UN

DE
R
THE
GUI
DA
NCE
OF:

Fi
n

DR.
JAYA
NTA
KUM
AR
SEA
L

TABLE OF CONTENTS
Sl No.

Topic

Page No.

Liquidity and Solvency Ratios

2-4

Profitability Ratios

5-7

Debt Coverage Ratios

Management Efficiency Ratios

Cash Flow Indicator Ratios

8
9-12
13

1. LIQUIDITY AND SOLVENCY RATIOS

1.1.

Current Ratio

The current ratio is a reflection of financial strength. It is the number of times a companys current
assets exceed its current liabilities, which is an indication of the short term solvency
(usually 1year) of the business.
Current Ratio = Total current assets / Total current liabilities

Current Ratio
2.5
2
1.5
1
0.5
0
2009

2010

2011

2012

Godrej

2013

ITC

HUL

DABUR

2009

2010

2011

2012

2013

ITC

1.42

0.92

1.08

1.08

1.22

HUL

0.68

0.92

0.84

0.86

0.83

Godre
j

2.07

1.3

1.32

1.37

1.28

DABU
R

1.19

0.93

0.99

1.15

1.17

Analysis :Current ratio of ITC has always been more than 1. This implies that working capital of ITC is
always positive. As compared to ITC , Godrej has always higher current ratio which shows better
short term solvency. A common rule of thumb is that a ideal current ratio is 2:1, but in industry
also it close to 1.
Therefore, Short-term financial position can be said Good.
2

1.2.

Quick Ratio

Quick Ratio looks at companys most liquid assets and compares them to current liabilities. The
quick ratio tests whether a business can meet its immediate obligations even if adverse
conditions occur.
Formula
Quick Ratio = Current Assets Inventory / Current liabilities
Company

2009

2010

2011

2012

2013

ITC

0.61

0.39

0.5

0.51

0.66

HUL

0.25

0.51

0.46

0.43

0.45

GODREJ

1.72

0.95

0.81

0.84

0.78

DABUR

0.99

0.68

0.78

0.85

0.97

Quick Ratio
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2009

2010
ITC

2011
HUL

DABUR

2012

2013

GODREJ

Analysis:It can be seen that quick ratio of ITC is rising slowly from 2009 to 2013. It is a healthy sign for
company as it will help them to meet very short term obligations without any troubles.
In case of Godrej it has been steadily declining. A very high quick ratio also shows that company
is sitting on idle cash reserves which has no use. So it should invest somewhere.
So, comparing from industry it can be said that ITC has healthy short term liquidity to meet its
immediate obligations.

1.3.

Debt Equity Ratio

The Debt-to-Worth Ratio (or Leverage Ratio) is a measure of how dependent a company is on
debt financing as compared to owners equity. It shows how much of a business is owned and how
much is owed. It tells about the long term solvency position of business
Formula:
Debt-to-Worth Ratio = Total Liabilities / Net Worth
Compan
y

2009

2010

2011

2012

2013

0.01

0.01

0.01

0.004

0.003

DABUR

0.19

0.14

0.23

0.21

0.15

GODREJ

0.12

0.01

0.18

0.09

0.09

ITC
HUL

Debt-Equity Ratio
0.25
0.2
0.15
0.1
0.05
0
2009

2010
ITC

2011
HUL

DABUR

2012

2013

GODREJ

Analysis :We can see that debt equity ratio is very low in whole industry. It is because of the fact that FMCG
companies require working capital i.e. short term requirement instead long term borrowings.
In case of ITC, it was very insignificant % that was very near to 0.

2. PROFITABILITY RATIOS
2.1.

Operating Profit Margin (%)

IT
C

ITC
HUL
Godrej
Dabur

2009
27.3
15.98
15.72
17.03

2010
27.1
15.74
18.22
16.71

2011
25.48
15.22
19.9
19.54

2012
25.27
16.24
21.81
19.06

HUL

Go
d r
e
j

Da b
u r

2013
23.05
14.88
17.19
17.28

Operating margin measures proportion of

a
company's revenue which remains after
paying for variable costs of production such as wages, raw materials, etc.

It gives an idea of how much a company makes (before interest and taxes) on each dollar of sales.
Operating margin ratio shows whether the fixed costs are too high for the production or sales
volume.
Thus a higher value of operating margin ratio is favorable which indicates that more proportion of
revenue is converted to operating income In general, a business which is more efficient is
controlling its overall costs will have higher operating margin ratio.
Operating profit margin of ITC, though falling since 2009, is far above its competitors which
indicates ability of ITC to cover its expenses efficiently.

2.2.

Net Profit Margin (%)

The net profit margin indicates how much net income a company makes with total sales achieved. A higher
net profit margin
means that a company is
2009
2010
2011
2012
2013
more efficient at
converting sales into actual
ITC
17.4
17.1
15.7
15.24 13.79
profit.
HUL
11.38
11.43
11.02 11.74
11.48
Godrej
Dabur

10.95
12.29

11.9
12.05

13.63
13.84

16.29
14.65

12.04
13.79

It is one of the most essential financial ratios. Net margin includes all the factors that influence profitability
whether under management control or not. The higher the ratio, the more effective a company is at cost
control. Net profit margin provides clues to the company's pricing policies, cost structure and production
efficiency.
Net profit margin of ITC is on decline right from 2009 and is below 14% in 2013 whereas its operating
profit margin was the highest among its competitors.

2.3.

Return on Capital Employed (%)

The return on capital employed (ROCE) ratio measures ability of company to generate returns
from its available capital base.

140
120
100

ITC

80

HUL

60

Godrej

40

Dabur

20
0
2009 2010 2011 2012 2013

ITC
HUL
Godrej
Dabur

2009
51.77
97.68
17.82
31.85

2010
50.64
86.82
19.74
28.06

2011
47.86
93.44
29.57
35.61

2012
43.83
106.35
46.83
57.5

2013
37.5
116.55
37.86
53.24

It
gauges ability of company to generate
earnings from a company's total pool of capital. ROCE of ITC is far less when compared to its
competitors as in case of HUL its ROCE is about 120 while ITC has below 40.

2.4.

Return on Net Worth (%)

120
100
80

ITC

60

HUL

40

Godrej
Dabur

20
0
2009 2010 2011 2012 2013

ITC
HUL
Godrej
Dabur

2009
35.99
98.5
22.58
39.77

2010
35.08
86.86
25.71
41.36

2011
31.65
85
38.41
48.74

2012
29.42
89.76
44.5
56.796

2013
25.41
109.8
46.63
54.07

The NET WORTH RATIO states the return that shareholders could receive on their investment in
a company, if all of the profit earned were to be passed through directly to them. Thus, the ratio is
developed from the perspective of the shareholder. The ratio is useful as a measure of how well a
company is utilizing the shareholder investment to create returns for them
The final formula is:

Net worthratio=

Net After Tax Profits

Shareholder Capital+Retained Earnings

Return on Net worth of ITC is the least among its top competitors while that of HUL is the
highest. The reason for this is that portion of shareholder capital and Retained earnings is much
large as compared to its competitors as their net profit value which is about 7600cr is larger than
its major competitor HUL whose net profit is about 3900cr.

3. DEBT COVERAGE RATIOS

3.1.

Interest Cover
3500
3000
2500

ITC

2000

HUL

1500

Godrej

1000

Dabur

500
0
2009 2010 2011 2012 2013

ITC
HUL
Godrej
Dabur

2009
103.71
167.23
11.03
17.1

2010
90.85
2195.96
11.63
15.68

2011
82.1
2928.63
14.44
25.3

2012
69.04
375.02
38.83
30.73

2013
101.56
115.49
12.09
20.17

A ratio determines how easily a company can pay interest on outstanding debt. The interest
coverage ratio is obtained by dividing a company's earnings before interest and taxes (EBIT) of
one
period
by
the
company's
interest
expenses
of
the
same
period:

EBIT of ITC has continuously increased over the years from 3200cr in 2009 to 5300 cr in 2013
and interest expenses have more or less remained the same as was in 2009 hence interest coverage
ratio of ITC shows a small increase.

4. MANAGEMENT EFFICIENCY RATIOS

4.1. Inventory Turnover Ratio
The Inventory Turnover Ratio measures the number of times inventory turned over or was
converted to sales during a time period. It is a good indication of purchasing and production
efficiency.
To calculate the ratio we use the formula:
Inventory Turnover Ratio = Cost of Goods Sold / Total Inventory

Compan
y
ITC
HUL
GODREJ
DABUR

2009
5.26
7.2
9.25
10.94

2010
6.04
9.26
7.93
11.31

2011
6.05
8.99
8.2
8.65

2012
6.53
7.91
7.26
7.19

2013
4.53
9.93
7.06
8.8

Inventory Turnover Ratio

12
10
8

ITC

HUL

GODREJ

DABUR

6
4
2
0
2009

2010

2011

2012

2013

Analysis:
High inventory ratio is more preferable especially for consumer goods. Here Inventory ratio for
ITC has been very low compared to other rivals in industry in all years. It is always remain around
6. This shows that ratio is constantly decreasing which is not good for company, despite being
continuous increase in sales over the years.
This resulted in increase the inventory holding cost. Due to which working capital is also more
required to operate business.

4.2. Debtors Turnover Ratio

Debtor Turnover Ratio measures the number of time accounts receivables turned over during a
time period. A higher ratio indicates a shorter time between making a sale and collecting the cash.
Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid
debtors. It is the reliable measure of the time of cash flow from credit sales.
Formula of Debtors Turnover Ratio:
Debtors Turnover Ratio = Total Credit Sales (Net Sales) / Avg. Debtors
Compan
y
ITC
HUL
GODREJ
DABUR

2009
21.32
31.41
99.37
22.63

2010
24.31
41.83
59.25
23.62

2011
23.91
29.24
35.1
19.67

2012
26.5
24.28
30.12
17.62

2013
27.82
27.27
33.1
18.14

Debtor Turnover Ratio

120
100

ITC

80

HUL
GODREJ

60

DABUR

40
20
0
2009

2010

2011

2012

2013

Debtors turnover ratio of ITC is showing slow increasing trend over the years. It is a good sign as
company is becoming more efficient in collection from its customers. The ratio remains closer to 25
for ITC, it shows that company is quick in collection.
Godrej also has been very strict with its collection policy as it remains always on top in all 4
companies. But much higher ratio is still not preferable as it reduces your sales.

4.3. Fixed Assets Turnover Ratio

The fixed-asset turnover ratio measures a company's ability to generate net sales from fixedassets. It shows how efficiently company has used its fixed assets like property, plant and
equipment (PP&E) - net of depreciation.
A higher fixed-asset turnover ratio shows that the company has been more effective in using the
investment in fixed assets to generate revenues.
Formula for Fixed Assets turnover Ratio:= Net Sales / Total Fixed Assets (Net of Depreciation)
Compan
y
ITC
HUL
GODREJ
DABUR

2009
1.44
9.8
4.18
4.84

2010
1.58
7.81
4.73
4.31

2011
1.69
5.35
6.09
4.39

2012
1.81
5.63
7.48
4.38

10

2013
1.8
6.26
8.28
4.7

Fixed Asset Turnover Ratio

12
10
8
6
4
2
0
2009

ITC
HUL
GODREJ
DABUR

2010

2011

2012

2013

Analysis :
It can be easily deduced from the above chart ITC has been very less efficient compared to all
rivals HUL, Godrej, Dabur in utilising its fixed assets to generate Sales. Its ratio remain closed to
2 compared to HUL having 6 times which is 3 times. It is very significant point need to be
considered by management of company.

4.4. Number of days in working capital

This describes that how many days it take to generate cash revenue from raw material since day of
purchase. It includes purchasing raw material, conversion into finished goods, then sales and
finally converting it into cash collection.
Longer the inventory period is, it increases the working capital requirements, hence cost also. It
tells more about overall operating efficiency of company.
Formula:
= Average Inventory holding period + Average Collection Period
Average Payable Period
Compan
y
ITC
HUL
GODREJ
DABUR

2009
62.19
-42.05
108.29
41.32

2010
-13.69
1.58
42.83
3.76

2011
13.97
-22.62
30.45
26.7

2012
12.56
-20.02
37.39
34.43

11

2013
31.26
21.06
30.66
39.18

Working Capital Days

120
100
80
60
40
20
0
2009
-20
-40
-60

ITC
HUL
GODREJ
DABUR
2010

2011

2012

2013

Analysis:
We can observe that most of the companies including ITC, days required in working capital is
approximate 30 days. It is overall industry average also. We can say that ITC is operating similarly
with its competitors.
Though above lines looks very skewed pre 2011, but we can observe that after 2011 they become
more stable. HUL has negative working capital days as it works more on advance basis with its
customers.

5. CASH FLOW INDICATOR RATIOS

5.1. Dividend Payout Ratio Net Profit
This ratio is calculated to find the extent to which earnings per share have been used for paying
dividend and to know what portion of earnings has been retained in the business. It is an important
ratio because ploughing back of profits enables a company to grow and pay more dividends in
future.
Formula of Dividend payout Ratio:
= Dividend per share / Earnings per Share

12

Company

Mar
'09
50.06
76.47
74.58
47.41

ITC
HUL
GODREJ
DABUR

Mar '10

Mar '11

109.63
75.2
59.34
46.86

80.24
71.2
45.19
49.42

Mar
'12
66.35
69.99
30.11
56.81

Mar '13
65.42
75
38.8
51.6

Dividend Payout Ratio

120
100
80
60
40
20
0
Mar '09

Mar '10

Mar '11

Mar '12

ITC

HUL

GODREJ

DABUR

Mar '13

Analysis:
Dividend Payout ratio is indicator of the amount of earnings that have been ploughed back in the
business. In ITC there is higher payout ratio which indicates the co. is paying more to its
shareholders and lower amount of earnings are ploughed back in the business. Same is the case
with HUL which is not good strong financial condition of both the companies.
There was fluctuation in payout ratio of ITC and Godrej which is also not in interest of
shareholders of company as it increases the uncertainty.
Therefore it can be said that Dividend policy of ITC has not been consistent over the years
13

Thank You

14