Ratio-analysis Of Itc 4df1v

Ratio Analysis of

Submitted to: Mrs.Vaishali Apte Faculty of International Finance, Muenchen International Business School, Pune

Presented By:

Vinod Prajapat (63) 1

Ratio Analysis It’s a tool which enables the banker or lender to arrive at the following factors :  Liquidity position  Profitability  Solvency  Financial Stability  Quality of the Management  Safety & Security of the loans & advances to be or already been provided 

How a Ratio is expressed? As Percentage

- such as 25% or

50% . For example if net profit is Rs.25,000/and the sales is Rs.1,00,000/- then the net profit can be said to be 25% of the sales.  As Proportion - The above figures may be expressed in of the relationship between net profit to sales as 1 : 4.  As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4th of the sales.

Classification of Ratios Balance Sheet Ratio

P&L Ratio or Income/Revenue Statement Ratio

Balance Sheet and Profit & Loss Ratio

Financial Ratio

Operating Ratio

Composite Ratio

Current Ratio Quick Asset Ratio Proprietary Ratio Debt Equity Ratio

Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio

Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors’ Turnover Ratio,

Format of balance sheet for ratio analysis

LIABILITIES

ASSETS

NET WORTH/EQUITY/OWNED FUNDS Share Capital/Partner’s Capital/Paid up Capital/ Owners Funds Reserves ( General, Capital, Revaluation & Other Reserves) Credit Balance in P&L A/c LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions) Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities

FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIES Original Value Less Depreciation Net Value or Book Value or Written down value

NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. assets which are not current or fixed in nature CURRENT LIABILTIES CURRENT ASSETS : Cash & Bank Balance, Bank Working Capital Limits such as Marketable/quoted Govt. or other securities, CC/OD/Bills/Export Credit Book Debts/Sundry Debtors, Bills Receivables, Sundry /Trade Creditors/Creditors/Bills Stocks & inventory (RM,SIP,FG) Stores & Payable, Short duration loans or deposits Spares, Advance Payment of Taxes, Prepaid Expenses payable & provisions against various expenses, Loans and Advances recoverable items within 12 months INTANGIBLE ASSETS Patent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses

Some important notes 









Liabilities have Credit balance and Assets have Debit balance Current Liabilities are those which have either become due for payment or shall fall due for payment within 12 months from the date of Balance Sheet Current Assets are those which undergo change in their shape/form within 12 months. These are also called Working Capital or Gross Working Capital Net Worth & Long Term Liabilities are also called Long Term Sources of Funds Current Liabilities are known as Short Term Sources of Funds

Some important notes 

Assets other than Current Assets are Long Term Use of Funds



Installments of Term Loan Payable in 12 months are to be taken as Current Liability only for Calculation of Current Ratio & Quick Ratio.



If there is profit it shall become part of Net Worth under the head Reserves and if there is loss it will become part of Intangible Assets



Investments in Govt. Securities to be treated currentonly if these are marketable and due. Investments in other securities are to be treated Current if they are quoted. Investments in allied/associate/sister units or firms to be treated as Non-current.

2. 3.Current Ratio : It is the relationship between the current assets and current liabilities of a concern.  Current Ratio = Current Assets/Current Liabilities  If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1  The ideal Current Ratio preferred by Banks is 1.33 : 1 

2.Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses, alternatively it is the difference of Current Assets and Current Liabilities.

3 . ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits Acid Test or Quick Ratio Liabilities

= Quick Current Assets / Current

Example : Cash 50 , 000 Debtors 1 , 00 , 000 Inventories 1 , 50 , 000 Liabilities 1 , 00 , 000 Total Current Assets 3 , 00 , 000

Current Ratio 3 , 00 , 000 / 1 , 00 , 000 Quick Ratio 1 , 50 , 000 / 1 , 00 , 000

=

> = 3 : 1 = > = 1.5 : 1

Current

4 . DEBT EQUITY RATIO : It is the relationship between borrower’s fund (Debt) and Owner’s Capital (Equity). Worth

Long Term Outside Liabilities / Tangible Net Liabilities of Long

Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets For instance, if the Firm is having the following : Capital = Rs . 200 Lacs Free Reserves & Surplus Lacs Long Term Loans / Liabilities Debt Equity Ratio i.e. 1.6 : 1

will be

= Rs . 300 = Rs . 800 Lacs =>

800 / 500

5 . PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owner’s Fund. Proprietary Ratio = ( Tangible Net Worth / Total Tangible Assets ) x 100 T he ratio will be 100% when there is no Borrowing for purchasing of Assets. 6. GROSS PROFIT RATIO : By comparing Gross Profit percentage

to Net Sales we can arrive at the Gross Profit Ratio which indicates the manufacturing efficiency as well as the pricing policy of the concern.

Gross Profit Ratio Sales ) x 100

=

( Gross Profit

/ Net

Alternatively , since Gross Profit is equal to Sales minus Cost of Goods Sold, it can also be interpreted as below :

Gross Profit Ratio = [ ( Sales – Cost of goods sold )/ Net Sales ] x 100

A higher Gross Profit Ratio indicates efficiency in production of the unit.

7 . OPERATING PROFIT RATIO : It is expressed as Net Sales ) x 100 Higher efficiency

the

( Operating Profit /

=> ratio

indicates

operational

8 . NET PROFIT RATIO : It is expressed as Net Sales ) x 100

=>

( Net Profit /

It measures overall profitability .

9.

STOCK / INVENTORY TURNOVER RATIO :

( Average Inventory / Sales ) x 365

days

for

( Average Inventory / Sales ) x 52

weeks months

for

( Average Inventory / Sales ) x 12

Average Inventory Stock + Closing Stock )

or Stocks

for

= ( Opening

-----------------------------------------

2 .

This

ratio

indicates

the

number

of

times

the

10 . DEBTORS TURNOVER RATIO : This is also called Debtors Velocity or Average Collection Period or Period of Credit given . ( Average Debtors / Sales ) x 365 for days ( 52 for weeks & 12 for months ) 11 . ASSET TRUNOVER RATIO : Net Sales / Tangible Assets 12 . FIXED ASSET TURNOVER RATIO Net Sales / Fixed Assets

:

13 . CURRENT ASSET TURNOVER RATIO Sales / Current Assets

:

Net

14 . CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio, which determines the creditor payment period. ( Average Creditors / Purchases ) x365 for days

15 . RETRUN ON ASSETS : Taxes / Total Assets

Net Profit after

16. RETRUN ON CAPITAL EMPLOYED : ( Net Profit before Interest & Tax / Average Capital Employed ) x 100

Average Capital Employed is the average of the equity share capital and long term funds provided by the owners and the creditors of the firm at the beginning and end of the ing period.

Composite Ratio 17 . RETRUN ON EQUITY CAPITAL ( ROE ) : Net Profit after Taxes / Tangible Net Worth 18 . EARNING PER SHARE : EPS indicates the quantum of net profit of the year that would be ranking for dividend for each share of the company being held by the equity share holders. Net profit after Taxes and Preference Dividend / No . of Equity Shares 19 . PRICE EARNING RATIO : PE Ratio indicates the number of times the Earning Per Share is covered by its market price. Market Price Per Equity Share / Earning Per Share

20 . DEBT SERVICE COVERAGE RATIO : This ratio is one of the most important one which indicates the ability of an enterprise to meet its liabilities by way of payment of installments of Term Loans and Interest thereon from out of the cash accruals and forms the basis for fixation of the repayment schedule in respect of the Term Loans raised for a project. (The Ideal DSCR Ratio is considered to be 2 ) PAT + Depr . + Annual Interest on Long Term Loans & Liabilities -------------------------------------------------------------------------------Annual interest on Long Term Loans & Liabilities + Annual Installments payable on Long Term Loans & Liabilities ( Where PAT is Profit after Tax and Depr. is Depreciation)

18

19

Notes All amounts worked here are in of Rupees in Crores (1 crore =10000000=10^7). MS Excel sheet has been used for computing the ratios. 

20

20

I Liquidity Ratios Year 2007 1 Current ratio: Current assets / Current Liabilities II.3 :C u rre n t a s s e ts ,L o a n s a n d a d v a6 n2 c8 e9 s.7 2 II.4 :C u rre n t lia b ilitie s a n d p ro v is io n3s8 5 7 .5 9 (II.3 /II.4 ) 1 .6 3 0 4 7 9 1 3 3

The current ratio of 1.63 times says that the company is in relatively good short-term financial standings. The ratio is an indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is.

21

21

I Year 2

Liquidity Ratios 2007 Quick ratio or Acid test ratio: (Current assetsinventories)/ Current Liabilities

II.3:(Current assets,Loans and advances) Less:II.3a:Inventories II.4:Current liabilities and provisions (II.3-II.3a)/(II.4)

6289.72 3354.03 2935.69 3857.59 0.761016593

The small ‘Quick ratio’, i.e. 0.76 times says that the company's financial strength is not so strong. In general, a quick ratio of 1 or more is accepted by most creditors; however, quick ratios vary greatly from industry to industry and ITC does not have as such any worries in getting creditors. ITC has strong financial positions in many other aspects. 22

22

I

Liquidity Ratios

Year 2007 3 Cash ratio or Absolute liquidity ratio: (Cash +Marketable securities)/Current liabilities

The cash ratio of 0.23 times says that the company is not in the position to very quickly liquidate its assets and cover short-term liabilities. But there is no such liquidity need for the company and so the small value of the ratio has no such important implications. (The ratio is of interest to short-term creditors) 23

23

II

Solvency Ratios

Year 2007 1 Debt – equity ratio: Long term debt/ equity (net worth)

I.2:Loan funds 200.8 I.1:Shareholders funds 10437.0 0.01924676 The(I.2)/(I.1) ratio of 0.02 times, which means that the company has not been aggressive in financing its growth with debt. Thus its earnings are stable. The company has better from the shareholders.

24

24

II

Solvency Ratios

Year 2007 2 Debt ratio: debt (long term)/ (debt (long term) + equity) or debt/capital employed I.2:Loan funds I.1:Shareholders funds (I.2)+(I.1) (I.2)/(I.2+I.1)

200.88 10437.08 10637.96 0.01888332

The ratio of 0.02 times signifies that the company has employed more capitals over its debts. Thus the company is efficiently utilizing its loan funds.

25

25

II

Solvency Ratios

Year 2007 3 Interest Coverage ratio : (earnings before interest and tax) / Interest

9 m2 6s P /L :III:p ro f it b e f o re ta x a tio n a n d e x c e p tio n a l3ite

II.4 a - 1 3 :In te r e s t a c c r u e d b u t n o t d u e o n lo0 a. 5n

( P . I I I ) / ( I I . 4 a 1 3 ) 7 1high 3 9 and .4 5 4 The ratio of 7139.4 times is magnificently very hence the company has very sound financial position. It has no tension of paying interests over its loans.

26

26

III

Turnover Ratios

Year 2007 1

Inventory turnover: Cost of goods sold or net sales/Average (or closing) inventory.

P/L:IB :N e t s ale s II.3 a:In ven tories (P/L:IB )/(II.3 a:)

7135.75 3354.03 2 .1 275 152 58

The ratio of 2.13 times signifies that the company is efficient in selling its stocks.

27

27

III Turnover Ratios Year 2007 2 Days of Inventory holding: Number of days in the year (say 360)/ Inventory turnover ratio.

N u m b e r o f d a y s in a y e a r 360 In v e n to rie s tu rn o v e r ra tio s 2 .1 2 7 169 days or about five and half months periods for the (3 6 0of)/(IT R ) is quiet efficient. 1 6 9 .2 5 2 4 6 8 liquidation stocks

28

28

III

Turnover Ratios

Year 2007 3

Debtors turnover ratio: Credit sales or net sales/ Average (or closing) debtors (or s receivable (total debtors +bills receivable)

P / L : I B : N e t s a le s II.3 b :S u n d ry d e b to rs (P /L :IB )/(II.3 b )

7 1 3 5 .7 5 6 3 6 .6 9 1 1 .2 0 7 5 7 3

The ratio of 11.2 times signifies that the company is getting good returns and has no visible risk but benefits out of its debtors. 29

29

III Turnover Ratios Year 2007 4 Collection period: Number of days in the year (say 360)/ Debtors turnover

N u m b e r o f d a y s in t h e y e a r 360 D e b to rs tu rn o v e r 1 1 .2 0 7 The period of 32 days ( 3 6 debt 0 ) / ( Dcollection TR ) 3 2 . 1 2is2quiet 7 8 0 4good 1

and the company is efficient in getting back its dues.

30

30

III Turnover Ratios Year 2007 5 Current assets turnover: Net sales/ Current assets

P / L : I B : N e t s a le s 7 1 3 5 .7 5 I I . 3 : C u r r e n t a s s e t s , lo a n s a n d6 2a 8d 9v a. 7n2c e s (P /L :IB )/(II.3 ) 1 . 1 3 4 5 0 9 9 6 2 The ratio of 1.13 times signifies that , in spite of the

current liabilities, the company is efficient in making sales revenue.

31

31

III Turnover Ratios Year 2007 6 Net current assets turnover: Net sales/ Net current assets

P / L : I B : N e t s a le s 7 1 3 5 .7 5 N e t C u rre n t A s s e ts 2 4 3 2 .1 3 ( P / L : I B ) / ( N C A ) 2 . 9company 3 3 9 5 0 8 is9 9 The ratio of 2.93 times signifies that the highly efficient in utilizing its net current assets and generating sales revenue.

32

32

III Turnover Ratios Year 2007 7 Fixed assets turnover: Net sales/ Net fixed assets P / L : IB :N e t s a le s 7 1 3 5 .7 5 I I. 1 : N e t F ixe d A s s e t s 5 6 1 0 .9 1 ( P / L : IB )/ ( I I . 1 ) 1 .2 7 1 7 6 3 4 0 4 The ratio of 1.27 times signifies that the company is very efficiently utilizing its fixed assets for generating sales revenue.

33

33

III

Turnover Ratios

Year 2007 8

Net assets turnover: Net sales/ Net assets or capital employed : (Net assets = all assets – accumulated depreciation) P/L:IB:Net sales II.1:Net Fixed Assets II.2: Investments Net Current assets Net assets (P/L:IB)/(NA)

7135.75 5610.91 3067.77 2432.13 11110.81 0.642234905

The ratio of 0.64 times signifies that the company has still to be more efficient in utilizing its net assets in generating sales revenue.

34

34

IV Profitability Ratios Year 2007 1 Margin: (Profit before interest and tax (PBIT)/ Net sales)×100

6 .m7 s P /L :III:P ro f it b e f o re ta x a tio n a n d E x c e p tio3n 9a l2ite P / L : I B : N e t S a le s ( P / L : I I I ) / ( P ×1 / L :0I B0 )

7 1 3 5 .7 5 5 5 .0 2 8 5 5 3 4 1

The Profit margin of 55.03% is quiet impressive and the company is making good profits.

35

35

IV

Profitability Ratios

Year 2007 2 Net margin: Profit after tax (PAT) ×100 / Net sales

P / L : I I I : P r o fit a ft e r t a x a t io n P / L : I B : N e t S a le s ( P / L : I I I ) / ( P ×1 / L 0: I 0B )

2 6 9 9 .9 7 7 1 3 5 .7 5 3 7 .8 3 7 2 2 8 0 4

The net margin of 37.83% is quiet impressive, and the company is performing well.

36

36

IV Profitability Ratios Year 2007 3 Before tax return on investment: (PBIT/Net assets) ×100 P/L:III:Profit before taxation and Exceptional items

II.1:Net Fixed Assets II.2:Investments Net Current assets Net assets (P/L:III)/(NA)×100

3926.7 5610.91 3067.77 2432.13 11110.81 35.34125775

The Return of 35.34% is quiet good and company is performing well. 37

37

IV Profitability Ratios Year 2007 4 Return on equity: (PAT/Equity (net worth)) ×100

P / L : I I I : P r o fit a ft e r t a x a t io n 2 6 9 9 .9 7 I . 1 : S h a r e h o ld e r s fu n d s 1 0 4 3 7 .0 8 ( P / L : I I I ) / ( P /×1 L :0I B0 ) 2 5 .8 6 9 0 1 7 The ratio of 25.86%is quiet good and the company utilizing the shareholders funds in a better way.

is

38

38

V Equity-related Ratios Year 2007 1 Earning per share (EPS): PAT/Number of ordinary shares

P /L : II I: P ro fit a fte r t a xa tio n

2 6 9 9 .9 7 P /L :IV -1 9 ( iv ):W e ig h te d a v e ra g e N u m b e r o f o rd in a ry s h a re s 3o u7ts5ta 7 n d6 in g3 6 9 0 7 (P /L :III)/(P /L×1 :IV0 )(^ 7 : to c o n v e rt in p e r 7ru.1p 8e 5e )2 8 7 1 0 2

In comparison to the face value of Re.1/share the EPS of Rs.7.18 is very good.

39

39

V Equity-related Ratios Year 2007 2 Dividends per share (DPS): Dividends/ Number of ordinary shares P/L:IV:Proposed D ividend

1166.29 3 757636907 P /L:IV-19(iv):W eighted average Num ber of ordinary s hares outs tanding Dividend per share (DPS) isunitaruppes simple and intuitive (P/L:III)/(P/L:IV) ×10^7 (to c onvert into ) 3.10378578

number. It is the amount of the dividend that shareholders have (or will) receive, over an year, for each share they own. In compared to the face value of the shares, i.e. Re.1.00/share. DPS of Rs.3.10 is quiet good.

40

40

V Equity-related Ratios Year 2007 3 Pay out ratios: DPS/EPS or Dividends/PAT D PS EPS (D P S )/(E P S )

3 .1 7 .1 9 0 .4 3 1 1 5 4 3 8 1

a very low payout ratio indicates that a company is primarily focused on retaining its earnings rather than paying out dividends. The payout ratio also indicates how well earnings the dividend payments: the lower the ratio, the more secure the dividend because smaller dividends are easier to pay out than larger dividends. So the value of 0.43 times is quiet good. 41

41

V Equity-related Ratios Year 2007 4 Dividend Yield: DPS/Market value per share We have to get the Market value per share of the relevant period .

Market Price Per Share The closing price of the common or preferred stock as reported on the applicable stock exchange consolidated tape as of the date indicated

42

42

V Equity-related Ratios Year 2007 5 Book value per share: Net worth/ Number of ordinary shares I.1 :S h a re h o ld e rs fu n d s

1 0 4 3 7 .0 8 BV is considered to be the ing 3 value 7 5 7 6 3 6of9 0each 7 P /L:IV-19(iv):W eighted average Num ber of ordinary s hares outs tanding share, than what the (I.1drastically )/(P/L :IV)× 1different 0 ^7 (to c onvert into unit ruppes ) 2 7 .7market 7 5 6 4 7 9 is 9 valuing

the stock at. The book value, i.e. Rs.27.77 is far higher than the face value of each share, i.e. Re.1.00. “Here “diluted” value in considering numbers of shares is not considered.”

43

43

VI Investment-related Ratios Year 2007 Return on assets or earning power (ROA): (PAT/ Average 1 total assets (of the given years, here 2006&07)) ×100 or ((PAT+ Interest)/Average fixed assets) ×100

P/L:III:Profit after taxation Fixed assets 2007 Investments 2007 Current assets 2007 Fixed assets 2006 Investments 2006 Current assets 2006 Average total assets (PAT/ATA) ×100

2699.97 5610.91 3067.77 6289.72 4405.13 3517.01 5161.9 14026.22 19.24944853

Earning power of the company, i.e. 19.25% is quiet good and the company is doing well.

44

44

VI Investment-related Ratios Year 2007 2 Return on capital employed (ROCE): (EBIT(PBIT)/ Capital employed) ×100

3 9n 2a l6it. e7m s P /L : II I:P r o f it b e f o r e ta x a tio n a n d E x c e p tio I:S o u rc e s o f F u n d s 1 1 1 1 0 .8 1 The ROCE signifies that the ( ( P / L of : I I×1 I35.34% ) /0I )0 3 5 .company 3 4 1 2 5 7 7is5 getting good return out of its investment decisions.

45

45

VII Return on Equity (ROE) Year 2007 1 ROTSE (return on total shareholders equity): (PAT/ Total shareholders equity) ×100

P / L : I I I : P r o fit a ft e r t a x a t io n 2 6 9 9 .9 7 I . 1 : S h a r e h o ld e r s fu n d s 1 0 4 3 7 .0 8 ( P / (25.87 L : I I I ) / ( times) P×1/ L0: I0B )is same as that2 5of. 8“Return 6 9 0 1 7 on The ratio equity”, since there are no preference shares.

46

46

VII

Return on Equity (ROE)

Year 2007 2 ROOSE (return on ordinary shareholders equity) / RONW (return on net worth): ((PAT-preferential dividends)/Net worth) ×100 P /L :III:P ro fit a fte r ta xa tio n I.1 :S h a re h o ld e rs fu n d s (P /L :III)/(P /L×1 :IB0 )0

2 6 9 9 .9 7 1 0 4 3 7 .0 8 2 5 .8 6 9 0 1 7

The ratio (25.87 times) is same as that of “Return on equity”, and “return on total shareholders equity” since there are no preference shares.

47

47

Du Pont Analysis

48

Du Pont analysis for year 2007:

49

Du Pont analysis for year 2006

50

Du Pont analysis for year 2005:

51

Du Pont analysis for year 2004:

52

Return on total assets (%)

Du Pont Analysis 28.55

30.00 25.00

22.44

23.37

22.69

3

4

20.00 15.00 10.00 5.00 0.00 1

2

Years:1~2004:2~2005:3~2006:4~2007

Du Pont chart portrays the earning power of a firm. The ROA ratio is a central measure of the overall profitability and operational efficiency of a firm it shows the interaction of Profitability and activity Ratios, It implies that the performance of a firm can be improved either by generating more sales volume per rupee of investment or by increasing the profit margin per rupee of sales. So as per the analysis, the company has to maintain more consistent and increasing trend in its ROA in the following years. 53

Thank you Give this great opportunity again to us !

56

56