This document discusses various financial ratios used to evaluate a company's financial performance. It provides details of liquidity, leverage, asset management and profitability ratios calculated for ICL for 2016-2017. The document analyzes ICL's current ratio, quick ratio, debt-to-equity ratio, interest coverage ratio and other key financial ratios, comparing them to industry standards. It finds that most of ICL's ratios are weaker than standards, indicating risks to creditors and need for ICL to improve earnings.

2. FINANCIAL RATIOS

3. COMPANY

4. GROUP MEMBERS
 IRFAN UR REHMAN FA17-BBA-069
 FAHAD MASOOD FA17-BBA-003
 WASIF EHSAN FA17-BBA-177
 TAUQEER AHMED FA17-BBA-167
 SAAD IBRAHIM SP17-BBA-091

5. FINANCIAL RATIOS
 Financial ratios are used by firm’s owners to evaluate it’s
financial progress.
 An index that relates two accounting numbers and is obtained by
dividing one number by the other.
 All the information is extracted from balance sheets, income
statement and statement of changes in owner’s equity

6. Categories of Financial Ratios
 There are five major categories of financial ratios: -
1. Liquidity Ratios.
2. Financial Leverage Ratios.
3. Asset Management Ratios.
4. Profitability Ratios.
5. Market Valuation.

7. Liquidity Ratios
 It is the ratio between liquid assets and the liabilities of the
company.
 Helps the company to convert asset into cash.
 It also shows the cash levels of the company.

8. Key Ratios of Liquidity
 Current Ratios.
 Quick Ratio or Acid-Test ratio.
 Net Working Capital.

9. Current Ratios
 Analyzes the ability of the firm to pay its short-term liabilities
with the current assets.
 Mainly, companies of limited time to raise their funds to pay
liabilities.
 Current Ratio = =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦

10. ICL’s Current Ratios
 For 2016: -
Current Assets = Rs 2,013,861; Current Liabilities = Rs
2,125,739
Current Ratio =
2,013,861
2,125,739
= 0.95
 For 2017: -
Current Assets = Rs 2,064,790; Current Liabilities = Rs
2,435,521
Current Ratio =
2,064,790
2,435,521
= 0.85

11. Comparison with Industry Standard
Year Current Ratio Industry
Standard
2016 0.95 2.00
2017 0.85 2.00

12. Continued…
 ICL has a weaker current ratio as compared to the industry
standard.
 They cannot easily pay its short term liabilities.
 Here, ICL have to increase its earnings to pay their pending
payments.

13. Quick Ratio
 Quick Ratio or Acid test ratio measures the ability of the firm to
pay its current liabilities when they come with most liquid assets.
The formula for calculating quick ratio is: -
Quick Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦

14. ICL’s Quick Ratios
 For 2016: -
Current Assets = Rs 2,013,861; Inventory = stock in trade = stores
= Rs 996,387
Quick Ratio =
2,013,861−996,387
2,125,739
=
1,017,474
2,125,739
= 0.45
 For 2017: -
Current Assets = Rs 2,064,790; Inventory = stock in trade = stores
= Rs 869,085
Quick Ratio =
2,064,790−869,085
2,435,521
=
1,195,705
2,435,521
= 0.49

15. Comparison with Industry Standard
Year Quick Ratio Industry
Standard
2016 0.45 1.00
2017 0.49 1.00

16. Continued…
 The comparison shows that ICL has weaker quick ratio.
 ICL may not be able to pay its current liabilities in the short term.
 There is a need for ICL to increase their earnings as it was in
current ratio.

17. Net Working Capital
 The net working capital indicates the safety cushion of the firm.
 It is important to management, investors and creditors because it
shows the firm’s short term liquidity.
 The formula for calculating net working capital is: -
Net Working Capital = Current Assets – Current Liabilities

18. ICL’s Net Working Capital
 For 2016: -
Current Assets = Rs 2,013,861; Current Liabilities = Rs
2,125,739
Net Working Capital = 2,013,861 – 2,125,739 = - 111,878
 For 2017: -
Current Assets = Rs 2,064,790; Current Liabilities = Rs 2,435,521
Net Working Capital = 2,064,790 – 2,435,521 = - 370,731

19. Continued…
 ICL has negative value of net working capital in both years.
 This shows that ICL is not producing enough to support their
current liabilities.
 It is just the indication that ICL’s short-term liquidities aren’t that
good.

20. Financial Leverage Ratio
 It shows how much the firm is dependent on the debt it has
issued.
 It also measures the value of equity in a company by analyzing its
overall debt load.
 How much of the company’s assets belong to the shareholders.

21. Key Financial Ratios
 Debt to Equity Ratio
 Debt to Total Assets Ratio.
 Cpitalization Ratio.
 Interest Coverage Ratio.

22. Debt to Equity Ratio
 This ratio shows that to what extent the firm is financed by its debt.
 It also gives information about the company’s financing coming from
investors and creditors.
 The formula for calculating debt to equity ratio is: -
Debt to equity =
Total Debt
Shareholder′s equity
; Total debts = Current + long term
liabilities

23. ICL’s debt to equity ratio
 Debt to equity (ICL – 2016) =
𝟑𝟒𝟕𝟎
𝟏𝟗𝟖𝟓
= 1.75 current liabilities =
Rs 2126, Long term = 1344
 Debt to equity (ICL - 2017) =
𝟑𝟑𝟖𝟎
𝟐𝟒𝟐𝟏
= 1.39 current liabilities =
Rs 2435 , Long term = 944
 The data is recorded in thousands.

24. Comparison with Industry Standard
Year Debt to equity
ratio
Industry
Standard
2016 1.75 0.90
2017 1.39 0.90

25. Continued…
 The debt to equity ratios of ICL are greater than 1 for both years.
 This shows that ICL has more debt burden on them and it can be
risky for the investors and creditors.
 ICL should pay its debts as soon by increasing their earnings.

26. Debt to Total Asset Ratio
 This ratio shows the percentage of the firm’s assets that are
supported by debt financing.
 It also represents that how company has grown its assets relative
to the debt.
 The formula for calculating debt to total assets is: -
Debt to total Assets =
Total Debt
Total Assets
; Total debts = Current liabilities
+ long term liabilities

27. ICL’s Debt to Total Assets Ratio
 For 2016: -
Current Liabilities = Rs 2,125,739, Long term liabilities = Rs
1,343,779
Debt to total Assets =
3,469,518
6,248,936
= 0.56
 For 2017: -
Current Liabilities = Rs 2,435,521, Long term liabilities = Rs
944,392
Debt to total Assets =
3,379,913
6,596,215
= 0.51

28. Comparison with industry standard
Year Debt to Total
Assets
Industry
Standard
2016 0.56 0.45
2017 0.51 0.45

29. Continued…
 ICL has greater debt to total assets ratio as compared with
industry standard.
 There are more liabilities than the assets.
 It can also leads a higher risk for investors and creditors of the
firm to invest in or lend to.

30. Capitalization Ratio
 This Ratio indicates the comparative importance of long-term
debt to the long-term financing of the firm.
 They are used to manage firm’s capital and determine it’s
capacity of debt.
 Capitalization Ratio =
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
;

31. ICL’s Capitalization Ratios
 For 2016: -
Equity = Total equity and liabilities – Total Liabilities = 2,779,418
Total Capitalization = 1,343,779 + 2,779,418 = 4,123,197
Capitalization Ratio =
3,469,518
4,123,197
= 0.84
 For 2017: -
Equity = Total Equity and liabilities – Total Liabilities = 3,216,302
Total Capitalization = 944,392 + 3,216,302 = 4,160,694
Capitalization Ratio =
3,379,913
4,160,694
= 0.81

32. Comparison with Industry Standard
Year Capitalization
Ratio
Industry
Standard
2016 0.84 0.50
2017 0.81 0.50

33. Continued…
 The ratios of both years are greater than industry standard.
 This situation shows that ICL is at risk because they are unable to
pay their debts on time.
 The high capitalization can increase their return on equity and
there can be chances of bankruptcy.

34. Interest Coverage Ratio
 Indicates the firm’s ability to cover its interest charges.
 Calculates the firm’s situation that either they can afford interest
charges or not.
 Interest Coverage Ratio =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑟𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥 (𝐸𝐵𝐼𝑇)
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶ℎ𝑎𝑟𝑔𝑒𝑠

35. ICL’s Interest coverage Ratio
 For 2016: -
Operating profit = EBIT = 371,944; Financial Charges = Interest
Charges = 165,249
Interest Coverage Ratio =
371,944
165,249
= 2.25
 For 2017: -
Operating profit = EBIT = 384,103; Financial Charges = Interest
Charges = 177,152
Interest Coverage Ratio =
384,103
177,152
= 2.17
The industry standard for interest coverage ratio is 5.19

36. Comparison with Industry Standard
Year Interest
Coverage
Industry
Standard
2016 2.25 5.19
2017 2.17 5.19

37. Continued…
 ICL has below average interest coverage ratio.
 This means that ICL have a lot of debt burden on them which
must be recovered.
 There are not sufficient amount of earnings available to pay the
interest charges.

38. Asset Management Ratio
 This ratio analyzes that how efficiently a company can manage its
overall assets.
 It answers the question that what are right amount of assets vs.
the sales.
 They are also called as efficiency ratios or turnover ratios.

39. Asset Management Ratios
 Receivable Turnover.
Average Collection Period.
 Payable Turnover.
 Inventory Turnover.
 Total Assets Turnover.

40. Receivable Turnover
 Analyzes how vigilant the firm is in the collection of its account
receivables.
 Also indicates the quality of Receivables.
 Receivable Ratio =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

41. ICL’s Receivable Turnover
 For 2016: -
Net Sales = 4,557,440; Receivables = Trade Debt = 500,801
Receivable Turnover =
4,557,440
500,801
= 9.10
 For 2017: -
Net Sales = 4,990,137; Receivables = Trade Debt = 551,326
Receivable Turnover =
4,990,137
551,326
= 9.05

42. Average Collection Period
 It basically indicates the receivable turnover in days obtained by
dividing the number of days with it.
 Average Collection Period =
𝐷𝑎𝑦𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 (365)
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

43. ICL’s Average Collection Period
 For 2016: -
Receivable turnover = 9.10
Average Collection Period =
365
9.10
≈ 40 Days.
 For 2017: -
Receivable turnover = 9.05
Average Collection Period =
365
9.05
≈ 40 Days.

44. Comparison
Year Average
Collection
Period
Industry
Standard
2016 40 Days 35 – 45 Days
2017 40 Days 35 – 45 Days

45. Continued
 The data shows the average collection period of both years is 40
days.
 This value lies within the industry standard ( 35-40 ).

46. Payable Turnover
 This ratio is used to measure the rate at which the firm pays its
accounts payables.
 Helps to analyze the liquidity of the firm.
 Payable Turnover =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠

47. ICL’s Payable Turnover
 For 2016: -
Purchases = Rs 3,766,514; Payables = Rs 821,005
Payable turnover =
3,766,514
821,005
= 4.59
In Days =
365
4.59
= 79 Days
 For 2017: -
Purchases = Rs 4,170,427; Payables = Rs 1,006,391
Payable turnover =
4,170,427
1,006,391
= 4.14
In Days =
365
4.14
= 88 Days

48. Comparison with Industry Standard
Year Payable
Turnover
Industry
Standard
2016 79 Days 20 – 30 Days
2017 88 Days 20 – 30 Days

49. Continued…
 The payable turnover of ICL is greater than the industry standard.
 This shows that quick payments should be made to suppliers
because of their increased demand of paying the payables.
 ICL has to actively reduce its debt burden.

50. Inventory Turnover
 This ratio shows how efficiently a firm can manage its inventory
accounts.
 Also determines if there is excessive inventory level as compared to
sales.
 Inventory is presented as stock in trade and stores in the annual report.
 Inventory Turnover =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

51. ICL’s Inventory Turnover
 For 2016: -
Cost of goods sold = Rs 3,766,514; Inventory = stock in trade + stores = 519748 + 476639= Rs
996,387
Inventory Turnover =
3,766,514
996,387
= 3.78
In Days =
365
3.78
= 96 days
 For 2017: -
Cost of goods sold = Rs 4,170,427; Inventory = stock in trade+ stores =
477341+391744=869,085
Inventory Turnover =
4,170,427
869,085
= 4.80
In Days =
365
4.80
= 76 Days.

52. Comparison with Industry Standard
Year Inventory
Turnover
Industry
Standard
2016 96 Days 100 – 150
Days
2017 76 Days 100 – 150
Days

53. Continued…
 ICL has poor inventory turnover on average as compared to the
industry standards.
 This may represent that ICL possibly have weak sales and
excessive inventory
 However, excessive inventory can have advantage when the
prices are excessive high and increased demand.

54. Total Assets Turnover
 Indicates that how effectively the firm is able to utilize its overall assets
to general sales.
 This ratio calculates the net sales as a percentage of its total assets.
 Total Assets Turnover =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

55. ICL’s Total Assets Turnover
 For 2016: -
Net Sales = Rs 4,557,440; Total Assets = Rs 6,248,936
Total Asset Turnover =
4,557,440
6,248,936
= 0.73
 For 2017: -
Net Sales = Rs 4,990,137; Total Assets = Rs 6,596,215
Total Assets Turnover =
4,990,137
6,596,215
= 0.76

56. Comparison with Industry Standard
Year Total Assets
Turnover
Industry
Standard
2016 0.73 1.5
2017 0.76 1.5

57. Continued…
 The table shows that ICL has weak total asset turnover as
compared with the industry standard.
 ICL is not using the their assets efficiently.
 They may have burden of debts.

58. Profitability Ratios
 Shows that how a firm is able to generate its profits from
operational activities.
 Investors and creditors use this ratio to check either the company
is making profits or not.
 This ratio emphasis on firm’s return on investment

59. Key Profitability Ratios
 Gross Profit Margin.
 Net Profit Margin.
 Return on Investment.
 Return on Equity.

60. Gross Profit Margin
 Assesses the company’s financial health.
 Measures the amount of net income earned by comparing the sales of
the company.
 Gross Profit Margin =
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠

61. ICL’s Gross Profit Margin
 For 2016: -
Gross Profit = Rs 790,926; Net Sales = Rs 4,557,440
Gross Profit Margin =
790,926
4,557,440
= 0.1735 or 17.35%
 For 2017: -
Gross Profit = Rs 819,710; Net Sales = Rs 4,990,137
Gross Profit Margin =
819,710
4,990,137
= 0.1642 or 16.42%

62. Comparison with Industry Standard.
Year Gross Profit
Margin
Industry
Standard
2016 17.35 % 30 %
2017 16.42 % 30 %

63. Continued…
 ICL is having low gross profit margin.
 This means ICL is not generating strong sales relative to the cost
of goods sold.
 ICL should have strong gross profit to achieve a good operational
profit.

64. Net Profit Margin
 Uses to calculate the firm’s profits from its total revenue.
 It involves the net profit after taxes compared with the net sales.
 Net Profit Ratio =
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠

65. ICL’s Net Profit Margin
 For 2016: -
Net profit after taxes = Rs 167,373; Net Sales = Rs 4,557,440
Net Profit Ratio =
167,373
4,557,440
= 0.0367 or 3.67 %
 For 2017: -
Net profit after taxes = Rs 233,347; Net Sales = Rs 4,990,137
Net Profit Ratio =
233,347
4,990,137
= 0.0467 or 4.67 %

66. Comparison with Industry Standard
Year Net Profit
Margin
Industry
Standard
2016 4 % 10 %
2017 5 % 10 %

67. Continued…
 The comparison shows that ICL has low net profit margin.
 This means that ICL is using an ineffective cost structure.
 There are high expenses of ICL due to the incompetent
management.

68. Return On Investment
 Profitability ratio that calculates the profit of the firm’s
investment as a percentage of the original assets.
 Investors use this ratio to compare the performance of different
investments of all types and sizes.
 Return on investment =
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

69. ICL’s Return on Investment
 For 2016: -
Net profit after taxes = Rs 167,373; Total Assets = Rs 6,248,936
Return on Investment =
167,373
6,248,936
= 0.027 or 2.7 %
 For 2017: -
Net profit after taxes = Rs 233,347; Total Assets = Rs 6,596,215
Return on Investment =
233,347
6,596,215
= 0.035 or 3.5 %

70. Comparison with Industry Standard
Year Return on
Investment
Industry
Standard
2016 2.7 % 10 %
2017 3.5 % 10 %

71. Continued…
 The data shows ICL has low return on investment.
 Again ICL is not managing its assets effectively to produce
greater amount of profits.
 There is a need of proper management of ICL’s assets.

72. Return on Equity
 Analyzes the ability of the firm to produce profits from
shareholder’s investments.
 This ratio is important for the potential investors because they
want to see how efficiently the company uses their money to
generate net income.
 Return on Equity =
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠 𝑒𝑞𝑢𝑖𝑡𝑦

73. ICL’s Return on Equity
 For 2016: -
Net profit after taxes = Rs 167,373; Shareholder’s Equity = Rs
1,985,212
Return on Equity =
167,373
1,985,212
= 0.094 or 9.4 %
 For 2017: -
Net profit after taxes = Rs 233,347; Shareholder’s Equity = Rs
2,421,454
Return on Equity =
233,347
2,421,454
= 0.106 or 10.6 %

74. Comparison with Industry Standard
Year Return on
Equity
Industry
Standard
2016 9.4 % 20 %
2017 10.6 % 20 %

75. Continued…
 The comparison shows that ICL has lower return on equity.
 This means that ICL is not using its investor funds effectively.
 ICL should use their investor funds properly to generate a good
profit.

76. Summary
 ICL should remove their debt burden because according to the
observations and data calculated, they have lot of debts.
 ICL should increase their earnings to earn a good profit.