Question

Ratio Analysis

Review and compare the following ratios for both companies: Choose two publicly traded companies in the same industry.

• Working capital
• Current ratio
• Debt ratio
• Net Profit Margin

Review the most recent ear

Review the Earning's call for both companies and report your findings to include, but not limited to, results and projections.

Answer 1

Ratio is one of the popular technique used by the financial analysts to do financial analysis for decision making purposes.

1.Working Capital :

Working Capital usually refers to the net current assets (Current Assets- Current liabilities) . Working capital is essential for a business concern to meet its day to day financial requirements. An effective working capital must be maintained by the management so that it keeps a balance between liquidity and implicit costs(lose of interest)

Gross Working Capital = Current Assets

Net Working Capital =Current Assets - Current Liabilities

2. Current Ratio :

The working capital ratio or current ratio indicates whether a company has enough short-term assets to cover its short-term debt. A good current ratio is considered anything between 1.2 and 2.0. These are usually maintained by conservative firms that are in afraid of chance of liquidity risk.

Current Ratio= Total Current assets/ Total Current liabilities

3. Debt Ratio :

The debt ratio  measures the extent of a company's leverage. The debt ratio is defined as the ratio of total debt to total assets. It can be interpreted as the proportion of a company's assets that are financed by debt . Even though financing through debt provides tax benefits(tax deductibility) , a high proportion of debt may lead to default risk and affect the credit worthiness of the firm.

Debt Ratio= Total Debt/Total Asset

4.Net Profit Margin :

Net profit margin is the percentage of revenue left after all expenses have been deducted from sales. The measurement reveals the amount of profit that a business can extract from its total sales. The net sales part of the equation is gross sales minus all sales deductions, such as sales allowances.

Net Profit Margin= Net Profit/ Net Sales

where,

Net sales= Gross Sales- Sales returns

Let's Compare HDFC Bank and ICICI Bank :

    INCOME DATA

   HDFC    ICICI

Interest income	Rs m	852,878	621,624	137.2%
Other income	Rs m	160,566	568,068	28.3%
Interest expense	Rs m	423,815	342,621	123.7%
Net interest income	Rs m	429,064	279,003	153.8%
Operating expense	Rs m	239,272	557,556	42.9%
Gross profit	Rs m	189,791	-278,553	-68.1%
Gross profit margin	%	22.3	-44.8	-49.7%
Provisions/contingencies	Rs m	65,718	191,949	34.2%
Profit before tax	Rs m	283,612	97,565	290.7%
Extraordinary Inc (Exp)	Rs m	0	0	-
Minority Interest	Rs m	513	-13,874	-3.7%
Prior Period Items	Rs m	5	0	-
Tax	Rs m	99,031	6,570	1,507.3%
Profit after tax	Rs m	185,100	77,122	240.0%
Net profit margin	%	21.7	12.4	174.9%

  

BALANCE SHEET

HDFC ICICI

Advances	Rs m	7,000,338	5,668,542	123.5%
Deposits	Rs m	7,883,751	5,857,961	134.6%
Credit/Deposit ratio	x	88.8	96.8	91.8%
Yield on advances	%	9.7	7.6	126.7%
Cost of deposits	%	4.2	4.1	102.6%
Net Interest Margin	%	4.0	2.7	148.9%
Net fixed assets	Rs m	38,106	94,650	40.3%
Share capital	Rs m	5,190	12,858	40.4%
Free reserves	Rs m	832,486	591,640	140.7%
Net worth	Rs m	1,095,991	1,106,241	99.1%
Borrowings	Rs m	1,564,421	2,294,018	68.2%
Investments	Rs m	2,384,609	3,722,077	64.1%
Total assets	Rs m	11,031,862	11,242,810	98.1%
Debt/equity ratio	x	8.6	7.4	117.0%
Return on assets	%	1.7	0.7	244.6%
Return on equity	%	16.9	7.0	242.3%
Capital adequacy ratio	%	14.8	18.4	80.3%
Net NPAs	%	0.4	4.8	8.4%

Earnings Per Share = Income Available to common shareholders/ No. of Shareholders Outstanding

HDFC ICICI

Earnings per share (Unadj.)

Rs

71.3

13.2

538.7%

Earnings Call

An earnings call is a public announcement, usually via conference call, of a company's profits, usually on a quarterly basis.