2.87 1.81 3.09

Return on equity 10.63 10.61 13.16 22.26 10.99 -2.48

Figure 3.2.7(A)

Return on equity of sampled units

Figure 3.2.7(B)

DuPont ratios sampled units

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The table and figure represent Average return on equity of sample companies

under study period. The average return calculates using five step DuPont model. Five

steps tax burden, Interest burden, operating profit margin Assets turnover and Equity

multiplier or Leverage.

The tax burden shows tax payment of the firm per one Rs. Earnings before

tax. For example, Tax burden is 0.60 means, 0.60 net come and 0.40 taxes (1-0.60) for

one rupee on EBT. The considering the sample companies tax Burden of BPCL-0.67,

HPCL-0.81, IOC -0.79, MRPL -0.68, NRL -0.72, CPCL -0.53. In case of HPCL

highest tax Burden that is 0.81. It represents Rs. 0.81 Net incomes and only Rs.0.19

Tax for one rupee of.EBT. This show efficient tax planning compare to other sample

companies. The lowest tax Burden 0.53 in case of CPCL means Rs. 0.53 Rs. Net

income and Rs. 0.47 Tax for every one rupee of EBT. The company pays

approximately 50% Amt of EBT in the form of tax. It means critical tax planning

policy in CPCL.

Interest Burden shows how interest is affecting profit. The company use debt

source for mobilizing the fund then company must pay to some interest in the form of

fixed expense. The interest burden ratio shows payment of interest for 1 rupee of

EBIT. For example interest burden ratio 0.70 means 0.70 Rs. EBT and Rs. 0.30

interest for every one rupees of EBIT. The sampled companies tax Burden ratio 0.60,

0.53, 0.69, 0.92, 0.94, 0.57 in case of BPCL, HPCL, IOC, MRPL, NRL, and CPCL

respectively. The higher Interest Burden 0.94 in case of NRL mean healthy capital

structure compared to other sampled companies.

The operating profit ratio shows earning capacity to sales, or it represents

excess of sales over a cost. The avg. operating profit margin ratio of sampled

companies is 2.43% in case of BPCL, 2.36% in HPCL 3.82% in IOC 4.84% in MRPL

4.50% in NRL, and 2.90% in CPCL. The MRPL takes first place among the sample

companies on average operating profit margin ratio. The higher operating profit ratio

shows effective mgt. policy toward lowering cost on other hand considering the

operating profit margin ratio of HPCL stand the last place among the sample

companies. Higher level operating cost lead to lower level operating margin ratio in

HPCL.

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The Assets turnover ratio shows uses efficiency of assets (utilization of

assets). The Assets turnover ratio of BPCL 2.74, HPCL 2.27, IOC 2.03, MRPL 2.55,

NRL 20.1, and CPCL 3.06. The highest assets turnover ratio was 3.06 times in the

CPCL. However CPCL incurred loss in some year under study period. This ratio is

show only utilization of assets not to cost and profit analysis. It means firm incurred

the losses with higher assets turnover ratio because of excess cost over sales.

The equity multiplier shows leverage situation or other words riskiness. The

equity multiplier shows portion of debt in total assets. Higher ratio shows higher

return but some risk arises. In case of BPCL, HPCL, and IOC equity multiplier ratio

has been 3.99 and 4.65 and 3.08. In case of MRPL, NRL and CPCL the ratio has been

2.87, 1.81 and 3.04 respectively. The NRL lowest equity Multiplier ratio shows

higher equity portion on total assets or lower leverage situation. The HPCL highest

ratio among sample companies shows higher debt and highly leverage firm.

The multiplication values of five ratios (shows in table3.2.7) give the overall

average ROE under study period. The average ROE ratio of sampled companies

10.63% in BPCL, 10.61% in HPCL, 13.16% in IOC, 22.26% in MRPL, 10.99% in

NRL, and -2.48% in CPCL.

The highest operating profit margin ratio with effective utilization of assets

and positive financial leverage MRPL stand in first rank for average ROE among the

sample companies. On other hand CPCL stand last rank because average ROE shows

negative sign. The negative sign was because of two year loss incurred by CPCL.

3.3 Profitability Analysis

The primary objective of the business undertaking is to earn profit. Profit

earning is considered essential for the business profits are the soul of the business

body without which the body becomes life less. Finance is heart of business body and

profit is the soul of business body. Profit has now become measurement test to

measure financial efficiency of the business firm. In other words of Lord Keynes.

―Profit is the engine that drives the business enterprise.‖

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The company survives and grows over a long period of time. Profit is

essential, but it would be wrong to assume that every action initiative by the

management for maximization of profit, irrespective of social consequences. It is

unfortunate that the word profit is looked upon as a term of abuse.

Now a day‘s some firm always want to maximize profit at the cost of

employees, customer and society. Except such infrequent cases, it is a fact that

sufficient profit must be earned to sustain the operations of the business to be able to

obtain funds from investor for expansion and growth and to contribute towards the

social overhead for welfare of the society. The term profit and profitability is

difference. Profit is the difference between revenue and expenses over a period of

time. Profit is the ultimate output of a company and it will have no future, if it fails to

make sufficient profits. Therefore the financial manager should continuously evaluate

the efficiency of its company in term of profits.

The word profitability is composed of two word profits and ability. Profit has

been defined in number of ways. From accounting point of view, it is excess of

revenue after deducting expenses for given period of time and ability mean capacity

power.

The concept of profitability may define as the ability of a given investment to

earn a return from its use. Thus one can say that profitability means the ability to earn

the profit from the business.

The operational efficiency of the company was measure by the profitability

ratios. Besides the entire stakeholder like creditors, owners, and management of the

company interested in the profitability of the firm. Creditors want to get interest and

repayment of principal regularly owners want to get reasonable return on their

investment. This is possible only when the company earns enough profits.

Generally, two major types of profitability ratio are calculated.

1. Profitability in relation of sales.

2. Profitability in relation to investments.

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Profitability in relation to sales indicates amount of profit per rupees of sales

similarly profitability in amount of profit per rupees invested in assets if a company is

not able to earn a satisfactory return on investment, it will not be able to pay a

reasonable return to its investors and survival of the company may be threatened. The

efficiency of the operation of the business is indicates by the profitability. Poor

operational performance may indicate poor sales and hence poor profit. A lower

profitability may arise due to the lake of control over the expenses. Bankers, financial

institutions and other creditors look at the profitability ratios as a an indicator whether

or not the firm earns substantially more than it pays interest for the use of borrowed

funds and whether the ultimate repayment of their debt appears reasonably certain

owner are interested to know the profitability as it indicates the return which they can

get on their investment.

The analysis of profitability ratios are to help to adequacy of profits earned by

the company and to discover whether profitability is increasing or declining. The

profitability of the firm is the net result of a large number of polices and decision. The

profitability ratios show the combined effect of liquidity, assets management and debt

management on operating results. Profitability analysis of cost of goods sold, analysis

of gross margin on goods sold, analysis of operating expense, analysis of profit in

relation to sales and capital. Profitability also indicates public acceptance of the

product or services rendered by the enterprise and shows the combined effects of

liquidity, assets management and debt management on operating result.

The Analysis of profitability of selected sampled researcher has taken two

basic ratios.

A. Margin ratio

B. Return ratio

[A] Margin Ratio:

The margin ratio reflects relationship between profit margin and total sales. It

measures the efficiency of company operations and this can also compared with

previous result also as well as also compared their competitors. The margin ratio

represents the firm‘s ability to translate sales in to profits at various stages of

measurement. A high margin ratio is a sign of good margin.

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3.3.1 Gross profit margin ratio

The relationship between gross profit and sales shows by the gross profit

margin ratio. The first profitability ratio in relation to sales is the gross margin ratio. It

is calculated simply as a gross margin ratio. It is calculated to dividing the gross profit

by the sales.

Gross Profit Margin = Profit Before Depreciation Interact & Tax / Sales.

Gross Profit Margin = Gross Profit / Gross Sales.

The gross profit ratio shows exceed of sales over a production cost. Gross

profit margin is a good indication of how profitable a company is at the most

fundamental level, how efficiently a company uses its resources, materials and labour

our. PBDIT to gross sales reflects the efficiency with which management produces

each unit of product. This ratio show profits relative to sales after the deduction of

production costs, and indicate the relation between production costs and selling price.

The higher gross profit margin of firm relative to the industry implies that he

firm is able to produce at relatively lower cost. A higher gross profit margin ratio is a

sign of sound management.

A low gross profit margin may reflect higher cost of goods sold due to the

firm inability to purchase raw materials at favorable firm, inefficient utilization of

plant and machinery or over investment in plant and machinery resulting in higher

cost of production. The ratio will also be low due to a fall in prices in the market. In

this situation selling product by the firm in an attempt to obtain large sales volume,

the cost of goods sold remain unchanged. The financial manager must be able to

detect the causes of falling gross margin and initiate action to improve the situation.

The following table shows gross profit margin of sampled units.

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Table-3.3.1

Gross profit margin of sampled units [%]

Table 3.3.1 indicates the gross profit margin of sampled units of oil refineries

that indicates the relationship between profit before depreciation interest & tax and

sales. The data was for five years and six sampled oil refineries. For BPCL this ratio

was 3.49%, 2.92%, 3.56%, 2.96% and 2.50% for respective year 2007-08, 2008-09,

2009-10, 2010-11, and 2011-12. It means they show mix trend with the average of

3.08% and standard deviation was 0.44 for BPCL. Unfortunately last three year ratio

was continuously decline. That shows negative impact in relation to gross profit for

BPCL. For HPCL this ratio shows mix trend it was 2.48%, 2.87%, 3.65%, 3.27%, and

2.99% for the year 2007-08, 2008-09, 2009-10, 2010-11 and 2011-12 respectively.

For IOC was also show mix trend respect to gross profit margin. It was fluctuate

between 2.48 to 3.65 in year 2007-08 to 2009-10. The Average value of this ratio was

4.50 and standard deviation was 1.41 for IOC during study period. For MRLP this

ratio was 6.05 in year 2007-08, 5.46 in year 2008-09, 6.06 in year 2009-10, 5.05 in

year2010-1, 3.43 in year 2011-12 was 5.21 and 1.09 standard deviation for MRPL.

FOR NRL this ratio shows mix trend during study period. The ratio likewise,

in 2007-08 - 6.69, in 2008-09 - 5.44, in 2009-10 - 6.50, in 2010-11 - 6.86, 2011-12 -

6.86, and 2011-12 - 3.68. However last year of the study period ratio was decline 50%

approximately. For CPCL ratio indicate decline trend excluding year 2007-08.

However in year 2008-09 ratio was stand in negative. It means higher operating

management cost over a sales. For management of CPCL need conscious about

decline trend regards to gross profit. Their mean and S.D was 2.89 and 2.66

REFINERIES OVERALL Hypothesis Testing

YEAR BPCL HPCL IOC MRPL NRL CPCL TREND F-Ratio F-Limit H0/H1

2007-08 3.49 2.48 5.35 6.05 6.69 6.55 5.10

4.00

2.62

H1 2008-09 2.92 2.87 3.24 5.46 5.44 -0.33 3.27

2009-10 3.56 3.65 6.06 6.35 6.50 3.72 4.97

2010-11 2.96 3.27 4.54 5.05 6.86 3.48 4.36

2011-12 2.50 2.69 3.00 3.43 3.68 1.02 2.72

Mean 3.08 2.99 4.50 5.21 5.83 2.89 4.08 Annexure -1

Table-3.3.1 S.D 0.44 0.47 1.41 1.09 1.32 2.66 1.05

127

respectively. Furthermore analysis researcher used overall trend for same ratio of

average value of all the units year wise. The year wise trend also shows mix trend

during entire study period but it was decline in last three years and stand to 2.72% in

year 2011-12. from 4.97% in year 2009-10.

Figure 3.3.1

Gross profit margin ratio of sampled units

Figure 3.3.1 shows that BPCL and HPCL are not stable in study period. Much

fluctuate in the study period. It shows whether sales or cost of production are not

stable. In case of IOC ratio also goes to more up and down. However last three year

ratio was decline up 200% and stand to 3% from the 6.35% for the MRPL and NRL

ratio was highest compare to other selected refineries. Unfortunately in the last year

ratio was decline in both MRPL and NRL. CPCL ratio was step fall goes to less than

one in year 2008-09. After that ratio increased and stand to 3.72 in year 2009-10.

Unfortunely in the last year one again ratio was declining due to higher production

cost and lower sales. So finance manager must be needed to detect the reasons for

falling of gross profit margin ratio.

Result of hypothesis:-

H0:- There is no significant difference on gross profit margin ratio between all

selected units under study period.

H1:- There is a significant difference on gross profit margin ratio between all


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From the table 3.3.1, the calculated value of F-test is 4.00 and F- limit is 2.62

(5% level of significance). The F-ratio is higher than the F- limit. It indicates that the

null hypothesis is rejected and alternative hypothesis accepted. To conclude there is

significant difference on gross profit margin between all selected sampled units. Thus

gross profit generating capacity of all sample units remains not same under study

period.

3.3.2 Operating profit margin ratio

Operating activity is a main working portion of the every firm. So this purpose

measuring operating efficiency of firm has essentials. The net operating profit margin

ratio is a yardstick of operating efficiency. Many factors are affected to them so it

should be used cautiously. The affected factor is such as external uncontrollable

factors, internal factors, employees and managerial efficiency etc. all of which are

different to analysis. The operating profit ratio defined to dividing EBIT by the sales.

Operating profit margin = EBIT / Sales.

The ratio is destroyed to focus attention in the net profit margin ratio arising

from business operation before interest and tax. This ratio measures the efficiency of

operation of the company. This ratio compared with the previous years and with that

competitors to determine the trend in operating profit margins of the company and its

performance in the industry. This measure will depict the correct trend of

performance where there is erratic fluctuation in the operating policy from year to

year.

The analyzed gross profit ratio and net profit ratio are jointly than analysis and

interpretation of the firms about profitability more meaning full. Net profit margin

will decline unless operating expenses decrease significantly.

The argument is that both are the ratio should be analyzed and each time of

expenses should be thoroughly investment to find out the causes of decline any or

both ratios.

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The variation can occur due to several factors such as:

a) Changes in sales prices.

b) Changes in the demand for the product.

c) Changes in the administrative or scaling expenses.

d) Changes in the proportionate shares of sales of different products with

varying gross margins.

A drawback is that the percentage which results varies depending on the

sources employed to finance business activity, interest is changed ― above the line ‖

while dividends are deducted ― below the line ‖. The following table shows the

operating profit ratio and overall trend of operating profit of sampled units.

Table-3.3.2

Operating profit margin of sample unit [%]

Table:-3.3.2 shows the operating profit margin of sample units. This ratio

shows that operating efficiency in term of return with the relationship to sales. For

BPCL operating profit margin ratio continuously decline (Excluding year 2009-10)

under study period. Reason for declining ratio that is high operating cost compared to

sales. For HPCL this ratio was 1.56, 2.13, 2.64, 2.28 and 1.78 in year 2007-08, 2008-

09, 2009-10, 2010-11 and 2011-12 respectively. The mean value this ratio was 2.08 it

is also very low. So during study period operating activity of HPCL was not

satisfactory for IOC this ratio stand big floating trend. The lowest value of ratio was



2007-08 2.58 1.56 4.34 5.04 4.90 5.78 4.04

3.21

2.62

H1 2008-09 2.18 2.13 2.36 4.57 3.78 -1.03 2.33

2009-10 2.61 2.64 5.24 5.75 6.43 2.80 4.24

2010-11 1.95 2.28 3.27 4.16 4.97 2.65 3.21

2011-12 1.66 1.78 1.96 2.67 2.45 0.22 1.79

Mean 2.20 2.08 3.43 4.44 4.50 2.09 3.12 Annexure -1

Table-3.3.2 S.D 0.41 0.42 1.36 1.15 1.48 2.63 1.06

130

1.96 in the year 2011-12 and highest value of ratio was 5.24 with the mean of 3.43

and standard deviation 1.36. For MRPL ratio was indicate mix trend. The ratio was

5.04, 4.57, 5.75, 4.16, and 2.67 for the year 2008-09 to 2011-12 respectively.

However ratio was decline last three year and in year 2011-12 ratio was decline up to

200%. For NRL average value of this ratio was 1.48%. In year 2009-10 ratio was

increased up to 6.43% from 3.78% in previous year but after that ratio was decline

continuously. So it is negative sign for NRL. Looking to the numerical fact of

operating profit margin ratio of CPCL, the operating profit of CPCL was not

satisfactory. In the year 2009-10 ratio goes to negative. After that they recovered and

stand to positive figure but trend was continuously decline. So management of CPCL

need to causes about this critical situation, looking to the average value, ratio between

years under study period. The value was 4.44% and 4.50% for MRPL and NRL it

was highest compared to other. Moderate level performance in case of IOC. For

BPCL, CPCL, and HPCL operating profit ratio was lower and it was not satisfactory

compared to other unit of oil refineries. The overall trend so year wise performance

units. The year 2009-10 performance of oil refineries was increase in operating

activity but after that continuously decline under study period.

Figure 3.3.2

Operating profit margin ratio of sampled units

Figure 3.3.2 indicates that in BPCL operating profit was not stable they

increase mid off study period after that decline. For HPCL rising initially three year

131

but after that ratio was decline. For IOC operating profit was quit fluctuate they goes

more up and more down under study period. But last three ratios was decline in case

of IOC. The MRPL and NRL the operating profit was not stable. In mid year of the

study period ratio was increased. In case of CPCL figure shows that the operating

profit decline and year 2008-09 below zero means in negative. But after that increased

and continuously decline. Looking to figure for all the selected oil refineries operating

profit of all the refineries was downstream under study period.


H0:- There is no significant difference on operating profit margin ratio between

all selected units under study period.

H1:- There is a significant difference on operating profit margin ratio between all


From the table 3.3.2, the calculated value of F-test is 3.21and limit is 2.62 (5%

level of significance). The F-ratio is higher than the F-limit. It indicates that the null

hypothesis is rejected and alternative hypothesis accepted. To conclude there is


all the sample units are different in terms of operating profit generating capacity under

study period.

3.3.3 Net profit margin ratio

Net profit is obtained when operating expenses, interest and taxes are

subtracted from the gross profit. The net profit margin ratio is measured by dividing

profit after tax by sales.

Net profit margin = Profit after Tax (PAT) / Sales.

The profit after tax figures excludes interest on borrowing, interest is tax

deductible and therefore a firm which pays more interest pays less tax.

Net profit margin ratio established a relationship between net profit and gross

sales indicates management efficiency in manufacturing, administering and selling

products. This ratio is overall measure of the firm`s ability to turn each rupee sales

132

into net profit. If net profit is inadequate than the firm will fail to achieve satisfactory

return on shareholder funds.

The firm‘s capacity to with stand in adverse economic condition depend

on significance of this ratio. A firm with a high net margin ratio would be in an

advantageous position to survive in the face of filling selling prices, rising costs of

production or declining demand for the product. It would really be difficult for a low

net profit firm to with stand these adversities. Similarly a firm with high better use of

favorable conditions such as rising selling prices, falling costs of production or

increasing demand for the product. The following table indicates net profit margin

ratio of selected sample companies.

Table-3.3.3

Net profit margin of sample unit [%]

Table: - 3.3.3 shows net profit margin ratio of selected oil refineries. The ratio

shows relationship between net profit and net sales. For BPCL this ratio was 1.29,

0.51, 1.17, 0.95 and 0.59 for the year 2008-09 to 2011-12 respectively. The ratio show

fluctuating trend during all study period and decline trend in last three year of the

period. For HPCL ratio was stable in initial two year but after that ratio was increased

up 1.31%. However last three year of study ratio was much flat under study period.

The ratio was 2.57, 0.89, 3.51, 3.51, 2.08 and 0.85 for the year 2007-08 to 2011-12. In

the year 2011-12 ratio was blow one need o take initiate steps for IOC. For MRPL

ratio shows mix trend with average value and standard deviation was 2.71 and 0.68

respectively and ratio was fluctuate between 1.59% to 3.40%. For NRL ratio was



2007-08 1.29 0.41 2.57 3.44 4.62 3.39 2.62

7.45

2.62

H1 2008-09 0.51 0.43 0.89 2.79 3.55 -1.08 1.18

2009-10 1.17 1.13 3.51 3.08 4.48 2.05 2.57

2010-11 0.95 1.08 2.08 2.68 4.65 1.34 2.13

2011-12 0.59 0.48 0.85 1.59 2.17 0.14 0.97

Mean 0.90 0.71 1.98 2.71 3.89 1.17 1.89 Annexure -1

Table-3.3.3 S.D 0.35 0.36 1.13 0.68 1.07 1.72 0.78

133

4.62% in year 2007-08 , 3.53% in year 2008-09, 4.48% in year 2009-10, 4.65% in

year 2010-11, 2.17 in year 2011-12.

For CPCL ratio indicate negative trend under study period. In the year 2007-

08 ratio was 3.39 but next year 2008-09 ratio come down up to -1.08 mean companies

in cared losses this year. However in the year 2009-10 and stable in positive ratio

during the remaining study period. According average value of net profit margin ratio

in the form of %, NRL stand to 1st rank due to low operating and financial cost

compared to sales and HPCL stand to last rank due to high cost compared to sales.

According to overall trend year wise performance of all selected oil refineries shows

mix trend. Unfortunately last three year net profit figure continuously decline for all

the selected all refineries.

Figure 3.3.3

Net profit margin ratio of sampled units

Figure 3.3.2 shows that BPCL net profit is very much fluctuate during study.

For HPCL increased first three year and after that continuously decline and last year

they reduce approximately twice in compared to previous year. In case of IOC net

profit position satisfactory at reasonable level but in year 2008-09 and 2011-12 they

lower than one. For MRPL net profit position shows mix trend with higher level

compare to other refineries. However they decline in last three year. For NRL net

134

profit position was very good because of low cost compared to sales. It is good sign

for management of NRL. For CPCL net profit figure shows that the first year net

profit was satisfactory but after that suddenly decline and make a loss in 2009-10. But

after that they recovered in next year and suffer with the profit under study period.


H0:- There is no significant difference on net profit margin ratio between all


H1:- There is a significant difference on net profit margin ratio between all


From the table 3.3.3, the calculated value of F-test is 7.45 and limit is 2.60



significant differences on gross profit margin between all selected sampled units. In

the terms of net profit all the sampled units are different.

3.3.4 Cash flow margin ratio

The cash flow margin ratio is an important ratio as it expresses the relationship

between cash generated, from operations and sales. The company needs cash to pay

dividends, suppliers, service debt, and invest in new capital assets, so cash is just as

important as profit to business firm.

The cash flow margin ratio measures the ability of a firm to translate sales into

cash the formula of cash flow margin ratio given below:

Cash flow margin = Cash flow from operating activities*100/Net sales

The numerator of the equation comes from the firm`s statement of cash flows.

The larger the percentage of cash flow margin shows effective cash generated position

from operations. Operating activities are the principal revenue producing activities

operating or financing activities operating activities include cash effect of those

transactions and events that enter into the determination of net profit or loss. The

following table no indicates cash flow margin ratio of sampled companies.

135

Table-3.3.4

Cash flow margin of sample unit [%]

Table 3.3.4 indicates cash flow margin ratio of sampled units. The shows

capacity of firm for converting to cash from sales for BPCL cash generating capacity

shows mix trend. The ratio shows negative sign in the year 2009-10 and also

increased up to 4.63 in year 2009-09 with the mean of 1.40 under study period. For

HPCL cash flow margin shows mix trend under study period. The ratio was 0.82%,

4.67%, 3.06%, 0.75% and 0.86% in the year 2007-08 to 2011-12. Their mean and

standard deviation was 2.03 and 1.77 respectively. For IOC cash generating capacity

was very much critical excluding in year 2009-10 and 2011-12 ratio shows negative.

There for IOC need to focus on cash flow margin. The cash generating capacity of

MRPL was very good compare to other because increasing trend in initially. For NRL

cash generating from sales was not satisfactory because ratio stand below one

excluding the year 2011-12, and mean value also only 1.13. For CPCL cash flow

margin ratio much fluctuates because they increase and decrease suddenly. The

overall trend shows year wise performance of selected refineries. The overall trend

shows mix trend under study period. In the year 2010-11 cash converting capacity

from sales was satisfactory. The mean shows performance of refineries under study

period. The mean value was 4.47 in MRPL and lowest value was -1.12 in IOC. The

IOC need to focus on this cash generating capacity from the sales.



2007-08 0.38 0.82 -9.36 4.86 0.80 1.97 1.09

1.42

2.62

H0 2008-09 4.63 4.67 -0.15 5.21 0.27 5.67 2.48

2009-10 -1.26 3.06 2.11 8.54 0.32 -5.97 1.13

2010-11 2.79 0.75 -0.83 4.98 4.31 2.91 3.38

2011-12 0.44 0.86 2.64 -1.23 -0.03 3.84 -0.09

Mean 1.40 2.03 -1.12 4.47 1.13 1.68 1.60 Annexure -1

Table-3.3.4 S.D 2.31 1.77 4.83 3.53 1.80 4.50 1.35

136

Figure 3.3.4

Cash flow margin ratio of sampled units

Figure 3.3.4 indicates BPCL cash generating capacity was not stable. In case

of HPCL, cash generating capacity was not stable the trend up at higher point in year

2009-10. For IOC cash generating capacity was very much poor. The ratios indicate

negative sign in two year initially after that they recovered but once again they go to

negative. However last year stable and indicate in positive sign. The MRPL cash flow

margin ratio indicates higher capacity compare to other sample units. However in last

year come down below zero. For NRL also this ratio not give satisfactory result. O nly

one year 2010-11 ratio was up-word but next down to negative. For CPCL also this

ratio not stable. Overall they stable in positive part excluding year 2009-10.


H0:- There is no significant difference on cash flow margin ratio between all


H1:- There is a significant difference on cash flow margin ratio between all



(5% level of significance). The F-ratio is lower than the F- limit. It indicates that the

null hypothesis is accepted and alternative hypothesis rejected. To conclude there is

no significant difference on gross profit margin between all selected sampled units.

Thus cash flow margin ratio of all sample units remains same under study period.

137

3.3.5 Operating Expense ratio

There are many expenses ratios, such as factory expenses to sales,

administrative expenses to sales, sales expense to sales, or any other individual

expense(advertisement expense, commission, fuel, and soon) to sales. All these ratios

when calculated and compared either with the same ratios of the previous user or

some standard ratios determined by the management. Give a very important indication

whether these expenses in relation to sales are increasing or decreasing or stationary,

which in turn reflect the profit earning capacity of the concern firm. With increasing

sales, if the management can limit these operating expenses, it indicates the efficiency

of management in improving the operating efficiency of the company. The lower the

ratio, the greater is the profitability. Sometimes all operating expenses are added and

compared with the sales. This ratio is called operating expense ratio:-

The formulae of these ratios are as follows:-

I. Factory expense to sales ratio = Factory expenses * 100 /sales

II. Administration expenses to Sales ratio = Administration expenses * 100/ sales

III. Selling and distribution expenses to Sales ratio = Selling and distribution

expenses * 100 /sales

Table-3.3.5

Operating expense ratio of sampled units [%]



2007-08 4.41 4.61 5.99 4.18 3.89 2.23 3.77

13.93

2.62

H1 2008-09 4.40 4.11 5.94 0.96 4.51 2.19 3.69

2009-10 5.49 5.84 7.14 1.11 5.22 3.07 4.65

2010-11 5.22 5.23 6.93 1.28 8.69 2.38 4.96

2011-12 4.73 4.46 5.71 1.85 7.55 2.35 4.94

Mean 4.85 4.85 6.34 1.34 5.97 2.44 4.30 Annexure -1

Table-3.3.5 S.D 0.49 0.69 0.64 0.35 2.06 0.36 0.55

138

The table 3.3.5 shows operating expense ratio of sample units. The ratio shows

operating efficiency of units. Higher expenses ratio shows negative sign. For BPCL

ratio shows minor mix trend. This ratio was 4.41%, 4.40%, 5.49%, 5.22% and 4.73%

for year 2008,2009,2010,2011 and 2012 respectively. The mean also 4.85 mean close

to variable value. For HPCL also this ratio shows mix stable situation it mean no more

fluctuate, higher value of ratio was 5.84 and lower value was 4.11 with the mean and

standard deviation 5.85 and 0.69 respectively. For IOC this ratio was stable instantly

two year after that ratio shows decline trend. The ratio was 5.99, 5.94, 7.14, 6.93, and

5.73 for year 2008-09 to 2011-12 respectively. For MRPL operating expenses ratio

quite low and in the year 2008-09 ratio come down below one it shows higher level of

operating efficiency in curtaining operating expense. For NRL this ratio was 3.89,

4.51, 5.22, 8.69, and 7.55 for the year 2008-09 to 2011-12 respectively. The ratio

shows continuously increased trend for four year after that they decline it shows

positive signals. For CPCL ratio shows mixture trend but they not more fluctuate they

fluctuate between 2 and 2.5 only. The mean and standard deviation was 2.44 and 0.36

respectively.

The overall trend year wise performance of operating expenses ratio of

Sample Company shows mix trend. The operating expenses condition of BPCL and

HPCL was same because same mean value. For NRL mean value was 5.97 mean

much higher management need to take corrective action for this higher expense for

MRPL operating exp was lower. So it shows good management regarding operating

activities.

Figure 3.3.5

Operating Expense ratio of sampled units

139

Figure 3.3.5 indicates that the for BPCL operating expenses ratio was stable in

first two years after that they increased and once again they decline up to previous

stable. In case of HPCL also same position happens for this ratio. For IOC this ratio

was not stable under study period. But they stand higher position due to certain reason

like higher administrative and salary cost. For MRPL figure trend show mixture trend

at lower level compare to other sampled units. It shows satisfactory position related to

operating efficiency. For NRL ratio trend shows upward up to year 2010-11. However

in year 2011-12 ratios come down is a sign for management. For CPCL ratio shows

stable position excluding the year 2009-10. But due to this level operating expenses

company incurred losses in certain year. So required to reduce operating expenses for

better profitability.


H0:- There is no significant difference on operating expense ratio between all


H1:- There is a significant difference on operating expense ratio between all






in all the units are differently work in the terms of factory, administrative and selling

expenses margin ratio.

[B] Return Ratio:

The strategic aim of a business enterprise is to earn a return on capital. If in

any particular case, the return in the long term is not satisfactory than the deficiency

should be corrected. The return ratio should be calculated for measuring the historical

performance of an investment centre called for a compression of the profit that has

been earned with capital employed.

140

3.3.6 Return on fixed Assets

Return on assets is a financial ratio that shows the percentage of profit that a

company earns in relation to its fixed Assets. The ratio shows ability of earning in

from investment in fixed Assets.

This ratio is computed to know the productivity of the fixed assets. This ratio

is calculated as follows:

Return on fixed Assets= Profit after tax*100 / Fixed Assets

The profitability of the firm is measured by establishing relation of net profit

which is also called profit after tax with the fixed assets of the organization. This ratio

is indicates the efficiency of utilization of assets in generating revenue.

Table-3.3.6

Return of fixed Assets of sampled units

The table 3.3.6 shows the return of fixed assets of selected sample units. The

data has been given for five year and six selected oil refineries. The mean shows unit

wise performance and overall trend shows year wise performance under study period.

For BPCL return on fixed assets shows mix trend. This ratio has been 7.15%, 2.39%,

5.41%, 5.44% and 4.58% for the year 2007-08 to 2011-12 respectively. The mean

value is lower compare to similar units IOC. So BPCL need to take a some corrective

action for this utilization of fixed assets. For HPCL also this ratio shows mixture

trend. In the year 2008-09 and 2011-12 ratios has been only 1.86% and 2.55%



2007-08 7.15 4.09 10.95 26.77 16.79 35.37 16.85

2.14

2.62

H1 2008-09 2.39 1.86 3.45 25.32 10.71 -10.98 5.45

2009-10 5.41 4.25 11.98 16.41 10.17 14.24 10.41

2010-11 5.44 4.55 8.24 13.59 12.42 11.07 9.22

2011-12 4.58 2.55 4.28 8.11 8.33 1.28 4.85

Mean 4.99 3.46 7.78 18.04 11.68 10.19 9.36 Annexure -1

Table-3.3.6 S.D 1.73 1.18 3.83 7.90 3.20 17.17 4.81

141

respectively. The mean was value also lower at 3.46%. So these show not satisfactory

utilization of assets in HPCL. For IOC this ratio much fluctuate and ratio varies

between 3.45% to 11.98% in the year 2008-09 and 2011-12. It means management of

IOC not constant on effective utilization of fixed assets. Compare to BPCL and IOC

mean value has been higher at 7.78%. The MRPL show satisfactory performance with

the 18.04% mean and 7.90 standard deviation unfortunately ratio shows continuously

downstream performance. In case of NRL also this ratio shows mix trend. In the year

2011-12 ratio was only 8.33% lower under study period. Need to take corrective

action to management of NRL. For CPCL this ratio shows mixture trend. In the year

2008-09 ratio goes to negative but after that company take a some measure and once

again goes to positive. Unfortunately in year 2011-12 once again ratio was down up to

1.28%. Looking to the overall trend utilization of fixed assets of sample units shows

downstream in last three year.

Figure 3.3.6

Return on fixed assets of sampled units

Figure 3.3.6 shows for BPCL and HPCL, trend of return on fixed assets

movement in same direction under study period. The HPCL curve down side compare

to BPCL. For IOC this ratio trend much fluatuate not to stable. The last three year

trend continusly downword and last year decline approximatel 50% compare to

previous year. For MRPL this ratio take a higher position compare all other selected

142

units but curve shows decresing trend under study period. In case of NRL also curve

movement in up and down. For CPCL this ratio curve decline up below zero mean

nagative in year 2008-09. However last three year curve shows decresing movement.

Looking to the overall figure of utilization of fixed assets,among the three big units

IOC stand to first rank and among the remaining three units MRPL stand to firs t rank.


H0:- There is no significant difference on return on fixed assets of sample units

between all selected units under study period.

H1:- There is a significant difference on return on fixed assets of sample units

between all selected units under study period.


(5% level of significance). The F-ratio is lower than the F- limit. It indicates that the


no significant difference on gross profit margin between all selected sampled units.

Thus utilization of fixed assets is same for all the sampled units.

3.3.7 Return on net worth

This ratio known as return on shareholders‘ funds. Return on shareholders‘

funds is very effective measure of the profitability of an enterprise. These ratios

measure the return on the total equity of the shareholders. It should be compared with

the ratios of other similar companies to determine whether the rate of return is

attractive. In fact, this ratio is one of the most important relationships in financial

statement analysis. It shows the ratio of net-profit to owner‘s equity.

Return on net worth = Net profit after tax & interest *100/ shareholders fund

This ratio strongly depends on many factors such as industry, economic

environment (inflation, macroeconomic risks etc…) the higher this ratio shows the

better financial performance of the company. The DuPont analysis shows higher ratio,

higher financial leverage and higher financial leverage dangerous for company

solvency.

143

Table-3.3.7

Return on net worth of sampled units (%)

The table 3.3.7 shows return on net worth of sample units. The ratio shows

relationship between shareholders earning and their investment. For BPCL ratio show

mixture trend under study period but decline trend in last three year. The ratio has

been in last three year 11.74%, 10.99%, and 8.79% for year 2009-10, 2010-11 and

2011-12 respectively. For HPCL also shows mixture trend for this ratio. The ratio has

been 8.56% in year 2007-08, 5.35% in the 2008-09, and 11.25% in year 2009-10,

10.99% in the 2010-11, and in the year 2011-12. The value was 8.87 it is lower

compare to BPCL and IOC. For IOC ratio has been not owner‘s fund. The value of

mean and standard deviation was 12.83 and 6.02 respectively. It is higher compare to

two similar units HPCL and BPCL. For MRPL ratio was declining trend under study

period. Approximately ratio decline 200% compare to first year and last year o f study

period. The mean value was 21.86% and standard deviation 7.98. The higher mean

value compare to all selected units. For NRL ratio decline for initially three year after

that they increased in one year and once again ratio was decline an last year. The ratio

has been 16.58%, 10.20%, 9.64%, 10.76% and 6.81 for the year 2007-08 to 2011-12.

For NRL ratio was continuously downward trend (excluding the year 2011-12). With

the mode rate level mean value that was 10.80%. For CPCL net profit to owner equity

shows mix trend. In the year 2008-09 ratio was in negative, but positive in next year

and last three year continuously decline and in the year 2011-12 ratio was 1.61 only.

Under study period overall trend shows mix-movement and last three year decline

movement in return in net worth.



2007-08 13.53 8.56 16.94 33.63 16.58 35.27 20.75

1.47

2.62

H0 2008-09 6.06 5.35 6.70 25.21 10.20 -12.94 6.76

2009-10 11.74 11.25 20.21 19.87 9.64 17.42 15.03

2010-11 10.99 12.27 13.45 18.01 10.76 13.57 13.189

2011-12 8.79 6.94 6.83 12.56 6.81 1.61 7.25

Mean 10.22 8.87 12.83 21.86 10.80 10.99 12.60 Annexure -1

Table-3.3.7 S.D 2.88 2.89 6.02 7.98 3.57 18.01 5.82

144

Figure 3.3.7

Return on net worth of sampled units

The figure 3.3.7, shows for BPCL and HPCL same direction under

study period. The intially three and last year BPCL up-side and only one year HPCL

was up-side. For IOC curve shows mix trend and last three year decline trend.

Performance IOC was uper Compare to BPCL and HPCL. For MRPL stay in higher

position. But however ratio decline 200% approximately under study period. For NRL

ratio was not stable it was decline and position of curve moderate compare to MRPL

and CPCL. For CPCL in the year 2008-09 ratio in nagetive side. Once again ratio was

decline and stay in 1.61. Overall figure says the MRPL curve upper-side and HPCL

curve down-side.


H0:- There is no significant difference on return on net worth between all selected

units under study period.

H1:- There is a significant difference on return on net worth between all selected





145

no significant difference on gross profit margin between a ll selected sampled units.

Thus, all the units get the same return from the share holders‘ fund.

3.3.8 Return on debt

The return on debt can be expressed as the quantification of a company

performance or net income as allied to the amount of debt issued by the compa ny.

Putting it other way the return on debt refers to amount of profit generated for every

rupees held by a company in debt. For compacting the return on debt following

formula can be used.

Return on Debt= Net Profit * 100 / Total Debt

Use the debt in capital structure it is skill because it is not commonly used

financial resources. The following table shows return on debt of sampled units.

Table-3.3.8

Return on debt of sampled units

Table:-3.3.8 indicates return on debt of selected units. The ratio shows net

profit relationship with debt. For BPCL this ratio has been mix trend. The ratio was

10.52%, 3.47%, 6.92%, 8.15% and 6.17% for the year 2007-08 to 2011-12. The mean

and standard deviation of this ratio was 7.05% and 2.59 respectively. For HPCL also

this ratio has been indicates mixture trend. The ratio was not much fluctuating under

study period. They variation take place between 2.52% to 6.11% only. The similar big



2007-08 10.52 5.38 19.60 61.81 24.97 35.28 26.26

9.69

2.62

H1 2008-09 3.47 2.52 6.56 60.02 15.67 -25.66 10.43

2009-10 6.92 6.11 22.93 65.57 11.21 14.79 21.25

2010-11 8.15 6.15 14.12 75.58 8.24 12.10 20.72

2011-12 6.17 3.32 5.62 15.79 6.24 1.80 6.49

Mean 7.05 4.70 13.77 55.75 13.26 7.66 17.03 Annexure -1

Table-3.3.8 S.D 2.59 1.67 7.69 23.13 7.44 22.23 8.23

146

company BPCL and IOC mean value was lower mean for HPCL leverage not act as

positively compare to BPCL and IOC. In IOC last year‘s three ratios was decline

trend they show in efficiency of management for utilization of debt for last three year.

The mean value was 13.77% so capacity of net profit arising from the debt was

satisfactory for all the year under study period. For MRPL this ratio was very high

because MRPL use the lower debt in capital structure. The ratio was 61.81%, 60.02%,

65.57%, 75.055% and 15.79% for the year 2007-08 to 2011-12. The mean value has

been 55.75 % which was higher among the all selected units. For NRL return of debt

ratio was decline under study period. The ratio was decline approximately 400%

under study period. The mean and standard deviation has been 13.26% and 7.44

respectively. For CPCL this ratio was mix trend but in the year 2008-09 and 2011-12

ratios has been much lower. The trend was decline in last three year. The overall trend

shows mix trend and last year ratio was much lower mean utilization of debt was not

satisfactory for all selected units.

Figure 3.3.8

Return on debt of sampled units

The figure shows performance of selected units regard to return on debt. For

BPCL ratio was not stable. The start at higher level after that decline and last three

year fluctuate between two points. For HPCL also curve says return on debt position

was not stable under study period. For IOC this ratio was higher position in figure

compare to BPCL and HPCL. However last three years has been decline

147

approximately two-hundred percentage position compared all units. Approximately

stable in initially for year but in the fifth year much decline.

The NRL curve says debt utilization capacity was decline under study period.

For CPCL ratio was starting at higher but further that decline and goes to negative.

Looking to the overall figure MRPL stand higher position and HPCL stand lower

position.


H0:- There is no significant difference on return on debt between all selected units

under study period.

H1:- There is a significant difference on return on debt between all selected units

under study period.

From the table 3.3.8, the calculated value of F-test is 9.69 and F - limit is 2.62




utilization of debt is not same in terms of return for all the sampled units.

3.3.9 Return of Capital employed

This is the most important test of profitability of a business it measure the

overall profitability it is ascertained by comparing profit earned and capital employed

to earned it. It is also called as return on investment on capital employed. It indicates

percentage employed in the business. It is calculated on the basic of the following

formula:-

Return on capital employed= EBIT * 100 / Capital employed

The term capital employed has been given different meaning by different

accountants. One popular formula is as follows:

Equity share capital + preference share capital + reserve and other

undistributed profit + long term loan and debentures – fictitious assets –non operating

assets.

148

The term operating profit means profit before interest and tax. Thus the return

on capital employed is dependent upon net profit ratio and capital turnover ratio.

Table-3.3.9

Return on Capital employed of sampled units (%)

The table: - 3.3.9 indicates return of capital employed sampled units.

This ratio is very useful for measuring the utilization of capital, reserve and equity

and performance capital, reserve and long term debt. For BPCL this ratio shows

increasing trend excluding the year 2007-08. The mean and standard deviation show

lower rate increasing trend. For HPCL this ratio was minor fluctuate in last three year

and mixture trend in under study period. The ratio has been 19.61%, 12.78%, 12.39%,

12.49% for the year 2007-08 to 2011-12.

For IOC this ratio indicates mix trend. Considering last three year ratio shows

declining trend. The mean value is 15.24% shows higher level efficiency for

utilization of capacity compared to BPCL and HPCL. For MRPL this ratio shows

decreasing trend under study period. The ratio has been declining approximately

250% compare to first year and last year of study period. For NRL ratio shows

mixture movement under study period. The mean and standard deviation has been

15.60% and 3.14 respectively. For CPCL ratio has been shows mixture trend under

study period. In the year 2008-09 ratios have negative sign means company not get

return from the capital. However in the next year company remove this critical

situation gets 14.43% return from the employed capital. Looking to the mean MRPL

use the effective utilization of employed capital CPCL not use efficiency employed



2007-08 15.89 19.61 18.87 38.71 14.86 23.07 21.84

5.47

2.62

H1 2008-09 12.74 11.30 12.00 34.77 18.63 -2.60 14.47

2009-10 13.25 12.78 19.43 30.00 18.81 14.83 18.11

2010-11 14.63 12.39 15.01 27.36 11.39 16.63 16.24

2011-12 15.40 12.49 10.87 15.10 14.33 6.44 12.44

Mean 14.38 13.71 15.24 29.19 15.60 11.59 16.61 Annexure -1

Table-3.3.9 S.D 1.36 3.34 3.88 9.01 3.14 9.91 3.59

149

capital. The overall trend shows mixture movement under study period for selected

units.

Figure 3.3.9

Return on capital employed of sampled units

The figure 3.3.9 indicates the BPCL upward trend in utilization of capital in

term of profit(Excluding first year of study period). For HPCL start at higher level but

after that curve decline and once again increasing and constant to reamining years of

study period. The curve position was below compare to BPCL means need to take

corrective action compare to competitors. For IOC figure says much mixture trend

under study period. Looking to the last three year movement was downstrem . in the

overall figure curve position was upper side compare to all unit in MRPL. But trend

was downword they says mismanegment was up-down under study period. For CPCL

in year 2008-09 vorve in goes to negative side and after that recovered and table in

positive side.


H0:- There is no significant difference on return on capital employed between all


H1:- There is a significant difference on return on capital employed between all




150


significant difference on return on capital employed between all selected sampled

units. Thus return from capital employed capacity of all sample units differ under

study period.

3.3.10 Cash Return on Assets

The ratio shows cash generating capacity from the assets. The ratio shows

important role because many times cash and profit shows positive Correlation. The

cash return on assets is generally used only in more advanced profitability ratio

analysis. It is used as a comparison to return on assets since. It is cash cooperation to

this ratio as return on assets is stated on an accrual basis. The cash is required for

future investment so this ratio has been much important. The following formula can

be used for calculate ratio.

Cash return on Assets= cash flow from operating activity * 100/ Total Assets

The numerator is taken from the statement of cash flows and the denominator

from the balance sheet. The higher percentage is better.

Table-3.3.10

Cash return on assets of sampled units (%)

The table 3.3.10 show cash return on assets of sample units. For future

investment cash is required so this ratio is useful for measuring the future investment

capacity. For BPCL cash generating capacity from the assets was not stable. In the

year 2009-10 it is negative with the positive mean of 6.26. For HPCL also cash return



2007-08 1.59 6.22 -12.25 27.10 2.76 59.20 14.09

2.64

2.62

H1 2008-09 18.66 17.44 -26.02 29.68 0.92 39.53 13.37

2009-10 -4.29 9.99 -0.49 37.34 0.86 -19.86 3.92

2010-11 12.73 2.67 5.26 24.17 12.18 12.08 11.50

2011-12 2.56 3.77 -2.15 -5.07 13.66 21.70 5.74

Mean 6.24 8.01 -7.13 22.61 6.07 22.53 9.72 Annexure -1

Table-3.3.10 S.D 9.26 5.97 12.30 16.25 6.32 29.75 4.61

151

position from the assets was not stable. Excluding the year 2008-09 lower level

capacity of HPCL in this ratio. For IOC this ratio has been very poor. This ratio stand

to negative sing like -12.25%, -26.02%, -0.49%, 5.29%, -2.15% for the year 2007-08

to 2011-12. The mean values of IOC regard to cash generating from assets also

negative. For MRPL ratio shows increasing trend initially three year but after that

ratio has been decline and goes to negative at -5.07% in year 2011-12. For NRL this

ratio was lower and demising movement for initially three year but after that the

suddenly increased at 12.18% and 13.66% in year 2010-11 and 2011-12 respectively.

This situation says positive sign for the future investment. For CPCL compare to fixed

assets cash was generate at higher level. The mean value has been 22.53% which was

higher compare to all selected units. The overall movement says mixture trend under

study period.

Figure 3.3.10

Cash return on assets of sampled units

The figure 3.3.10, says cash generating capicity from the assets. For BPCL

ratio has been much mixture trend becouse their standard deviation was higher than

mean. For HPCL also ratio shows mixture trend under study period. For IOC curve

stand in negative side under period excluding the year 2010-11. In the negative side

ratio also mixture trend under study period. For MRPL curve stay in upper side in

figure compare to BPCL,HPCL and IOC and also increasing trend intially three year.

However in last year ratio goes to nagetive side. For NRl curve at lower side in

positive side intially three year but in the last two year suddenly increased at higher

level and also stable for the next year. For CPCL curve start at higher position but

then after suddenly decline and come down in negative side. Looking to overall

152

figure excluding HPCL and NRL all the sample units goes to nagetive side one or

more year under study period.


H0:- There is no significant difference on cash return on assets between all


H1:- There is a significant difference on cash return on assets between all selected






cash generating capacity of all the sampled units are different.

3.4 Correlation between selected variable and ROI

This section of chapter shows simple correlation – coefficient analysis are

done between some selected ratios and return on investment (ROI). The ratios used

for the analysis are WCR (Working Capital Ratio), Acid test ratio, Total assets

turnover ratio, Investment turnover ratio and Debt- equity ratio. These ratios help us

to measure the overall performance and judge profitability of the companies. The

correlation shows impact of some selected ratio on ROI and also shows degree of

relationship between selected ratio and ROI.

3.4.1 Correlation between selected variable and ROI of BPCL

CO.

Year

BPCL

WCR ATR TATR ITR DEQ ROI (%)

2007-08 0.74 0.61 4.61 11.64 1.29 11.37

2008-09 0.50 0.67 4.43 21.91 1.75 14.88

2009-10 0.72 0.68 3.51 11.09 1.70 11.11

2010-11 0.72 0.51 4.42 10.76 1.35 9.84

2011-12 0.76 0.71 6.13 13.95 1.42 10.18

Correlation

Co-efficient

-0.94 0.33 -0.23 0.90 0.68

153

It can see from table 3.4.1 the correlation between WCR and ROI highly was

negative means WCR does not lead to increased in ROI. Secondary correlation

between ATR & ROI was lower. It is only 0.33. The relationship between TATR &

ROI was lower negative it was -0.23. The correlation with ITR highly it was 0.90.

Mean ITR increased than ROI also increased of higher degree. DER & ROI

correlation show moderate level correlations.

3.4.2 Correlation between selected variable and ROI of HPCL

CO.

Year

HPCL


2007-08 1.03 0.51 3.83 9.47 1.59 6.23

2008-09 0.93 0.53 3.74 15.31 2.12 9.48

2009-10 0.74 0.43 3.28 9.28 1.84 9.91

2010-11 0.77 0.43 3.28 9.28 1.84 9.91

2011-12 0.66 0.52 4.41 9.68 2.09 8.27

Correlation

Co-efficient

0.84 -0.26 -0.37 0.42 0.60

The table 3.4.2 shows that correlation between selected indicators and ROI.

The correlation between WCR and ROI of HPCL was highly positive mean effective

working capital policy adopted by management of HPCL. The correlation with ATR

was lower negative same as a correlation with TATR also negative. The relationship

between ITR and ROI was moderate level positively it was 0.42. The DER and ROI

relationship also positively correlated with each other.

3.4.3 Correlation between selected variable and ROI of IOC

CO.

Year

IOC


2007-08 0.84 0.54 3.57 9.09 0.86 14.06

2008-09 0.61 0.47 3.71 13.98 1.02 14.64

2009-10 0.76 0.45 2.93 8.37 0.88 15.83

2010-11 0.80 0.51 3.26 7.56 0.95 10.32

2011-12 0.83 0.74 3.71 8.15 1.22 13.08

Correlation

Co-efficient

-0.37 -0.29 -0.12 0.42 -0.21

154

The above Table 3.4.3 correlation of selected variable and ROI it can

be seen from table correlation between ROI and selected performance measuring

indicator was negative excluding one indicator that it ITR. It shows in case of IOC,

WCR, ATR, TATR and DER does not positively effect on ROI. The Correlation

between ATR and ROI was moderate level positive.

3.4.4 Correlation between selected variable and ROI of MRPL

CO.

Year

MRPL


2007-08 1.15 0.57 5.58 10.53 0.53 29.91

2008-09 1.36 0.98 5.71 23.6 0.42 38.15

2009-10 1.01 0.71 4.38 12.03 0.27 23.07

2010-11 0.94 0.54 4.82 11.01 0.23 21.86

2011-12 1 0.54 4.15 7.32 0.54 11.76

Correlation

Co-efficient

0.86 0.76 0.92 0.86 -0.03

It can be seen from table 3.4.4 shows correlation between selected

indicators and ROI of MRPL. The table shows excluding one indicator are positively

correlated with ROI. It shows higher degree of profitability. The DER and ROI

relationship was negatives. The r value was 0.86, 0.76, 0.92, 0.56, -0.03 with WCR,

ATR, TATR, ITR, and DER respectively.

3.4.5 Correlation between selected variable and ROI of NRL

CO.

Year

NRL


2007-08 1.24 1.19 1.88 3.44 0.50 14.33

2008-09 1.30 0.52 2.17 3.44 0.36 11.39

2009-10 1.47 0.27 1.49 2.68 0.28 18.81

2010-11 1.33 0.58 1.67 2.83 0.46 18.81

2011-12 1.36 0.49 2.59 4.48 0.40 14.86

Correlation

Co-efficient

0.62 -0.34 -0.68 -0.57 -0.15

155

Table 3.4.5 shows correlation between selected, Performance

indicators and ROI of NRL. The r-value was 0.62 between WCR and ROI mean

moderate level positive correlation. The ROI relationship with selected indicators was

negatives excluding one indicator WCR. It shows poor level profitability performance

of NRL. The measure selected performance indicator does not support to increase

ROI.

3.4.6 Correlation between selected variable and ROI of CPCL

CO.

Year

CPCL


2007-08 1.19 0.57 5.42 7.70 0.71 30.88

2008-09 1.08 0.55 6.11 15.87 0.50 3.44

2009-10 1.02 0.64 4.12 6.95 1.18 8.61

2010-11 0.99 0.62 4.28 7.77 1.12 12.17

2011-12 0.94 0.50 5.36 7.14 0.90 1.38

Correlation

Co-efficient

0.80 0.27 -0.06 -0.32 -0.08

It can be seen from the table 3.4.6 the correlation between WCR and

ROI was 0.80 means highly positive. Shows effective working capital policy and

positively shows support to ROI. The relationship ATR was also positive but at lower

level it was valued at 0.27. The correlation between ROI and TATR, ITR and DER

was negative. Mean these three indicators does not support positively to increase ROI

of CPCL.

156

References:-

1. Dr. Maheshwari S.N.–Financial Management-Principal & Practice Sultanchand

& Sons – New Delhi

2. M.N.Arora – Cost and Management Accounting – Theory and Problems -

Himalaya Publishing House

3. Khan M.Y.and Jain P. K. - Financial Management - Tata Mc. Graw Hill

Publishing Co.

4. Pandey I M – Financial Management – Vikas Publishing houses pvt. Ltd

5. M.N.Arora - Management Accounting – Theory, Problems and

Solutions – First Edition

6. E.F. Brigham, Michael C. Ehrhardt – Financial Management Theory &

Practice – Thomson Publication

7. Prasanna Chandra-Financial Management-Theory and Practice-Tata McGRAW

Hill Publications

8. D K Bhattacharya - Research Methodology

9. P.P.Arya, Yesh Pal – Research Methodology in Management – Theory

10. C. R. Kothari - Research Methodology – New age of internationals publishers

11. ―D.R. Patel‖ Accounting and financial management atul prakashan -

Ahmadabad (2002)

12. ―A study of financial performance of refinery industry of India‖ Urvashi jala,

Ph.D. Saurashtra University has analyzed public sector refineries in India.

http://www.bajajauto.com/

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