Financial Ratio Analysis of OGDCL – 2019

1. Profitability Ratios
Profitability ratios consist of a group of metrics that assess a company's ability to generate
revenue relative to its revenue, operating costs, balance sheet assets, and shareholders'
equity. Profitability ratios also show how well companies use their existing assets to
generate profit and value for shareholders.
i. Gross Profit Margin
It is the measure of the company’s profitability. Gross profit margin is the amount
remaining after deducting the cost of goods sold from revenue.
Gross profit
Formula: Gross Profit Margin = ∗100
Net sales

Rs .167.62
Year 2019: ∗100 = 63.8 or 64 % (Rs. in Billions)
Rs . 261.48

Year 2018: 59 %

Interpretation

Gross Profit Margin is the indicator of the company’s financial health and evaluates the
operational performance of the company. A lower margin indicates that the company is
underpricing whereas a higher margin shows that company can make reasonable profit on
sales. In 2018, the gross profit margin was 58% which was improved to 64% in 2019. This
shows that OGDCL has controlled the overhead costs efficiently and increased the number
of sales as compared to the previous year.

ii. Net Profit Margin

Net profit margin is the percentage of revenue remaining after all operating expenses,
interest, taxes, and preferred stock dividends (but not common stock dividends) have
been deducted from a company's total revenue.

Net profit
Formula: Net Profit Margin = ∗100
Net sales

Rs . 118.386
Year 2019: ∗100 = 45.2 % (Rs. in Billions)
Rs . 261.48
Year 2018: 38 %
Interpretation
Net profit ratio measures the relationship of sales and profit after tax. It shows that what
percentage of sales is the actual profit for company. This helps investors assess if a
company's management is generating enough profit from its sales and

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whether operating costs and overhead costs are being contained. In 2019, an increase of
about 7% was recorded as compared to the previous year which shows that OGDCL is more
efficient at converting sales into profit.
iii. Return on Assets
The return on assets shows the percentage of how profitable a company's assets or
resources are in generating revenue.
Net income
Formula: Return on Asset (ROA) =
Total assets
Rs . 118.286
Year 2019: = 0.154 or 15.4 % (Rs. in Billions)
Rs . 766.60
Year 2018: 12 %
Interpretation
The higher the ROA ratio the greater the benefit earned. In 2018, the ROA ratio for OGDCL
was 12% which they improved to about 15% proving that the company’s assets are more
profitable in generating revenues. This means that OGDCL is effectively using its assets to
generate revenue and invested them in the more profitable sources as compared to the
previous year.
iv. Return on Equity
The return on equity is a measure of the profitability of a business in relation to the
equity.
Net income
Formula: Return on Equity (ROE) =
Shareholders equity
Rs . 118.286
Year 2019: = 0.189 or 19 % (Rs. in Billions)
Rs . 625.37

Year 2018: 16.3 %

Interpretation

ROE is a profitability ratio that measures the ability of a firm to generate profits from its
shareholders investments in the company. In other words, the return on equity ratio
shows how much profit each rupee of common stockholders' equity generates. It
measures how effectively management is using company investments and assets to
generate profits. If we compare the ROE of OGDCL for the year 2018 and 2019, it shows
us that the management significantly performed well in the year 2019. The management
effectively distributed the idle cash and used more financial leverage to improve its ROE
hence the ability of OGDCL to generate profits without needing much capital has
increased.

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2. Liquidity Ratios
Liquidity ratios are the ratios that measure the ability of a company to meet its short-term
debt obligations. They show the number of times the short-term debt obligations are
covered by the cash and liquid assets.

v. Current Ratio

The current ratio is a liquidity ratio that measures a company's ability to pay short-term

obligations or those due within one year. It tells investors and analysts how a company
can maximize the current assets on its balance sheet to satisfy its current debt and other
payables.
Current Assets
Formula: Current Ratio =
Current Liabilities
Rs . 509.79
Year 2019: = 7.02 Times (Rs. in Billions)
Rs . 72.64

Year 2018: 7.35 Times

Interpretation

The ratio for 2019 shows that OGDCL has about 7 times more current assets than liabilities
to pay off debts, which is very good. However, if we look at the ratio for year 2018, current
ratio has decreased in the later year which show that OGDCL had faster conversion cycle of
debtors or accounts receivables in 2018. Also, company sold out its unproductive assets and
was efficiently managing the process of paying off current liabilities in the previous year. A
decline in the ratio show an increase in short-term debt, a decrease in current assets, or a
combination of both.

vi. Acid Test / Quick Ratio

The acid-test, or quick ratio, compares a company's most short-term assets to its most

short-term liabilities to see if a company has enough cash to pay its immediate liabilities,
such as short-term debt. The acid-test ratio disregards current assets that are difficult to
quickly liquidate such as inventory.
Current Assets−Inventory
Formula: Acid Test =
Current Liabilities
Rs . 509.79−Rs . 87.44
Year 2019:
Rs. 72.64
= 6.75 Times (Rs. in Billions)

Year 2018: 7.02 Times

Interpretation

If the acid-test ratio is much lower than the current ratio, it means that a company's current
assets are highly dependent on inventory. However, the current ratio and acid test ratio for

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OGDCL are almost same that clearly shows current assets are not dependent on inventory.
The quick ratio for year 2019 shows that OGDCL can meet its current financial obligations
with the available quick funds on hand. If we compare the ratio for year 2018 and 2019, the
stats for the previous year were comparatively better and company had to struggle a little
this year to maintain or grow sales, or might have paid their bills to quickly or collected
receivables slowly due to which the ratio decreased.

vii. Cash Ratio

The cash ratio is a measurement of a company's liquidity, specifically the ratio of a

company's total cash and cash equivalents to its current liabilities. The metric calculates
a company's ability to repay its short-term debt with cash or near-cash resources, such
as easily marketable securities.
Cash∧Cash Equivalents
Formula: Cash Ratio =
Current Liabilities
Rs . 95.08
Year 2019:
Rs . 72.64
= 1.31 Times (Rs. in Billions)

Year 2018: 1.30 Times

Interpretation

A ratio above 1 means that a company will be able to pay off its current liabilities
with cash and cash equivalents, and have funds left over. The cash ratio is almost like an
indicator of a firm’s value under the worst-case scenario—say, where the company is about
to go out of business. It tells creditors, investors, and analysts the value of current assets
that could quickly be turned into cash, and what percentage of the company’s current
liabilities these cash and near-cash assets could cover. OGDCL has improved its cash ratio in
2019 which means that company focused on controlling overhead expenses and efficiently
negotiated for longer payment cycles while focusing on long-term debt for financing.

viii. Cash Flow from Operations to Sales Turnover

The cash flow to sales ratio reveals the ability of a business to generate cash flow in

proportion to its sales volume. It is calculated by dividing operating cash flows by
net sales.

Formula: Cash flow from Operations to Sales =

Net Cash¿ Operating Activities ¿
Net Sales
Rs .142.32
Year 2019:
Rs . 261.68
= 54.4 % (Rs. in Billions)

Year 2018: 51 %

Interpretation

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A higher ratio – greater than 1.0 – is preferred by investors, creditors, and analysts, as it
means a company can cover its current short-term liabilities and still have earnings left over.
Companies with a high or up trending operating cash flow are generally considered to be
in good financial health. In year 2019, OGDCL managed to increase its cash flow from
operations than previous year. This indicates that in the later year company has focused
more on leasing than buying while improving the inventory on continuous basis. Also the
reason behind an increased operating cash flow is controlling overhead expenses.

3. Activity Ratios
An activity ratio is a type of financial metric that indicates how efficiently a company is
leveraging the assets on its balance sheet, to generate revenues and cash .
ix. Inventory Turnover Ratio
Inventory turnover is a ratio showing how many times a company has sold and
replaced inventory during a given period
Cost of Goods Sold
Formula: Inventory Turnover =
Average Inventory
Rs . 94.36
Year 2019:
Rs .18.76
= 5.02 Times (Rs. in Billions)

Year 2018: 4.49 Times

x. Inventory Turnover in Days

365
Formula: Inventory Turnover in Days =
Inventory Turnover Ratio
365
Year 2019:
5.02
= 72.7 Days

365
Year 2018: = 81.3 Days
4.49
Interpretation
Inventory turnover shows how many times a company has sold and replaced inventory
during a given period. This helps businesses make better decisions on pricing,
manufacturing, marketing, and purchasing new inventory. OGDCL improved its inventory
turnover ratio in year 2019 as it took 72 days to sale the inventory on hand. This means that
OGDCL reduced costs and successfully increased the demand of its inventory by reviewing
the pricing strategies effectively and optimizing the supply chain. In general, a
higher inventory turnover is better because inventories are the least liquid form of asset.
xi. Account Receivable Turnover Ratio

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 This ratio is used to evaluate the ability of a company to efficiently issue credit to its
customers and collect funds from them in a timely manner.
Net Credit Sales
Formula: A/R Turnover =
Average Receivables
Rs . 261.44
Year 2019:
Rs .190.73
= 1.37 (Rs. in Billions)

Year 2018: 1.46

Industry Average: 4.05
xii. Account Receivable Turnover in Days
365
Formula: A/R Turnover in Days =
Account Receivable Turnover Ratio
365
Year 2019:
1.37
= 266 Days

365
Year 2018: = 251 Days
1.46
365
Industry Average: = 90 Days
4.05
Interpretation
The accounts receivable turnover ratio measures how many times a business can collect its
average accounts receivable during the year. Whether the accounts receivable turnover
ratio of 10 is good or bad depends on the company's past ratios, the average for other
companies in the same industry, and the specific credit terms given to the company's
customers. OGDCL has comparatively poor account receivable turnover as compared to the
industry average. This means OGDCL has poor collection process, bad credit policies, or
customers are not financially viable or creditworthy.

xiii. Account Payable Turnover

The accounts payable turnover ratio is a short-term liquidity measure used to quantify
the rate at which a company pays off its suppliers.
Credit Purchases
Formula: Account Payable Turnover =
Average Payables
Rs . 95.23
Year 2019:
Rs. 7.66
= 12.43 (Rs. in Billions)

Rs . 82.95
Year 2018: = 12.78 (Rs. in Billions)
Rs. 6.49
xiv. Account Payable Turnover in Days

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 365
Formula: A/P Turnover in Days =
Account Payable Turnover
365
Year 2019:
12.43
= 29.3 Days

365
Year 2018: = 28.6 Days
12.78
Interpretation
A high ratio means there is a relatively short time between purchase of goods and services
and payment for them. Conversely, a lower accounts payable turnover ratio usually signifies
that a company is slow in paying its suppliers. If the turnover ratio declines from one period
to the next, this indicates that the company is paying its suppliers more slowly and may be
an indicator of worsening financial condition. OGDCL account payable turnover ratio for
2019 indicates that a company is taking a little longer to pay off its suppliers than in previous
year. But the decrease is minimal that shows OGDCL is taking advantage of early payment
discounts and paying supplier on time and maintaining this ratio.
xv. Asset Turnover
The asset turnover ratio is an efficiency ratio that measures a company's ability to
generate sales from its assets by comparing net sales with average total assets.
Net Sales
Formula: Asset Turnover =
Average Total Assets
Rs . 261.48
Year 2019: = 36 % (Rs. in Billions)
(Rs . 766.60+ Rs . 666.47)/2
Year 2018: 32 %

Interpretation
The higher the asset turnover ratio, the better the company is performing, since higher
ratios imply that the company is generating more revenue per dollar of assets. OGDCL has
managed to increase its asset turnover by 4 % in year 2019 hence showing that
management is using assets efficiently and accelerating sales revenue.
xvi. Working Capital
Formula: Working Capital = Current Asset – Current Liabilities
Year 2019: Rs. 509.79 – Rs. 72.64 = Rs. 437.15 (Rs. in Billions)
Year 2018: Rs. 405.85 – Rs. 55.19 = Rs. 350.66 (Rs. in Billions)
Interpretation

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 Due to the increase in value of current assets, OGDCL has a significant increase in its
working capital in year 2019.
xvii. Working Capital Turnover
The working capital ratio reveals whether the company has enough short-term assets to
pay off its short-term debt. The working capital ratio measures a company's efficiency
and the health of its short-term finances.
Net Sales
Formula: Working Capital Turnover =
Average WorkingCapital
Rs . 261.48
Year 2019:
Rs . 393.90
= 0.66 (Rs. in Billions)

Year 2018: 0.63

Interpretation
The working capital turnover ratio measures how well a company is utilizing its working
capital to support a given level of sales. A high turnover ratio indicates that management is
being extremely efficient in using a firm's short-term assets and liabilities to support sales.
The working capital turnover for OGDCL has increased in year 2019 which indicates that the
company is earning additional profit and the method for financing is replaced from short-
term debt to long-term debt. As there is a significant increase in the current assets of the
company whereas current liabilities also increased which shows that OGDCL is effectively
managing its financing while balancing the limit for both assets and liabilities. OGDCL has
managed to purchase more profitable assets to support the sales than previous year.

4. Solvency Ratios
A solvency ratio measures the extent to which assets cover commitments for future
payments, the liabilities. The solvency ratio indicates whether a company's cash flow is
sufficient to meet its short-and long-term liabilities.
xviii. Debt to Asset Ratio
The debt to total assets ratio is an indicator of a company's financial leverage.
Total Debt
Formula: Debt to Asset Ratio =
Total Assets
Rs . 141.74
Year 2019:
Rs .766.60
= 18.43 % (Rs. in Billions)

Year 2018: 26%

Interpretation
A lower value of the ratio is better than a higher number. A lower ratio signals a stable
company with a lower proportion of debt. A higher ratio means that a higher percentage of
the assets can be claimed by the company's creditors. OGDCL has about 19 % of its assets
backed by debt in year 2019 which was 26 % in 2018. This indicates that company has

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increased the number of assets while lowering down or paying off the debts. OGDCL has a
total-debt-to-total-assets ratio of 0.184, 18.4% of its assets are financed by creditors, and
81.6% are financed by owners (shareholders) equity. This shows that OGDCL shareholder
equity was increased in 2019.
Creditors use the ratio to see how much debt the company already has and whether the
company can repay its existing debt. This will determine whether additional loans will be
extended to the firm.
xix. Debt to Equity Ratio
The debt-to-equity (D/E) ratio is calculated by dividing a company's total liabilities by its
shareholder equity.
Total Debt
Formula: Debt to Equity Ratio =
Equity
Rs . 141.74
Year 2019:
Rs .625.36
= 22.6 % (Rs. in Billions)

Year 2018: 24.3 %

Interpretation
The ratio is used to evaluate a company's financial leverage. A low debt-to-equity
ratio indicates a lower amount of financing by debt via lenders, versus funding
through equity via shareholders. A higher ratio indicates that the company is getting more
of its financing by borrowing money, which subjects the company to potential risk
if debt levels are too high. The ideal debt to equity ratio will vary depending on the industry
because some industries use more debt financing than others. OGDCL has a stable debt to
equity ratio Increase which indicates that sales are increase, management reinvest the
money in the company, adding assets or paying down debt. This increases equity, which
keeps the debt/equity ratio down.
xx. Financial Leverage Ratio
Leverage can be referred to the amount of debt a firm uses to finance assets.
Average Total Assets
Formula: Financial Leverage Ratio =
Average Total Equity
Rs . 716.54
Year 2019:
Rs .587.96
= Rs. 1.36 (Rs. in
Billions)
Year 2018: Rs. 1.21
Interpretation
The financial leverage ratios measure the overall debt load of a company and compare it
with the assets or equity. This shows how much of the company assets belong to the
shareholders rather than creditors. The OGDCL leverage ratio for 2019 indicates that for
every Rs. 1 equity supported by Rs. 1.36 of assets. OGDCL has more assets backed by equity

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than debt. This shows how much of the company assets belong to the shareholders rather
than creditors. When shareholders own most of the assets, the company is said to be
less leveraged.
xxi. Interest Coverage Ratio
The interest coverage ratio is used to determine how easily a company can pay
their interest expenses on outstanding debt. The ratio is calculated by dividing a
company's earnings before interest and taxes (EBIT) by the company's interest expenses
for the same period.
Earning Before Interest ∧Tax
Formula: Interest Coverage Ratio =
Interest Payments
Rs . 67.52
Year 2019:
Rs . 2.18
= 30.97 Times (Rs. in Billions)

Year 2018: 38.2 Times

Interpretation

A higher ratio indicates a better financial health as it means that the company

is more capable to meeting its interest obligations from operating earnings. In 2019, the
interest coverage ratio for OGDCL decreased due the increase in the percentage of interest
payment. However, the company is still stable if compared with the industry average and
can easily meet its obligations of interest payments from operating profits. Creditors can use
the ratio to decide whether they will lend to the company. A lower ratio may be unattractive
to investors because it may mean the company is not poised for growth.

5. Investment – Market Ratios

The values of “number of outstanding shares, share price, dividend per share and book
value per share” were mentioned in the Annual Reports 2019 – OGDCL
xxii. Earnings Per Share

Earnings per share is the portion of a company's profit that is allocated to each
outstanding share of its common stock
Profit for the year
Formula: Earnings Per Share =
Number of outstanding shares
Rs . 118.38
Year 2019: = Rs. 27.53 (Rs. in Billions)
43.01(' 000)
Year 2018: Rs. 18.13
Interpretation
Earnings per share or EPS is an important financial measure, which indicates the
profitability of a company. OGDCL has improved its EPS in 2019 by a significant margin. This
indicates that management majorly focused on increasing the net profit in 2019 and
maintained its share prices.

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OGDCL Financial Report 2019 https://ogdcl.com/sites/default/files/OGDCL%20ANNUAL
%20REPORT-%202019_0.pdf

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