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Introduction Financial statements are prepared primarily for decision making.

They play a dominant role in setting the frame work of managerial decisions. But information provided in the financial statements is not analysis end in it self as no meaning full conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of the immense use in making decisions through analysis and interpretation of financial statements. Financial statement analysis is the process of identifying of financial strength and the weakness of the firm by properly establishing a relation ship between the items of the balance sheet and the profit and loss account. There are various methods used in analyzing financial statements such as comparative statements, schedules of changes in working capital, common size percentages, funds analysis and the ratio analysis. The ratio analysis is the most powerful tool of financial analysis. Meaning and Nature of Accounting Ratios: Ratio simply means one number expressed in terms of another. A ratio is the statistical yard stick by means of which relationship between two or various figures can be compared and measured. The term Accounting Ratio is used to describe significant relationship between figures shown on a balance sheet and profit and loss account of a company. Thus accounting ratios show the relationship between accounting data. It may be expressed in the form of percentage, coefficient, proportion and rate. Who is Interested in Financial Analysis of Company? Ratio analysis of a firms financial statements is of interest to share holders, creditors and the firms own management. Both current and prospective share holders are interested in the firms current and future level of risk and return, which directly affect the share price. The firms creditors are interested in the short term liquidity of the company and its ability to make interest and principal payments. A secondary concern of creditors is the firms profitability: they want assurance that the business is healthy. Management like stake holders is concerned with all aspects of the firms financial situation, and its attempts to produce financial ratios that will be considered favorable

by both owners and creditors. In addition management uses ratios to monitor the firms performance from period to period. Advantages of Ratio Analysis: Ratio analysis is analysis important and age old technique of financial analysis. The followings are some of the advantages of ratio analysis.

Simplifies Financial Statements:

It simplifies the comprehension of financial statements. Ratio tells the whole story of changes in the financial condition of the business.

Facilitates Inter Firm Comparison:

It provides data for inter firm comparison. Ratio highlights the factors associated with the successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and under valued firms.

Helps in Planning:

it helps in planning and forecasting. Ratios can assist management in its basic function of forecasting, learning, coordination, control and communication.

Helps in Investment Decisions.

It helps in investment decisions in the case of investors and the landing decisions in the case bankers and other financial institution. Types of ratio Comparison: Ratio analysis is not merely the calculation of a given ratio. More important is the interpretation of the ratio value. Two types of ratio comparison can be made.

1. Time Series Analysis 2. Cross Sectional Analysis 1. Time Series Analysis: This analysis is concerned with the evaluation of the firms financial performance over time using financial ratio analysis. Comparison of current to past performance, using ratios, enables analyst to asses the firms progress. For time series analysis of BOC Pakistan Ltd. we used the data for 2 years i.e. 2005 and 2006. 2. Cross Sectional Analysis Cross sectional analysis involves the comparison of the firms financial ratios at the same point in time and involves comparing the firms ratios to those of other firms in its industry or to industry averages. Analysts are often interested in how well a firm has performed in relation to other firms in its industry. Frequently a firm will compare its ratios values to those of key competitor or group of competitors that it wishes to emulate. This type of cross sectional analysis called bench marking has become popular. Classification of Accounting Ratios: Followings are the main ratios which are commonly used by the financial analysts, management of the company, investors, lenders, creditors and other stake holders. There detail definitions and explanations are given in next pages 1. Liquidity Ratios

Current Ratio. Acid Test Ratios

2. Profitability Ratios Gross Profit Ratio Net Profit Ratio Operating Profit Ratio. Cost of Sales to Sales Ratio. With Respect to Sales

Return on Equity Capital Return on Share Holders Fund. Return on Capital Employed Earring Yield Ratio. Dividend Yield Ratio. Price Earning Ratio. Dividend Cover Ratio. With Respect to Investment.

3. Activity Ratios Stock Turn over Ratio. Debtors Turn Over Ratio. Creditors Turn Over Ratio

4. Long Term solvency in Leverage Ratios. Debt to Equity Ratio. Debt Service / Interest Coverage Ratio. Capital Gearing Ratio.

We performed the ratio analysis on BOC Pakistan Ltd which is a listed company and it deals in Gases, Welding (Gases and Electric), Medical and Industrial Gases and Medical Equipments. Following few pages consist of the Introduction of the Company. BOC Pakistan Ltd. HISTORY: BOC Pakistan Limited (Formerly Pakistan Oxygen Limited) has played a distinguished role since it was established on 8 June 1949. The Company was one of the pioneers of the infant state of Pakistan in the field of Industrial & Medical Gases and Welding Technology and has all along proved a steady partner in the economic development of the Country.

It was incorporated in 1949 to acquire the assets in Pakistan of the then Indian Oxygen and acetylene Company Limited which started operations in India in 1935 when the British Oxygen Company Limited acquired and amalgamated a few oxygen and acetylene producing units in the Country to form that Company. It was originally a 100% subsidiary of the British Oxygen Company Limited (now the BOC Group) which was established in 1886. On 17th March 1958, the company became a Public Limited Company and its capital structure was broadened by the offer of 40% shares to Pakistan Nationals. Since then this equity structure has been maintained. BOC Pakistan (BOCP) is a portfolio of three businesses - industrial and special gases, health care and welding products. It is a part of the BOC Group, one of only a handful of truly global companies based in the U.K. The market, technology and management of the Group are global in nature and transcend 60 countries. Our technology, developed in many different parts of the World, is deployed on every continent. The 40,000 employees serve some two million customers worldwide, many of whom themselves operate around the world and expect us to serve them consistently everywhere they do business. In Pakistan, the company continues to play a leadership role in adding strategic value to the nations industrial and infrastructure development since 1949. Through its core business, industrial gases, it meets the significant and emerging needs in the metal processing, manufacturing/ fabrication/construction, chemicals, petrochemicals, pharmaceuticals, petroleum, glass and defense manufacturing market sectors. In health care, BOCP provides the majority of health care facilities (hospitals) inhaled anesthetic pharmaceuticals. In fact the Group invented and developed these systems on a worldwide basis. Business: The Company's core business is to manufacture and supply industrial gases to the various industries in the country. The Company also markets medical gases, welding equipment and consumables and anesthetic and related medical equipment. From the very inception the company has been a pioneer and pacesetter in the industrial development of the country BOC World Wide

BOC operates in more than 60 countries including Pakistan. BOC Gases - the Core Business of The BOC Group - is one of the worlds largest Industrial Gases Companies. BOC gases have over 2.6 billion sales and over 27,600 employees in over 60 countries. BOC Gases worldwide supplies over 20,000 different gases and mixtures, from atmosphere gases like oxygen and nitrogen to complicated specialty products. Every year about 1000 new products and processes to meet the evolving needs of worldwide customers are added in the product range. BOC Gases constantly review their systems and use their world wide experiences to identify and shares the best operating practices from each market in order to apply them to customer needs in other. BOC Pakistan, being a member of the BOC Group can offer customers in Pakistan both the experience to solve local problems and the highest international standards demanded by the industrial leaders of today. ANALYSIS OF ACCOUNTING RATIOS: Now we shall analyze some important factors like liquidity, profitability, long term solvency and activities of firm with the help of ratios which are usually brought under observation by the creditors, investors, management and other stake holders. Analysis for Liquidity (Liquidity Ratios) This analysis is also called analysis for short term solvency of short term financial position. Liquidity simply means how quickly a company can convert its current assets I into cash to pay off its current obligations in time or when they will become due. The short term creditors of a company like supplier of goods of goods on credit and commercial banks providing short term loans are primarily interested in knowing the companys ability to meet its current or short term obligations as and when these become due. The short term obligations of a firm can be met only when there are sufficient liquid assets. Therefore, a firm must insure that it does not suffer from lake of liquidity on the capacity to pay its current obligations. If a firm fails to meet such current obligations due to lack of good liquidity position its good will in the market is likely to be affected beyond the repair. It will result in a loss of creditors confidence in the firm. Even a very high liquidity is not good for a firm because such a situation represents unnecessarily excessive funds of the firm being tied up in current assets.

Liquidity Ratios: These are the most important ratios from the lenders point of view. These are the ratios which measure the short term solvency or financial position of firm. These ratios are calculated to comment upon the short-term paying capacity of a concern or a firms ability to meet its current obligations. The various liquidity ratios are current ratio, liquid ratio (Acid Test Ratio) and absolute liquid ratio. Current Ratio: Current ratio measures general liquidity and is widely used to make the analysis for a short term financial position or liquidity of a firm. Current ratio is basically a relationship between current assets and current liabilities. This ratio is also known as working capital ratio. Significance: Current ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety to creditors. It is an index of the firms financial stability. It is also an index of technical solvency and an index of the strength of working capital. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time as and when they become due. On the other hand, a relatively low current ratio represents that the liquidity of the company is not good and firm shall not be able to pay its current liabilities. Generally current ratio = 1:1 is considered reliable by the banks which means 1 rupee asset 1 rupee liability. Current Ratio Sep 30th 2005 (Rs. 000) = = 1.21:1 Interpretation: The current ratio of BOC Pakistan Ltd. up to 30th September 2005 shows that it has the ability to meet all its obligations in respect of financial debts. But the ratio up to = = 1.73:1 = Dec 31st 2006 (Rs.000)

December 31st is the indication that the enterprise has been in good liquid position since last fifteen months. It is an attractive sign for the stakeholders to keep full confidence in the operations and policies of the enterprise. The company can avail easily short term borrowing facility from banks and financial institutions with more reliably than the previous year as its current position is better than the previous year. Liquid Ratio (Acid Test Ratio): This ratio shows better liquidity than the current ratio as it is a relationship between liquid assets and current liabilities. Liquid assets include all current assets except prepayments and stock because prepayments usually are not converted into cash and stock takes much time to be converted into cash. Significance: The quick ratio is very useful in measuring the liquidity of the firm. It measures the firms capacity to pay off current obligations immediately and is a more rigorous test of liquidity then the current ratio. Usually a high liquid ratio is an indication that the firm is liquid and has ability to meet its current liabilities in time and on other hand a low liquidity ratio represents that the firms liquidity position is not good. Generally current ratio = 0.75:1 is considered reliable by the banks that means Rs. 0.75 liquid asset for Rs. 1 liquidity. Acid Test Ratio Sep 30th 2005 (Rs. 000) = Liquid Assets = = = = 1.08:1 = = = 1.41:1 = Current Assets - (Stock + Prepayments) Dec 31st 2006 (Rs.000)

Interpretation:

The liquid ratio of BOC Pakistan Ltd. is showing its better liquidity position and its liquid ratio is better than the requirement that is usually observed by the banks and other financial institutions. The stake holders especially creditors can rely on the company because BOC Pakistan Ltd. has liquid assets to pay the short term liabilities in time or when they will become due. The liquidity of the enterprise has been increased from the last year which is an indication of the better business operations and policies. Analysis of Profitability: (profitability Ratios) Profit earning is considered essential for the survival of the business and it is primary motive of any business. A business needs profit not only for its existence but also for expansion and diversification. The investors want adequate return on their investments creditors want higher security for their interest and loan and so on. A business enterprise can discharge its obligations to the various segments of the society only thorough earning profits. Profit is a useful measure of overall efficiency of a business. Profitability ratios are measured by the investors and share holders to asses the management in order to assess how efficiently the business operations are being carried out. Profitability is the main base for liquidity as well solvency. Creditors, bankers and financial institutions are interested in profitability ratios since they indicate liquidity of the business to meet interest obligations and regular improved profits to enhance the long term solvency of the business. Owners are interested in profitability to indicate the growth and also the rate of return on their investments. Generally profitability ratios are calculated with respect to sales and with respect to investments. Following ratios are calculated with respect to sales. Gross Profit Ratio (Gross Profit Margin): Gross Profit ratio is a ratio of Gross Profit to Net Sales expressed as percentage. It expresses the relation ship directly between gross profit and sales and indirectly between cost of goods sold and sales. Significance:

Gross profit ratio may indicate to what extend the selling prices of goods per unit may be reduced with incurring losses on operation. It reflects the efficiency with which a firm produces its products. As the gross profit is form by deducting cost of goods sold from net sales, higher the gross profit ratio better it is. There is no standard GP ratio for evaluation. It may vary from business to business. However the gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends. G.P Ratio = Sep 30th 2005 (Rs. 000) = = 41.96% Interpretation: The gross profit percentage of BOC Pakistan Ltd. has been reduced from 41.96% to 39.83%. Although there is increase in Gross Profit (28%) and sales (36%) but this increment is not relatively equal to the increase in cost of sales which is 41%. Management should assess that why their cost has been increased. However this GP Margin is still up to the mark GP margin can be made by increasing sales, by decreasing cost and adopting better purchase policies. = = 39.83% Dec 31st 2006 (Rs.000)

Net Profit Ratio: This is the ratio of net profit (before tax) to net sales expresses as percentage: Significance: This used to measure the overall profitability and hence it is very useful to proprietors. The ratio is very useful as if the net profit is not sufficient the firm should not be able to achieve a satisfactory return on its investment. This ratio also indicates the firms capacity to face adverse economic conditions such as price competition low demand etc. obviously, higher the ratio the better is the profitability. Net Profit Ratio =

Sep 30th 2005 (Rs. 000) = = = 21.10% Interpretation:

Dec 31st 2006 (Rs.000)

= 18.90%

Net profit ratio of the company is decreased from 21.10% to 18.90%. One reason of this decrease is the remarkable increment in some expenses like deprecation, repairs and maintenance and traveling expenses due to revision of estimated useful life of assets and rising in fuel prices. There is a pressure on the profit margin of the company. Operating Profit Ratio: Operating ratio is a relationship between operating profit and net sales. It measures the cost of operations per rupee of sales. Significance: This ratio shows the operational efficiency of the business. Some of the revenues and expenses of a business is result from activities other then the companys basic business operations. This ratio shows a relationship between revenue earned from customers and expenses incurred in producing this revenue. In effect operating profit ratio measures the profitability of a companys basic or core business operations and leaves out other types of revenues and expenses are excluded. Operating Profit Ratio = Sep 30th 2005 (Rs. 000) = = 29.58% Interpretation: It has been observed and mentioned earlier that profit margins of BOC Pakistan Ltd. are decreasing as we compare them with the previous years. An operating profit ratio equal to 25% to 30% is considered normally good and company is needed to raise its = = 24.5% Dec 31st 2006 (Rs.000)

profitability to maintain the confidence of the stake holders through better business operations. Cost of goods sold to sales: This ratio can be defined as a relationship between cost of sales and sales. It is measured in percentage. Significance The profits of any company can be increased only through deduction in cost or with increase in sales or both. This ratio is important to analyze the cost of sales with respect to sales. It measures the percentage of cost to sales. Higher the ratio is an indication of an increase in cost of the enterprises production and direct cost and vice versa. It can be helpful for the management to make better purchasing, production and other direct cost decisions as it related directly sales to the cost of sales. Cost of Goods sold to sales = Sep 30th 2005 (Rs. 000) = = 58.03% Interpretation: The cost of sales of BOC Pakistan Ltd. in 2006 has been increased which reduced the GP margin of the company. The company should be cost efficient to attract the investors. Although there is not a substantial increase but management is needed to reduce the cost to make better profitability. And if the company is running already at low cost then there is need to increase the sales of its products. Profitability Ratios with respect to Investment: Following ratios are important to find out the profitability of a company with respect to investment. As investors demand adequate returns to their investments so with the help = = 60.17% Dec 31st 2006 (Rs.000)

of these ratios they can realize and analyze about the security and returns of their investments. Return on Equity Capital: In real sense ordinary shareholder are the real owners of the company and they assume highest risk in the company. Preference share holders have a preference over ordinary shareholders in the payment of dividend as well as capital. Preference share holders get a fixed rate of dividend irrespective of the quantum of the company. The rate of dividend varies with the availability of profits in case of ordinary shares only. The ordinary share holders are more interested in the profitability of a company and its performance should be judged on the bases of return of equity capital of the company. Significance: This ratio is more meaning full to equity share holders who are interested to know profits earned by the company and those profits which can be ,made available to pay dividend to them. This ratio directly relates the net profit available for appropriations to the capital invested by the share holders. Higher the ratio is higher the return on capital invested in company. Return on Equity = Sep 30th 2005 (Rs. 000) = = 147.74% Interpretation: The return on equity capital ratio of BOC Pakistan Ltd. is a clear cut indication for the investors that the company is managing its capital in a very efficient way and is earring Rs 179 for each Rs 100 of its capital and company is in position to give better returns to the share holders. This is also analysis indication that the operations of the business are carried on in analysis appropriate manners. = = 179.63% Dec 31st 2006 (Rs.000)

Return on Share Holders Fund: It is a relationship between net profit (After interest and Tax) and shareholder fund expressed in percentage. Significance: This is one of the most important ratios used to measure the overall efficiency of the firm. As the primary objective of business is to maximize its earning. This ratio indicated the extent to which this primary objective of business is being achieved. It is calculated for net profit after interest and tax because share holders are interested in the profit which is available for them in respect of dividends. This is better measure then the return on equity capital because it includes not only capital but also the reserves which are maintained for several financial purposes. Inter firm caparison of this ratio determines whether the investment in the firm is attractive or not as investors would like to invest only where the return is higher. Returns on share holder fund= Sep 30th 2005 (Rs. 000) = = 34.79% Share Holder Fund = Capital +Reserves Interpretation: There is increase in the return from the last year and it is an indication that the operations of business are good and management efficiently employs the share holders fund in generating the revenues. It is also a better sign for the stock holders that there investments are being utilized to give them better returns. Return on Capital Employed: It is relation ship between operating profit and capital employed of the company. There are various methods to calculate the capital employed. We use the share capital, long term liabilities and reserves to calculate the capital employed. Capital employed can also be calculated with the debit side of the balance sheet. = = 37.09% Dec 31st 2006 (Rs.000)

Significance: The return on capital employed is the most important ratio because it answers how well the management has utilized the share holders fund and the borrowings which were taken from the creditors. Higher the ratio shows that the management utilized these funds efficiently to earn operating profit. This ratio is calculated with EBIT because investors are interested to know that how the management has utilized the funds and long term borrowings because a business borrows to conduct its operations and to enhance profitability Return on capital Employed = Sep 30th 2005 (Rs. 000) = = 41.66% Interpretation: As there is remarkable increase in the ratio which is an indication that the management is using efficiently funds provided by the creditors and shareholders and the reserves of previous profits kept for the financial purposes. There is a suitable return to the capital employed that is 47.36 % which means funds of Rs. 100 are generating profit of Rs. 47.36. This is good sign for the stake holders especially for the investors which are interested in the return of the capital employed. Earning per Share: Earning per share is a small variation of return on equity capital and it is calculated by net profit after tax and preference dividend dived by the total number of equity shares. It determines the per share earning in Rupees. Significance: High earning per share usually reflects the rate of profitability, performance and dividends and when compare with E P S of similar other companies, it gives a view of comparative earnings or earning power of firm. However high EPS is not an authentic and scientific tool to assume high performance but high EPS is considered high rate of dividends. = = 47.36% Dec 31st 2006 (Rs.000)

Capital Employed = long term liabilities + share Holders Fund

Earning Per Share

In the BOC Pak (Ltd) there is no prefers share holder so the formula will be. = Sep 30th 2005 (Rs. 000) = = Rs. 14.77/Share Interpretation: Earning per share of BOC Pakistan Ltd. is relative increased from the previous years and is satisfactory for the share holders with respect to their return on the shares purchased by them. As this ratio describes the rate of dividend so it can be assumed company is distributing high dividends. Price Earning Ratio: Price earning is the ratio between Market Value per Share to Earning per Share and it is expressed in number of years. Significance: This ratio helps the new investors to determine that how many years it will take to recover the market price paid for one year. Higher ratio results in greater number of years and of course discourages the new investors. Generally people purchase the shares of a company from stock exchange at market price dont look for dividend rather they care about capital gain. Price Earning Ratio = Sep 30th 2005 (Rs. 000) = = Almost 10 years Dec 31st 2006 (Rs.000) = = Almost 8 years = = Rs. 17.96/Share Dec 31st 2006 (Rs.000)

This ratio is the subject of great fluctuations because market price of share changes substantially almost every day. This ratio does not give exact idea but for the purpose of rough estimation it can be used. Earning Yield Ratio: Earning yield is ratio of earning per share to the market value per hare and it is expressed in terms of percentage. Significance: This ratio helps the investors to determine that how many percent is being earned with his earning per share. This ratio is the reciprocal of price earning ratio. Greater this ratio means the greater capital gain and vice versa. The ratio is subject to great fluctuations as market prices of shares are changed rapidly in our stock exchange. Earning yield and price earning ratio both are analyzed before taking the investment decision in any company. Earning Yield Ratio=

Sep 30th 2005 (Rs. 000) = = = 9.37% Dividend Yield Ratio:

Dec 31st 2006 (Rs.000)

= 12.17%

This ratio is relationship between dividend per share paid and the market value per share expressed in terms of percentage. Significance: This ratio is much better tool then the earning yield ratio because it relates dividends paid with the market value of share. It helps investor assess that how much return he is going to get on the proposed investment. Dividend Yield Ratio

= Sep 30th 2005 (Rs. 000) = = 7.60% Dividend Pay out Ratio: Dividend pay out ratio is the relationship between dividend per equity share and the earring per share expressed in percentage: Significance: Dividend pay out ratio is calculated to find the extent to which earning per share have been used for paying dividend and to know what portion of earning has been retained in the business. It is an important ratio because ploughing back of profits enables a company to grow and pay more dividends in future. Dividend Pay-out Ratio = Sep 30th 2005 (Rs. 000) = = 81.24% = 83.51% Interpretation: BOC Pakistan Ltd. is paying much dividends and its retained earning per share is lower. The company is paying more dividends and retaining lesser portion of the profit for its reserves. This policy might be the result that already companys reserves are three times greater than the share capital. Investors are going to have adequate return on their investments because 83 % of the profit is being paid to them. Dividend Cover Ratio: Dividend cover ratio is a relationship between earning after tax and dividend declared by the company expressed in times. Significant: = Dec 31st 2006 (Rs.000) = = 10.60% Dec 31st 2006 (Rs.000)

This ratio gives information that how many times the dividend is covered through the profit. Greater the ratio means the company is retaining greater portion of profit for future purposes and paying lesser portion to the share holders and vice versa. Dividend cover ratio and dividend pay out ratio give almost same type of information to the investors. Dividend Cover Ratio = Sep 30th 2005 (Rs. 000) = =1.31 times = = 1.33 times Dec 31st 2006 (Rs.000)

The answers of above ratio indicate that BOC Pakistan Ltd. is retaining lesser portion of the profits in shape of reserves and paying greater portion to the share holders in shape of dividend. Analysis of Current Assets Movement (Liquidity Ratios): The liquidity ratios generally liquid Ratio and Absolute Liquidity Ratio generally indicate the adequacy of current assets for meeting current liabilities. This is one dimensions of liquidity analysis. The other dimension of liquidity is determination of the rate at which various short term assets are converted into cash. The efficiency with which assets are managed directly, affect the volume of sales. The better the management of assets, the larger is the amount of sales and profits. Activity ratios measure the efficiency or effectiveness with which a firm manages its resources or assets. These ratios are also called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. Stock Turnover Ratio: Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. But the level of inventory should neither be too high nor too low. A too high inventory means higher carrying costs and higher risk

of stocks becoming obsolete whereas too low inventory may mean the loss of business opportunities. Thus, it is very essential to keep sufficient stocks in business. Inventory turnover ratio, also known as stock turnover, is the relationship between the cost of goods sold during a particular period of time and the cost of average inventory during that period. It is expressed in number of times. Significance: Inventory turnover ratio measures the velocity of conversion of stock into sales. Usually, a high inventory turnover/stock velocity indicates efficient management is required to finance the inventory. A low inventory turnover ratio indicates an inefficient management of inventory. A low inventory turnover implies over-investment in inventories, dull business, poor quality of goods, stock accumulations, accumulation of obsolete and slow moving goods and low profits as compared to total investments. Stock Turn over Ratio = Sep 30th 2005 (Rs. 000) = = 14.9 times No. of Days (Rotation period) = Sep 30th 2005 (Rs. 000) = = 25 days Interpretation: The results of the stock turn over ratio show that there is a little bit mismanagement of the inventory because rotation period has been increased from 25 to 36 days and stock turn over ratio of BOC Pakistan Ltd. has been shifted from 14 to 10 times which means last year stock of the company converted 14 times into sale in period of 25 days and in year 2006 it could be converted only 10 times into sales and the whole process was = = 36 days Dec 31st 2006 (Rs.000) = = 10.08 times Dec 31st 2006 (Rs.000)

completed in 36 days. BOC Pakistan Ltd. is needed to be efficient in inventory. One reason of this substantial increase may be the increased cost of goods sold during this year (increased up to 41%). Debtors or Receivables Turnover Ratio: The volume of sales can be increased by following a liberal credit policy. But the effect of a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are expected to be converted into cash within a short period and are included in current assets. The liquidity position of a concern to pay its short-team obligations in time depends upon the quality of its trade debtors. Significance: Debtors turnover ratio indicates the number of times the debtors are turned over during a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid are the debtors. Similarly, low debtors turnover implies inefficient management of debtors or less liquid debtors. It is the reliable measure of the time of cash flow from credit sales. Debtor Turnover Ratio = Sep 30th 2005 (Rs. 000) = = 16.87 times Average Collection Period Ratio: The debtors/Receivables Turnover Ratio when calculated in terms of days known as average collection period or debtors collection period ratio. The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash. It can be calculated as follows: Significance: = = 16.48 times Dec 31st 2006 (Rs.000)

This ratio measures the quality of debtors. A short collection period implies prompt payment by debtors. It reduces the chances of bad debts. Similarly a longer collection period implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of debtors. No. of Days (average collection Period Debtor Turnover Ratio = Sep 30th 2005 (Rs. 000) = = 22 days Interpretation: BOC Pakistan Ltd. is working on relatively better debtor turnover ratio and average debtors collection period showing that debtors are more liquid and company is much efficient in the management of its debtors. Creditors/Payables Turnover ratio: This ratio is similar to Debtors/Receivable turnover ratio. It compares the creditors with total credit purchases. It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable include both sundry creditors and bills payable. Same as debtors turnover ratio, creditors turnover ratio can be calculated in two forms Significance: The average payment period ratio represents the number of days taken by the firm to pay its creditors. A higher creditors turn over ratio or a lower credit period ratio signifies that the creditors being paid promptly, thus enhancing the creditworthiness of the company. However, a very favorable ratio to this effect also shows that the business is not taking full advantage of credit facilities allowed by the creditors. Creditors Turn over Ratio = Sep 30th 2005 (Rs. 000) = = Dec 31st 2006 (Rs.000) = = 22 days Dec 31st 2006 (Rs.000)

= 7.35 times No. of days (Average payment period):

= 8.85 times

This ratio gives the average credit period enjoyed from the creditors. Significance: The average payment period ratio represents the number of days taken by the firm to pay its creditors. A higher creditors turn over ratio or low credit period ratio signifies that the creditors being pair promptly, thus enhancing the credit worthiness of the company however, a very favorable ratio to this effect also shows that the business is not taking full advantage of credit facilities allowed by the creditors. No. of Days (Average Payment Period) = Sep 30th 2005 (Rs. 000) = = 50 days Interpretation: As the credit purchases were not available in the financials of BOC Pakistan Ltd. so we have calculated the creditors turn over ratio by assuming all the purchases as credit. BOC Pakistan Ltd. has improved its creditors turn over ratio from the previous years as in previous years creditors were paid in the span of 50 days which has been reduced in the current year to 41 days. It is clear indication that company has enhanced its credit worthiness. Although the volume of purchases and creditors is increased during the year 2006 but as the companys liquidity is very good and company has made its creditors turn over ratio better. Analysis of Solvency (Long Term Financial Position): The long term indebt ness of a firm includes debenture holders, financial institutions providing medium and long term loan. Short term creditors of a firm are primarily = = 41 days Dec 31st 2006 (Rs.000)

interested in knowing the firms ability to meet its short term obligations, the debenture holders and another long term creditors are primarily interested in knowing the firms ability to pay regular interest on long term borrowings, repayment of the principal amount at the maturity and the security of the loan. Accordingly long term solvency ratios indicate the firms ability to meet the fixed interest and cost and repayment schedules associated with its long term borrowings. These ratios also used to analyze the capital structure of the company. They indicate the pattern of financing, whether long term requirements have been met out of long term funds or not. Following ratios are generally calculated to test the long term solvency. Debt-Equity Ratio: Debt-to-equality ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds. It is also known as External internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company. Significance: The ratio indicates the proportionate claims of owners and the outside against the firms assets. The purpose is to get an idea of the cushion available to outsider on the liquidation of the firm. However, the interpretation of the ratio depends upon the financial and business policy of the company. The owners want to do the business with the maximum of outsiders funds in order to take lesser risk of their investments and to increase their earnings (per share) by paying a lower fixed rate of interest to outside. The outsiders (creditors) on the other hand, want that shareholders (owners) should invest and risk their share of proportionate investments. Debt Equity Ratio = Sep 30th 2005 (Rs. 000) = = = 1:2.9 = 1:4 Dec 31st 2006 (Rs.000)

Interpretation: Debt equity ratio of the company is being increased from the previous year from 1:2.9 to 1:4 which is indication that the company now has more funds to pay out the long term funds. One reason of the companys improved debt equity ratio is the payment of the long term funds. On one side the long term debts are being decreased and on other side there is a substantial increase in the share holders fund which made the credibility better. Debt equity ratio = 1:1 (for Rs.1 of long term debts share holders have Rs.1) is considered satisfactory but the debt equity ratio of the BOC Pakistan Ltd. is above standard which is sign for the financial institutions that the company is in position to pay back the loans acquired with in time or when they will become due. Debt Service or Interest Coverage Ratio: This ratio relates the fixed interest charges to the income earned by the business. It is also known as interest Coverage Ratio. It indicates whether the business has earned sufficient profits to pay periodically the interest charges. Significance: The interest Coverage Ratio is very important from the lenders point of view. It indicates the number of times interest is covered by the profits available to pay interest charges. It is an index of the financial strength of an enterprise. A high ratio assures the lender a regular and periodical interest income. But the weakness of the ratio may create some problems to the financial manager in raising funds from debts sources. Interest Coverage Ratio = Sep 30th 2005 (Rs. 000) = = 32.14 times Interpretation: = = 46.10 times Dec 31st 2006 (Rs.000)

The results of the interest coverage ratio of BOC Pakistan Ltd. for both periods are clear indication of the companys ability to pay the periodic interest on long term borrowings and especially in year 2006 the companys profit before tax is 42 times greater than its financial costs. Through the analysis of this solvency ratio the confidence of the bankers and other financial institutions with respect to the credibility will definitely increase and they will feel the repayment of their loaned principal together with interest very safe. One reason of this improved ratio is that company has repaid a substantial portion of its long term liabilities which has reduced the payment of interest Capital Gearing Ratio: Closely related to solvency ratios is the Capital Gearing Ratio which is mainly used to analyze the capital structure of a company. The term capital structure refers to the relationship between the various long-term forms of financing such as debentures. P.T.C. preference and equity share capital including reserves and surpluses. Leverage or capital structure ratios are calculated to test the long-term financial position of a firm. The term capital garaging or leverage normally refers to the proportion or relationship between equity share capital including reserve and surpluses to preference share capital and other fixed interest bearing funds or loans. In other words it is the proportion between the fixed interest or dividend bearing funds and non fixed interest or dividend bearing funds. Equity share capital includes equity share capital and all reserves and surpluses items that belong to shareholders. Significance: The ratio is important to the company and the prospective investors. It must be carefully planned as it affects the companys capacity to maintain a uniform divided policy during difficult trading periods. It reveals the suitability of companys capitation. Capital Gearing Ratio = Sep 30th 2005 (Rs. 000) = = Dec 31st 2006 (Rs.000)

= 2.89:1 Interpretation:

= 4:1

Capital gearing ratio is just reciprocal of debt to equity ratio. BOC Pakistan Ltd. is relatively low geared than the previous year. Its results show that BOC Pakistan Ltd. has Rs. 4 for every Rs. 1 of the long term borrowings. Again the ratio is the depiction of the better credibility of the company. After analyzing the over all long term solvency ratio the creditors will finance the company because they will fill their financing very safe. Review Report With respect to Investors and Creditors Performance of financial analysis is of key importance for many stake holders especially for management of the company which needs to analyze the overall operations of the enterprise, investors because they are interested in adequate return of their investment and creditors who are interested in on time repayments of loan and interest. As we go through the ratio analysis of BOC Pakistan Ltd. with investors point of view then it is found that the company has potential to pay back the relatively better and attractive returns to the investors. Although the company has profit pressures from the last year because the cost of sales has been substantially increased this is mainly subject to rising of fuel prices in year 2006. Secondly company revaluated the useful life of the assets which has substantially increased the depreciation charge. But still the company is paying relatively better returns to the investors. The analysis of profitability ratios is the depiction that share holders are getting adequate returns. The companys performance in many aspects like payment of dividends, return on equity capital, earning per share, return to share holders fund, price earning ratio and dividend yield ratio all reveal that the company is paying attractive returns and have better liquidity and solvency position to pay back the loans and dividends to the share holder. There seems a policy in BOC that greater portion of the profits are distributed among share holders in form of dividends and lesser portion is retained for the reserves. Company is also managing long term funds like (share holder fund long term liabilities) and current assets (like debtors and other assets) efficiently and in such manners that for the payment of short term and long term liabilities the company has better liquidity and solvency position.

If we analyze the liquidity and solvency ratios then it will be clear the creditors are being paid promptly and company has sufficient funds to pay it liabilities on time or when they will become due. Before sanctioning the loan the financial institutions analyze the potential of the company to repay the amount of interest together with principal. BOC has potential to meet its all to meet its long term and short term liabilities and obligations. We conclude that the BOC Pakistan Ltd. is in has potential and attraction for both the parties i.e. it can pay its liabilities in time and it can also give the adequate returns to the investors. Investment of the investors and financing by the creditors both are secured.