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A

PROJECT REPORT
ON
“EVALUATING FINANCIAL PERFORMANCE
OF LIFE INSURANCE CORPORATION”

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR


THE AWARD OF DEGREEOF
MASTER OF BUSINESS ADMINISTRATION (MBA)
SESSION (2009-2011)

SUBMITTED TO: - SUBMITTED BY:-


DEPT. OF MANAGEMENT, ANUBHA
DCRUST, MBA 4th SEM.
MURTHAL 09092807

DEENBANDHU CHHOTU RAM UNIVERSITY OF


SCIENCE AND TECHNOLOGY
DECLARATION
I, Anubha, student of MBA 4th Semester, studying at Deenbandhu Chhotu Ram
University of Science and Technology, Murthal, hereby declare that the project report on
topic “Evaluating Financial Performance of Life Insurance Corporation.” submitted
to DCRUST, Murthal in partial fulfillment of Degree of Master’s of Business
Administration is the original work conducted by me.
The information and data given in the report is authentic to the best of my knowledge.
This project report is not being submitted to any other University for award of any other
Degree, Diploma and Fellowship.

ANUBHA
MBA 4th SEM.
09092807

ACKNOWLEDGEMENT
It is my pleasure to be indebted to various people, who directly or indirectly contributed
in the development of this work and who influenced my thinking, behavior, and acts
during the course of study.
I express my sincere gratitude to Prof. Rajbir Singh worthy Principal for providing me an
opportunity to undergo project report at Life Insurance Corporation..
I am thankful to Dr Satpal Singh ( Guide) for his support, cooperation, and motivation
provided to me during the project for constant inspiration, presence and blessings.
I also extend my sincere appreciation to Mr. Pankaj Chaudhary who provided his
valuable suggestions and precious time in accomplishing my project report.
Lastly, I would like to thank the almighty and my parents for their moral support and my
friends with whom I shared my day-to-day experience and received lots of suggestions
that improved my quality of work.

Anubha
MBA 4th SEM.
09092807

Table of Contents:
Chapters Particulars Page No.
Chapter 1 Statement of Problem

Chapter 2 Objectives of Study

Chapter 3 Industry Profile

Chapter 4 Company Profile

About LIC

Members On the board of the corporation

Competitors of LIC

Vision, Mission and Goals

LIC products

LIC achievements

Chapter 5 Introduction to the Topic

Basis of study

Financial performance

Financial performance measurement methods

Chapter 6 Research Methodology

Chapter 7 Study of the Topic

Table showing ratios calculation

Chapter 8 Data Analysis and Interpretation

Current ratio

Cash ratio

Debt-Equity ratio

Proprietary ratio

Net profit ratio


Return on shareholder’s fund

Return on capital employed

Chapter 9 Limitations of Study

Chapter 10 Suggestions and Recommendations

Chapter 11 References
• Statement of Problem

Statement of the problem:


Development of industries depend on several factors such as financial, personnel,
technology, quality of the product and marketing. Out of these, financial aspect assumes a
significant role in determining the growth of industries. All of the company’s operations
virtually affect its need for cash. Most of these data covering operational areas are
however outside the direct responsibility of financial executive. Unless top management
appreciates the value of good financial analysis, there will be a continuing problem for
the financial executive to know the profitability and liquidity of concern.
In this context I am interested in undertaking an analysis of the financial
performance of Life Insurance Corporation (LIC) to examine financial position of LIC.
Hence the present study of the evaluating financial performance of LIC in India has been
undertaken.
Here for my study I will use ratio analysis. As the most common
method of analyzing financial statement is the use of ratios. These ratios are simple
mathematical relationships between various items on financial statement. The analytical
skill lies not in computing the ratios but in determining which ratio to use in each case
and interpreting the results. Just by themselves the ratios are relatively meaningless. Only
by comparing ratios over time or between companies- and by determining the underlying
causes of the difference among them- does ratio analysis help the analyst or manager
gains insight into corporate performance.
• Objectives of Study

Objectives of the study:


• To evaluate financial performance of LIC.
• To study financial trend of LIC.
• To measure strength and weakness of financial performance of LIC
• Industry Profile

Industry profile (Insurance)


The story of insurance is probably as old as the story of mankind. The same instinct that
prompts modern businessmen today to secure themselves against loss and disaster existed
in primitive men also. They too sought to avert the evil consequences of fire and flood
and loss of life and were willing to make some sort of sacrifice in order to achieve
security.
Life Insurance in its modern form came to India from England in the
year 1818. Oriental Life Insurance Company started by Europeans in Calcutta was the
first life insurance company on Indian Soil. All the insurance companies established
during that period were brought up with the purpose of looking after the needs of
European community and Indian natives were not being insured by these companies.
However, later with the efforts of eminent people like Babu Muttylal Seal, the foreign life
insurance companies started insuring Indian lives. But Indian lives were being treated as
sub-standard lives and heavy extra premiums were being charged on them. Bombay
Mutual Life Assurance Society heralded the birth of first Indian life insurance company
in the year 1870, and covered Indian lives at normal rates. Starting as Indian enterprise
with highly patriotic motives, insurance companies came into existence to carry the
message of insurance and social security through insurance to various sectors of society.
Prior to 1912 India had no legislation to regulate insurance business.
In the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were
passed. The Life Insurance Companies Act, 1912 made it necessary that the premium rate
tables and periodical valuations of companies should be certified by an actuary. But the
Act discriminated between foreign and Indian companies on many accounts, putting the
Indian companies at a disadvantage. On the 19th of January, 1956, that life insurance in
India was nationalized. About 154 Indian insurance companies, 16 non-Indian companies
and 75 provident were operating in India at the time of nationalization.
Company Profile
• About LIC
• Members on the board of the corporation
• Competitors of LIC
• Vision, Mission and Goals
• LIC products
• LIC achievements

Company profile (LIC)


The Parliament of India passed the Life Insurance Corporation Act on the 19th of June
1956, and the Life Insurance Corporation of India was created on 1st September, 1956,
with the objective of spreading life insurance much more widely and in particular to the
rural areas with a view to reach all insurable persons in the country, providing them
adequate financial cover at a reasonable cost.
LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its
corporate office in the year 1956. Since life insurance contracts are long term contracts
and during the currency of the policy it requires a variety of services need was felt in the
later years to expand the operations and place a branch office at each district headquarter.
Re-organization of LIC took place and large numbers of new branch offices were opened.
As a result of re-organization servicing functions were transferred to the branches, and
branches were made accounting units. It worked wonders with the performance of the
corporation. Today LIC functions with 2048 fully computerized branch offices, 109
divisional offices, 8 zonal offices, 992 satellite offices and the Corporate office. LIC’s
Wide Area Network covers 109 divisional offices and connects all the branches through a
Metro Area Network. LIC has tied up with some Banks and Service providers to offer on-
line premium collection facility in selected cities.
Members On The Board Of The Corporation:
 Shri T.S. Vijayan (Chairman)
 Shri D.K. Mehrotra (Managing Director - LIC)
 Shri Thomas Mathew T. (Managing Director - LIC)
 Shri A.K. Dasgupta (Managing Director - LIC)
 Shri Ashok Chawla (Finance Secretary, Ministry of Finance, Govt. of India
 Shri R. Gopalan (Secretary, Department of Financial Services, Ministry of
Finance Govt. of India.

Competitors of LIC:
Insurance is a kind of risk management basically used to evade the danger of a contingent
loss. It involves an equitable transmission of the risk of a loss, from one entity to others
for a premium. Insurance in India covers the areas including loss caused by fire, death,
burglary and peril of sea. There are many Insurance Companies in India who are
competitors of Life Insurance Corporation that are as follows:

 Birla Sun Life Insurance


 Kotak Life Insurance
 Reliance Life Insurance
 Bajaj Alliance Life Insurance
 HDFC Standard Life Insurance Company
 ICICI Prudential Life Insurance
 ING Vysya Life Insurance
 Kotak Mahindra Insurance
 Max New York Life Insurance
 Net Life India Insurance
 SBI Life Insurance
 Tata AIG Insurance
 AMP Sammar Life Insurance Company Ltd.
 Aviva Life Insurance Company
 Shri Ram Life Insurance Co. Ltd
 Sahara India Insurance Co. Ltd.
 Bharti AXA Life Insurance

Vision, Mission and Goals:

LIC Products:
LIC Achievements:
Introduction To The Topic
• Basis of study
• Financial performance
• Financial performance measurement methods
Introduction To The Topic

Basis of study:
The study is based on -Analysis of financial statement:
The financial statements namely profit and loss a/c and balance sheet, of a
business firm contains substantial and extremely useful information about its financial
health. This set of information may also be useful to the management for judging the
business firm from all perspectives such as:

• The firm should be able to pay short-term maturing obligations as well as and when they
become
due:
• It should make available a satisfactory rate of return on investments made by
shareholder’s;
• Above all, management should ensure that organization is profitable;

Before going further I would like to explain what is financial performance?

Financial Performance:
Financial performance of a company/organization means how a firm is
performing in monetary context. It shows is the position of business financially sound or
not? The objective of going in to business is to make profit. Financial results summarise
the result for a given period. Activities undertaken during such period involves many
facets of co. These include the management of sales, customer care, cost and most
important management of personnel. It is inconceivable that a co. can only have financial
performance measures. There are numerous measures that need to be applied and that
lead to achievement of the objective i.e. the posting of a profit. This means that financial
performance is a part of performance management. The primary goal of financial
reporting and analysis is to provide information that is useful to the internal and external
users of this information. Internal users of financial information are people who control
the resources of the operation, or the decision makers. External users are people who do
not directly control the resources of the operation. These would include bankers,
accountants, the Internal Revenue Service, and possibly stockholders.
A financial performance measurement system should provide with tools and
metric to understand financial situation. This information can be used for making better
business decisions in a number of areas including:

• Business profitability
• Pricing
• Budgeting
• Cost accounting
• Capital purchasing
• Strategic planning
• Incentive compensation etc.
Financial statement analysis is the most objective way to evaluate the
financial performance of a company. Financial analysis involves assessing the leverage,
profitability, operational efficiency and solvency for a company. Financial ratios are the
principle tool used to conduct the analysis. The challenge is to know which ratios to
choose from and how to interpret the result.

People interested in evaluation of financial performance:


• Lenders
• Banks/ Fnancial Istitutions
• Potential Investers
• Managers( Internal Analysts)
• Government etc.
Financial performance measurement method:

Financial performance can be measured by different persons and for different purposes,
therefore, the methodology adopted for measuring financial performance may be varying
from one situation to another. However, the following are some of the common
techniques of measuring financial performance:
1. Comparative financial statements.
2. Common- size financial statements.
3. Trend percentage analysis, and
4. Ratio analysis

1. Comparative Financial statement (CFS):


In CFS, two or more BS and/or the IS of a firm are presented simultaneously in columnar
form. The financial data for two or more years are placed and presented in adjacent
columns and thereby the financial data is provided a times perspective in order to
facilitate periodic comparison.
• The absolute amount of different items in monetary terms
• The amount of periodic changes in monetary terms
• The percentages of periodic changes to reveal the proportionate changes.

2. Common Size Statement (CSS):


The CSS represents the relationship of different items of a financial statement with some
common item by expressing each item as a percentage of the common item. In common
size balance sheet, each of the balance sheets is stated as percentage of net sales. The
percentages for different items are computed by dividing the absolute amount of that item
by common base (i.e., the balance sheet total or the net sales as the case may be) and then
multiplying by 100. The percentages so calculated can be easily compared with the
corresponding percentages in some other period. Thus, the CSS is useful not only in
intra-firm comparisons over a series of different year but also in making inter-firm
comparisons for the same year or for several years.

3. Trend Percentage Analysis (TPA):


The TPA is a technique of studying several financial statements over a series of years. In
TPA, the trend percentage are calculated for each item by taking the figure of that item
for some base year as 100. Therefore, the trend percentage is percentage relationship,
which each item of different years bears to the same item in the base year. Any year can
be taken as base year, but generally,he initial year is taken as the base year. Therefore,
each item of base year is taken as 100 and the same item for other years is expressed as a
percentage of the base year.

4. Ratio Analysis:
Most popular and commonly used fiancial performance measure is Ratios Analysis. It
helps in estimating financial soundness or weekness. Ratio is quantitative relationship
between two items for the purpose of comparison. The items presented in profit an dloss
account and balance sheet are related to each other. This relationship can be calculated
with the help of ratios. For example, profit is related to capital investmed in business and
debtors are related to credit sales. Thus ratio helps in drawing meaningful conclusionsby
establishing relationship between various facts. On the basis of their interpretation,
unfavourable situations in the future can be avoided. Hence comparative and significant
conclusions cannot be drawn from financial data of different years of a business or of
different businesses unless arithmetic relationship is established among such data.
Forms of expressing ratio:
There are basically two ways of expressing ratio i.e. proportion and
percentage.
Classification of ratios:
According to purpose ratios can be classified in four parts i.e.
• Liquidity ratios
• Profitability ratios
• Activity ratios
• Capital structure ratios

Liquidity ratios: It is also called as working capital or short term solvency ratio.
Liquidity means ability of the firm to pay its short term debts on time. Important liquidity
ratios are current ratio, quick ratio, super quick ratio.

Profitability ratios: The main aim of all the business concerns is to earn profit. Equity
shareholders of the company are mainly interested in the profitability of the company.
Profitability ratios measure the various aspects of the profitability of the company such as
(i) what are the rate of profit on sales? (ii) whether the profits are increasing or
decreasing? (iii) whether an adequate return is being obtained on the capital employed?
Profitability ratios include gross profit ratio, net profit ratio, operating ratio, expenses
ratio, return on capital employed, return on shareholder’s fund.

Activity Ratios: This ratios are calculated on the basis of cost of sales or sales, therefore
these ratios are also called as turnover ratios. These ratios indicate how efficiently the
capital is being used to obtain sales; how efficiently the fixed assets are being used to
obtain sales etc. these ratios include stock turnover ratio, debtors turnover ratio, creditors
turnover ratio, fixed assets turnover ratio, working capital turnover ratio.

Capital structure ratios: These ratios are calculated to assess the ability of the firm to
meet its long term liabilities as and when they become due. These ratios include debt
equity ratio, debt to total fund ratio, proprietary ratio, capital gearing ratio, interest
coverage ratio.
Usefulness of ratio analysis:
• Useful in analysis of financial statement.
• Useful in judging operating efficiency of business.
• Useful for forecasting purposes.
• Useful in locating the weak spots of business.
• Useful in comparison of performance.
• Benefit to other parties interested in business.
• Helps in determining trends etc.

• Research Methodology
Research Methodology:

Research Methodology is the procedure adopted for conducting the research.


Research Methodology should be carefully planned as the accuracy; reliability and
adequacy of results depend on the research methodology followed. It gives the researcher
a guideline by which he can decide which techniques and procedures will be applicable to
a given problem. Research Methodology guiding the present research work has been
explained under the following sub head;
Research design:
Research design is the blueprint to study any problem. It is a plan for
collection, analysis and interpretation of data in a manner that is relevant to the research
purpose with economy in procedure. Present study is based on analytical research design
Source of data:
In my study I have decided to use secondary data(5 year Annual Reports of
LIC, libraries-journals, research papers and other e-sources etc.)
Period of study:
The study covers a period of five years from 2005-2006 to 2009-2010 to
mean an accounting year of the company consisting of twelve months.
Sampling universe:
I have selected Life Insurance Corporation.
Sampling techniques:
I have selected convenience sampling technique.
Framework of analysis:
For the purpose of evaluating financial performance the study makes
use of various accounting ratios extensively. Ratio analysis helps comparison of
performance over years or with other companies. For data analysis I have selected pie
chart and other convenient and suitable tools with ratio analysis.
Study Of The Topic
• Table showing ratio analysis
Study Of The Topic
As discussed earlier my study include ratio analysis with the help oh annual reports of
LIC of 5 years (2005-06 to 2009-10).
Table showing some popular and commonly used ratios’ calculation:
Year
2005-06 2006-07 2007-08 2008-09 2009-10
Ratios

Current 1.51:1 1.69:1 1.93:1 2.48:1 2.25:1


Ratio
Cash
Ratio 1.51:1 1.69:1 1.93:1 2.48:1 2.25:1

Debt
Equity 3001:07 2136.75 2522.60 2562.02 3052:1
Ratio
Proprietory
Ratio 0.0059:1 0.0081:1 0.0068:1 0.0065:1 0.0069:1

Net
Profit 0.695% 0.605% 0.564% 0.609% 0.57%
Ratio
Return on
Shareholder’s 356.82% 264.20% 274.36% 284.85% 289.38%
Fund
Return on
Capital 5.74% 5% 3.70% 2.98% 3.44%
Employed
Data Analysis And Interpretation
• Current ratio
• Cash ratio
• Debt-Equity ratio
• Proprietary ratio
• Net profit ratio
• Return on shareholder’s fund
• Return on capital employed
Data analysis and Interpretation

1. Current Ratio:

This ratio explains the relationship between the current assets and current
liabilities of a business. The formula for calculating the ratio is:
Current Ratio = Current Assets/Current Liabilities
‘Current Assets’ include those assets which can be converted in to cash with in a year’s
time and ‘Current Liabilities’ include those liabilities which are repayable in a year’s
time.
This ratio is used to assess the firm’s ability to meet its short term liabilities on time.
According to accounting principles, a current ratio of 2:1 is supposed to be an ideal ratio.
It means that current assets of a business should, atleast, be twice of its current liabilities.
The reason for assuming 2:1 as the ideal ratio is that the current assets include such assets
as stock, debtors etc., from which full amount can not be realized in case of need. Hence
even if half amount is realized from the current assets on time, the firm can still meet its
current liabilities in full. The higher the ratio, the better it is, because the firm will be able
to pay its current liabilities more easily. If the current ratio is less than 2:1, it indicates
lack of liquidity and shortage of working capital. But a much higher ratio is not
necessarily good for company as it indicate poor investment policy of management.

Particulrs/Year Current Current Ratios


assets Liab.

2005-06 2855376.72 1881804.57 1.51:1

2006-07 3431573.80 2026671.36 1.69:1

2007-08 4279502.77 2208785.03 1.92:1

2008-09 4871466.75 1959021.90 2.48:1

2009-10 4947809.41 2190219.82 2.25:1


Interpretation:
My study of current ratio shows increase in liquidity position of
company till 2008-09. Therefore, it can be said that short term financial position of the
company is satisfactory. Means thereby short term creditors need not to worry about their
receipts i.e. payment from LIC. Meaning thereby company is in position to pay its current
liabilities in time.
Calculation show that current ratio is declining in 2009-10 as compare to 2008-09 but
there is no fear of problem as ideal level i.e.2:1 is not compromised. It could happen that
company has used its resources like cash for investment or some part of debtors are paid
during 2009-10.
2. Cash Ratio:

Cash Ratio indicates whether the firm is in a position to pay its current liabilities within
a month or immediately. The formula for calculating the ratio is:
Cash Ratio = (Cash + Short Term Securities) / Current liabilities
Although receivables, debtors and bills receivables are generally more liquid than
inventories, yet there may be doubts regarding their realization into cash immediately or
in time. Hence some authorities are of the opinion that the absolute liquid ratio should
also be calculated with current ratio so as to exclude even receivables from current assets
and find out the absolute liquid assets. Prepaid expenses too are excluded from the list of
liquid assets because they are not expected to be converted in to cash.
An ideal Cash Ratio is .05:1. Rupee 1 worth absolute liquid assets are considered
adequate to pay rupees 2 worth current liabilities in time as all the creditors are not
expected to demand cash at the same time and then cash may also be realized from
debtors and inventories. If it is more it is considered to be better. This ratio is better test
for short term financial position of company than the current ratio, as it considers only
those assets which can be easily and readily converted into cash. Stock is not included in
liquid assets as it may take a lot of time before it is converted into cash.

Particulrs/Year Cash Current Ratios


Liab.

2005-06 2855376.72 1881804.57 1.51:1

2006-07 3431573.80 2026671.36 1.69:1

2007-08 4279502.77 2208785.03 1.92:1

2008-09 4871466.75 1959021.90 2.48:1

2009-10 4947809.41 2190219.82 2.25:1


Interpretation:
My study shows that cash ratio is similar to current ratio as ther is no stock
lying and no bills receivables are there. But as per analysis point of view cash ratio is not
sound during the period of study, specially in last 2 years of my study i.e. 2008-09 and
2009-10. As in 2008-09 cash ratio is 2.48:1 and in 2009-10 cash ratio is 2.25:1 which
shows that company is not using its resources efficiently. LIC is having extra cash lying
idle which it can use as investment somewhere to have some earning. No doubt company
is short term financially sound, it can pay its creditors but having this much ratio is also
not sound indication.
3. Debt-Equity Ratio:

Debt-Equity ratio, also known as External-Internal Equity Ratio is calculated to measure


the relative claims of outsiders and owners against the firm’s assets. This ratio indicates
the relationship between the external equities or the outsider’s fund and the internal
equities or the shareholder’s fund. Thus:
Debt-Equity Ratio = outsider’s fund/shareholder’s fund
Here outsider fund represents for policyholder’s fund and internal funds represents for
shareholder’s fund.
The debt equity ratio is calculated to measure the extent to which debt financing has been
used in a business. The ratio indicates the proportionate claims of owners and the
outsider’s against the firm’s assets. The purpose is to get an idea of the cushion available
to outsiders on the liquidation of the firm. A ratio of 1:1 may be usually considered to be
a satisfactory ratio although there can not be any rule of thumb or standard norm for all
types of businesses. In some businesses a high ratio 2:1 or even more may be considered
satisfactory. A high debt equity ratio may not be considered good by the creditors
because it gives a lesser margin of safety for them at the time of liquidation of the firm.
So ideal ratio is 2:1.

Particulrs/Year Debts Equity Ratios

2005-06 53118611.71 17699.85 3001:1

2006-07 62566417.89 29280.99 2137:1

2007-08 77659709.17 30784.61 2523:1

2008-09 84087747.65 33607.91 2562:1

2009-10 111696914.80 36587.32 3052:1


Interpretation:
As standards say that debt equity ratio should be more than 2:1 but much
more than 2:1 could be dangerous. But here in case of insurance sector as policyholder’s
fund is treated as long term debs so in that sense as more the ratio is as it is good for
company because more than 90% fund used by insurance company are from outside and
much the funds from outside means much policyholder fund is good for company
working. So here as study shows that till 2008-09 debt equity ratio is declining bt in
2009-10 it starts increasing showing good business by LIC.
4. Proprietary ratio:

This ratio indicates the proportion of total assets funded by owners or shareholders. The
formula for calculating this ratio is:
Proprietary Ratio = Equity/Total Assets OR Shareholder’s Funds/Total Assets
A higher proprietary ratio is generally treated as indicator of sound financial position
from long term point of view, because it means that a large proportion of total assets is
provided by equity and hence the firm is less dependent on external sources of finance .
On the contrary, a low proprietary ratio is a danger signal for long term lenders as it
indicates a lower margin of safety available to them. The lower the ratio, the less secured
are the long terms loans and they face the risk of losing their money.

Particulars/Year Shareholder’s Total assets Ratios


Fund

2005-06 17699.85 2981591.18 0.0059:1

2006-07 29280.99 3571929.53 0.0081:1

2007-08 30784.61 4491272.29 0.0068:1

2008-09 33607.91 5169447.19 0.0065:1

2009-10 36587.32 5260108.33 0.0069:1


Interpretation:
My study shows that proprietary ratio during all five years is not sound. As
per the accounting rules proprietary ratio should be as high as possible and 62.5% is
considered better. Proprietary ratio of LIC is not even 1%. Study shows it is .59% during
2005-06, .81% during 2006-07, .68% during 2007-08, .65% during 2008-09, .69% during
2009-10. Proprietary ratio of LIC is showing fluctuations earlier positive then negative
and a bit positive later on. This ratio shows that LIC is not using its own funds to acquire
total assets. Here LIC is less dependent on internal sources and more dependent on
external sources which in turn is increasing its cost and could be dangerous.
This is only one side point of view. Here in case of LIC if we properly examine the
balance sheet than sources of company’s fund is not only shareholder fund. It also
include policyholder fund that company could use for acquiring its assets. And here for
acquiring assets company has used both sources of fund i.e. Shareholder fund and
policyholder fund. So from this point of view company’s proprietary ratio should not be
considered only from shareholder’s fund point of view. Both shareholder fund and
policyholder fund should be used to calculate actual proprietary fund in case of LIC.
5. Net Profit Ratio:

This ratio shows the relationship between net profit and sales. Here as it is not a
manufacturing unit it will not be having sales. So here as insurance company net sales are
taken as equivalent to net premium received. So here the formula for this ratio is:
Net Profit Ratio = Net Profit/Net Premium Received
The two basic elements of the ratio are net profits and net premium received. The net
profits are obtained after deducting income tax and generally non- operating incomes and
expenses are excluded from the net profit for calculating this ratio.This ratio measures the
rate of net profit earned on sales. It helps in determining the overall efficiency of the
business operations. An increase in the ratio over the previous year shows improvement
in the overall efficiency and profitability of the business. This ratio is very useful as if the
profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its
investment. This ratio also indicates the firm’s capacity to face adverse economic
conditions such as price competition etc. Obviously higher the ratio, the better is the
profitability.

Particulars/Year Net Profit Net Sales Ratios

2005-06 63158.01 9075919.72 0.659%

2006-07 77362.03 12778225.94 0.605%

2007-08 84462.59 14970558.79 0.564%

2008-09 95734.88 15718655.04 0.609%

2009-10 106071.68 18598591.22 0.57%


Interpretation:
Higher the profit higher is the chances of sound position. But here net profit
ratio is declining till 2007-08 and its start increasing in 2008-09 but again start declining
in 2009-10, indicating poor position of LIC from profitability point of view.
6. Return on Shareholder fund:

Return on shareholder’s fund popularly known as ROI or return on shareholder’s


investment is the relationship between net profits and the proprietor’s funds. Thus:
Return on Shareholder’s Fund = Net profit(after interest and tax)/ Shareholder’s
Fund
The two basic components of this ratio are net profits and shareholder’s funds.
Shareholder’s fund here includes share capital and reserves and surplus. The net profit are
derived at after deducting interest and tax, visualized from the point view of owners,
because those will be the only profits available for shareholders.
The ratio is one of the most important ratios used for measuring the overall efficiency of
the firm. As the primary objective of the business is to maximize its earnings, this ratio
indicates the extent to which the primary objective of business is being achieved. This
ratio is of great importance to the present and prospective shareholders as well as the
management of company, as this ratio reveals how well the resources of a firm are being
used, higher the ratio better are the results, because in such a case equity shareholders
may be given a higher dividend. By comparing the previous year’s ratio with that of the
current year of the business we can ascertain whether the return on equity shareholder’s
fund s is increasing or not.

Particulars/Year Profit after Shareholder’s Ratios


Int., Tax and Fund
Dividend

2005-06 63158.01 17699.85 356.82%

2006-07 77362.03 29280.99 264.20%

2007-08 84462.59 30784.60 274.36%

2008-09 95734.88 33607.91 284.85%

2009-10 105879.90 36587.32 289.38%


Interpretation:
In 2005-06 return on shareholder’s fund was sound but it starts declining in
2006-07 again start increasing till 2009-10 showing safety to shareholder’s and indication
of increase in value of shareholder’s worth showing sound position of LIC.

7. Return on Capital Employed:


This ratio reflects the overall profitability of the business. It is calculated by comparing
the profit earned and the capital employed to earn it. This ratio is also known as rate of
return or yield on capital. The ratio is computed as under:
Return on Capital Employed = Profit before interest, tax and dividend/ Capital
Employed
Capital employed can be computed by following formula:
Capital Employed = Fixed Assets+ Current Assets - Current Liabilities
Since the profit is overall objective of a business enterprise, this ratio is a barometer of
the overall performance of the enterprise. It measures how efficiently the capital
employed in the business is being used. The owners are interested in knowing the
profitability of the business in relation to amounts invested in it. A higher percentage of
return on capital employed will satisfy the owners that their money is profitably utilized.

Particulars/Year EBIT Capital Employed Ratios

2005-06 63158.01 1099786.61 5.74%

2006-07 77362.03 1545258.17 5.00%

2007-08 84462.59 2282487.26 3.70%

2008-09 95734.88 3210425.29 2.98%

2009-10 105879.90 3069888.45 3.44%


Interpretation:
Return on capital employed is declining till 2008-09 and start increasing in
2009-10 showing improvement in overall performance. But still company is not using its
capital in efficient manner.
8. Dividend Payout Ratio:
It ia also known as payout ratio. It measures the relationship between the earnings
available to equity shareholders and the dividend distributed among them.In other words
it shows what percentage of profits after taxes and preference dividend is paid as
dividend to equity shareholders. It can be calculated as follows:
Dividend Payout ratio = Dividend paid to equity shareholders/ EAT
Here EAT stands for Profit after tax and dividend i.e. total earnings belonging to equity
shareholders.
If dividend payout ratio is subtracted from 100, it will give what percentage of profit is
remained in the business.
How much profit is to be distributed as dividend and how much to be retained, depends
on need and policies of company. For example if a company is suspecting a big need of
finance in future, such company should have more retention ratio i.e. retaining profits
instead of distributing them as dividend to shareholders. As its better to have internal
financing rather than external financing and retained earnings are better source of internal
financing. Also company should make its investors satisfied by paying regular and
satisfied dividend as return. So now decision regarding how much to pay and how much
to retain depends upon company’s need and policy as there is no ideal ratio for dividend
payout ratio.

Particulars/Year Dividend Profit After Ratios


Paid Tax

2005-06 69660.16 63158.01 110%

2006-07 62177.05 77362.03 80.37%

2007-08 75780.88 84462.59 89.72%

2008-09 82958.97 95734.88 86.65%

2009-10 92911.58 106071.68 87.59%


Ratios

120

100

80
Ratio

60 Ratios

40

20

0
2005-06 2006-07 2007-08 2008-09 2009-10
Year

Interpretation:
Above table shows that earlier LIC was distributing whole its profit even more but later it
started retaining a part of its profit.
• Limitations of Study
Limitations of Study

However I have tried my best in collecting the relevant information yet there always use
to present some limitations under which researcher has to work. Here following are some
limitations under which I had to work:
1. This study of evaluating financial performance have same limitations as of ratio
analysis i.e.

• Difficulty in comparison.

• Impact of inflation.

• Conceptual diversity.

2. Non coverage of certain aspects (Due to confidential nature of some documents).

3. Lack of knowledge and experience.

4. Problem of window dressing.

5. Difficult to understand information provided in annual reports.

6. Time constraint.
• Suggestions and Recommendations
Suggestions and Recommendations:

1. LIC should concentrate on better investment policies.

2. Profitability of LIC is not sound. So company should plan that can help it in
having better profitability.

3. Internal financing should be used much for acquiring assets rather than acquiring
from external financing.

4. Annual reports show that return on investment, both of shareholder’s fund and
policyholder’s fund are going downward. So co. should have some reliable and profitable
plans to improve it.

5. As company is in its growing stage and capturing a high market share, company
should be very careful to customers.

6. The Co. should make its customer aware about the activities of insurance.

7. LIC should retain adequate part of its profit as internal financing is better source
than external financing.
• References
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