Financial Ratio Analysis of ITC Ltd.

TABLE OF CONTENTSSl No.TopicPage No.1Liquidity and Solvency Ratios2-42Profitability Ratios5-73Debt Coverage Ratios84Management Efficiency Ratios9-125Cash Flow Indicator Ratios13

1. LIQUIDITY AND SOLVENCY RATIOS1.1. Current RatioThe 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

20092010201120122013

ITC1.420.921.081.081.22

HUL0.680.920.840.860.83

Godrej2.071.31.321.371.28

DABUR1.190.930.991.151.17

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.

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 Company20092010201120122013

ITC0.610.390.50.510.66

HUL0.250.510.460.430.45

GODREJ1.720.950.810.840.78

DABUR0.990.680.780.850.97

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 RatioThe 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 businessFormula: Debt-to-Worth Ratio = Total Liabilities / Net WorthCompany20092010201120122013

ITC0.010.010.010.0040.003

HUL00000

DABUR0.190.140.230.210.15

GODREJ0.120.010.180.090.09

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 RATIOS2.1. Operating Profit Margin (%)

20092010201120122013

ITC27.327.125.4825.2723.05

HUL15.9815.7415.2216.2414.88

Godrej15.7218.2219.921.8117.19

Dabur17.0316.7119.5419.0617.28

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.

20092010201120122013

ITC17.417.115.715.2413.79

HUL11.3811.4311.0211.7411.48

Godrej10.9511.913.6316.2912.04

Dabur12.2912.0513.8414.6513.79

2.2. Net Profit Margin (%)

The net profit margin indicates how muchnet incomea company makes with total sales achieved. A higher net profit margin means that a company is more efficient at converting sales into actual profit.

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 (%)

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

20092010201120122013

ITC51.7750.6447.8643.8337.5

HUL97.6886.8293.44106.35116.55

Godrej17.8219.7429.5746.8337.86

Dabur31.8528.0635.6157.553.24

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 (%)

20092010201120122013

ITC35.9935.0831.6529.4225.41

HUL98.586.868589.76109.8

Godrej22.5825.7138.4144.546.63

Dabur39.7741.3648.7456.7954.07

Thenet worth ratiostates the return thatshareholderscould receive on their investment in a company, if all of theprofitearned 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 themThe final formula is:

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 RATIOS3.1. Interest Cover

20092010201120122013

ITC103.7190.8582.169.04101.56

HUL167.232195.962928.63375.02115.49

Godrej11.0311.6314.4438.8312.09

Dabur17.115.6825.330.7320.17

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 RATIOS4.1. Inventory Turnover RatioThe Inventory Turnover Ratio measures the number of times inventory turned over or wasconverted 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

Company20092010201120122013

ITC5.266.046.056.534.53

HUL7.29.268.997.919.93

GODREJ9.257.938.27.267.06

DABUR10.9411.318.657.198.8

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 RatioDebtor 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

Company20092010201120122013

ITC21.3224.3123.9126.527.82

HUL31.4141.8329.2424.2827.27

GODREJ99.3759.2535.130.1233.1

DABUR22.6323.6219.6717.6218.14

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 RatioThe fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-assets. 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) Company20092010201120122013

ITC1.441.581.691.811.8

HUL9.87.815.355.636.26

GODREJ4.184.736.097.488.28

DABUR4.844.314.394.384.7

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 capitalThis 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 Company20092010201120122013

ITC62.19-13.6913.9712.5631.26

HUL-42.051.58-22.62-20.0221.06

GODREJ108.2942.8330.4537.3930.66

DABUR41.323.7626.734.4339.18

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 RATIOS5.1. Dividend Payout Ratio Net ProfitThis 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 CompanyMar '09Mar '10Mar '11Mar '12Mar '13

ITC50.06109.6380.2466.3565.42

HUL76.4775.271.269.9975

GODREJ74.5859.3445.1930.1138.8

DABUR47.4146.8649.4256.8151.6

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

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