financial ratio analysis of HDFC Bank

1. Financial Ratio Analysis
Presented By:
Sushil Panigrahi
Nishu Navneet
Shashank Shivhare
Manoj Jhawar
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2. Financial Ratios
• Financial Ratio Analysis is a study of relationship
among various factors in a business
• It can be used as a preliminary screening tool for
the assessment of a stock or future financial
condition and hence result for a company
• Most importantly these ratios are used from the
perspectives of credit rating agency(debt
instruments) , equity research firm(equity
growth) and shareholders or investors(financial
health) and Managers
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3. Types of Financial Ratios
• Liquidity Ratio
• Profitability Ratio
• Efficiency Ratio
• Capital Structure Ratio
• Cash Flow Ratio
• Activity Ratio
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4. Liquidity Ratio
• A financial ratio indicating a companies ability to
meet it’s short term financial obligations
• It’s a ratio between Liquid Assets (that can be
converted to cash) to short term liabilities
• Greater the coverage the more likely is that a
business will able to pay its debt and vice-versa
• Commonly used liquidity ratios are
– Current Ratio
– Quick Ratio
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5. Quick Ratio
• It measures the ability of a company to use its near cash or
quick assets to extinguish or retire its current
liabilities immediately
• Include those current assets that presumably can be quickly
converted to cash
• Quick Ratio = (Cash Equivalents + Short term investments +
Accounts receivable )/ current liabilities
18
16
14
12
10 Investors
HDFC
8
ICICI
6
4 Manager
2
0
Mar'08 Mar'09 Mar'10 Mar'11 Mar'12 Creditors
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6. Interpretation of Quick Ratio
• A company with quick ratio < 1 cannot currently payback its
current liabilities
• Higher the quick ratio, more likely the company be able to
pay its short term bills
• Creditors are most concerned about the quick ratio and a
lesser quick ratio leads to higher creditors concern
• The quick ratio for HDFC is 6.2 for Mar 12 which indicates
the bank’s robustness and financial soundness in paying off
short term obligation though the figure has dipped as
compared to the last year
• But ICICI bank has far better liquidity ratio implying ICICI
bank highly robust and hence its ability to extinguish short
term liabilities is better than HDFC
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7. Efficiency Ratio
• Analyzes how effectively the business is managing its
assets to produce sales.
• If too much has been invested, the operating capital is
high
• If invested too low, it may affect sales hurting the
profitability
• There are various efficiency ratios
– Inventory Turnover ratio
– Revenue per employee
– Receivables Turnover
– Assets Turnover
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8. Asset Turnover Ratio
• The amount of sales generated for every
dollar's worth of assets
• It indicates the effectiveness of the firm’s use
of its total assets to create revenue
• Asset turnover = Sales/Assets
6
Investors
5
4 Creditors
3 HDFC
ICICI
2
Manager
1
0
Mar'08 Mar'09 Mar'10 Mar'11 Mar'12
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9. Interpretation of Asset Turnover Ratio
• Low asset turnover might mean that the company has too
much capital tied up in its asset base
• High turnover ratio may imply that the firm has too few
assets for potential sales
• Owners/Managers use these ratio to gauge the business
performance
• There was a fall in assets turnover ratio to 0.12 from 4.65 in
current period. This is due to the lesser rise in Net Revenue
when compared to the rise in assets over the period
• We see that the ratio for ICICI bank too has fallen during
the period and is lower than that of HDFC bank indicating
lower efficiency.
• The management has to consider this seriously and take
steps to improve the operating efficiency of the HDFC bank
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10. Profitability Ratio
Margins
• Gross profit margin
• Operating profit margin
• Net profit margin
Returns
• Return on assets
• Return on equity
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11. Profitability Ratios
 Net Profit margin
Net Profit Margin Investors
18 16.09
15.93
16 14.76
Manager
14 12.82
11.35
12
10
8 Net Profit Margin
6
4
2
0
2008 2009 2010 2011 2012 11

12. Profitability Ratio Cont..
 Return on net worth
Return on net worth=Net Income/Share holders equity
20
17.27
18
16 15.74
15.47 RONW(%)
13.83
14
12 13.7
10 HDFC
8 ICICI
6
Investors
4
2
Creditors
0
2008 2009 2010 2011 2012
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13. Profitability Ratio Cont..
 Interest spread
8
7
6
5
4 HDFC
3 ICICI
2
1 Investors
0
2008 2009 2010 2011 2012
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14. EPS(Earning Per Share)
• The amount of earnings per each outstanding
share of a company's stock
• Earning Per Share EPS=PAT/No. of outstanding
shares
60 Investors
50
Manager
40
30 HDFC
ICICI
20
10
0
2008 2009 2010 2011 2012
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15. Interpretation of EPS
• It decides how much of a company's profit is
allotted to the Companies outstanding stocks.
• It can be used as one of the comparison tools
for picking up the stock for investment.
• The EPS has increased in 2012, this is due to
increase in net profit Rs 113,413,323 for FY
2011-12 as compared to Rs 84,591,957 in
FY2010-11
• From investor point ICICI seems to better than
HDFC as its EPS is considerably high
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16. Price-to-Earnings ratio
• It is a valuation ratio of a company's current share
price compared to its per share earnings
• P/E ratio = Average stock price/Earning per share
• The P/E ratio for HDFC : 23.51 Investors
• The P/E ratio for ICICI : 17.70
• Here we can see that HDFC bank has higher P/E
ratio as compared to ICICI bank
• A high P/E value suggests that investors are
expecting higher earnings growth in the future
compared to companies with lower P/E
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17. Capital Structure Ratio
• A financial ratio highlighting the capital
structure of a company
• There are various capital structure ratios
– Assets-to-Equity ratio
– Degree of Financial Leverage
– Debt-to-Equity ratio
– Interest Coverage ratio
– Degree of Operating Leverage
– Degree of Total Leverage
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18. Asset-to-Equity Ratio
• It shows the relationship of the total assets of the firm to the
portion owned by shareholders
• It indicates a company's leverage, the amount of debt used to
finance the firm
• Asset-to-Equity Ratio = Total Assets/Total Shareholders' Equity
14
12
10
8 Investors
HDFC
6
ICICI
4
Creditors
2
0
2007-08 2008-09 2009-10 2010-11 2011-12
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19. Interpretation of Asset-to-Equity Ratio
• A relatively high asset/equity ratio may indicate the
company has taken on substantial debt merely to remain in
business
• There is a high asset/equity ratio because the return on
borrowed capital exceeds the cost of that capital.
• A low asset/equity ratio can indicate a strong firm that
needs no debt, or an overly conservative company, foolishly
foregoing business opportunities.
• As we see from the graph the Asset/Equity ratio has
increased as compared to last year due to increase in total
assets of the company indicating high borrowing as
compared to previous year
• The ratio is more in case of HDFC than ICICI implying
majority of the asset are financed through debt
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20. Debt-to-Equity Ratio
• A financial ratio indicating the relative proportion of
shareholders' equity and debt used to finance a company's
assets
• The two components are often taken from the firm's balance
sheet or statement of financial position (book value)
• Debt-to-Equity Ratio = Long Term Debt/Equity
12
Investors
10
8 Creditors
6 HDFC
ICICI
4
2
0
2008 2009 2010 2011 2012
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21. Interpretation of Debt-to-Equity Ratio
• It indicates the what proportion of equity and debt HDFC is
using to finance its assets
• Increase in this ratio suggests greater reliance on debt as a
source of financing and vice versa
• Investing in a company with a higher debt/equity ratio may
be riskier, especially in times of rising interest rates, due to
the additional interest that has to be paid out for the debt
• if the ratio is greater than 1, the majority of assets are
financed through debt and for less than assets are primarily
financed through equity
• As we see the ratio for HDFC bank is higher than that of
ICICI bank and as compared to last year it has been
increased a little bit more indicating majority of assets are
financed through debt.
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22. Interest Coverage Ratio
• A risk ratio that help determining the firm's ability to repay its
debt obligations
• Interest coverage ratio = Profit Before Interest and Taxes/
Interest Expenses
1.80
1.60
Investors
1.40
1.20
1.00 Creditors
HDFC
0.80
ICICI
0.60
0.40
0.20
0.00
2011-12 2010-11 2009-10 2008-09 2007-08
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23. Interpretation of Interest Coverage
Ratio
• The lower the ratio, the more the company is burdened by
debt expense and the firm will have difficulties in meeting
its debt payments
• When a company's interest coverage ratio is 1.5 or
lower, its ability to meet interest expenses may be
questionable.
• An interest coverage ratio below 1 indicates the company
is not generating sufficient revenues to satisfy interest
expenses
• Here we see the ratio for HDFC bank is on the lower side
indicating HDFC bank’s interest expenses are very high as
compared to previous years. This is due to high borrowings
the company has made in FY 2011-12
• As compared to ICICI bank,HDFC is better placed indicating
HDFC has less interest expenses as compared to ICICI bank
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24. Cash Flow Ratio
• A company’s ability to generate cash flow is one of the
most important indicators of its health
• Cash flow ratios examine the flow of money into a
company, it can help to identify struggling companies
and in turn, struggling stocks
• A company can demonstrate earnings, but if more
money is pouring out of a company than pouring
in, there will be fiscal problems in the future
• There are 2 cash flow ratios
– Price-to-Cash Flow Ratio
– Free Cash Flow Ratio
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25. Free Cash Flow Ratio
• It represents the cash that a company is able to generate
after laying out the money required to maintain or expand its
asset base
• It allows a company to pursue opportunities that enhance
shareholder value. Without cash, it's tough to develop new
products, make acquisitions, pay dividends and reduce debt
• Free cash flow taking operating cash flow and subtracting
capital expenditures
0.06
0.05
0.04
0.03
0.02
HDFC Bank
• 0.01
0
2009-10 2010-11 2011-12
-0.01
-0.02
-0.03
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26. Summary
Ratio Investors Creditors Manager(Internal)
Liquidity ratio
Profitability ratio
Efficiency ratio
Capital ratio
Cash flow
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27. References
• Accounting for Management, Text & Cases – By
S.K.Bhattacharya and John Dearden
• http://www.moneycontrol.com
• http://www.hdfcbank.com/htdocs/common/pdf/
corporate/Annual_Report11_12.pdf
• http://www.icicibank.com/aboutus/annual.html
• http://www.investopedia.com
• http://en.wikipedia.org/wiki
• http://money.rediff.com/companies/HDFC-Bank-
Ltd
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28. Thank You…
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