The ratio analysis is one of the important tools of financial statement analysis for studying the financial stature of the business fleeces, corporate houses and so on and the ratio illustrates the relationship between the two related variables (Pandikumar M P).
A study's of the relationships between financial variables. Ratios of one firm are often compared with the same ratios of similar firms or of all firms in a single industry. This comparison indicates if a particular firm's financial statistics are suspect. Likewise, a particular ratio for a firm may be evaluated over a period of time to determine if any special trend exists. Compare trend analysis. (http://financial-dictionary.thefreedictionary.com/ratio+analysis).
Ratio Analysis is a process of comparison of one figure against another, which make a ratio, and the evaluation of the ratios to make proper analysis about the strengths and weakness of the firm's operations. Ratio analysis is extremely helpful in providing valuable insight into a company's financial picture. 'Ratio' may be defined as the mathematical expression of the relationship between two accounting figures (Agarwal J.K. and Agarwal R.K.).Purposes of Ratio Analysis -:
- To study the short term solvency of the firm - liquidity of the firm.
- To study the long term solvency of the firm - leverage position of the firm.
- To interpret the profitability of the firm - profit earning capacity of the firm.
- To identify the operating efficiency of the firm - turnover of the ratios (Agarwal J.K. and Agarwal R.K. "Management Accounting").
According to the requirement of various users the ratio may be classified into following three groups and each group has sub-groups:-
- Profitability Ratio
- Turnover Ratio
- Financial Ratio
(A). Profitability Ratios ?The purpose of studying and analysis of profitability ratios are to help in assessing the adequacy of profits earned by the company and also to discover whether profitability is increasing or declining.
Types of Profitability Ratio:-
- Gross Profit Ratio: The ratio elucidates the relationship among the gross profit and sales volume. It facilitates to study the profit earning capacity of the firm out of the manufacturing or trading operations.
- Net Profit Ratio: This ratio expresses the relationship between the net profit and sales volume. It helps to portray the overall operating efficiency of the firm. The net profit ratio is an indicator of overall earning capacity of the firm in terms of return out of sales volume.
- Expenses Ratio: The ratio of particular operating expense to sales is 'expense ratio'. The major components of operating cost are factory expenses, office and general expenses and selling expenses. Therefore, it is worthwhile to classify the cost ratio as follows -:-
- Factory Expenses
- Selling Expenses Ratio
(B). Turnover Ratios ?By using the assets invested in a business, profit are earned. It's used for checking whether or not these assets are utilized skillfully and profitability.
Types of Turnover Ratios:-
- Stock Turnover: The ratio expresses the speed of converting the stock into sales. In other words, how quickly the stock is being converted in to sales in a year? A greater ratio of conversion leads to lesser the number of days/weeks/months required to convert the stock into sales.
- Total Assets Turnover: This ratio shows the relationship between total assets of the business concern and sales (or cost of sales). This ratio indicates the utilization of total assets in the working if the concern.
- Fixed Assets Turnover: This ratio set up the relationship among Net Sales and Fixed Assets. It actually indicates the extent to which the investments in fixed assets contribute towards sales.
- Current Assets Turnover: This ratio attempts to measures the utilization and effectiveness of the use of current assets. This shows the relationship between cost of sales and current assets.
(C). Financial Ratios ?It's used for checking the financial condition of the company.
Types of Financial Ratios:-
- Current Ratio: It is the important Accounting Ratio for finding out the ability of the business fleeces to meet the short term financial commitments. This ratio establishes the relationship between the current assets and current liabilities.
- Liquid / Quick / Acid Test Ratio: It is ratio that expresses the relationship between the quick assets and current liabilities. This ratio is to replace the bottleneck associated with the current ratio. It considers only the liquid assets which can be easily translated into cash to meet the financial commitments.
- Cash Ratio: This ratio shows the floating of cash in the firm or company.
- Absolute Liquidity Ratio: Used for evaluating liquidity minutely absolute liquidity ratio is ascertained.
- Solvency Ratio: This ratio indicates the relationship between the total outsider's liabilities to total assets of the firm. The ratio is a small a small variant of proprietary ratio. It is calculated as '100 - proprietary ratio'. Solvency ratio generally refers to the ability of the business concern to meet its short term and long term obligations.
List of companies which are taken for the purpose of Ratio Analysis:-
- Royal Dutch Shell
- Exxon Mobil
- Royal Dutch Shell plc, usually known as Shell. It's a public company and listed on LSE (London Stock Exchange).
- Shell is a multinational petroleum company of Dutch and British origins.
- The Royal Dutch Shell Group was come in existence in February 1907 when the Royal Dutch Petroleum Company of Dutch and the "Shell" Transport and Trading Company Ltd of the United Kingdom merged their operations.
- Mr. Jorma Ollila is the Chairman and Mr. Peter Voser is the CEO of Royal Dutch Shell.
- The company's headquarters is at The Hague, Netherlands, and its registered office is at the Shell Centre in London, United Kingdom.
- The group primary business is the exploration for and the production, processing, transportation, and marketing of petroleum and natural gas.
- Shell Oil Company, Shell Nigeria and Shell Canada are subsidies of Royal Dutch Shell.
- Shell operates in over 140 countries with 45000 service stations worldwide. According to March 2009 there are 102,000 employees working in this group.
- Shell was listed as the world's largest corporation for 2009 by Fortune 500 and world's second largest corporation by Forbes.
- Their revenue is ? US$ 458.361 billion (2008), profit is ? US$ 26.277 billion (2008), total assets is ? US$ 282.401 billion (2008).
- The Exxon Mobil Corporation, or ExxonMobil, is an American oil and gas corporation. It's a public company.
- In 1911, the Supreme Court of the United States ruled that Standard Oil must be dissolved and split into 34 companies. Two of these companies were Jersey Standard ("Standard Oil Company of New Jersey"), which eventually became Exxon, and Socony ("Standard Oil Company of New York"), which eventually became Mobil.
- So, is a direct descendant of John D. Rockefeller's Standard Oil Company and then it was created on November 30, 1999, by the merger of Exxon and Mobil.
- Mr. Rex W. Tillerson is the Chairman and CEO of this corporation.
- Their products are Fuel, Lubricants and Petrochemicals serves worldwide with 38 oil refineries in 21 countries.
- And their brands are Esso, Exxom and Mobil.
- Their headquarters is at Irving, Texas, USA.
- There are 79,900 employees according to March 2009 working in Exxon Mobil.
- Their revenue is ? US$ 477.35 billion (2008), net income is ? US$ 45.22 billion (2008), total assets is ? US$ 228.052 billion (2008).
- Imperial Oil Limited, SeaRiver Maritime are subsidiaries of the corporation.
- Aera Energy LLC is an E&P joint venture with Shell Oil, operating in California. And Infineum is a joint venture between ExxonMobil and Royal Dutch/Shell for manufacturing and marketing lubricant and fuel additives.
Exxon net profit ratio is more than Shell so on point of net profit Exxon is stronger than Shell. The administrative expenses ratio of Exxon is less than shell, shell expenses is varying between 4.67 to 5.21 and of Exxon is between 3.68 to 3.88. And the stock turnover of shell is increasing continuously while of Exxon is decreasing continuously; turnover of shell is stronger than Exxon. Exxon make the best utilization of Current Assets in 2005 with current assets turnover ratio of 5.05, and Shell make the best utilization in 2006 with current assets turnover ratio of 2.86. Total assets turnover ratio of Exxon is decreasing continuously while Shell's ratio is increases in 2006, then in 2007 it decreases again. The satisfactory ratio of quick ratio is 1:1 and Shell improves their condition from 2005 to 2007, but Exxon quick ratio is still not in the 1:1 proportion. Condition of both companies is not good at current ratio; satisfactory ratio is 2:1, current ratio of Exxon is not in the ratio of 2:1 and condition become worse due to continuous decreasing in ratio and Shell ratio is increasing continuously, but even after the condition of Exxon is better than Shell. But the cash ratio of the Exxon is less than Shell, and the net working capital of Exxon is more than Shell.
Both are the companies of same level, but even after the overall condition of Exxon is better than Shell.Conclusion
Analysis is the most important part of ratio analysis, only by analyzing we can know or find the profitability, turnover and financial condition of the firm. As I find that the condition of both companies, Shell is doing well not as such as Exxon, their gross profit is decreases but there is increase in the net profit in 2007 and diminishes in expenses is also in the favor of the Shell, Exxon net profit is decreases and their manufacturing expenses are increases. Stock turnover of Shell increases continuously while of Exxon is decreases continuously, current assets turnover ratio of Exxon is decreases continuously even then the condition of Exxon is better. Only Shell follows the proportion of 1:1 under the quick ratio. Both are not following the condition of 2:1under current ratio.
Both companies are well known and success companies.
- Agarwal J.K. & Agrawal R.K. (2006), Management Accounting, First Edition, Ramesh Book Depot Jaipur - New Delhi.
- Pandikumar M P, Management Accounting