Project Report (Submitted for the Degree of B.Com. Honours in Accounting & Finance under the University of Calcutta)
FINANCIAL STATEMENT ANALYSIS OF DABUR INDIA LTD. & ITC LTD. Submitted by Name of the Candidate : Kankana Nag Registration Number : 034-1221-0526-13 Name of the College : Shri Shikshayatan College College Roll Number : 155 Supervised by Name of the Supervisor: Smt. Papiya Chaudhury Name of the College: Shri Shikshayatan College Month and Year of Submission FEBRUARY 2016 ~ I ~
Annexure I-A
Supervisor's Certificate This is to certify that Miss Kankana Nag a student of B.Com Honours in Accounting & Finance of Shri Shikshayatan College under the University of Calcutta has worked under my supervision and guidance for her Project Work and prepared a Project Report with the title FINANCIAL STATEMENT ANALYSIS OF DABUR AND ITC which she is submitting, is her genuine and original work to the best of my knowledge. Place: Kolkata Signature: Date: Name: Smt. Papiya Chaudhury Designation: Associate Professor Shri Shikshayatan College ~ II ~
Annexure I-B
Student's Declaration I hereby declare that the Project Work with the title FINANCIAL STATEMENT ANALYSIS OF DABUR & ITC submitted by me for the partial fulfillment of the degree of B.Com. Honours in Accounting & Finance under the University of Calcutta is my original work and has not been submitted earlier to any other University /Institution for the fulfillment of the requirement for any course of study. I also declare that no chapter of this manuscript in whole or in part has been incorporated in this report from any earlier work done by others or by me. However, extracts of any literature which has been used for this report has been duly acknowledged providing details of such literature in the references. Signature: Name: Kankana Nag Address: AA-151, Sector 1, Salt Lake City, Kolkata-7000064 Registration Number: 034-1221-0526-13 Place: Kolkata Date: ~ III ~
ACKNOWLEDGEMENT The success and final outcome of this project required a lot of guidance and assistance from many individuals and I am extremely fortunate to have got this all along the completion of my project work. Whatever I have done is only due to such guidance and assistance. Firstly I would like to thank my supervisor Smt. Papiya Chaudhury for her continuous support in this project, for pin pointing the errors and suggesting necessary measures to debug them. I would also use this platform to express my deep regards for our Head of the Department, Dr. Kajal Gandhi and Principal Dr. Aditi Dey for being so helpful and considerate. Infact I was fortunate enough to get constant encouragement, support and guidance from all the teaching staff of the Commerce Department. Apart from this I would also like to thank my friends, who gave me suggestions and advices to do this project. Last but not the least I would like to thank my family, my parents for educating me with the aspects of commerce, for their unconditional support and encouragement to pursue my interest; my sister for sharing her knowledge relating to this particular topic. I like to thank God for giving me strength and capability, and also for helping me complete my project in high perfection. ~ IV ~
SYNOPSIS Financial statements are formal records of the financial activities of a business, person, or other entity and provide an overview of a business or person's financial condition in both short and long term. They give an accurate picture of a company’s condition and operating results in a condensed form. Analysis and interpretation of financial statements help in determining the liquidity position, long term solvency, financial viability and profitability of a firm. It helps the clients to decide in which firm the risk is less or in which one they should invest so that maximum benefit can be earned. The report at hand manifests an in-depth analysis of the financial statements of ITC Ltd. and Dabur India Ltd. that caters to the fast moving consumer goods (FMCG) segment of the national market. An attempt has been carried out in this study to scrutinize the financial statements of the companies and justify whether profitability is sufficient enough to determine the performance of a company. This report comprises of a literature review which projects the perceptions of different authors about the different ratios used to analyse the financial statements followed by the analysis of the financial statements using financial ratios and ends with a brief conclusion and recommendation. The objective of this paper is: To understand, analyze and interpret the basic concepts of financial statements of different FMCG companies, to interpret the financial ratios and their significance, to study the solvency liquidity and profitability position of these companies during the time span of 2011-2015. The data used for the study is secondary data obtained from the web pages, as disclosed by the 2 companies. ~ V ~
TABLE OF CONTENTS Sl. No. Chapter Name Page No. Chapter 1 Introduction ➢ 1.1 Background of the study 1 ➢ 1.2 Literature review 2 ➢ 1.3 Research design 4
Chapter 2 Conceptual Framework ➢ 2.1 Concept 5 ▪ 2.1.1 Steps in ratio analysis 5 ▪ 2.1.2 Classification of Ratio 6 ➢ 2.2 Benefits and Challenges 7 ▪ 2.2.1 Importance of financial ratios 7 ▪ 2.2.2 Limitations of financial ratios 9
Chapter 3 Analysis and Findings ➢ 3.1 Objectives of the study 10 ➢ 3.2Methodology 10 ▪ 3.2.1 Sample 10 ▪ 3.2.2 Data Type 11 ~ VI ~
Sl. No. Chapter Name Page No. ▪ 3.2.3 Data Source 12 ▪ 3.2.4 Period of study 12 ▪ 3.2.5 Tools used 12 ➢ 3.3 Analysis and Findings 13 ▪ 3.3.1 Current Ratio 13 ▪ 3.3.2 Liquid Ratio 16 ▪ 3.3.3 Absolute liquidity Ratio 19 ▪ 3.3.4 Proprietary Ratio 22 ▪ 3.3.5 Fixed Assets to Equity Ratio 25 ▪ 3.3.6 Debt-Equity Ratio 28 ▪ 3.3.7 Net Profit Ratio 31 ▪ 3.3.8 Operating Profit Ratio 34 ▪ 3.3.9 Return on Equity Ratio 37 ▪ 3.3.10 Earnings per Share Ratio 40
Chapter 4 Conclusions and recommendations ➢ 4.1 Summary Observations 43 ➢ 4.2 Recommendations for Improvement 44 ➢ 4.3 Limitations of the Study 45 ➢ 4.4 Scope for further Research 46 ~ VII ~
1. INTRODUCTION 1.1 BACKGROUND OF THE STUDY Financial statements are the mirror which reflects the financial position, strength and weakness of the company. Financial statements of the company helps to know how a business is doing and how it’s useful internally for a company- stock holders and to its board of directors, its managers and some employees including labor unions, externally they are important to perspective investors, to government agencies responsible for taxing and regulating, to lenders such as banks and credit rating agencies & investment analysts & stock brokers. Financial statement analysis involves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the company. This is accomplished by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios. John N. Myres defines that “Financial statement analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements and a study of the trends of these factors as shown in a series of statements.” Fast Moving Consumer Goods (FMCG), are the products that are sold quickly at relatively low cost. Though the absolute profits made by FMCG companies are relatively small, the goods generally sell in large quantities, so the cumulative profits on such products can be large. Examples of FMCG generally include a wide range consumer products such as toiletries, soap, cosmetics, teeth cleaning products, detergents etc. India having a population of 1.252 billion as of 2013 is a vital target market for Consumer Goods produced globally. Two of the most significant Indian companies dealing in FMCG is inarguably ITC Ltd and Dabur India Ltd. They cater to and touch the lives of 1 out of every 3 India through the sale of their chain of consumer goods. Their equity shares are listed on Bombay Stock Exchange, National Stock Exchange of India and Calcutta Stock Exchange. Analysis and interpretation of the solvency, liquidity and profitability positions of these companies in a comparative approach would aid the investors in taking rational decisions
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1.2 LITERATURE REVIEW A brief discussion of the reviews of the previous researches related with study of ratio analysis is being presented below: Chen and Shimerda (1981) examined the financial ratios used in a number of early studies for analysis and prediction of the financial soundness of the entities. They noted that there was an abundant 41 different financial ratios which were found useful in the earlier studies. They reconciled by judgement the factors in the earlier studies into financial leverage, capital turnover, return on investment, inventory turnover, receivables turnover, short-term liquidity, and cash position. Martikainen (1993) classified financial ratios and tested their stability with transformation analysis in a study identifying the key factors that determine stock returns. Elizabeth Duncan and Elliott (2004) he had pointed out that he had stated that the paper in the title of efficiency, Customer service and financing performance among Australian financial institutions showed that all financial performance measures as interest margin, return on assets, and capital adequacy are Positively correlated with customer service quality scores. Jonas Elmerraji (2005) in his research article on financial performance had pointed out that ratios can be an invaluable tool for making an Investment decision. Even so, many new investors would rather leave their decisions to fate than try to deal with the intimidation of financial ratios. The truth is that ratios aren't that intimidating, Even if one doesn’t have a degree in business or finance. Using ratios to make informed decisions about an investment makes a lot of sense, once one knows how to use them. Bull (2007) stated that financial ratio analysis help managers to analyse control and improve an organisations operations. Credit analysts can use it to determine the ability of an organisation to pay its debts and security analysts can use it to analyse an organisations ability to pay interests on its bonds. ~ - 2 - ~
Besley and Brigham (2008) suggested that financial statement analysis may be used to help predict the firm’s financial position in the future and to determine expected earnings and dividends. Frederic M. Scherer, (2008) examined how product innovation contributes to the renewal of the firm through its dynamic and reciprocal relation with the firm’s competences. Based on the notion that new products are created by linking competences relating to technologies and customers, a typology is derived that classifies new product projects based on weather a new product can draw on existing competences. Following organizational learning these options are conceptualized as exploitation and exploration. These organizational concepts are used to gain a dynamic and path-dependent view of product innovation and development, and to reveal the unique nature and challenges of different types of product innovation. Gibson (2010) said that investors and other external users of financial information will often need to measure the performance and financial health of an organization. This is done in order to evaluate the success of the business, determine any weaknesses of the business, compare current and past performance, and compare current performance with industry standards. Financially stable organizations are desirable, because a financially stable business is one that successfully ensures its ability to generate income for investors and retain or increase value Rachchh Minaxi A (2011), in his research article on financial performance had pointed & suggested that the financial statement analysis involves analyzing the financial statements to extract information that can facilitate decision making. It is the process of evaluating the relationship between component parts of the financial statements to obtain a better understanding of an entity’s position and performance. Priyaaks (Mar 2012), had stated that Financial statement analysis is the process of examining relationships among financial statement elements and making comparisons with relevant information. It is a tool in decision-making processes related to stocks, bonds, and other financial instruments ~ - 3 - ~
From the above literature review, it is evident that, the financial performance depicts the efficiency of organization. Along with that financial statements are very useful for decision making in the company by Board of Directors and management. It also helps to know the prosperity of the company with the profitability.
1.3 RESEARCH DESIGN Chapter 2 : Conceptual Framework Chapter 3 : Analysis and Findings Chapter 4 : Conclusion and Recommendations ~ - 4 - ~
2. CONCEPTUAL FRAMEWORK 2.1 CONCEPT The major tool of analysis of financial statements of companies is RATIO ANALYSIS. Financial ratios are mathematical comparisons of financial statement accounts or categories. These relationships between the financial statement accounts help investors, creditors, and internal company management understand how well a business is performing and areas of needing improvement. Ratios are easy to understand and simple to compute. They can also be used to compare different companies in different industries. Since a ratio is simply a mathematically comparison based on proportions, big and small companies can be use ratios to compare their financial information. In a sense, financial ratios don't take into consideration the size of a company or the industry. Ratios are just a raw computation of financial position and performance. Ratios allow us to compare companies across industries, big and small, to identify their strengths and weaknesses. Financial ratios are often divided up into seven main categories: liquidity, solvency, efficiency, profitability, market prospect, investment leverage, and coverage.
2.1.1 STEPS IN RATIO ANALYSIS:- The ratio analysis requires two steps: • Calculation of ratio • Comparing the ratio with some predetermined standards. The standard ratio may be the past ratio of the same firm or industry’s average ratio or the ratio of the most successful firm in the industry. In interpreting the ratio of a particular firm, the analyst cannot reach any fruitful conclusion unless the ~ - 5 - ~
calculated ratio is compared with some predetermined standard. The importance of a correct standard is oblivious as the conclusion is going to be based on standard itself.
2.1.2 CLASSIFICATION OF RATIO BASED ON FINANCIAL STATEMENT Accounting ratios express the relationship between figures taken from financial statements. Figures may be taken from Balance Sheet, P&L A/C, or both. One-way of classification of ratio is based upon the sources from which are taken. BALANCE SHEET RATIO: Balance sheet is the financial statement that provides a picture of a company’s financial position by listing a company’s assets, liabilities and shareholder’s equity. Income statement and cash flows statement provides information about profitability and cash flows. A financial ratio determines relationship between two components. These may include: Balance Sheet Ratio Based on Financial Statement Financial Ratios Liquidity Ratios
~ - 6 - ~ Solvency Ratios Based on functions Profitability Ratios
Two ▪ balance sheet components, i.e. assets, liabilities and shareholders’ equity ▪
Two income statement components, i.e. sales, gross profit, net income, etc. ▪
A balance sheet component and an income statement component ▪
An income statement component and a cash flows statement component ▪
A balance sheet component and a cash flows statement component A balance sheet ratio belongs to the first category, i.e. it includes either two classes of assets, assets and liabilities, assets and shareholders equity, liabilities and share holders equity.
BASED ON FUNCTIONS LIQUIDITY RATIOS: It shows the relationship between the current assets and current liabilities of the concern. E.g. liquid ratios and current ratios. SOLVENCY RATIOS: It shows the relationship between proprietor’s funds and debts used in financing the assets of the concern. E.g. Capital Gearing ratio, debt equity ratio & proprietary ratio. PROFITABILITY RATIOS: Shows the relationship between profit & sales. E.g. Operating ratios, gross profit ratio, operating net profit ratio, etc.
2.2 BENEFITS AND CHALLENGES 2.2.1 IMPORTANCE: As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the drawing of interference regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: ~ - 7 - ~
1. Liquidity position: Ratio analysis helps in determining the liquidity position of the firm. A firm can be said to have the ability to meet its current obligations when they become due. It is measured with the help of liquidity ratios. 2. Long term solvency: Ratio analysis is equally useful for assessing the long term financial viability of a firm. This respect of the financial position of a borrower is of concern to the long term creditors, security analyst & the present & potential owners of a business. The long term solvency is measured by the leverage/capital structure & profitability ratio. 3. Operating efficiency: The various activity ratios measure this kind of operational efficiency. In fact, the solvency of a firm is in the ultimate analysis dependent upon the sales revenues generated by the use of its assets- total as well as its components. 4. Overall profitability: The management is constantly concerned about overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meets its short term as well as obligations to its creditors. This is possible if an integrated view is taken & all the ratios are considered together. 5. Inter firm comparison: An inter firm comparison would demonstrate a firms position vice-versa its competitors. If the results are at variance either with the industry average or with those of the competitors, the firm can seek to indentify the probable & in light. Take remedial measure. ~ - 8 - ~
6. Trend analysis: Finally, ratio analysis enables a firm to take the time dimension into account. In other words, whether the financial position of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis.
2.2.2 LIMITATIONS: 1. Historical Results: All of the information used in ratio analysis is derived from actual historical results. This does not mean that the same results will carry forward into the future. 2. Inflation: If the rate of inflation has changed in any of the periods under review, this can mean that the numbers are not comparable across periods. 3. Operational changes: A company may change its underlying operational structure to such an extent that a ratio calculated several years ago and compared to the same ratio today would yield a misleading conclusion. 4. Accounting policies: Different companies may have different policies for recording the same accounting transaction. This means that comparing the ratio results of different companies may be like comparing apples and oranges. 5. Company strategy: It can be dangerous to conduct a ratio analysis comparison between two firms that are pursuing different strategies. In short, ratio analysis has a variety of limitations that can limit its usefulness. But as long as one is aware of these problems it’s an useful tool. ~ - 9 - ~
3. ANALYSIS AND FINDINGS 3.1 OBJECTIVES OF STUDY ▪ To analyse the financial performances of the companies through relevant financial analysis. ▪ To study the growth profile of the companies during the study period. ▪ To appraise the financial soundness of the companies - Dabur India Ltd. and ITC Ltd. ▪ To provide valuable suggestions and recommendations to the companies.
3.2 METHODOLOGY 3.2.1 Sample (Company Profiles) ITC Limited or ITC is an Indian conglomerate headquartered in Kolkata, West Bengal. Its diversified business includes five segments: Fast Moving Consumer Goods (FMCG), Hotels, Paperboards & Packaging, Agricultural Business & Information Technology. Established in 1910 as the Imperial Tobacco Company of India Limited, the company was renamed as the Indian Tobacco Company Limited in 1970 and further to I.T.C. Limited in 1974. The periods in the name were ~ - 10 - ~
removed in September 2001 for the company to be renamed as ITC Ltd. The company completed 100 years in 2010 and as of 2012-13, had an annual turnover of US$8.31 billion and a market capitalization of US$45 billion. It employs over 25,000 people at more than 60 locations across India and is part of Forbes 2000 list. Dabur (Dabur India Ltd.) (Devanagari: derived from Daktar Burman) is the fourth largest Fast Moving Consumer Goods (FMCG) company in India with consolidated Revenues of over INR 7,800 Crores and Market Capitalisation of over INR 46,600 Crore (at the end of 2014-15). Building on a legacy of over 130 years, Dabur is today India’s most trusted name and the world’s largest Ayurvedic medicine & related products manufacturer and Natural Health Care Company. Today, Dabur has a portfolio of over 381 trusted products spread across 21 categories and over 1,000 SKUs. Dabur was founded in 1884 by Dr. S. K. Burman, a physician in West Bengal, to produce and dispense Ayurvedic medicines.
3.2.2 Data Type The data used in this study is secondary. Due to the busy schedule of the high officials of the companies the collection of primary data was not possible. ~ - 11 - ~
3.2.3 Data Source Data have been collected from the websites of both the companies and their annual reports
3.2.4 Period of Study Financial year 2011-12 to 2014-15
3.2.5 Tools Used The tools used for analysis and graphical representation are Bar Graphs, Linear graphs, pie charts created with the help of MS Word. ~ - 12 - ~
3.3 Analysis and Findings 3.3.1 CURRENT RATIO The ratio compares the current assets to current liabilities. It is also known as working capital ratio or ‘solvency ratio’. The ideal current ratio for a company is 2:1. CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
ITC TABLE 1 CURRENT RATIO OF ITC
YEAR CURRENT ASSETS CURRENT LIABILITIES CURRENT RATIO 2011- 2012 15801.45 9304.00 1.69 2012-2013 17591.47 10330.73 1.70 2013-2014 22581.06 11886.06 1.89 2014-2015 23955.03 11681.91 2.05 SOURCE : BALANCE SHEETS OF ITC LTD.
2.5 2.05 2 1.69 1.7 1.89 1.5 0 2011- 2012 2012-2013 2013-2014 2014-2015 GRAPH 2 CURRENT RATIO OF ITC
2011- 2012 2012-2013 1 2013-2014 0.5 2014-2015
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DABUR TABLE 3 CURRENT RATIO OF DABUR
YEAR CURRENT ASSETS CURRENT LIABILITIES CURRENT RATIO 2011- 2012 1630.62 1077.42 1.51 2012-2013 1737.39 1158.44 1.49 2013-2014 1969.85 1136.68 1.73 2014-2015 1572.32 1259.03 1.25 SOURCE: BALANCE SHEETS OF DABUR INDIA LTD.
CURRENT RATIO DABUR 1.73 1.8 1.6 1.51 1.49 1.4 1.25 1.2 1 0.8 0.6 0.4 0.2 0 2011- 2012 2012-2013 2013-2014 2014-2015 GRAPH 2 CURRENT RATIO OF DABUR
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INTERPRETATION OF CURRENT RATIO In Graph 1 (ITC) the current ratio is increasing from 1.69 in year 2011-12 to 2.05 in year 2014-15. So it can be said that the company has reached ideal current ratio in 2014-15. . It indicates that company current ratio is in a stronger position and the company has sufficient cash liquidity to meet its short-term liquidity. Whereas in Graph 2 (Dabur) the current ratio is decreasing from 1.51 in year 2011-12 to 1.25 in the year 2014-15 which is 1.5 times lower than that of ITC Ltd. on an average. Thus a higher current ratio is preferable. 2.5 2.05 2 1.73 1.5 1.51 1.49 1.25 1 0.5 0 2011- 2012 2012-2013 2013-2014 2014-2015 GRAPH 3: COMPARING THE CURRENT RATIOS OF THE TWO COMPANIES ITC & DABUR
1.69 1.7 CURRENT RATIO ITC
~ - 15 - ~ 1.89 CURRENT RATIO Dabur
3.3.2 LIQUID RATIO Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compares quick assets with quick liabilities. The ideal liquid ratio is 1:1. LIQUID RATIO= QUICK ASSETS / QUICK LIABILITIES
ITC TABLE 3 LIQUID RATIO OF ITC
YEAR CASH AND CASH EQUIVALENT SHORTTERM INVESTMENT ACCOUNTS RECEIVABLE CURRENT LIABILITIES QUICK RATIO
2011-12 3130.12 465.98 1203.84 9304.00 0.51 2012-13 3615.00 512.12 1163.34 10330.73 0.51 2013-14 3490.19 816.12 2439.21 11886.06 0.56 2014-15 7588.61 549.89 1722.40 11681.91 0.84 SOURCE: BALANCE SHEETS OF ITC LTD.
0.9 0.8
LIQUID RATIO 0.7 0.6 0.5 2011-12 2012-13 2013-14 2014-15 GRAPH 4 LIQUID RATIO OF ITC 0.4 0.84 0.3 0.2 0.1 0 0.51 0.51
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DABUR TABLE 4 LIQUID RATIO OF DABUR
YEAR CASH AND CASH EQUIVALENT SHORTTERM ACCOUNTS INVESTMENT RECEIVABLE QUICK RATIO
2011-12 291.29 141.33 224.17 1077.42 0.60 2012-13 319.40 116.53 255.32 1158.44 0.59 2013-14 297.47 84.62 323.12 1136.68 0.62 2014-15 123.94 114.08 338.79 1259.03 0.46 SOURCE: BALANCE SHEETS OF DABUR LTD. GRAPH 5 LIQUID RATIO OF DABUR
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LIQUID RATIO 0.7 0.6 0.5 0.4 0.3 0.62 0.2 0.46 0.1 0 2011-12 2012-13 2013-14 2014-15 0.6 0.59
CURRENT LIABILITIES
INTERPRETATION OF LIQUID RATIO In general, higher quick ratio is preferable than lower ratio. From the data above, in Graph 4 (ITC) the liquid ratio is increasing from 0.51 in year 2011-12 to 0.84 in year 2014-15. Whereas in Graph 4 (Dabur) the liquid ratio is decreasing from 0.6 in year 2011-12 to 0.46 in the year 2014-15. The comparison between the years 2013-14 and 2014-15 reveals that their (Dabur’s) quick ratio has substantially decreased during the particular year. So it indicates that the industry’s profit margin was not so high that they could make some investments paying off the liabilities that could result in an increase in assets and decrease in liabilities to make the liquidity position far better. QUICK RATIO ITC QUICK RATIO DABUR 0.9 0.8 0.6 0.84 0.7 0.59 0.62 0.6 0.51 0.5 0.51 0.56 0.46 0.4 0.3 0.2 0.1 0 2011-12 2012-13 2013-14 2014-15 GRAPH 4 COMPARING THE QUICK RATIOS OF TWO COMPANIES ITC & DABUR
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3.3.3 ABSOLUTE LIQUIDITY RATIO It is a variation of quick ratio. Absolute liquidity ratio measures relationship between cash and near cash items on one hand immediately maturing obligation on the other. The ideal Absolute quick ratio is 0.75:1. ABSOLUTE LIQUIDITY RATIO= (CASH + MARKETABLE SECURITIES) / CURRENT LIABILITIES ITC TABLE 5 ABSOLUTE LIQUIDITY RATIO OF ITC YEAR CASH & CASH EQUIVALENTS
CURRENT LIABILITIES ABSOLUTE LIQUIDITY RATIO 2011-12 3130.12 9304.00 0.37 2012-13 3615.00 10330.73 0.35 2013-14 3490.19 11886.06 0.29 2014-15 7588.61 11681.91 0.65 SOURCE: BALANCE SHEETS OF ITC LTD.
ABSOLUTE LIQUIDITY RATIO ITC GRAPH 7 ABSOLUTE LIQUIDITY RATIO OF ITC
0.65 0.7 0.6 0.5 0.37 0.35 0.4 0.29 0.3 0.2 0.1
0 2011-12 2012-13 2013-14 2014-15
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DABUR TABLE 6 ABSOLUTE LIQUIDITY RATIO OF DABUR
YEAR CASH & CASH EQUIVALENTS CURRENT LIABILITIES ABSOLUTE LIQUIDITY RATIO 2011-12 291.29 1077.42 0.27 2012-13 391.40 1158.44 0.34 2013-14 297.47 1136.68 0.26 2014-15 123.94 1259.03 0.11 SOURCE: BALANCE SHEETS OF DABUR LTD.
0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 GRAPH 8 ABSOLUTE LIQUIDITY RATIO OF DABUR
~ - 20 - ~ ABSOLUTE 0.34 LIQUIDITY RATIO OF DABUR 0.27 0.26
0.11
2011-12 2012-12 2013-14 2014-15
INTERPRETATION OF ABSOLUTE LIQUIDITY RATIO On comparing the Absolute liquidity Ratio of both the companies ITC and Dabur we can conclude that ITC’s Absolute liquidity Ratio increased to 0.65 in 2014-15 from 0.37 in 2011-12, though in 2013-14 there was a drop but it managed to climb back the next year. Where as in case of Dabur after a rise in 2012-13 it kept falling and in 2014-15 the fall was much drastic to 0.11. 0.7 0.6 0.65 0.5 0.4 0.37 0.27 0.35 0.34 0.26 0.3 0.29 0.2 0.1 0.11 0 2011-12 2012-13 2013-14 2014-15 GRAPH 5 COMPARING THE ABSOLUTE LIQUIDITY RATIO OF TWO COMPANIES ITC &DABUR
~ - 21 - ~ ABSOLUTE LIQUIDITY RATIO ITC ABSOLUTE LIQUIDITY RATIO DABUR
3.3.4 PROPRIETARY RATIO Proprietary ratio is a test of financial and credit strength of the business. It relates shareholders fund to total assets. This ratio determines the long term or ultimate solvency of the company. PROPRIETARY RATIO= SHAREHOLDER’S FUND / TOTAL ASSESTS
ITC TABLE 7 PROPRIETARY RATIO OF ITC
YEAR SHAREHOLDER’S TOTAL ASSETS PROPRIETARY FUND RATIO 2011-12 19458.58 30079.77 0.65 2012-13 22287.67 34017.43 0.66 2013-14 27236.96 40883.93 0.67 2014-15 30735.69 44195.66 0.70 SOURCE: BALANCE SHEETS OF ITC LTD.
PROPRIETARY RATIO 0.70 0.70 0.69 0.68 0.67 0.67 0.66 0.65 0.66 0.65 0.64 0.63 0.62 2011-12 2012-13 2013-14 2014-15 GRAPH 6 PROPRIETARY RATIO OF ITC
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DABUR TABLE 8 PROPRIETARY RATIO OF DABUR
SHAREHOLDER’S YEAR FUND TOTAL ASSETS PROPRIETARY RATIO 2011-12 1303.27 2840.71 0.46 2012-13 1594.78 2827.89 0.56 2013-14 1902.34 3121.80 0.61 2014-15 2336.1 3688.36 0.63 SOURCE: BALANCE SHEETS OF DABUR LTD.
PROPRIETARY RATIO 0.70 0.61 0.63 0.60 0.56 0.50 0.46 0.40 0.30 0.20 0.10 0.00 2011-12 2012-13 2013-14 2014-15 GRAPH 7 PROPRIETARY RATIO OF DABUR
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INTERPRETATION OF PROPRIETARY RATIO Higher the net worth ratio better the long term solvency position of the company. From Graph 10 (ITC) it is evident that the ratio is conistently increasing during the period. In 2011-12 it stood at 0.65 and in 2014-15 it has reached 0.7. In case of Dabur (Graph 11) it can be inferred that the ratios have been lower on an average but the growth from 2011- 12 to 2014-15 is substantial with a total increase of 1.37 times. This ratio indicates the extent to which the assets of the company can be lost without affecting the interest of thecreditors of the company 0.8 0.65 0.46 0.66 0.56 0.67 0.61 0.7 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2011-12 2012-13 2013-14 2014-15 GRAPH 8 COMPARISON OF PROPRIETARY RATIO OF ITC & DABUR
0.63 PROPRIETARY RATIO ITC PROPRIETARY RATIO DABUR
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3.3.5 FIXED ASSETS TO EQUITY RATIO Fixed assets to equity ratio measures the contribution of stockholders and the contribution of debt sources in the fixed assets of the company. Other names of this ratio are fixed assets to net worth ratio and fixed assets to proprietors fund ratio. If fixed assets to stockholders’ equity ratio is more than 1, it means that stockholders’ equity is less than the fixed assets and the company is using debts to finance a portion of fixed assets. If the ratio is less than 1, it means that stockholders’ equity is more than the fixed assets and the stockholders’ equity is financing not only the fixed assets but also a part of the working capital. Generally a ratio of 0.60 to 0.70 is considered satisfactory. FIXED ASSETS TO EQUITY RATIO = FIXED ASSETS / STOCK HOLDERS EQUITY ITC TABLE 9 FIXED ASSETS TO EQUITY RATIO YEAR FIXED ASSETS STOCK HOLDER’S
EQUITY FIXED ASSETS TO EQUITY RATIO 2011-12 12095.42 19615.67 0.62 2012-13 12697.13 22288.58 0.57 2013-14 15747.20 27439.99 0.58 2014-15 16292.63 30735.69 1.8 SOURCE: BALANCE SHEETS OF ITC LTD.
FIXED ASSETS TO EQUITY RATIO ITC GRAPH9 FIXED ASSETS TO EQUITY RATIO
1.8 1.8 1.6 1.4 1.2 1 0.8 0.62 0.6 0.57 0.58 0.4 0.2 0 2011-12 2012-13 2013-14 2014-15
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0.46 0.5 0.4 0.39 0.35 0.3 0.29 0.2 0.1 0 2011-12 2012-13 2013-14 2014-15
FIXED ASSETS TO EQUITY RATIO DABUR
DABUR TABLE 10 FIXED ASSETS TO EQUITY RATIO OF DABUR
YEAR FIXED ASSETS STOCK HOLDER’S EQUITY FIXED ASSETS TO EQUITY RATIO
2011-12 596.91 1303.27 0.46 2012-13 633.65 1594.78 0.39 2013-14 670.38 1902.34 0.35 2014-15 694.74 2336.19 0.29 SOURCE: BALANCE SHEETS OF DABUR LTD. GRAPH 10 FIXED ASSETS TO EQUITY RATIO
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INTERPRETATION OF FIXED ASSETS TO EQUITY RATIO An analysis of Graph 13 (ITC) conveys that this ratio has always been ‘satisfactory’ that is above 0.60 times. Although it has dropped between the years 2012 to ’14, it climbed up to a massive 1.8 times in the financial year 2014-15. It means that stockholders’ equity is less than the fixed assets and the company is using debts to finance a portion of fixed assets. Contradictorily Dabur’s FA to Equity Ratio (in Graph 14) is seen to be decreasing continuously and it has dropped to a mere 0.29 in the F.Y. 2014-15, 6.2 times lower than that of ITC. Since it has always been much lower than unity , it means that stockholders’ equity of Dabur is more than the fixed assets and the stockholders’ equity is financing not only the fixed assets but also a part of the working capital. 2014-15 2013-14 0.58 2012-13 0.57 2011-12 0.62 GRAPH 11 COMPARISON OF FIXED ASSETS TO EQUITY RATIO OF DABUR &ITC
0 0.5 1 1.5 2 0.29 1.8 0.35 FIXED ASSETS TO STOCKHOLDER’S EQUITY RATIO DABUR 0.39
FIXED ASSETS TO STOCKHOLDER’S 0.46 EQUITY RATIO ITC
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3.3.6 DEBT- EQUITY RATIO Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage, calculated by dividing a company’s total liabilities by its stockholders' equity. The D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity. For most companies the maximum acceptable debt-to-equity ratio is 1.5-2 and less. For large public companies the debt-to-equity ratio may be much more than 2, but for most small and medium companies it is not acceptable. DEBT - EQUITY RATIO = TOTAL LIABILITIES / SHAREHOLDERS' EQUITY
ITC TABLE 11 DEBT-EQUITY RATIO OF ITC YEAR TOTAL LIABILITIES SHAREHOLDERS' EQUITY DEBT- EQUITY RATIO 2011-12 10464.1 19615.67 0.53 2012-13 11728.6 22288.58 0.54 2013-14 13443.94 27439.99 0.49 2014-15 13459.97 30735.69 0.44 SOURCE: BALANCE SHEETS OF DABUR LTD.
DEBT- EQUITY RATIO ITC 0.6 0.54 0.5 0.49 0.44 0.4 0.3 0.2 0.1 0 2011-12 2012-13 2013-14 2014-15 GRAPH 12 DEBT EQUITY RATIO OF ITC
0.53
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DEBT- EQUITY RATIO ITC
DABUR TABLE 12 DEBT EQUITY RATIO OF DABUR
YEAR TOTAL LIABILITIES SHAREHOLDERS' EQUITY DEBT- EQUITY RATIO 2011-12 1537.44 1303.27 1.18 2012-13 1233.11 1594.78 0.77 2013-14 1219.46 1902.34 0.64 2014-15 1352.17 2336.19 0.58 SOURCE: BALANCE SHEETS OF DABUR LTD.
DEBT- EQUITY RATIO DABUR 1.18 1.2 1 0.77 0.8 0.64 0.58 0.6 0.4 0.2 0 2011-12 2012-13 2013-14 2014-15 GRAPH 17 DEBT EQUITY RATIO OF DABUR
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INTERPRETATION OF DEBT-EQUITY RATIO In Graph 16, the debt to equity ratio of ITC ltd. in 2011-12 (at 1.18 times) can be called unsatisfactory as a higher ratio indicates that the outside debts or liabilities are more than the shareholders’ funds, further indicating that the state of long term creditors are more and financial structure is a bit weak. Although in the subsequent years the ratio has dropped and reached its lowest at 0.58 in 2014-15 to an acceptable level. Dabur’s position in terms of Debt and Equity (In Graph 17) is more or less consistent throughout these years with a slight drop towards the last two financial years. 1.4 1.2 1.18 1 0.8 0.77 0.6 0.64 0.53 0.54 0.49 0.58 0.4 0.44 0.2 0 2011-12 2012-13 2013-14 2014-15 GRAPH 13 COMPARISON OF DEBT EQUITY SHARE BETWEEN DABUR AND ITC
~ - 30 - ~ DEBT- EQUITY RATIO ITC DEBT- EQUITY RATIO DABUR
3.3.7 NET PROFIT RATIO Net profit ratio (NP ratio) is a popular profitability ratio that shows relationship between net profit after tax and net sales. It is computed by dividing the net profit (after tax) by net sales. For the purpose of this ratio, net profit is equal to gross profit minus operating expenses and income tax. All non-operating revenues and expenses are not taken into account because the purpose of this ratio is to evaluate the profitability of the business from its primary operations. There is no norm to interpret this ratio. To see whether the business is constantly improving its profitability or not, the analyst should compare the ratio with the previous years’ ratio, the industry’s average and the budgeted net profit ratio. The use of net profit ratio in conjunction with the assets turnover ratio helps in ascertaining how profitably the assets have been used during the period. NET PROFIT RATIO = NET PROFIT AFTER TAX / NET SALES
ITC TABLE 13 NET PROFIT RATIO OF ITC YEAR NET PROFIT AFTER TAX
NET SALES NET PROFIT RATIO 2011-12 6322.39 26179.52 0.24 2012-13 7418.39 29605.58 0.25 2013-14 8990.62 34948.70 0.26 2014-15 9607.73 36083.21 0.26 SOURCE: PROFIT AND LOSS STATEMENT OF ITC LTD.
NET PROFIT RATIO ITC 0.265 0.26 0.26 0.26 0.255 0.25 0.245 0.24 0.235 0.23 2011-12 2012-13 2013-14 2014-15 GRAPH 14 NET PROFIT RATIO OF ITC
0.24 0.25
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DABUR TABLE 14 NET PROFIT RATIO OF DABUR
YEAR NET PROFIT AFTER TAX NET SALES NET PROFIT RATIO 2011-12 463.24 3759.33 0.12 2012-13 590.98 4349.39 0.14 2013-14 672.10 4870.08 0.14 2014-15 762.58 5431.28 0.14 SOURCE: PROFIT AND LOSS STATEMENTS OF DABUR LTD.
NET PROFIT RATIO DABUR 0.14 0.14 0.14 0.14 0.135 0.13 0.125 0.12 0.12 0.115 0.11 2011-12 2012-13 2013-14 2014-15 GRAPH 15 NET PROFIT RATIO OF DABUR
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INTERPRETATION OF NET PROFIT RATIO From 0.24 times in 2011-12 the NP margin of ITC has increased to 0.26 with an average growth rate of 4.15% each year. Although it is not huge, it indicates a positive advancement. In contrast to ITC’s figures the Net Profi Ratios of Dabur (Graph 2.1) have been almost 0.5 times lower. Further the ratio has elevated during the 1st year but subsequently been stagnant at 0.14 from FY 2012-13 to 2014-15. The constant net margin rate does not denote the company is improving its profitability but also does not show any decline. However a higher growth rate is anticipated. 0.3 0.24 0.25 0.26 0.26 0.25 0.2 0.15 0.12 0.14 0.14 0.14 0.1 0.05 0 2011-12 2012-13 2013-14 2014-15 GRAPH 16 COMPARISON OF NET PROFIT RATIO OF DABUR & ITC
~ - 33 - ~ NET PROFIT RATIO ITC NET PROFIT RATIO DABUR
3.3.8 OPERATING PROFIT RATIO The operating profit ratio indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc. It is expressed as a percentage of sales and shows the efficiency of a company controlling the costs and expenses associated with business operations. The operating profit margin ratio is a key indicator for investors and creditors to see how businesses are supporting their operations. If a company requires both operating and non-operating income to cover the operation expenses, it shows that the business' operating activities are not sustainable. A higher operating margin is more favorable compared with a lower ratio because this shows that the company is making enough money from its ongoing operations to pay for its variable costs as well as its fixed costs. OPERATING PROFIT RATIO = OPERATING PROFIT / NET SALES
ITC TABLE 15 OPERATING PROFIT RATIO OF ITC
YEAR OPERATING PROFIT NET SALES OPERATING PROFIT RATIO 2011-12 9168.15 26179.52 0.35 2012-13 10684.18 29605.58 0.36 2013-14 13051.55 34948.70 0.37 2014-15 13997.52 36083.21 0.39 SOURCE: PROFIT AND LOSS STATEMENTS OF ITC LTD.
OPERATING PROFIT RATIO ITC 0.4 0.39 0.38 0.37 0.36 0.35 0.34 0.33 0.32 2011-12 2012-13 2013-14 2014-15 GRAPH 17 OPERATING PROFIT RATIO OF ITC
~ - 34 - ~ OPERATING PROFIT RATIO ITC
DABUR TABLE 16 OPERATING PROFIT RATIO OF DABUR
YEAR OPERATING PROFIT NET SALES OPERATING PROFIT RATIO 2011-12 631.92 3759.33 0.17 2012-13 749.67 4349.39 0.17 2013-14 862.05 4870.08 0.18 2014-15 976.53 5431.28 0.18 SOURCE: PROFIT AND LOSS STATEMENTS OF DABUR LTD.
OPERATING PROFIT RATIO DABUR 0.185 0.18 0.175 0.17 0.165 0.16 0.155 2011-12 2012-13 2013-14 2014-15 GRAPH 18 OPERATING PROFIT RATIO OF DABUR
~ - 35 - ~ OPERATING PROFIT RATIO DABUR Poly. (OPERATING PROFIT RATIO DABUR)
INTERPRETATION OF OPERATING PROFIT RATIO On comparing the Operating Profit Ratio of both the companies ITC and Dabur we can conclude that ITC’s Operating Profit Ratio increased to 0.39 in 2014-15 from 0.35 in 2011-12 ; and Dabur’s from 0.17 in 2011-12 to 0.18 in 2014-15. ITC’s higher margins indicates that the company is making more money from its ongoing operations to pay for its variable costs as well as its fixed costs than that of Dabur. Also the rate of increase of this ratio is a bit sluggish in case of Dabur. 0.4 0.35 0.36 0.37 0.39 0.35 0.3 0.25 0.17 0.17 0.18 0.18 0.2 0.15 0.1 0.05 0 2011-12 2012-13 2013-14 2014-15 GRAPH 19 COMPARISON OPERATING PROFIT RATIO OF DABUR & ITC
OPERATING PROFIT RATIO ITC OPERATING PROFIT RATIO DABUR
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ITC 3.3.9 RETURN ON EQUITY RATIO Return on equity or return on capital is the ratio of net income of a business during a year to its stockholders' equity during that year. It is a measure of profitability of stockholders' investments. It shows net income as percentage of shareholder equity. Net income is the after tax income whereas average shareholders' equity is calculated by dividing the sum of shareholders' equity at the beginning and at the end of the year by 2. Return on equity is an important measure of the profitability of a company. Higher values are generally favorable meaning that the company is efficient in generating income on new investment. Investors should compare the ROE of different companies and also check the trend in ROE over time. However, relying solely on ROE for investment decisions is not safe. It can be artificially influenced by the management. RETURN ON EQUITY RATIO = NET INCOME / SHAREHOLDERS’ EQUITY TABLE 17 RETURN ON EQUITY RATIO OF ITC YEAR NET INCOME SHAREHOLDERS'
EQUITY RETURN ON EQUITY RATIO 2011-12 6258.14 19615.67 0.32 2012-13 7418.39 22288.58 0.33 2013-14 8891.38 27439.99 0.32 2014-15 9607.73 30735.69 0.31 SOURCE: BALANCE SHEET AND P/L STATEMENT OF ITC LTD
0.335 0.33 0.33 0.325 0.32 0.32 0.32 0.315 0.31 0.31 0.305 0.3 2011-12 2012-13 2013-14 2014-15 GRAPH 20 RETURN ON EQUITY RATIO OF ITC
~ - 37 - ~ 2011-12 2012-13 2013-14 2014-15
DABUR TABLE 18 RETURN ON EQUITY RATIO OF DABUR
YEAR NET INCOME SHAREHOLDERS’ EQUITY RETURN ON EQUITY RATIO 2011-12 463.24 1303.27 0.36 2012-13 590.98 1594.78 0.37 2013-14 672.10 1902.34 0.35 2014-15 762.58 2336.19 0.32 SOURCE: BALANCE SHEET AND P/L STATEMENT OF DABUR LTD.
0.38 0.37 0.37 0.36 0.35 0.35 0.34 0.33 0.32 0.32 0.31 0.3 0.29 2011-12 2012-13 2013-14 2014-15 GRAPH 21 RETURN ON EQUITY RATIO OF DABUR
~ - 38 - ~ 0.36 RETURN ON EQUITY RATIO DABUR
INTERPRETATION OF RETURN ON EQUITY RATIO From the analysis (Graph 27) it shows that Dabur Ltd. has higher return on equity than ITC ltd. However in contrast to the previous years the ROE of Dabur has drastically decreased in 2014- 15 and the possible cause of this occurrence is the lower net income between 2013 to 2015 0.37 0.37 0.36 RETURN ON EQUITY RATIO ITC 0.36 0.35 0.35 RETURN ON EQUITY RATIO DABUR 0.34 0.33 0.33 0.32 0.32 0.32 0.32 0.31 0.31 0.3 0.29 0.28 2011-12 2012-13 2013-14 2014-15 GRAPH 22 COMPARISON OF RETURN ON EQUITY RATIO OF DABUR & ITC
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3.3.10 EARNINGS PER SHARE RATIO (EPS) Earnings per share, also called net income per share, is a market prospect ratio that measures the amount of net income earned per share of stock outstanding.. Earnings per share is also a calculation that shows how profitable a company is on a shareholder basis. So a larger company's profits per share can be compared to smaller company's profits per share. Obviously, this calculation is heavily influenced on how many shares are outstanding. Thus, a larger company will have to split its earning amongst many more shares of stock compared to a smaller company. Earnings per share is the same as any profitability or market prospect ratio. Higher earnings per share is always better than a lower ratio because this means the company is more profitable and the company has more profits to distribute to its shareholders.
EPS = NET INCOME / AVERAGE OUTSTANDING COMMON SHARES ITC TABLE 19 EARNINGS PER RATIO OF ITC YEAR NET INCOME AVERAGE
OUTSTANDING COMMON SHARE SOURCE: BALANCE SHEETS AND P/L STATEMENT OF ITC LTD. GRAPH 23 EARNINGS PER SHARE RATIO OF ITC
EARNINGS PER SHARE RATIO 2011-12 6258.14 97.12 64.43 2012-13 7418.39 83.61 88.73 2013-14 8891.38 70.88 125.44 2014-15 9607.73 66.52 144.43
EARNINGS PER SHARE RATIO ITC 160
144.43 140
125.44 120 100
64.43 88.73 80 60 40 20 0 2011-12 2012-13 2013-14 2014-15
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YEAR NET INCOME AVERAGE OUTSTANDING COMMON SHARE EARNINGS PER SHARE RATIO 2011-12 463.24 65.49 7.07 2012-13 590.98 51.41 11.50 2013-14 672.10 45.29 14.84 2014-15 762.58 40.38 18.88
EARNINGS PER SHARE RATIO DABUR 20
18.88 18
11.50 14.84 16 14 7.07 12 10 8 6 4 2 0 2011-12 2012-13 2013-14 2014-15
DABUR TABLE 20 EARNINGS PER SHARE RATIO OF DABUR SOURCE: BALANCE SHEETS AND P/L OF DABUR LTD TABLE 24 EARNINGS PER SHARE RATIO OF DABUR
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INTERPRETATION OF EARNINGS PER SHARE RATIO From Graph 29 (Dabur) it is apparent that Earnings per share of the company has drastically improved throughout the time span and reached its pinnacle at 18.88 in 2014-15. ITC (Graph 28) has also improved in terms of EPS with a sharp ascent during the year 2012-13. A comparative analysis in Graph 30 below, depicts that the overall ratio of Dabur is higher than that of ITC but the rate of increase in both the companies is commendable. 180 160 140 120 100 80 60 40 20 0 2011-12 2012-13 2013-14 2014-15 GRAPH 25 COMPARISON OF EARNING PER SHARE RATIO OF DABUR & ITC
~ - 42 - ~ EARNINGS PER SHARE RATIO DABUR EARNINGS PER SHARE RATIO ITC
4. CONCLUSIONS AND RECOMMENDATIONS 4.1 SUMMARY OBSERVATIONS: TABLE 21 SUMMARY OF ALL THE RATIOS ANALYSED IN TABULAR FORM FOR THE LAST 4 FINANCIAL YEARS
2011-12 2012-13 2013-14 2014-15 ITC DABUR ITC DABUR ITC DABUR ITC DABUR CURRENT RATIO 1.60 1.51 1.79 1.49 1.89 1.73 2.05 1.25 LIQUID RATIO 0.51 0.60 0.51 0.59 0.56 0.62 0.84 0.46 ABSOLUTE LIQUIDITY RATIO
0.37 0.27 0.35 0.34 0.29 0.26 0.65 0.11 PROPRIETARY RATIO 0.65 0.46 0.66 0.56 0.67 0.61 0.70 0.63 FIXED ASSETS TO EQUITY RATIO
0.62 0.46 0.57 0.39 0.58 0.35 1.8 0.29 DEBT-EQUITY RATIO 0.53 1.18 0.54 0.77 0.49 0.64 0.44 0.58 NET PROFIT RATIO 0.24 0.12 0.25 0.14 0.26 0.14 0.26 0.14 OPERATING PROFIT RATIO
0.35 0.17 0.36 0.17 0.37 0.18 0.39 0.18 RETURN ON EQUITY RATIO
0.32 0.36 0.33 0.37 0.32 0.35 0.31 0.32 EARNINGS PER SHARE RATIO
64.43 7.07 88.73 11.50 125.44 14.84 144.43 18.88 SOURCE: FINANCIAL STATEMENTS OF ITC AND DABUR
The following are, in brief the inferences drawn from the data analysis and calculations made in this study: ▪ Current ratio of ITC is seen to have escalated in the time span whereas for DABUR it has kept drooping. So it can be said that ITC Ltd. has a much better solvency position. ▪ ITC’s liquid ratio has increased over the years and in case of Dabur quick ratio is seen to decrease especially during the last two financial years which shows that the firm has been facing some problems regarding paying short term liabilities for 3 years. Since a higher quick ratio is
always anticipated ITC is in a better position.
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▪ The trend of absolute liquidity ratio shows that for both the companies it has been fluctuating throughout the period but the drop in the last financial year is especially high for Dabur indicating an unsound liquidity position. ▪ An upward trend in the proprietary ratios of both the companies shows that the long term or ultimate solvency of the company is good and getting better. ▪ The fixed asset to equity ratio of ITC has been satisfactory that is around 0.6. However Dabur’s ratio has kept decreasing meaning that stockholders’ equity is more than the fixed assets and the stockholders’ equity is financing not only the fixed assets but also a part of the working capital. ▪ The Net profit and Operating profit ratios depicts that the ratios of Dabur have been almost 0.5 times less than that of ITC. Morover the former company fails to increase its profitability in the last few years ▪ The trend of ratios shows that Dabur Ltd. has higher return on equity than ITC ltd. However in contrast to the previous years the ROE of Dabur has drastically decreased in and the possible cause of this occurrence is the lower net income between the last 2-3 years. ▪ The overall Earnings per ratio of Dabur is higher than that of ITC but the rate of increase in both the companies is commendable. ▪ It can further be concluded that in terms of solvency and liquidity ITC Ltd. is showing a better trend but in terms of profitability Dabur Ltd. surpasses the former marginally, if not considerably.
4.2 RECOMMENDATIONS FOR IMPROVEMENT Financial analysis is the process of selecting and evaluating the relationship between component part of financial statement to obtain a better understanding of the firms’ position and performance. This financial analysis is done using the tools of ratio analysis. These tools show us the company position in terms of liquidity profitability, solvency, bankruptcy and stability. By using these tools we came to the conclusion that the companies should improve their revenue from operations or sales by adopting better marketing techniques and procedures. They should also try to expand the geographical market by trying to gain strong hold in the foreign countries. Dabur Ltd. especially is far behind of ITC in this aspect. Further Dabur Ltd. is advised
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to cope up and compete with its competitors in the FMCG market by introducing new and better line of products. Both the companies are advised to improve upon the solvency and liquidity position as they are responsible for creating a significant impact in the minds of the potential investors and other interested parties. In the changing economy scenario the financial performance has to be better. Even though the firms’ profitability, liquidity and other positions are somewhat satisfactory it can reach even higher positions and better stability if the above said suggestions are considered.
4.3 LIMITATIONS OF THE STUDY • The study is done within a period of four months only (Oct-Jan), so some additional financial analyses are not covered in this study. • Further the period of study is of 4 financial years only. So this conclusions are not exhaustive. • Due to the time constraint, all the financial ratios could not be analyzed. • The financial statement and annual reports were used; hence the data collected is secondary** in nature. • Ratios are only post-mortem of what happened between two balance sheet data. • Ratio analysis is based on accounting not economic data so its credibility is questioned by some users. • They reveal only the past performance of firm, it is not necessary that the same conditions have to be repeated in the future. Past performance (good or bad) is not a perfect indicator of future performance. **Due to the busy schedules of the high officials of the companies the collection of primary data was not possible. As such, this project report is restricted to the use of secondary data.
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4.4 SCOPE FOR FURTHER RESEARCH In light of the limitations specified earlier it can be said there was, and there is ample scope for further research in this aspect and topic. Apart from the 10 ratios analyzed in this project there are several other financial ratios that can be calculated and assessed to present a clearer picture of the financial stability of the two companies. Also there are other techniques (like common size balance sheet) for comparison and assessment of financial statements other the conventional ratio analysis. The study can also be conducted for a much larger time bracket which would facilitate the investors to make more prudent and informed decisions. Apart from this use of secondary data if accessible can improve the credibility of the calculations and results obtained as it will be free from any manipulative figures from the internal management of the companies.
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BIBLIOGRAPHY • Besley, S., Brigham, E. F., & Besley, S. (1999). Principles of finance. Fort Worth: Dryden Press. • Birchall, A. (1991). Ratio analysis. Financial Analysis and Control, 30-53. • Bull, B., & McNeill, D. (2007). Development issues in global governance: Public-private partnerships and market multilateralism. London: Routledge. • Chen, K. H., & Shimerda, T. A. (1981). An Empirical Analysis of Useful Financial Ratios. Financial Management, 10(1), 51. • Drake, P. P., & Fabozzi, F. J. (2008). Financial Ratio Interpretation. Handbook of Finance. • Duncan, E., & Elliott, G. (2004). Efficiency, customer service and financial performance among Australian financial institutions. Intl Jnl of Bank Marketing International Journal of Bank Marketing, 22(5), 319-342. • Financial Ratio Analysis. (2011). The Basics of Finance An Introduction to Financial Markets, Business Finance, and Portfolio Management, 243-274. • Financial Ratios: Technical Analysis of Financial Markets. (n.d.). Retrieved January 17, 2016, from http://www.finpipe.com/financial-ratios-analysis/ • Horrigan, J. O. (1978). Financial ratio analysis: An historical perspective. New York: Arno Press. • Ratio Analysis: Using Financial Ratios | Investopedia. (2003). Retrieved January 8, 2016, from http://www.investopedia.com/university/ratio-analysis/using-ratios.asp • Scherer, F. M. (2008). The World Productivity Growth Slump. Organizing Industrial Development.
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Annexure II- A Financial Statements of ITC Ltd. ~ IX ~
~ X ~
Annexure II – B Financial Statements of Dabur India Ltd. ~ XI ~
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