CHAPTER IV PROFITABILITY ANALYSIS AND ITS TREND...

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CHAPTER IV

PROFITABILITY ANALYSIS AND ITS TREND

A. Analysis of profitability

The “profit” is the golden egg, the centre of attraction of all those who are

interested in the corporate unit. Therefore, it is necessary to analyze and interpret

profitability in the corporate sector as a whole. The business firms are generally

established with a view to earning profit from the business operations. But under

different situations the object of the business firms may be changed to survival,

growth, stability etc. Business firms are to survive in dynamic and expanding

environment. It has to go on expanding the scale of its operation on a regular and

continuing basis by generating sufficient profit. Profits are useful intermediate

beacon towards which a firm‟s capital should be directed.1 It is difficult for a

business to breathe well without profit. It may be regarded as a mirror of the

operating performance of the business activities. But in the real business

environment of today, profit is thus, not the sole objective but one among the

most important objectives, which normally guide and direct business operations.

Indeed, profits are the test of efficiency and a measure of control; to the

owners, a measure of worth of their investment; to the creditor, the margin of

safety; to the employees, source of fringe benefits; to the governments, measures

of taxable capacity and the basis of legislative action; to the customer, demand

for price cut. It is the criteria of judging the efficient operation. In short, profit is

the legitimate object of an enterprise from the investor. According to economic

thinkers, profits are the report card of the past, incentive gold star for the future

and also stake for the new venture. Accountants ascertain profits is not only a

reliable measure of efficient performance in using production resources but also,

a means of measuring the progress of the business or “testing its pulse” and of

indicating when and whole remedial action, if necessary shall be taken2.

In the era of economic development, profit and profitability are two

different concepts. Although both are controversial, even then both are

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inter-related and mutually inter-dependent. Profit is an absolute term and

profitability is a relative concept. Notably, while profit is the residue of income,

profitability is the profit-making ability of the enterprise. It may be remarked that

the profit making ability might denote a constant or improved or deteriorated

state of affairs during a given period. Thus, profit is an absolute connotation,

whereas profitability is a relative concept, despite being closely related to and

mutually inter-dependent, as they are, profit and profitability are two different

concepts. In other words, in spite of their generic nature, each one of them has a

distinct role in business concerns and more often than not their profitability could

differ when measured in terms of the size of investment3. An analysis of the

profitability reveals as to how the position of profits stands as a result of total

transactions made during the year.

Measurement of Profitability

Profitability is the main indicator of the efficiency and effectiveness of a

business enterprise in achieving its goal of earning profit. Profitability of a firm

can be measured by its profitability ratios. In the process of performance

appraisal of a business, profitability ratios can be calculated to measure

the operating efficiency. The profitability ratios can be determined on the basis

of either investment or sales and for this purpose a quantitative relationship

between the profit and the investment or the sales is established. In the words of

James C. Van Horne, “Profitability ratios are of two types: those showing

profitability in relation to sales, and those showing profitability in relation to

investment4. The author further adds with all of the profitability ratios,

comparisons of a company with similar companies are extremely valuable. Only

by comparison one can judge whether the profitability of a particular company is

good or bad, because absolute figures give some insight, but it is relative

performance which is the most important”5. The profitability of the company

should be evaluated in terms of its investment in assets and in terms of capital

contributed by creditors and owners, as such if a company is unable to earn a

satisfactory return on investments, its survival is threatened.

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The profitability of selected oil refineries in India has been analyzed from

the view point of financial management, shareholders and utilization of assets.

The following profitability ratios have been computed and analyzed for the

selected oil refineries in India during the study period.

I. Profitability from the view point of Financial Management

1. Operating profit margin ratio

2. Gross profit margin ratio

3. Return on capital employed

4. Interest coverage ratio

II. Profitability from the view point of Shareholders

1. Net profit margin ratio

2. Return on total assets

3. Return on shareholders‟ funds

4. Earnings Per Share

5. Dividend Payout Ratio

III. Profitability from the view point of utilization of assets

1. Total assets turnover

2. Fixed assets turnover

3. Current assets turnover

4. Inventory turnover

In order to test the significance of variation in the mean percentage of

profitability ratios between the companies and the years, the following

hypotheses are framed and tested.

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H0 – There is no significant differences in the mean percentage of

profitability ratios between the companies and years.

H0 – There is no significant differences between the Industry mean

profitability ratio and individual company mean profitability ratio.

I. Profitability from the view point of Financial Management

A financial manager is very much interested in locating and pinpointing

the causes which are responsible for low or high profitability. The financial

manager should continuously evaluate efficiency of his company in terms of

profit. The profit margin ratio is a profitability ratio which measures the

relationship between the profit and sales. It indicates the efficiency or

effectiveness with which the operations of business are carried on. Profit margin

varies with disproportionate variations in sales revenue in comparison to cost or

vice-versa. To judge profitability from the view point of financial management of

selected oil refineries in India, the following ratios have been computed and

analyzed.

Operating profit margin ratio

The first profitability ratio in relation to sales is the operating profit

margin.6 The operating profit margin reflects the efficiency with which the

management produces each unit of product. This ratio indicates the average

spread between the cost of goods sold and sales.7 It is one of the most carefully

watched measures of profitability. A high operating profit margin is the sign of

managerial effectiveness. Conversely, a low ratio should be carefully investigated

and compared with the ratios of similar companies to diagnose and also to

remedy the problem.8

There is no standard norm for operating profit ratio and it

may vary from business to business but the operating profit should be adequate to

provide for fixed charges, interest and dividend.

Table 4.1 shows a fluctuating trend in the operating profit margin ratio of

the selected refineries during the study period. Such a fluctuating trend could be

attributed to the poor performance of selected oil refineries due to poor market

condition, difficulty in getting raw material and all round rise in the input cost

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Table 4.1

Operating profit margin ratio of selected oil refineries in India

(1994-95 to 2008-09)

(in per cent)

Year IOCL HPCL BPCL MRPL CPCL EOL RIL Industry

Average

1994-95 4.50 6.42 5.74 46.40 9.98 22.89 30.12 18.01

1995-96 4.76 7.27 6.11 48.10 12.25 23.77 30.61 18.98

1996-97 5.33 7.30 5.40 45.90 13.57 4.60 30.28 16.05

1997-98 6.36 6.38 5.90 41.06 13.94 25.08 39.74 19.78

1998-99 7.12 6.65 6.00 19.52 12.72 24.36 31.23 15.37

1999-00 6.19 5.10 4.91 4.70 6.66 25.11 30.02 11.81

2000-01 4.60 4.43 4.26 3.86 5.47 27.00 24.17 10.54

2001-02 6.53 4.52 5.00 4.64 4.89 26.98 19.92 10.35

2002-03 8.43 5.78 5.88 4.47 8.64 3.38 18.74 7.90

2003-04 8.69 6.17 6.13 8.40 8.42 -4.91 19.45 7.48

2004-05 5.46 3.62 3.15 10.02 9.19 -15.00 19.52 5.14

2005-06 4.67 1.51 1.64 4.06 5.36 -10.22 16.82 3.41

2006-07 6.08 3.29 4.02 5.15 5.31 -3.91 17.35 5.33

2007-08 5.24 2.57 3.42 6.05 7.70 2.16 20.78 6.85

2008-09 3.22 2.92 2.78 5.46 -3.46 4.16 17.58 4.67

Mean 5.81 4.93 4.69 17.19 8.04 10.36 24.42 10.78

SD 1.49 1.83 1.41 18.07 4.44 15.15 7.00 5.41

CV 0.25 0.37 0.30 1.04 0.55 1.46 0.28 0.50

CAGR -2.20 -5.11 -4.71 -13.29 -193.18 -10.75 -3.52 -8.60

t-value -3.33* -5.42* -5.09* 1.83*** -2.70** -0.14 19.43*

Analysis of Variance

Sources of variations SS df MS F P-value F critical

value

Between the years 3070.87 14.00 219.35 3.19 0.00 1.81

Between the companies 4962.34 6.00 827.06 12.02 0.00 2.21

Error 5777.57 84.00 68.78

Total 13810.78 104.00

CV - Co-efficient of Variation; CAGR - Compound Annual Growth Rate

*- Significant at 0.01 per cent level; **-Significant at 0.05 level; ***-Significant at 0.10 per cent level

Source: Computed

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without corresponding increase in selling price. On an average the oil refinery

industry had the overall operating profit margin ratio of 10.78 per cent with a

co-efficient of variation of 0.50. The average operating profit margin ratio varied

from company to company, the highest average was 24.42 per cent in Reliance

Industries Ltd followed by 17.19 per cent in Mangalore Refinery and

Petrochemicals Ltd and 10.36 per cent in Essar Oil Ltd. The performance of

Reliance Industries Ltd and Mangalore Refinery and Petrochemicals Ltd was

satisfactory because their average operating profit margin ratio was higher than

the industry average. The average operating profit margin of rest of the

companies was less than the industry average.

The CV value shows that moderate fluctuation was absorbed in the

operating profit of Indian Oil Corporation Ltd, Bharat Petroleum Corporation

Ltd, Hindustan Petroleum Corporation Ltd and Chennai Petroleum Corporation

Ltd. Mangalore Refinery and Petrochemical Ltd and Essar Oil Ltd have

registered higher fluctuation in their operating profit during the study period.

Such fluctuation could be attributed to the differences in the growth rates of

operating profit margin and sales because of the factors such as high operating

expenses, market condition and government policy. CAGR of operating profit

ratio witnessed a negative trend in all the selected companies along with industry

average. This showed the poor performance of selected oil refineries during the

study period.

In order to test the hypothesis, paired sample t-test has been applied.

It can be viewed from the Table 4.1 that the mean operating profit margin ratio of

all the selected oil refineries except Essar Oil Ltd showed significant differences

from the industry average as per the t-value during the study period. The

significant level varied from one per cent to ten per cent. Analysis of variance has

been applied between the years and between the companies to test the hypothesis.

Since the calculated values of F (3.19 and 12.02) are higher than the table values

of F (1.81 and 2.21) at five per cent level between the years and companies, it is

concluded that the null hypothesis is rejected. The rejection of the null hypothesis

would indicate that there is a significant difference in the mean per cent of

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operating profit margin ratio between the years and companies. Thus, the overall

analysis of profitability of the selected oil refineries in India measured through

operating profit margin ratio is satisfactory.

Gross profit margin ratio

Generally, excess of net sales over cost of goods sold is termed as gross

profit margin. It reflects the efficiency with which management produces each

unit of product. This ratio indicates the average spread between cost of goods

sold and sales9. This ratio is of vital importance for gauging business results.

It reflects pricing policies of a business. It also helps in ascertaining whether the

average per cent of mark up on the goods is maintained. A low gross profit ratio

will suggest a decline in business which may be due to insufficient sales, higher

cost of production with the existing or reduced selling price or all round

inefficient management. The finance manager must be able to detect the causes of

falling gross profit ratio and initiate action to improve the situation. A high gross

profit margin is a sign of good and efficient management.

Table 4.2 shows a fluctuating trend in the gross profit margin ratio of the

selected oil refineries in India during the fifteen- year study period. On an

average the oil refineries had the overall gross profit margin ratio of 6.51 per cent

with co-efficient of variation of 0.20. The average gross profit margin ratio varies

from company to company. The highest average was 20.49 per cent in Reliance

Industries Ltd followed by 6.91 per cent in Essar Oil Ltd and 5.96 per cent in

Chennai Petroleum Corporation Ltd. The performance of Reliance Industries Ltd

and Essar Oil Ltd was satisfactory because its average ratio of gross profit margin

was higher than the industry average. The average of Indian Oil Corporation Ltd,

Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd,

Mangalore Refinery and Petrochemicals Ltd and Chennai Petroleum Corporation

Ltd were lower than the industry average. The CV value of these ratios shows

very high fluctuation in the gross profit margin ratio of Mangalore Refinery and

Petrochemicals Ltd and Essar Oil Ltd. Such fluctuations could be attributed to the

differences in the growth rates of gross profit margin and sales because of the

factors such as higher financial charges, market condition and

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Table 4.2

Gross profit margin ratio of selected oil refineries in India

(1994-95 to 2008-09)

(in per cent)


average

1994-95 2.96 5.58 5.41 14.01 5.82 16.06 24.93 5.40

1995-96 3.55 6.96 5.84 16.06 7.57 19.92 28.69 5.80

1996-97 3.58 6.76 4.95 19.32 8.11 -5.04 27.64 6.30

1997-98 4.47 5.96 5.36 12.06 8.56 20.07 24.56 7.00

1998-99 5.39 6.20 5.32 5.31 9.67 21.46 24.37 7.70

1999-00 5.15 4.59 4.38 -5.96 5.06 18.51 23.66 5.70

2000-01 3.23 3.6 3.72 -3.57 3.59 21.34 18.89 5.30

2001-02 5.17 3.84 4.27 -8.04 2.77 23.57 15.90 6.40

2002-03 7.80 5.49 5.07 -2.03 7.31 1.57 15.64 8.20

2003-04 8.37 6.07 5.94 5.66 7.89 -4.94 16.90 9.10

2004-05 5.13 3.50 2.93 8.91 8.08 -15.55 17.51 7.40

2005-06 4.19 1.25 1.35 3.39 4.53 -11.21 15.84 5.60

2006-07 5.46 2.73 3.52 4.49 4.54 -4.56 16.35 6.70

2007-08 4.69 1.75 2.93 5.66 7.00 0.26 20.01 7.10

2008-09 2.10 1.28 1.42 5.13 -1.04 2.26 16.39 3.90

Mean 4.75 4.37 4.16 5.36 5.96 6.91 20.49 6.51

SD 1.68 1.97 1.49 7.97 2.78 13.63 4.66 1.31

CV 0.35 0.45 0.36 1.49 0.47 1.97 0.23 0.20

CAGR -2.26 -9.63 -8.53 -6.48 -189.15 -12.25 -2.76 -2.15

t-value -8.81* -4.42* -6.42* -0.549 -1.033 0.11*** 10.79*



value



Error 3121.69 84.00 37.16

Total 7092.25 104.00

CV - Co-efficient of variation; CAGR - Compound annual growth rate

*- Significant at 0.01 per cent level; ***-Significant at 0.10 per cent level

Source: Computed

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change in demand during the study period. The other companies have registered

moderate fluctuations during the study period. All the selected companies and the

whole industry witnessed negative compound annual growth rate of this ratio

during the study period.

In order to test the hypothesis, analysis of variance was applied between

the years and between the companies. Since the calculated value of F (13.75) is

more than the table value of F (2.21) at five per cent level of significance between

the companies, it is concluded that the null hypothesis is rejected. The rejection

of the null hypothesis would indicate that there are significant differences in the

gross profit margin ratio between the companies. However, this was insignificant

between the years as the calculated value of F (1.74) is lower than the table value

of F (1.81) at five per cent level of significance.

Paired sample t-test was applied between the companies mean and

industry mean for testing the hypothesis framed. As majority of the selected

companies have shown significant differences, it is concluded that the null

hypothesis is rejected. It can be seen from Table 4.2 that Indian Oil Corporation

Ltd, Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd

and Reliance Industries Ltd showed significant differences in the gross profit

margin ratio as per the t-value from the industry average during the study period.

The table also shows that all the selected oil refineries had positive gross

profit margin during the study period except Essar Oil Ltd, Mangalore Refineries

and Petrochemicals Ltd and Chennai Petroleum Corporation Ltd. Essar Oil Ltd

had negative gross profit margin in 1996-97 and from 2003-04 to 2006-07.

Mangalore Refineries and Petrochemicals Ltd had negative gross profit margin

from 1999-2000 to 2002-03 and Chennai Petroleum Corporation Ltd had positive

gross profit margin throughout the study period except in the year 2008-09. These

companies have negative gross profit margin due to inadequate sales, higher cost

of production and inefficient management. The table also reveals a fluctuating

trend of this ratio among the companies selected under different capacities of oil

refineries in India. Hence, the profitability of the selected oil refineries measured

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through the gross profit margin ratio was satisfactory and adequate to cover the

fixed charges during the study period.

Return on Capital Employed

The primary objective of making investment in any business is to obtain

satisfactory return on the capital invested. Hence, the return on capital employed

is used as a measure of success of a business in realizing this objective. It is the

chief profitability ratio and the most important measure of performance as it

indicates the comparative efficiency with which the whole company runs

properly. Therefore, return on capital employed is a valuable yardstick to

measure the overall performance of an undertaking. The return on capital

employed shows the earning power of capital invested. It indicates how the

management has used the funds supplied by creditors and owners. The higher the

ratio, the more efficient can be considered the enterprise in using fund entrusted

to it. The comparison of this ratio with the ratio of similar business organizations

will reveal the relative operating efficiency of a business enterprise. Further, an

investor can judge the future prospects of business enterprise by taking into

consideration the earning capacity of capital employed. It shows the earning

capacity of the capital.

Table 4.3 indicates that a fluctuating trend in the return on capital

employed ratio of the whole industry in India and had an average of 11.67

per cent ranging from 6.30 per cent in 2008-09 to 18.3 per cent in 2003-04. The

average return on capital employed varied from company to company. The

highest average was 15.03 per cent in Bharat Petroleum Corporation Ltd

followed by Hindustan Petroleum Corporation Ltd (14.57 per cent) and Indian

Oil Corporation Ltd (12.88 per cent). The performance of Reliance Industries

Ltd, Bharat Petroleum Corporation Ltd, Hindustan Petroleum Corporation Ltd

and Indian Oil Corporation Ltd was satisfactory because their average return on

capital employed ratios were higher than the industry average. Mangalore

Refinery and Petrochemicals Ltd, Chennai Petroleum Corporation Ltd and Essar

Oil Ltd had a low average compared to industry average.

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Table 4.3

Return on capital employed ratio of selected oil refineries in India

(1994-95 to 2008-09)

(in per cent)


average

1994-95 12.88 19.54 18.83 4.57 7.15 9.71 12.95 8.30

1995-96 13.50 20.49 21.13 -3.83 6.60 3.32 11.80 9.30

1996-97 12.28 18.01 16.72 3.56 6.66 2.39 9.41 10.40

1997-98 12.16 15.79 16.16 0.82 7.65 0.71 9.20 10.20

1998-99 12.70 16.22 18.71 0.28 10.98 0.45 8.65 14.30

1999-00 10.58 16.82 16.31 -5.07 6.98 0.49 11.18 10.70

2000-01 9.28 14.07 15.77 -3.28 5.41 0.20 12.04 8.50

2001-02 9.59 9.82 14.69 -9.19 2.78 0.45 9.96 6.80

2002-03 21.49 20.24 21.00 -7.26 11.94 0.35 9.19 15.10

2003-04 23.78 23.8 25.56 7.58 12.11 0.15 10.99 18.30

2004-05 14.19 15.22 12.57 15.19 15.80 -1.21 14.70 15.00

2005-06 10.99 4.16 2.67 6.66 11.95 -0.70 15.32 11.40

2006-07 13.92 13.52 12.36 9.73 3.17 -0.33 16.50 14.80

2007-08 11.52 7.56 8.97 23.36 24.02 -4.01 20.55 15.70

2008-09 4.41 3.33 3.93 19.08 -6.85 3.01 10.55 6.30

Mean 12.88 14.57 15.03 4.15 8.42 1.00 12.20 11.67

SD 4.65 6.01 6.23 9.64 6.84 2.98 3.31 3.63

CV 0.36 0.42 0.41 2.33 0.81 0.33 0.27 0.31

CAGR -6.89 11.12 -9.91 9.99 0.28 -7.51 -1.35 -1.82

t-value 1.55 1.91*** 2.07*** -3.15* 2.53** -7.12* 0.504



value



Error 2768.69 84.00 32.96

Total 6070.74 104.00


*- Significant at 0.01 per cent level; **-Significant at 0.05 level; ***-Significant at 0.10 per cent level

Source: Computed

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The CV value of this ratio showed moderate fluctuations during the study

period except Mangalore Refinery and Petrochemicals Ltd and Essar Oil Ltd.

Both had very high fluctuations during the study period. The fluctuation in this

ratio could be attributed to the differences in growth rate of EBIT and the capital

employed. The compound annual growth rate of this ratio was negative in all the

selected oil refineries except Mangalore Refinery and Petrochemicals Ltd and

Chennai Petroleum Corporation Ltd.

To test the hypothesis between company mean and industry mean paired

t-test has been applied. It can be seen from Table 4.3 that all the selected oil

refineries showed significant differences in their return on capital ratio from the

industry average as per t-value during the study period except Indian Oil

Corporation Ltd and Reliance Industries Ltd. The significant level varied from

one per cent to ten per cent level.

In order to test the hypothesis, the analysis of variance has been applied

among all the selected companies and between the years. Table 4.3 reveals that

differences in the return on capital employed ratio is insignificant between the

years as the calculated value of F (1.63) is less than the table value of F (1.81) at

five per cent level of significance. It is concluded that the null hypothesis is

accepted. However, the value is significant between the companies as the

calculated value of F (12.89) is greater than the table value of F (2.21) at five

per cent level of significance. Hence, the null hypothesis is rejected. The rejection

of null hypothesis denotes that there are significant differences in the return on

capital employed ratio of selected oil refineries in India.

The overall analysis of this ratio of return on capital employed decreased

significantly due to wide fluctuations in the growth rate of EBIT and capital

employed in the selected oil refineries in India during the study period.

Interest coverage ratio

It is relevant to analyze the interest burden in the oil refineries to have an

idea of its impact on the net profit margins. Interest means a fixed burden to a

certain degree does not change with variance in volume of business operations.

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This ratio is very important from the lenders point of view, as this ratio reveals

the fixed interest charges bearing funds such as debentures, long term borrowing

as the extent covers the profit before interest and tax to fixed charges interest paid

or payable. This ratio is an important factor which affects the capital structure and

financial management as it measures debt-serving capacity of a firm. The ratio

suggests that how many times the interest charges are covered by the earnings

before interest and taxes. A high ratio is a sign of low burden of debt-serving and

lower utilization of borrowed funds but too high ratio suggests the firm is not

taking the advantages of „trading on equity‟ and is very conservative in using

debt and credit facility. In contrast a very low ratio signifies the danger signal that

the firm is highly dependent on borrowed funds and its earnings cannot meet the

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profit margin in as much as it is computed after adding the non-operating

surplus/deficit. A high net profit margin would ensure adequate return to the

owners as well as enable a firm to withstand adverse economic conditions when

the selling price is declining, cost of production is rising and demand for the

product is falling10

. In case the net profit margin is inadequate, the company will

not be in a position to pay off its debts and give a satisfactory return to its

shareholders11

.

Table 4.5 demonstrates a fluctuating trend in the net profit margin ratio of

the selected oil refineries in India during the study period. Industry average was

also fluctuating trend during the period of study. The oil refineries in India had

the overall net profit margin ratio of 3.13 per cent with a co-efficient of variation

of 1.70. Industry average and all the selected oil refineries in India has registered

negative compound annual growth rate. The highest average was 15.10 per cent

in Chennai Petroleum Corporation Ltd followed by 3.50 per cent in Reliance

Industries Ltd and 2.51 per cent in Indian Oil Corporation Ltd. Mangalore

Refinery and Petrochemicals Ltd had negative net profit margin during the period

of study. The performance of Reliance Industries Ltd and Chennai Petroleum

Corporation Ltd was good because their average net profit margin ratios were

better than that of the industry average. Mangalore Refinery Petrochemicals Ltd

and Essar Oil Ltd have not performed well during the whole period of study, as

their average net profit margin ratios had negative sign and was lower than the

industry average due to rising cost of production, reduction in selling price,

inventory losses and foreign exchange rate fluctuations and under recoveries of

selected oil refineries. In these circumstances, these companies failed to achieve

satisfactory return on shareholders‟ funds and these cannot withstand in adverse

economic conditions. Companies with high average net profit margin ratios

would be in advantageous position to survive in the phase of falling sales prices,

rising cost of production, and declining demand for the product.

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Table 4.5

Net profit margin ratio of selected oil refineries in India

(1994-95 to 2008-09)

(in per cent)


average

1994-95 1.01 2.80 2.17 5.28 3.87 12.62 19.76 1.90

1995-96 1.32 3.40 2.57 -1.94 4.37 13.01 22.82 2.20

1996-97 1.71 3.33 2.38 7.81 4.22 -23.74 20.56 2.50

1997-98 2.29 2.97 2.16 2.06 4.91 8.11 17.02 2.90

1998-99 3.13 3.19 2.66 -0.41 5.61 7.73 16.00 4.00

1999-00 2.52 3.08 2.01 -10.69 2.66 2.91 15.21 2.70

2000-01 2.03 2.24 1.67 -9.73 180 6.51 11.49 2.40

2001-02 2.48 1.74 1.97 -15.72 1.03 1.51 7.07 2.32

2002-03 4.62 2.84 2.58 -3.94 3.75 -15.29 8.23 4.30

2003-04 4.99 3.16 3.19 1.58 4.58 -6.51 9.08 4.90

2004-05 3.13 1.72 1.33 4.15 4.22 -16.52 10.37 4.10

2005-06 2.18 0.23 0.29 1.16 2.26 -14.89 10.18 3.00

2006-07 3.09 1.29 1.79 1.72 2.29 -7.21 10.10 3.80

2007-08 2.44 0.66 1.20 3.26 3.99 -1.28 13.97 4.30

2008-09 0.71 0.33 0.50 2.89 -1.23 -1.50 10.69 1.70

Mean 2.51 2.20 1.90 -0.83 15.10 -2.30 13.50 3.13

SD 1.18 1.13 0.80 6.55 45.65 11.40 4.86 1.01

CV 0.47 0.51 0.42 -0.13 3.02 -4.95 0.36 1.70

CAGR -2.30 -13.28 -9.32 -2.91 -192.64 -13.23 -4.01 -0.58

t-value -4.35* -2.44** -4.38* -2.36** 1.011 -1.78*** 7.51*



value



Error 27454.49 84.00 326.84

Total 36191.08 104.00


*- Significant at 0.01 per cent level; **- Significant at 0.05 per cent level

***-Significant at 0.10 per cent level

Source: Computed

97

It would be possible to interpret the firm‟s profitability more

meaningfully if both gross profit margin and net profit margin are studied

together. By comparing Table 4.2 with Table 4.5, it may be observed that the

average gross profit margin of oil refineries in India has decreased from 5.4

per cent in 1994-95 to 3.9 per cent in 2008-09 during the study period. Gross

profit margin of oil refineries in India has declined because of increase in the

price of raw materials and cost of goods sold. The average net profit margin had

declined sharply from 1.9 per cent in 1994-95 to 1.7 per cent in 2008-09.

It implies that the operating expenses relating to sales have been increasing. The

increasing expenses should be identified and controlled.

Table 4.5 shows that CV value of these ratios is on the higher side which

indicates high fluctuation in the net profit margin ratios of selected companies

during the study period. Such fluctuation could be attributed to the differences in

the growth rates of net profit margin and sales because of the adverse economic

conditions such as falling sales prices, increasing crude oil prices or declining

demand for the product. All the selected companies and the whole industry

witnessed negative compound annual growth rate of this ratio over the period of

study.

Paired sample t-test has been applied between the company mean and

industry mean. It is observed from Table 4.5 that all the selected oil refineries

have shown significant differences as per t-value from the industry mean except

Chennai Petroleum Corporation Ltd during the study period. The significant level

varied from one per cent to ten per cent. Since all the selected companies have

shown significant differences as per t-value except Chennai Petroleum

Corporation Ltd, the null hypothesis is rejected. In order to test the hypothesis,

analysis of variance was applied between the years and between the companies.

It is concluded that the null hypothesis is accepted, since the calculated value of

F is lower than the table value of F at five per cent level between the years and

between the companies. The acceptance of null hypothesis would indicate that

there is no significant difference in net profit margin ratios between the years and

companies.

98

To sum up, majority of the companies were performing well and the

efficiency in manufacturing, and selling the products was proved to be

satisfactory. Among the selected companies, Mangalore Refinery and

Petrochemicals Ltd and Essar Oil Ltd failed to achieve satisfactory returns.

In contrast, they incurred net losses over the period of study. But positive sign at

tail end of the study period gives good hope for the companies in the years to

come from the view point of shareholders.

Return on total assets

Profitability of business enterprises is measured in relation to investment.

It is the prime measure of the overall profitability of an enterprise. Return on

investment measures the overall effectiveness of management in generating profit

with its available assets12

. This ratio reveals how profitability of the firm‟s assets

has been utilized. The rate of return on investment is the end product of the

two-fold sequence of the profit margin path and can be ascertained by the

multiplication of the investment turnover with the percentage of profit margin on

sales13

.

The return on assets of a company determines its ability to utilize the

assets employed in the enterprises efficiently and effectively to earn good return.

This ratio measures the percentage of profit earned per rupee of assets and thus is

a measure of the efficiency of the company in generating profits on its assets. The

ratio can be very well used for inter-firm and inter-industry comparison. Notably,

neither the operating profit margin nor the turnover ratio by itself provides an

adequate measure of operating efficiency. Further, while the net profit margin

ignores the utilization of assets, the turnover ratio ignores profitability on sales,

the return on assets ratio or earning power reveals these shortcomings.14

An improvement in the earning power of the firm will result if there is an

increase in turnover on existing assets and an increase in the net profit margin.

Most of the industries acquire assets to produce sales revenues and ultimately,

profits. Asset utilization ratios indicate how effectively or efficiently an industry

uses its assets. The asset efficiencies and the returns on assets of selected oil

refineries are shown in Table 4.6. The whole industry registered 5.99 per cent

average rate of return on total assets during the period of study. The efficiency

in generating

99

Table 4.6

Return on total assets ratio of selected oil refineries in India

(1994-95 to 2008-09)

(in per cent)


average

1994-95 5.69 10.77 9.45 1.56 3.02 4.04 10.84 4.00

1995-96 5.96 11.8 10.95 1.75 3.06 1.96 9.83 4.60

1996-97 4.92 10.22 8.78 2.28 2.61 1.93 7.65 4.60

1997-98 5.08 9.32 8.96 0.46 2.76 0.58 7.14 4.30

1998-99 6.54 10.28 10.22 -0.21 3.63 0.38 6.48 6.10

1999-00 6.25 9.43 7.77 -4.54 3.00 0.41 8.36 4.50

2000-01 5.57 7.73 7.10 -2.62 3.97 0.51 8.93 5.10

2001-02 5.28 5.24 6.38 -6.34 1.97 0.32 7.48 4.00

2002-03 10.56 9.46 8.17 -4.93 7.39 -0.23 6.83 7.90

2003-04 11.33 10.57 9.7 5.31 7.53 -0.11 7.57 9.20

2004-05 7.03 6.78 5.02 9.73 9.03 -1.02 9.89 8.40

2005-06 5.88 1.85 1.19 4.06 5.97 -0.54 10.41 6.50

2006-07 7.71 5.55 5.77 5.70 6.60 -0.22 11.33 8.60

2007-08 6.12 3.09 4.10 11.69 11.8 -2.36 14.57 8.90

2008-09 2.24 1.30 1.62 9.64 3.21 -1.56 7.73 3.20

Mean 6.41 7.56 7.01 2.24 5.04 0.27 9.00 5.99

SD 2.20 3.42 2.99 5.54 2.88 1.54 2.17 2.08

CV 0.34 0.45 0.42 2.48 0.82 5.65 0.24 0.35

CAGR -6.02 -13.14 -11.09 11.17 0.4 -6.39 -2.22 -1.48

t-value 1.08 1.46 1.03 -2.89* -2.73* -7.02* 4.91*

Analysis of variance


value



Error 828.24 84.00 9.86

Total 1866.71 104.00


*- Significant at 0.01 per cent level;

Source: Computed

100

profits on its assets was better in all the selected companies except Mangalore

Refinery and Petrochemicals Ltd, Essar Oil Ltd and Chennai Petroleum

Corporation Ltd because their average return on total assets was not better than

the industry average. The highest average was 9.00 per cent in Reliance

Industries Ltd followed by 7.56 per cent in Hindustan Petroleum Corporation Ltd

and 7.01 per cent in Bharat Petroleum Corporation Ltd during the study period.

The asset utilization efficiency of Essar Oil Ltd was the worst among the selected

oil refineries in India because its average ratio was the least among the companies

and below the industry average. This poor performance could be attributed to the

under utilization of assets due to non-availability of crude oil, over stocking and

over investment in assets. The CV value of these ratios shows very high

fluctuations in the return on total assets ratio of the selected oil refineries during

the study period. From the table it is clear that Essar Oil Ltd was more volatile in

utilizing its assets efficiently as its CV was the highest among the sample

companies. Such fluctuations could be attributed to the differences in the growth

rates of profit after tax and total assets and under utilization of assets. All the

selected oil refineries and the whole industry recorded a negative compound

annual growth rate of this ratio during the study period. In order to test the

hypothesis, paired t-test has been applied between the company mean and

industry mean. Mangalore Refinery and Petrochemicals Ltd, Chennai Petroleum

Corporation Ltd, Essar Oil Ltd and Reliance Industries Ltd have shown

significant differences as per t-value. The rest of the companies remained stable

during the study period.

The hypothesis framed was tested by applying analysis of variance

between the years and between the companies. Since the calculated value of

F(14.63) is more than the table value of F(2.21) at five per cent level of

significance between the companies, it is concluded that the null hypothesis is

rejected. The rejection of null hypothesis denotes that there are significant

differences in the return on total assets ratio between the companies. However,

this was insignificant between the years as the calculated value of F is lower than

the table value of F at five per cent level of significance.

To sum up, Reliance Industries Ltd is the fast growing among the selected

oil refineries during the study period in relation to asset utilization.

101

Return on shareholders fund

Return on shareholders fund is of utmost importance to shareholders.

Since it reflects the earning power of the funds belonging to them after all debts

and charges of every description have been paid. The profitability of a company

from the owner‟s point of view should, therefore be assessed in terms of the

return on the owner‟s equity. The ratio measures the ability of the management of

an enterprise to generate adequate returns for the capital invested by the owners

of the company. The ratio is meaningful in the sense that it measures the residue

of income, which really belongs to the owners.

This residue is measured in relation to the capital base, which takes into

account not only the share capital paid by the owners, but also accumulated

surplus or deficit. The earning of a satisfactory return is the most desirable

objective of business. Thus, this ratio is of great interest to the present as well as

prospective shareholders and also of great concern to the management.15

As in the

case of return on assets, the estimate of market value will have a large impact on

this ratio. The return on owners‟ equity of the company should be compared with

the ratios for other similar companies. This will reveal the relative performance

and also the relative strength of the enterprise in attracting future investments.

Table 4.7 clarifies how the selected oil refineries in India have used the

resources of owners during the study period. All the selected oil refineries in

India and the whole industry registered a fluctuating trend during the study

period. The average return on shareholders fund varied from company to

company. The highest average return was 20.30 per cent in Bharat Petroleum

Corporation Ltd followed by 19.67 per cent in Indian Oil Corporation Ltd and

19.24 per cent in Reliance Industries Ltd. All the selected oil refineries in India

except Mangalore Refinery and Petrochemicals Ltd and Essar Oil Ltd have

performed well in generating adequate return for the capital invested by the

owners and used the resources of owners well. These companies have

accomplished the most desirable objective of the companies. This achievement

attracted the present shareholders and will attract the prospective shareholders.

106

Chennai Petroleum Corporation Ltd, Essar Oil Ltd and Mangalore Refinery and

Petrochemicals Ltd were the poor performers in the earnings per share because

their average earnings per share were lower than the industry average of

Rs 25.46 per share during the study period. Among the poor performers

Mangalore Refinery and Petrochemicals Ltd and Essar Oil Ltd were the worst

performers because their average earnings per share were the least among the

companies and below the industry average.

The CV value of this ratio showed very high fluctuations in the earnings

per share of Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd and

Hindustan Petroleum Corporation Ltd. CV value of this ratio in Mangalore

Refinery and Petrochemicals Ltd and Essar Oil Ltd and Reliance Industries Ltd

were erratically fluctuated during the period of study. The fluctuation in this ratio

could be attributed to the difference in the growth rates of earnings available to

equity shareholders, utilization of borrowed and owners fund by the selected oil

refineries in India.

It can be observed from Table 4.8 that the differences in earnings per

share of all selected oil refineries were significant between the companies and

industry average as per the t-value. Such significant differences were obtained in

Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd, Hindustan

Petroleum Corporation Ltd, Mangalore Refinery and Petrochemicals Ltd, Essar

Oil Ltd and Reliance Industries Ltd. However, it was insignificant in the case of

Chennai Petroleum Corporation Ltd during the study period. In order to test the

hypothesis, the analysis of variance has been applied between the years and

between the companies. Table 4.8 shows that differences in earnings per share

were significant between the years and companies as calculated values of F are

higher than the table values of F at five per cent level of significance. The above

overall analysis shows that the performance of the selected oil refineries in India

varied between the companies. Majority of the selected oil refineries have

performed well during the study period.

107

Dividend Payout Ratio

This ratio indicates what percentage of firms‟ earnings after tax less

preference dividend is being paid to equity share holders in the form of dividend.

Dividend payout ratio is a major aspect of the dividend policy of a company.

It measures the relationship between the earnings belonging to the equity share

holders and the dividend paid to them. A ratio lower than 100 per cent denotes

the retention of distributable earnings whereas a ratio higher than 100 per cent

indicates the distribution of a part of resources by way of dividends. The ratio is a

list of managerial ability and reputation of company.

Table 4.9 shows a fluctuating trend in the dividend payout ratio of the

selected oil refineries in India and the whole industry during the study period. On

an average the industry had overall dividend payout ratio of 17.74 per cent with a

coefficient of variation of 0.23. The average of dividend payout ratio varied from

company to company. The highest average was 28.54 per cent in Hindustan

Petroleum Corporation Ltd followed by 27.98 per cent in Chennai Petroleum

Corporation Ltd and 25.04 per cent in Bharat Petroleum Corporation Ltd. The

CV value of this ratio shows very high fluctuations in the dividend payout ratio

of the selected oil refineries during the study period. Such fluctuations could be

attributed to the company‟s effort to maintain stable dividend policy, irrespective

of their actual earnings. These fluctuations could also be a result of the company

policy in the light of economic conditions and company practices.

The analysis of company-wise dividend payout ratio has been given in

Table 4.9. Higher average dividend payout ratios were found in Hindustan

Petroleum Corporation Ltd, Chennai Petroleum Corporation Ltd, Bharat

Petroleum Corporation Ltd and Reliance Industries Ltd. These companies were

slow growing companies as they had higher dividend payout ratios. The average

dividend payout ratios of Mangalore Refinery and Petrochemicals Ltd, Essar Oil

Ltd and Reliance Industries Ltd were lower than the industry average during the

study period. The average of rest of the companies was higher than the industry

average.

108

Table 4.9

Dividend payout ratio of selected oil refineries in India

(1994-95 to 2008-09)

(in per cent)


average

1994-95 10.27 9.74 17.13 0 31.42 7.58 18.64 13.54

1995-96 12.45 12.73 12.83 0 32.21 0.03 23.72 13.42

1996-97 11.16 15.19 12.73 0 30.71 0.14 22.53 13.21

1997-98 11.56 16.97 15.71 0 27.46 0 25.32 13.86

1998-99 23.43 30.49 30.59 0 22.31 0 25.28 18.87

1999-00 24.55 31.86 34.53 0 33.19 0 18.74 20.41

2000-01 27.94 35.45 30.64 0 31.66 0 19.2 20.70

2001-02 30.9 43.06 35.5 0 46.73 0 20.23 25.20

2002-03 35.48 48.89 30.45 0 17.61 0 17.93 21.48

2003-04 33.2 39.76 27.53 0 19.08 0 14.44 19.14

2004-05 31.01 40.25 22.9 0.26 31.27 0 13.97 19.95

2005-06 30.63 28.36 21.21 0.35 39.22 0 15.15 19.27

2006-07 29.18 40.41 29.01 0.28 33.43 0 12.13 20.63

2007-08 8.16 10.33 10.72 0.17 23.45 0 8.48 8.76

2008-09 41.68 24.66 44.14 0.18 0 0 12.97 17.66

Mean 24.11 28.54 25.04 0.08 27.98 0.52 17.92 17.74

SD 10.34 12.53 9.49 0.12 10.39 1.89 4.86 4.14

CV 0.43 0.44 0.38 1.49 0.37 3.65 0.27 0.23

CAGR 9.79 6.39 6.51 0.00 0.00 0.00 -2.39 1.79

t-value 3.20* 4.53* 4.00* -15.98* 3.73* -12.88* 0.92



value



Error 5539.13 84.00 65.94

Total 21196.93 104.00


*- Significant at 0.01 per cent level

Source: Computed

109

It is inferred from the table that Mangalore Refinery and Petrochemicals

Ltd, Essar Oil Ltd had not paid dividend from 1994-95 to 2003-04 and 1997-98 to

2008-09 respectively as they incurred losses during that period. The shareholders

of Chennai Petroleum Corporation Ltd had not been paid dividend in 2008-09 due

to non-availability of profits. The CV value of this ratio showed high fluctuations

in all the selected oil refineries in India except Mangalore Refinery and

Petrochemicals Ltd and Essar Oil Ltd during the study period. Mangalore Refinery

and Petrochemicals Ltd and Essar Oil Ltd had shown very high fluctuations in

dividend payout ratio due to non- availability of profits. The CV value of industry

average had also shown very high fluctuations in dividend payout ratio during the

study period.

It is also inferred that Indian Oil Corporation Ltd, Hindustan Petroleum

Corporation Ltd and Bharat Petroleum Corporation Ltd had registered positive

compound annual growth rate. CAGR was not obtained by Mangalore Refinery

and Petrochemicals Ltd, Essar Oil Ltd and Chennai Petroleum Corporation Ltd

during the period of study. In order to test the hypothesis, paired sample t-test

was applied between the company mean and industry mean. Since all the

selected oil refineries except Reliance Industries Ltd had shown significant

differences as per t-value at one per cent level, the null hypothesis is rejected.

It can also be viewed from the table that differences in the dividend payout ratio

is significant between the companies and years as the calculated values of F are

greater than the table value of F at five per cent level of significance. This higher

payout ratio indicates that the companies have grown slowly as the retention ratio

is less. In brief, majority of the selected companies have been making higher rates

of dividend payment annually.

III. Profitability from the view point of utilization of assets

The overall profitability of any business largely depends on two factors:

the rate of return on capital employed and turnover. The turnover refers to the

number of times an asset flows through a business firms‟ operations and into

sales. The triangular relationship among the sales, profits and assets greatly affect

110

the profitability of a business. The relationship between the sales and profits is

known as profit margin and relationship between the sales and assets is known as

asset turnover. Any change in asset turnover would affect the profitability of the

business. Profitability is the end product of profit margin and assets turnover.19

Assets are the economic resources owned by the business which can be

conveniently expressed in monetary terms.20

The assets are usually significant for

the owners, investors, management, bankers, creditors, government and public.

The assets communicate the financial fact about an enterprise or economic entity

to those who have an interest in interpreting and using those facts. These serve as

means for analyzing and controlling the operation of the enterprise and planning

future action.21

Turnover ratios are concerned with how efficiently the assets of

the firm are managed or utilized. These ratios indicate the rate at which different

assets are turned over in the process of doing business. The greater the rate of

turnover, the more efficient the utilization, other things being equal, resulting in

higher profitability. Thus, the assets turnover helps one to know the efficiency of

the use of assets in generating profits. Hence, a detailed analysis of assets

turnover has been made for better study and tracing out the factors responsible for

changes in profitability.

Total assets turnover

The total assets turnover ratio is an indication of financial soundness of

the business in terms of the sales revenue generated against total funds employed

in the business. This ratio indicates the overall efficiency with which total assets

are used. The total assets taken here are after deducting the depreciation

provision, intangible assets and miscellaneous non-current assets. Using the total

assets turnover ratio alone does not lead to any firm conclusions about a

company‟s efficiency. However, when the information about asset efficiency is

joined with information about the nature of the business, the industry and

economic conditions, it is possible to gain real insight.

The total assets turnover ratio of the selected oil refineries in India during

the period of study is given in Table 4.10. The total assets turnover ratio of whole

industry and all the selected oil refineries registered a fluctuating trend during

111

Table 4.10

Total assets turnover ratio of selected oil refineries in India

(1994-95 to 2008-09)

(in times)


average

1994-95 2.96 4.04 3.95 0.15 1.58 0.54 0.38 2.04

1995-96 2.66 3.37 3.59 0.019 1.46 0.19 0.32 1.78

1996-97 2.49 2.61 2.58 0.36 1.39 0.09 0.32 1.55

1997-98 2.11 2.26 2.47 0.32 1.44 0.06 0.39 1.35

1998-99 2.5 3.35 4.05 0.40 1.84 0.05 0.38 1.43

1999-00 2.89 3.71 4.78 0.47 2.50 0.04 0.53 1.45

2000-01 0.3 4.44 5.06 0.49 2.90 0.03 0.82 1.96

2001-02 2.95 4.38 4.50 0.88 2.62 0.04 0.90 1.68

2002-03 3.25 6.05 0.38 1.25 2.47 0.02 0.91 1.73

2003-04 3.32 5.46 5.6 1.80 2.20 0.09 0.94 1.76

2004-05 3.22 5.68 5.64 3.28 3.21 0.14 1.11 1.90

2005-06 3.13 4.63 4.31 4.38 4.21 0.07 1.13 2.00

2006-07 3.49 4.46 4.58 5.54 5.53 0.04 1.22 2.06

2007-08 3.22 3.85 4.13 5.76 4.76 0.05 1.13 1.87

2008-09 3.45 3.75 4.03 5.77 6.97 2.80 0.71 3.90

Mean 2.80 4.14 3.98 2.06 3.01 0.62 0.75 1.90

SD 0.79 1.06 1.34 2.24 1.67 1.22 0.33 0.60

CV 0.28 0.25 0.34 1.08 0.55 1.97 0.44 0.32

CAGR 1.02 -0.49 0.13 27.54 10.4 11.75 4.25 4.41

t-value 4.04* 7.49* 5.77* 0.32 3.41* -24.07* -7.18*


Sources of variations SS df MS F P-value F critical value



Error 101.76 84.00 1.21

Total 367.61 104.00



Source: Computed

112

the study period. Such a fluctuating trend could be due to the increase in sales

which was not in tune with that of total assets, due to market conditions,

revaluation of assets and development of plans.

The table implies that the total assets turnover ratio of all the selected oil

refineries was higher than the industry average except Essar Oil Ltd and Reliance

Industries Ltd. The overall ratio of the oil refineries in India was 1.90 times with

a co- efficient of variation of 0.32 times. The highest average total assets turnover

ratio of 4.14 times was recorded in Hindustan Petroleum Corporation Ltd

followed by 3.98 times in Bharat Petroleum Corporation Ltd and 3.01 times in

Chennai Petroleum Corporation Ltd. The efficiency of all selected oil refineries

in India was satisfactory because its average total assets turnover ratios were

higher than the industry average except Essar Oil Ltd and Reliance Industries

Ltd. The asset utilization efficiency of Essar Oil Ltd was the worst among the

selected oil refineries in India during the study period because its average ratio

(0.62 times) was the least among the companies and below the industry average.

The CV value of the whole industry showed high fluctuation in total

assets turnover ratio during the study period. Such high fluctuation could be

attributed to the unstable investment in fixed assets and current assets and

fluctuations in sales revenue over the period of study. CV value of this ratio

showed very high fluctuation in all the selected oil refineries in India except

Mangalore Refinery and Petrochemicals Ltd and Essar Oil Ltd. The CV value of

both the companies has erratically fluctuated during the study period. It is also

inferred from the table that all the selected oil refineries and whole industry have

registered positive compound annual growth rate except Hindustan Petroleum

Corporation Ltd. It is observed that all the selected oil refineries have utilized

their assets more efficiently to generate sales except Hindustan Petroleum

Corporation Ltd.

In order to test the hypothesis paired sample t-test was applied. It showed

that there were significant differences in the total assets turnover ratios of

selected oil refineries in India except Mangalore Refinery and Petrochemicals

Ltd. As majority of the selected oil refineries have shown significant differences

113

at one per cent level, the null hypothesis is rejected. Analysis of variance was

applied between the years and between the companies to test the hypothesis.

Since the calculated values of F (3.87 and 27.55) are higher than the table values

of F (1.81 and 2.21) at five per cent level between the years and companies, it is

concluded that the null hypothesis is rejected. The rejection of null hypothesis

would indicate that there is significant differences in the mean percentage of asset

turnover ratio between the years and companies.

In brief most of the selected companies maintained stable total asset

turnover ratio over the period of study. The overall assets utilization efficiency of

the selected oil refineries was satisfactory.

Fixed assets turnover ratio

The fixed assets turnover ratio represents the extent of utilization of fixed

assets in terms of the sales achieved. The ratio indicates whether the investment

in fixed asset was judicious or not when compared with a previous period. It has

been calculated to determine whether the investment decision has been good or

bad in the sense of their efficient utilization. A high ratio will show that the

concern is overtrading on its assets, while a low ratio will indicate that excessive

investments have been made in fixed assets. It is also essential that the assets

should be effectively utilized to generate sufficient earning. The fixed asset

turnover ratio of selected oil refineries in India is catalogued in Table 4.11.

The table shows a fluctuating trend in the fixed asset turnover ratio of the

selected oil refineries and the whole industry during the study period. On an

average, the whole industry had the overall fixed asset turnover ratio of 5.17

times with a co-efficient of variation of 0.30. The average fixed asset turnover

ratio varied from company to company. The highest average was 5.11 times in

Hindustan Petroleum Corporation Ltd followed by 4.98 times in Indian Oil

Corporation Ltd and 4.84 times in Bharat Petroleum Corporation Ltd. The

average ratio of fixed asset turnover ratio was lower than the industry average in

all the selected oil refineries in India. Among the selected companies Hindustan

Petroleum Corporation Ltd was the most efficient company in generating sales

revenue from its investment in fixed assets during the study period.

114

Table 4.11

Fixed assets turnover ratio of selected oil refineries in India

(1994-95 to 2008-09)

(in times)


average

1994-95 6.86 4.12 3.54 0.96 2.59 1.9 1.07 9.26

1995-96 6.67 4.01 3.38 0.85 1.78 0.94 0.94 7.13

1996-97 6.77 4.02 3.28 0.66 1.79 0.57 0.72 6.87

1997-98 5.05 3.33 2.92 0.58 1.88 0.5 0.75 5.6

1998-99 4.18 4.53 4.23 1.00 2.52 0.5 0.69 5.52

1999-00 4.76 4.79 5.25 1.19 3.14 0.44 0.85 4.83

2000-01 4.88 5.53 5.99 0.63 3.5 0.32 1.04 4.55

2001-02 4.05 4.6 4.56 0.81 3.02 0.35 1.36 3.33

2002-03 3.88 5.19 5.04 1.27 3.95 0.35 1.09 3.67

2003-04 3.8 5.22 5.06 1.87 3.14 0.42 1.14 3.86

2004-05 4.03 5.52 5.36 3.07 3.82 3.71 1.42 4.42

2005-06 4.61 5.99 5.67 4.18 5.31 2.48 1.34 4.09

2006-07 4.84 6.71 5.83 4.57 6.04 1.63 1.34 4.42

2007-08 4.84 6.42 5.94 5.09 6.58 1.52 1.39 4.43

2008-09 5.53 6.66 6.6 5.77 7.1 6.02 1.21 5.55

Mean 4.98 5.11 4.84 2.17 3.74 1.44 1.09 5.17

SD 1.04 1.04 1.14 1.84 1.74 1.60 0.25 1.57

CV 0.20 0.20 0.24 0.84 0.46 1.11 0.23 0.30

CAGR -1.42 3.25 4.24 -12.70 6.95 7.99 0.82 -3.36

t-value -0.90 -0.101 -0.518 -4.29* -1.99*** -6.77* -9.26*



value



Error 85.34 84.00 1.02

Total 449.54 104.00



Source: Computed

115

Reliance Industries Ltd was the worst performer in generating sales revenue and

utilizing fixed assets because it had the least average during the study period.

The CV value of this ratio shows high fluctuation in the fixed asset turnover ratio

of selected companies during the study period. Such fluctuations could be

attributed to the differences in the growth rate of sales and fixed assets because of

the external factors such as government policy and market conditions.

Table 4.11 also identifies that the majority of the selected companies had

positive compound annual growth rate in fixed asset turnover ratio during the

study period. In order to test the hypothesis, paired sample t-test has been applied

between the company mean and industry mean. It can be seen from

Table 4.11 that fixed assets turnover ratio of majority of the selected oil refineries

in India showed significant differences from industry average as per t-value.

In order to test the hypothesis, the analysis of variance has been applied between

the companies and between the years. It is concluded that null hypothesis is

rejected since the calculated values of F (6.32 and 45.01) are greater than the

table values of F (1.81 and 2.21) at five per cent level of significance.

Hence, the overall analysis of fixed asset turnover ratio indicates that

there were mixed performers in utilizing the fixed asset turnover ratio to generate

sales revenue ranging from Rs. 1.09 by Reliance Industries Ltd to Rs. 5.11 in

Hindustan Petroleum Corporation Ltd for one rupee investment in fixed assets.

Current assets turnover ratio

This ratio is applied to measure the turnover and profitability of total

current assets applied to conduct the operations of the firm. The idea behind the

current assets turnover ratio is to give an overall impression of how rapidly the

total investment in current assets is being turned and is thought of by some as an

index of “efficiency” or profitability. The lower the turnover of current assets, the

worse is the utilization of current assets and vice- versa. Table 4.12 reveals the

current assets turnover ratio in selected oil refineries under study.

116

Table 4.12

Current assets turnover ratio of selected oil refineries in India

(1994-95 to 2008-09)

(in times)


average

1994-95 4.28 5.05 5.09 0.49 1.27 0.32 1.31 2.04

1995-96 3.38 4.37 4.25 0.58 0.95 0.62 1.09 1.78

1996-97 2.80 2.88 3.06 0.67 0.67 0.44 1.32 1.55

1997-98 4.03 4.96 4.62 0.57 0.72 0.32 1.52 1.35

1998-99 3.68 6.49 5.86 1.26 0.69 0.25 1.03 1.43

1999-00 3.57 4.59 5.48 1.87 3.04 0.27 1.70 1.45

2000-01 4.05 5.61 6.46 2.33 3.86 0.22 2.24 1.96

2001-02 4.56 6.52 6.35 3.37 3.74 0.37 2.17 1.68

2002-03 3.79 5.69 5.20 4.91 3.64 0.19 2.04 1.73

2003-04 3.79 5.46 5.73 4.46 3.79 0.25 2.28 1.76

2004-05 3.75 6.35 5.58 5.01 3.53 0.84 2.32 1.90

2005-06 4.13 6.48 5.68 6.50 4.04 0.65 3.29 2.00

2006-07 4.96 7.83 7.08 6.36 4.86 0.10 3.73 2.06

2007-08 4.66 5.45 5.59 4.67 4.57 0.01 3.12 1.87

2008-09 6.88 7.86 8.77 6.37 8.76 6.43 2.59 3.90

Mean 4.15 5.71 5.65 3.29 3.21 0.75 2.12 1.90

SD 0.92 1.30 1.29 2.31 2.16 1.59 0.82 0.60

CV 0.22 0.22 0.21 0.70 0.67 2.12 0.38 0.32

CAGR 3.21 2.99 3.69 12.98 13.74 22.14 4.64 4.41

t-value 3.67* 12.06* 14.78* -0.75 -1.35 -7.29* -6.52*



value



Error 85.16 84.00 1.01

Total 535.80 104.00



Source: Computed

117

Current assets turnover ratio of the whole industry and all the selected oil

refineries registered a fluctuating trend during the study period. Industry average

has increased from 2.04 times in 1994-95 to 3.90 times in 2008-09. It is clear

from the table that the whole industry had the overall current asset turnover ratio

of 1.90 times with a coefficient of variation of 0.32. The average current asset

turnover ratios varied from company to company. The highest average was

5.71 times in Hindustan Petroleum Corporation Ltd followed by 5.65 times in

Bharat Petroleum Corporation Ltd and 4.15 times in Indian Oil Corporation Ltd.

The performance in utilizing current assets of Hindustan Petroleum Corporation

Ltd (5.71), Bharat Petroleum Corporation Ltd (5.65), and Indian Oil Corporation

Ltd (4.15) was better during the study period because their average current assets

turnover ratios were higher than the industry average.

Among the better performers Hindustan Petroleum Corporation Ltd was

the most efficient company as its average current assets turnover ratio was the

highest among the better performers. The best performance indicates that the

company needs one rupee investment in current assets to generate sales revenue

of Rs.5.71. Mangalore Refinery and Petrochemicals Ltd, Reliance Industries Ltd

and Essar Oil Ltd were poor performers, because their average current asset

turnover ratios were lower than the industry average of Rs 3.56. Among the

selected oil refineries Essar Oil Ltd was the poor performing company as its

average during the period was the least and below the industry average

(0.75 times). That is one rupee investment in current assets can generate sales

revenue of Rs 0.75. The CV value of the whole industry has shown moderate

fluctuation during the study period. The CV value of these ratios show less

fluctuation in the current asset turnover ratio of selected companies during the

study period except Mangalore Refinery and Petrochemicals Ltd, Essar Oil Ltd

and Chennai Petroleum Corporation Ltd. Such low fluctuation could be attributed

to the marginal difference in the growth rates of sales and current assets. The CV

value of Mangalore Refinery and Petrochemicals Ltd, Essar Oil Ltd and Chennai

Petroleum Corporation Ltd has shown high fluctuation during the study period.

All the selected oil refineries in India and industry witnessed positive compound

annual growth rate of this ratio during the study period.

118

In order to test the hypothesis, paired sample t-test has been applied

between the company mean and industry mean. It is evident from the analysis

that there were significant differences in the current assets turnover ratios of

selected oil refineries in India except Mangalore Refinery and Petrochemicals Ltd

and Chennai Petroleum Corporation Ltd. Analysis of variance has been applied

between the years and between the companies for testing the hypothesis framed.

The hypothesis is rejected since the calculated values of F (11.14 and 48.09) are

greater than the table values of F (1.81 and 2.21) at five per cent level of

significance between the years and companies.

To sum up, the selected oil refineries was capable of generating minimum

sales revenue of Rs. 0.75. and a maximum of Rs. 5.71 from one rupee investment

in current assets with a narrow fluctuation between the companies and within the

companies as well.

Inventory turnover ratio

Inventory turnover indicates the efficiency of the firm‟s inventory

management. It shows the rapidity of turning inventories into sales. Generally, a

high turnover is good indicator of inventory management. Simultaneously, a low

inventory turnover implies excessive inventory level that is warranted by

production and sales activities, or a slow moving or obsolete inventory. A high

level of sluggish inventory amounts to unnecessary tie-up of funds, impairment

of profit and increased cost. On the other hand, a very high inventory turnover

may result in frequent stock outs. The inventory will also be high if the firm

replenishes its inventory in too many small lot sizes. The situation of frequent

stock outs and too many small inventory replacements are costly for the firm.

Thus, too high and too low inventory turnover rates are not preferred.

The inventory ratio has been calculated for the selected oil refineries in

India during the study period and represented in Table 4.13. A low fluctuating

trend in the companies‟ inventory turnover ratio could be drawn from the table.

On an average the oil industry in India had the overall inventory turnover of

10.25 times with a co-efficient of variation of 0.13 times. The average inventory

119

Table 4.13

Inventory turnover ratio of selected oil refineries in India

(1994-95 to 2008-09)

(in times)


average

1994-95 10.6 11.38 11.10 3.45 4.01 19.00 8.64 9.74

1995-96 11.97 11.57 15.46 0.01 4.19 7.12 8.05 8.34

1996-97 13.29 10.40 14.96 6.00 4.11 4.36 6.98 8.59

1997-98 12.62 11.02 15.01 6.18 4.37 6.73 8.00 9.13

1998-99 12.51 18.07 19.98 12.83 6.70 14.35 7.72 13.17

1999-00 11.48 11.75 15.31 7.20 6.90 13.39 9.81 10.83

2000-01 11.52 12.06 14.57 4.25 7.85 9.88 11.17 10.19

2001-02 11.17 11.89 12.80 6.96 7.78 11.74 12.48 10.69

2002-03 10.15 12.45 13.26 9.37 8.82 8.40 8.03 10.07

2003-04 9.26 10.99 12.30 11.54 7.88 9.00 7.63 9.80

2004-05 8.92 11.85 12.11 13.35 9.01 11.17 9.99 10.91

2005-06 8.81 11.49 11.13 14.86 9.15 7.44 10.17 10.44

2006-07 9.73 12.28 12.14 14.66 9.24 0.27 10.64 9.85

2007-08 9.72 11.23 12.63 12.17 8.64 0.16 10.56 9.30

2008-09 11.76 12.74 16.69 15.45 10.61 11.72 10.01 12.71

Mean 10.90 12.08 13.96 9.22 7.28 8.98 9.33 10.25

SD 1.42 1.77 2.38 4.75 2.17 4.87 1.58 1.33

CV 0.13 0.14 0.17 0.52 0.29 0.54 0.169 0.13

CAGR 0.69 0.76 0.275 10.51 6.70 1.76 0.98 1.71

t-value 1.30 6.18* 6.86* -0.97 -6.22* -1.09 -1.97***



value



Error 750.35 84.00 8.93

Total 1372.10 104.00

CV - Co-efficient of variation

CAGR - Compound annual growth rate


Source: Computed

120

turnover ratio varied from company to company, the highest average was 13.96

times in Bharat Petroleum Corporation Ltd followed by 12.08 times in Hindustan

Petroleum Corporation Ltd and 10.90 in Indian Oil Corporation Ltd. These

companies have performed well regarding inventory turnover ratio because their

average ratios were higher than the industry average and have utilized their

financial resources efficiently by maintaining low inventories. However, rest of

the companies have not performed well regarding inventory turnover ratio

because their average ratios are lower than the industry average. Over stocking,

poor sales and economic conditions could be the reasons for this poor

performance. The CV value of this ratio is consistent in Indian Oil Corporation

Ltd, Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd

whereas Mangalore Refinery and Petrochemicals Ltd and Essar Oil Ltd showed

very high fluctuations during the study period.

The CV value of Reliance Industries Ltd erratically fluctuated during the

period of study. Such fluctuations could be attributed to the differences in the

growth rates of inventory and sales because of the factors such as market

conditions, rise in raw material price and upward revision of selling price. All the

selected oil refineries and industry average witnessed positive compound annual

growth rate of this ratio during the study period.

Among the selected oil refineries in India, Bharat Petroleum Corporation

Ltd had the fastest rate during the study period. However, a notable point in this

analysis was that majority of the selected oil refineries have failed or struggled to

maintain their inventory turnover on par with the industry average.

Paired sample t-test was applied between the company mean and industry

mean for testing the hypothesis framed. It can be seen from Table 4.13 that

inventory turnover ratio of Hindustan Petroleum Corporation Ltd, Bharat

Petroleum Corporation Ltd, Chennai Petroleum Corporation Ltd, Reliance

Industries Ltd have showed significant differences from industry average as per

t-value during the study period. Table 4.13 also depicts that differences in

Inventory turnover ratios is significant between the companies as calculated

121

values of F are greater than the table values of F at five per cent level. However

they are insignificant between the years as the calculated values of F are lower

than the table values of F at five per cent level of significance.

To conclude the selected oil refineries having higher average inventory

turnover ratio show narrow variance within the companies and between the

companies.

B. Analysis of profitability trend

Profitability of various industries would hardly diverge in a world of

perfection, because, future can easily be predicted. However, real world is far

from perfection. A number of dynamic forces (e.g., change in income,

technology, population, etc.,) operate simultaneously in a real imperfect and

uncertain world. Consequently, profitability of different concerns and industries

etc., are greatly affected. Rate of profit, which is one of the most used and

popular financial measure of performance of a concern and an industry plays a

pivotal role in the growth process of the concern, the industry and the whole

economy. It reflects the financial stability and also enhances the earning capacity

of a concern. It plays a dual role in the investment process of the economy by

attracting fresh investment on one hand, and generating internal source of finance

on the other hand. However, low rate of profit or loss reports any fresh inflow of

investment and induces existing capital to quit towards the fields of higher rates

of profit. It thus reflects investors‟ and lenders‟ need of knowing financial

indicator of performance and is a key factor in determining the commercial

viability of the concern.

The current rate of profit is an indicator and source of and a need for the

expansions of a business through re-investment and through attracting and

observing new capital in the industry. Hence, investors and lenders are interested

in knowing the profitability of a concern and industry over time or at a point of

time. The celebrated tendency of rates of profit to fall over long period of time

had been theoretically developed by classical economist like Adam Smith, David

Ricardo, their critic Karl Marx and also by neoclassical writers like Alfred

122

Marshall. The study therefore intends to empirically examine whether the rate of

profit of selected oil refineries in India had a tendency to rise or fall over a period

from 1994-95 to 2008-09. The objective is not to test the validity of classical

hypothesis, as the economic conditions as assumed by classical writers do not

prevail in the country. However, knowledge about whether profitability is raising

or falling over the period from 1994-95 to 2008-09 would throw interesting

results for formulation of future policies.

An attempt has been made in the study to examine the trends in rates of

profit of selected oil refineries in India over the period from 1994-95 to 2008-09.

Further an attempt has also been made to capture the company- wise variations in

the series of profit rates, which reveals the dispersion of the series for each

company over the study period. In this study a ratio of profits to capital employed

and expressed in percentage term has been used for this purpose. The rate of

profit on capital indicates the earning power of capital of long-term nature and

thus examines long- term profitability better. The linear regression model fitted is

as follows:

P=α+βt+e

Where P is rate of profit, t is the time and α and β are the parameters

(intercept and co-efficient respectively) and e is the error term. The results of the

application of the above stated model to the profitability of selected oil refineries

in India are presented in Table 4.14.

Table 4.14 reveals that the linear model of time trend of profitability has

proved to be a “good fit” in the case of five out of seven selected companies

during the study period. This is revealed from the value of R2, the co-efficient of

determination. Among these companies Hindustan Petroleum Corporation Ltd,

Bharat Petroleum Corporation Ltd and Essar Oil Ltd experienced a

strong tendency in profitability to decline over the study period. The negative

values of β the time trend co-efficient, confirms this trend as these are observed

to be statistically significant. Negative value of β indicates a negative

relationship between profitability and time over the study period. Only in the case

123

Table 4.14

Results of regression rates of profit on time for selected Oil Refineries in India

(1994-95 to 2008-09)

S.No. Companies

P=α+βt+e

R2 F value

1. Indian Oil Corporation Ltd 13.59 -8.78

(-0.31) 0.01 0.093

2. Hindustan Petroleum Corporation Ltd 21.51 -0.87

(-3.04) 0.42 9.26

*

3. Bharat Petroleum Corporation Ltd 22.10 -0.89

**

(-2.96) 0.40 8.77

**

4. Mangalore Refinery and Petrochemicals Ltd. -6.85 1.37

**

(2.99) 0.41 8.90

**

5. Chennai Petroleum Corporation Ltd 7.35 0.13

(0.32) 0.01 0.10

6. Essar Oil Ltd 4.30 -0.41

**

(-2.84) 0.38 8.08

**

7. Reliance Industries Ltd 9.04 0.40

**

()2.27 0.28 5.16

**

Whole industry 15.33 -4.97

(2.12)***

0.26 4.48

Figures in brackets are t values;*-Significant at 0.01 level; **-Significant at 0.05 level;

***-Significant at 0.10 level;

Source: Computed

124

of Mangalore Refinery and Petrochemicals Ltd, Chennai Petroleum Corporation

Ltd and Reliance Industries Ltd, the sign for β, the time trend co-efficient is

positive implying the tendency of profit rate to rise over time. The value of co-

efficient of determination R2

also varied in the case of companies having strong

increasing tendency of profit rate over time, from 1 per cent for Chennai

Petroleum Corporation Ltd to 41 per cent for Mangalore Refinery and

Petrochemicals Ltd.

Table 4.14 further reveals that β assumes different values (negative) for

selected companies ranging from -0.41 for Essar Oil Ltd to -8.78 for Indian Oil

Corporation Ltd during the study period. This implies that profitability of the

companies declined at different rates over this period. The value of co-efficient of

determination R2

varied in the case of companies having strong declining

tendency of profit rate over time, from 1 per cent for Indian Oil Corporation Ltd

to 42 per cent for Hindustan Petroleum Corporation Ltd. Such variations in the

value of R2

implies profitability variation of different companies in different

degrees over time. Among the selected oil refineries no definite trend could be

observed in Indian Oil Corporation Ltd and Chennai Petroleum Corporation Ltd,

as the results are statistically insignificant. For the whole industry time explains

the variations in profitability to the extent of 26 per cent over the study period.

The analysis shows that majority of the selected oil refineries had a strong

tendency for profit rate to fall over the study period as the results for R2 and β are

statistically significant.

Dispersion in rate of profit

In order to study year to year variation in the profit rates the estimates of

standard deviation and co-efficient of variation for profit rate series of selected oil

refineries in India are worked out and presented in Table 4.15. These measures

reveal the extent of variation of actual values of profit rate of each company from

its mean value of the series. The higher values of co-efficient of variation indicate

larger dispersion among the profit rate series of respective companies and vice

versa.

125

Table 4.15

Company-wise variation in profitability of selected oil refineries in India

(1994-95 to 2008-09)

S.No. Companies Mean SD CV

1. Indian Oil Corporation Ltd 12.88 4.65 0.36

2. Hindustan Petroleum Corporation Ltd 14.57 6.01 0.42

3. Bharat Petroleum Corporation Ltd 15.03 6.23 0.41

4. Mangalore Refinery and Petrochemicals Ltd. 4.15 9.64 2.33

5. Chennai Petroleum Corporation Ltd 8.42 6.84 0.81

6. Essar Oil Ltd 1.00 2.98 0.33

7. Reliance Industries Ltd 12.20 3.31 0.27

Whole industry 9.75 2.73 0.28

Source: Computed from the annual reports of the respective companies.

126

The company-wise dispersion in rates of selected oil refineries in India

over the study period is achieved through estimation of mean, standard deviation

and co-efficient of variations. The estimates are presented in Table 4.15. It is

observed from the table that on an average, Bharat Petroleum Corporation Ltd

experienced the highest profit rate (15.03 per cent), while Essar Oil Ltd

experienced the lowest rate of profit (1.00 per cent) over the study period. All the

selected oil refineries on an average enjoy 9.75 per cent rate of profit. On an

average Hindustan Petroleum Corporation Ltd (14.57 per cent), Bharat Petroleum

Corporation Ltd (15.03 per cent), Indian Oil Corporation Ltd (12.88 per cent) and

Reliance Industries Ltd had a profit rate above the industry average, while

Chennai Petroleum Corporation Ltd (8.42 per cent), Mangalore Refinery and

Petrochemicals Ltd (4.15 per cent) and Essar Oil Ltd (1.00 per cent) had below it.

Out of the total of seven selected oil refineries, four companies namely Indian Oil

Corporation Ltd, Hindustan Petroleum Corporation Ltd, Bharat Petroleum

Corporation Ltd and Reliance Industries Ltd enjoyed a higher rate of profit than

the industry average.

In order to study year to year variation in the profit rates the estimates of

standard deviation and co-efficient of variation for profit rate series of selected oil

refineries are worked out and presented in Table 4.15. These measures reveal the

extent of variation of actual values of profit rate of each company from its mean

value of the series. The higher values of co-efficient of variation indicate larger

dispersion among the profit rate series of respective companies and vice versa.

Reliance Industries Ltd with a co-efficient of variation of 0.27 experienced the

lowest variation in profit rate over the study period while Mangalore Refinery

and Petrochemicals Ltd with the lowest profit rates suffered from the largest

dispersion, with a co-efficient of variation of 2.33.

The selected oil refineries in India are divided arbitrarily into relatively

stable (CV with value up to 0.25), moderately fluctuating (CV lying between 0.25

and 0.50), highly fluctuating (CV lying between 0.50 and 0.75) and erratically

fluctuating (CV above 0.75). It is observed from Table 4.15 that two out of seven

companies (28.57 per cent) experienced erratic fluctuation in profit rate series.

127

These companies are Mangalore Refinery and Petrochemicals Ltd and Chennai

Petroleum Corporation Ltd. Five out of the seven companies (71.43 per cent)

experienced moderately fluctuating variations in profit rate series. These

companies are Hindustan Petroleum Corporation Ltd, Bharat Petroleum

Corporation Ltd, Indian Oil Corporation Ltd, Essar Oil Ltd and Reliance

Industries Ltd. As far as the whole oil refineries variations is concerned, it

experienced moderately fluctuating profit rate series over the period.

128

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5. Ibid., p.43.

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13. Ibid., p.204.

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18. Pandey, I.M. op.cite., p.552.

19. Gupta. M.C(1989). “Profitability Analysis”, Jaipur: Pointer Publisher, p.36.

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McGraw- Hill Publishing Company Ltd, p.154.

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New Delhi: Tata McGraw-Hill Publishing Company Ltd., p.583.

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CHAPTER IV PROFITABILITY ANALYSIS AND ITS TREND...

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