Anagram Tops Nbfcs In Return On Net Worth Ratings

Anagram Finance, Shriram Transport Finance, Kothari Orient Finance, SBI Home Finance and Lloyds Finance occupy the top five positions in terms of return on net worth (RONW) in 1995-96, according to a study of 55 non-banking finance companies (NBFCs). On the basis of data compiled from individual profit & loss accounts of these 55 NBFCs, the study determines the change in ranking in terms of RONW between 1994-95 and 1995-96

RONW, which is used as a measure of profit performance of a company, is the product of income of capital, return on income and financial leverage ratio.

The short cut method of computation of RONW is to divide net profit (profit after tax) by net worth, and multiply it by 100.

 

The total income of capital is calculated by dividing total income by capital employed.

The return on income is calculated by dividing net profit by total income and multiplying by 100.

The financial leverage ratio is calculated by dividing the capital employed by net worth.

The table shows that RONW of these 55 non-banking finance companies declined by 3 percentage points to 15.65 per cent because of a decline in two of the three factors on which it is calculated.

Return on income (net profit to total income) and financial leverage ratio (ratio of capital employed to net worth) declined by 14.28 per cent and 6.41 per cent respectively.

On the other hand, income of capital (ratio of total income to capital employed) rose by 5.55 percent during 1995-96.

The three factors multiply out imprecisely, indicating a decline of 15.28 per cent instead of 15.65 per cent.

However, that is close enough to suggest where the action lay, and the major role played by return on income.

In 1995-96, the 55 non-banking finance companies earned a net profit of Rs.1074 crore.

In the previous year, the profit was Rs.911 crore.

Total income increased by 37.4 percent to Rs.5246 crore in 1995-96 from Rs.3817 crore in 1994-95. On the other hand, capital employed rose by 30.5 percent to Rs.27,130 crore from Rs.20,783 crore.

The networth of these companies rose by 39.7 per cent to Rs.6640 crore in 1995-96 from Rs.4754 crore in 1994-95.

While 16 companies showed a decline in the ratio of income of capital, it increased in the case of 35 companies, while it showed no change in respect of four companies, namely HDFC, DCL Finance, Motor and General Finance and Can Fin Homes.

The return on income dropped substantially for some companies. However, positive changes in return on income were noticed in respect of 12 companies. Prominent among the companies recording negative changes in return on income are Gujarat Lease Financing (-54.2 per cent), ITC Classic (-50.13 per cent), DCL Finance (-56.26 per cent), DSP Financial Con.(-72.22 percent) & Birla Global Finance (-53.01) per cent). The maximum positive change in the return on income ratio was recorded in the case of Harita Finance (70.39 per cent) followed by Reliance Capital (17.19 per cent) and Dewan Housing Finance (16.48 per cent).

The financial leverage ratio declined in the case of 25 companies, while it showed no change in respect of only one company, namely 20th Century.

The maximum positive change in leverage ratio were noticed in Lloyds Finance (49.31 per cent), Magma Leasing (52.55 per cent), Enarai Finance (55.07 per cent), Birla Global Finance (87.31 per cent) & BCL Financial (65.23 per cent).

On the other hand, the maximum negative change in financial leverage ratio was recorded in the case of KJMC Financial (-45.68 per cent) followed by Pal Credit & Capital (-43.55 per cent), Srei International Finance (-40.61 per cent), TCI Finance (-35.43 per cent), ShriramTransport Finance (-31.17 per cent) and HDFC (-27.59 per cent).

It is interesting to observe the shifts in rank according to RONW among the NBFCs between 1994-95 and 1995-96.

In 1994-95, the top five companies were KJMC Financial, Anagram Finance, Shriram Transport Finance, Apple Credit Corporation and Srei Intl. Finance while in 1995-96, the top five were Anagram Finance, Shriram Transport Fin., Kothari Orient Fin., SBI Home Finance and Lloyds Finance.

During 1994-95, the bottom five companies in order were Reliance Capital, Shrachi Securities, DSP Financial Con., Birla Global Finance and Dewan Housing Finance but during 1995-96, the bottom five were W.H.Brady & Co., DSP Financial Con., Birla Global Finance, Reliance Capital and ITC Classic.

Anagram Finance moved to the top position during 1995-96 from the second position during 1994-95. Lloyds Finance improved to join the top five positions during 1995-96 from the 11th position it held in 1994-95.

Similarly, SBI Home Finance moved up to 4th position during 1995-96 from its 8th position during 1994-95.

Srei International Finance sharply declined to the 42nd position during 1995-96 from the group of top five during 1994-95. KJMC Financial went down to the 11th position in 1995-96 from the first position in 1994-95.

This was probably due to its comparatively poor performance in 1995-96.

Other companies which improved their ranks in 1995-96 over 1994-95 were Ashok Leyland Finance (19 to 13), Sundaram Finance (15 to 6), Harita Finance (49 to 21), Shrachi Finance (54 to 30), India Lease Development (50 to 33), Magma Leasing (28 to 12), Dugar Finance (36 to 22), SP Capital Finance (45 to 18), Cholamandalam Inv. & Fin.(43 to 27), Dewan Housing Fin.(51 to 32), Asia Pasific Inv.(22 to 9), BCL Financial (48 to 16) and Elgi Finance (32 to 15).

From the above analysis, it is apparent that RONW is governed by the level of the three ratios which, taken together, determines the overall profitability of the company.

However, to ensure high profitability, it may not always be necessary that all the three ratios should be correspondingly high.

In some companies like SP Capital Finance and KJMC Financial, a high return on net worth was obtained following a high ratio of income of capital and return on income irrespective of low financial leverage ratio.

In the case of companies like Magma leasing and SBI Home Finance, a high return on income together with a high financial leverage ratio resulted in an impressive return on net worth inspite of a low income of capital ratio.

In the case of Enarai Finance, on the other hand, a high return on net worth is due to a high return on income but a low ratio of income of capital and financial leverage ratio.

In the case of Shriram Transport Finance, a high ratio of income of capital & financial leverage ratio determine the high return on net worth inspite of a comparatively low return on income.

In the case of Nicco Uco Fin. Ser., a high ratio of income of capital determines the high return on networth despite a comparatively low return on income.