TYPES OF RATIOSSeveral ratios, calculated from the accounting data, can be grouped into various classes according to financial activity or function to be evaluated. As started earlier, the parties interested in financial are short and longterm creditors, owners and management. Short term creditors mainly interested in the liquidity position or the short-term solvency of the firm. Long-term creditors, on the other hand, are more interested in the long term solvency of the firm. Similarly, owners concentrate on the firms profitability and financial condition. Management is interested in evaluating every aspects of the firms performance. They have to protect the interests of all parties and see that the firm grows profitably. In view of the requirements of the various users of ratios, we may classify them into the four important categories Liquidity Ratios. Leverage Ratios. Activity Ratios. Profitability Ratios.

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LIQUIDITY RATIOS:It is extremely essential for a firm to be able to meet its obligations as they become due. Liquidity ratios measure the ability of the firm to meet its current obligations. In fact, analysis of liquidity needs the preparation of cash budgets and cash and fund flow statements; but liquidity ratios, by establishing a relationship between cash and other current assets to current obligations, provide a quick measure of liquidity. A firm should ensure that it does not suffer from lack of liquidity, and also that it does not have the excess liquidity. The failure of a company to meet its obligation due to lack of sufficient liquidity, will result in a poor creditworthiness, loss of creditors confidence, or even legal tangles resulting in the closure of the company. A very high degree of liquidity also bad; idle asset earn nothing. The firms funds will be unnecessarily tied up in current assets. Therefore it is necessary to strike a proper balance between high liquidity and lack of liquidity. The most common ratios which indicate the extent of liquidity and the lack of liquidity are:o o Current Ratio and Quick Ratio.

Current Ratio = Current Asset/ Current LiabilityPage | 2

Current assets include cash and those assets which can be converted into cash within one year, such as marketable securities, debtors and inventories. Prepaid expenses are also included in the current assets as they represent the payments that will not be made by the firm in future. All obligations maturing within a year are included in the current liabilities. Current liabilities include creditors, bills payable, accrued expenses, short-term bank loan, income-tax liability and long term debt maturing in the current year. Ideal Current Ratio is 2:1.

Quick Ratio = (Current Assets-Inventories) / Current Liabilities

Quick Ratio establishes a relationship between quick, or liquid, assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset. Other assets which are considered to be relatively liquid and included in quick assets are debtors and bills receivables and marketable securities. Inventories are considered as less liquid asset, because they require some time for realizing cash; their value also has a tendency to fluctuate. The quick ratio is found out by dividing quick assets by current liabilities.

LEVERAGE RATIOS:The short time creditors, like bankers and suppliers of raw material, are more concern with the firms current debt-paying ability. On the other hand, long term creditors, like debenture holders, financial institutions etc. are more the long term financial concerned with the firms long term financial strength. In fact, a firm should have a strong short as well as long term financial position. To judge the long term financial position of firm, financial leverage or capital structure ratios arePage | 3

calculated. These ratios indicate mix of funds provided by owners and lenders. As a general rule there should be an appropriate mix of debt and owners equity in financing the firms assets. The manner in which assets are financed has a number of implications. First, between debt and equity, debt is more risky from the firms point of view. The firm has a legal obligation to interest to debt holders, irrespective of the profits made by or losses incurred by the firm. If the firm fails to pay debt holders in time, they can take legal action against it to get payments and in extreme cases, can force the firm into liquidation.

Second, use of debt is an advantage for shareholders in two ways: (a) they can retain control of the firm with a limited stake and (b) their earning will be magnified, when the firm earns a rate of return on the total capital employed higher than the interest rate on the borrowed funds. Leverage ratios can be calculated from the balance sheet items to determine the proportion of debt in total financing. There are different kinds of leverage ratios; we will consider Debt ratio, Debt-equity ratio and Interest coverage ratio.

DEBT RATIOSeveral debt ratios may be used to analyze the long term solvency of the firm. The firm may be interested in knowing the proportion of the interest bearing debt (also called funded debt) in the capital structure. It may, therefore, debt ratio can be computed by dividing total debt by capital employed or net asset. Total debt will include short and long term borrowings from financial institutions, debentures/bonds, deferred payment arrangements for buying capital equipments, bank borrowings, public deposits and any other interest-bearing loan.

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Debt Ratio= Total Debt/ Capital Employed

DEBT-EQUITY RATIODebt-Equity ratio can be calculated by dividing total debt by net worth.

COVERAGE RATIOS:-

Debt ratios described above are static in nature, and fail to indicate the firms ability to meet interest and other fixed obligations. The interest coverage ratio is used to test the firms debt servicing capacity. The interest coverage ratio is determined by dividing earnings before interest and taxes by interest charges.

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Interest Coverage Ratio= EBIT/Interest

ACTIVITY RATIOS:Funds of creditors and owners are invested in various assets to generate sales and profits. The better the management of assets, the larger the amount of sales. Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. The ratios are also called turnover ratios because they indicate the speed with which the assets are being converted or turned over into sales. A proper balance between sales and assets generally reflects that the assets are managed well. Several ratios can be calculated to judge the effectiveness of asset utilization.

DEBTORS TURNOVER RATIOS:A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of companies. When the firm extends credit to its customers, debtors are created in the firms accounts. Debtors are expected to be converted into cash over a short period and, therefore, are included in the current assets. The liquidity position of the firm depends upon the quality of the debtors to a great extent. Quality of the debtors can be identified with the analysis of Debtors Turnover & Collection Period.

Debtors TurnoverDebtors turnover is found out by dividing credit sales by average debtors.

Debtors Turnover= Credit Sales/Average

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Debtors

Debtors turnover indicates the number of times debtors turned over each year. Generally the higher the value of debtors turnover, more efficient management of the credit. To an outside analyst, information about credit sales and opening and closing balances of debtors may not be available. Therefore debtors turnover is calculated by dividing sales by the year-end balance of debtors.

Collection PeriodThe average number of days for which debtors remain outstanding is called the average collection period, and can be calculated as follows:

Collection Period= 360/ Debtors Turnover

PROFITABILITY RATIOS: A company should earn profits to survive and grow over a long period of time. Profits are essential, but it would be wrong to assume that every action initiated by the management of the company should be aimed at maximizing profit, irrespective of social consequences. It is unfortunate the word profit is looked upon as a term of abuse since some firms always wanted to maximize profits at the cost of employees, customers & society. Except such infrequent cases, it is fact that sufficient profit must be earned to sustain the operation of the business to be able to obtain funds from the investors for the expansion and growth and to contribute towards the social overheads for the welfare of the society.Page | 7

Profit is the difference between revenues and expenses over a period of time (usually one year). Profit is the ultimate output of the company, and it will have no future if it fails to make sufficient profits. Therefore, the financial manager should continuously evaluate the efficiency of the company in terms of profits. The profitability ratios are calculated to measure the operating efficiency of the firm. Beside management of the company, the creditors and owners are also interested in the profitability of the firm. Creditors want to get interest and repayment of principal regularly. Owners want to get a required rate of return on their investment. This is possible only when the company earns enough profits. Generally two major types of profitability ratios are calculated. Profitability in relation to sales. Profitability in relation to investment.

NET PROFIT MARGIN RATIO: Net profit is obtained when operating expenses, interest and taxes are subtracted from gross profit. The net profit margin ratio is obtained by dividing profit after tax by sales.

Net Profit Margin= Profit After Tax/Sales

Net profit margin ratio establishes a relationship between net profit and sales and indicates management efficiency in manufacturing,Page | 8

administration and selling the products. The ratio is the overall measure of the firms ability to each rupee sales into net profit. If the net margin is inadequate, the firm will fail to achieve satisfactory return on shareholders fund.

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COMPANY PROFILE

HISTORY OF ONGC Ltd. 1947-1960 During the pre-independence period, the Assam Oil Company in the northeastern and Attock Oil company in northwestern part of the undivided India were the only oil companies producing oil in the country, with minimal exploration input. The major part of Indian sedimentary basins was deemed to be unfit for development of oil and gas resources. After independence, the national Government realized the importance oil and gas for rapid industrial development and its strategic role in defense. Consequently, while framing the Industrial Policy Statement of 1948, the development of petroleum industry in the country was considered to be of utmost necessity. Until 1955, private oil companies mainly carried out exploration of hydrocarbon resources of India. In Assam, the Assam Oil Company was producing oil at Digboi (discovered in 1889) and the Oil India Ltd. (a 50% joint venture between Government of India and Burma Oil Company) was engaged in developing two newly discovered large fields Naharkatiya and Moran in Assam. In West Bengal, the Indo-Stave Petroleum project (a joint venture between Government of India and Standard Vacuum Oil Company of USA) was engaged in exploration work. The vast sedimentary tract in other parts of India and adjoining offshore remained largely unexplored. In 1955, Government of India decided to develop the oil and natural gas resources in the various regions of the country as part of the Public Sector development. With this objective, an Oil and Natural Gas Directorate was set up towards the end of 1955, as a subordinate office under the then Ministry of Natural Resources and Scientific Research. The department was constituted with a nucleus of geoscientists from the Geological survey of India. A delegation under the leadership of Mr. K D Malviya, the then Minister of Natural Resources, visited several European countries to study the status of oil industry in those countries and to facilitate the training of Indian professionals for exploring potential oil and gas reserves.

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Foreign experts from USA, West Germany, Romania and erstwhile U.S.S.R visited India and helped the government with their expertise. Finally, the visiting Soviet experts drew up a detailed plan for geological and geophysical surveys and drilling operations to be carried out in the 2nd Five Year Plan (1956-57 to 1960-61). In April 1956, the Government of India adopted the Industrial Policy Resolution, which placed mineral oil industry among the schedule 'A' industries, the future development of which was to be the sole and exclusive responsibility of the state. Soon, after the formation of the Oil and Natural Gas Directorate, it became apparent that it would not be possible for the Directorate with its limited financial and administrative powers as subordinate office of the Government, to function efficiently. So in August, 1956, the Directorate was raised to the status of a commission with enhanced powers, although it continued to be under the government. In October 1959, the Commission was converted into a statutory body by an act of the Indian Parliament, which enhanced powers of the commission further. The main functions of the Oil and Natural Gas Commission subject to the provisions of the Act, were "to plan, promote, organize and implement programmes for development of Petroleum Resources and the production and sale of petroleum and petroleum products produced by it, and to perform such other functions as the Central Government may, from time to time, assign to it ". The act further outlined the activities and steps to be taken by ONGC in fulfilling its mandate.

1961-1990 Since its inception, ONGC has been instrumental in transforming the country's limited upstream sector into a large viable playing field, with its activities spread throughout India and significantly in overseas territories. In the inland areas, ONGC not only found new resources in Assam but also established new oil province in Cambay basin (Gujarat), while adding new petroliferous areas in the Assam-Arakan Fold Belt and East coast basins (both inland and offshore). ONGC went offshore in early 70's and discovered a giant oil field in the form of Bombay High, now known as Mumbai High. This discovery, along with subsequent

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discoveries of huge oil and gas fields in Western offshore changed the oil scenario of the country. Subsequently, over 5 billion tones of hydrocarbons, which were present in the country, were discovered. The most important contribution of ONGC, however, is its self-reliance and development of core competence in E&P activities at a globally competitive level. After 1990 The liberalized economic policy, adopted by the Government of India in July 1991, sought to deregulate and de-license the core sectors (including petroleum sector) with partial disinvestments of government equity in Public Sector Undertakings and other measures. As a consequence thereof, ONGC was re-organized as a limited Company under the Company's Act, 1956 in February 1994. After the conversion of business of the erstwhile Oil & Natural Gas Commission to that of Oil & Natural Gas Corporation Limited in 1993, the Government disinvested 2 per cent of its shares through competitive bidding. Subsequently, ONGC expanded its equity by another 2 per cent by offering shares to its employees. During March 1999, ONGC, Indian Oil Corporation (IOC) a downstream giant and Gas Authority of India Limited (GAIL) - the only gas marketing company, agreed to have cross holding in each other's stock. This paved the way for long-term strategic alliances both for the domestic and overseas business opportunities in the energy value chain, amongst themselves. Consequent to this the Government sold off 10 per cent of its share holding in ONGC to IOC and 2.5 per cent to GAIL. With this, the Government holding in ONGC came down to 84.11 per cent. In the year 2002-03, after taking over MRPL from the A V Birla Group, ONGC diversified into the downstream sector. ONGC will soon be entering into the retailing business. ONGC has also entered the global field through its subsidiary, ONGC Videsh Ltd. (OVL). ONGC has made major investments in Vietnam, Sakhalin and Sudan and earned its first hydrocarbon revenue from its investment in Vietnam.

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CALCULATION OF CURRENT RATIOYEAR2004 2005 2006 2007 2008

CURRENT ASSETS248933 285477 326279 387850 434298

CURRENT LIABILITIES89080 108763 105951 139932 176083

CURRENT RATIO2.794488101 2.624762097 3.079527329 2.771703399 2.466439122

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CALCULATION OF QUICK RATIOYEAR2004 2005 2006 2007 2008

CURRENT ASSETS280615 321658 371615 443953 434298

INVENTORY23178 37293 37043 30338 34806

CURRENT LIABILITIES89080 108763 105951 139932 176083

QUICK RATIO2.889952851 2.614538032 3.15779936 2.955828545 2.268770977

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CALCULATION OF INTEREST COVERAGE RATIOYEAR EBDIT INTEREST(Receipt) 2004 2005 2006 2007 2008 18123 0 24678 4 28373 1 30646 5 31479 0 36125 20695 13278 12264 11209 5.016747405 11.92481276 21.36850429 24.98899217 28.08368275

INTEREST COVERAGE RATIO

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CALCULATION OF DEBT-EQUITY RATIOYEAR DEBT(Total Unsecured Loan) 2118 1490 1069 696 369

NET WORTH400024 463142 535934 614099 699435

DEBT-EQUITY RATIO0.005294682 0.003217156 0.001994649 0.001133368 0.000527569

Aprox .

2004 2005 2006 2007 2008

0.001 0.003 0.002 0.001 0.001

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CALCULATION OF ASSET TURNOVER RATIOYEAR2004 2005 2006 2007 2008

SALES32509 6 46709 8 48200 9 56903 7 60137 3

CAPITAL EMPLOYED395299 419926 493763 540744 604844

ASSET TURNOVER RATIO0.822405319 1.112334078 0.976195057 1.052322356 0.99426133

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CALCULATION OF DEBTORS TURNOVER RATIOYEAR2004 2005 2006 2007 2008

SALES DEBTORS32509 6 46709 8 48200 9 56903 7 60137 3 23178 37293 37043 27594 43604

DEBTORS TURNOVER RATIO14.02605919 12.52508514 13.01214804 20.6217656 13.79169342

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CALCULATION OF COLLECTION PERIODYEAR2004 2005 2006 2007 2008

SALES325096 467098 482009 569037 601373

DEBTORS23178 37293 37043 27594 43604

COLLECTION PERIOD(360/SALES/DEBTORS)26 29 27 17 26

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CALCULATION OF NET MARGIN RATIOYEAR2004 2005 2006 2007 2008

SALES32509 6 46709 8 48200 9 56903 7 60137 3

PROFIT AFTER TAX86644 129830 144308 156429 167016

NET MARGIN RATIO(In %) 26.65181977 27.79502374 29.93886006 27.49012806 27.77244738

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CALCULATION OF EARNINGS PER SHARE (EPS)YEAR2004 2005 2006 2007 2008

PROFIT AFTER TAX(Rs in million) 86644 129830 144308 156429 167016

NUMBER OF SHARESN/A 1425933992 1425933992 2138891502 2138891502

EPSN/A 91.049 1 101.20 24 73.135 55 78.085 31

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FindingsRELEVANCE OF RATIO ANALYSIS

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as the indicated quotient of two mathematical expressions and as the relationship between two or more things. In financial analysis a ratio is used as a benchmark for evaluating the financial position and performance of a firm. The absolute accounting figures reported in the financial statement do not provide a meaningful understanding of the performance and financial position of a firm. An accounting figure conveys meaning when it is related to some other relevant information. Ratios help to summaries large quantities of financial data and to make qualitative judgment about the firms financial performance. After analyzing the key ratios of ONGC Ltd. several important things about the company has been identified.

CURRENT RATIO:Current ratios of ONGC Ltd. for last five years state a very good financial condition of the company itself. It has been found that for last five years ONGC ltd. has maintained a current ratio of 2.4 to 3. That means the company has been able to maintain adequate amount of current assets to meet its current obligations. But in the year 2006, the current ratio of 3.07 says that it has kept extra amount of assets idle, which could have been utilized to earn more profit.

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QUICK RATIO:Quick ratio is measured to observe the liquidity position of the firm. ONGC Ltd. has an extremely well maintained quick ratio over the last five years. It has maintained a quick ratio of 2.2 to 3.15 during the last five years, which displays a great liquidity position of the company. The company was able to meet its current obligation efficiently. A quick ratio of over 2 shows that the firm has maintained a healthy liquidity even after not including inventories into current assets; as inventories needs some times to convert into liquid cash. So quick ratios of ONGC Ltd. state a healthy financial position of the company.

INTEREST-COVERAGE RATIO:Interest coverage ratios of ONGC Ltd. for the last five years have maintained an increasing trend, which shows that the firm is becoming too conservative about using debt.

DEBT-EQUITY RATIO:Debt-equity ratios of ONGC Ltd. for the last five years show that the company has been more faithful in equity finance. The ratio states that the company has only used .1% to .3% of debt financed cost structure for the last five years, which generally shows the market position of the company was very high during last five years.

ASSET TURNOVER RATIO:The average Asset Turnover ratio of the company was approximately 1 during last 5 years. This indicates the firm was able to generate a sale of Re. 1 for its every Re.1 assets. In this field the company is not doing exceptionally well but still the Asset Turnover ratios state a good position of the company.

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DEBTORS TURNOVER RATIO:As Debtors turnover ratio indicates the number of times debtors turnover each year, the debtors turnover ratio of last five years of ONGC Ltd. shows that the credit management department of the ONGC Ltd. is very efficient in recovering their debts. The debtors turnover ratio of the company shows that the recovery of credit is very frequent, which is very good.

COLLECTION PERIOD:Average Collection period of ONGC Ltd. itself states the excellent credit management policy of the company. The company is doing exceptionally well during last five years to recover their debtors. In the year 2007 the sale of the company was 2nd highest among last five years (Rs. 569037 million) and during that year their average collection period was 17 days, which says they companys debtors did not remain outstanding for more than 17 days, even after having such a huge sales. So, it can be observed that the credit management of ONGC Ltd. is excellent.

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