Financial Statement Analysis

Submitted to: Mrs. S.Sudha

Faculty of Financial Management, Indian Institute of Plantation Management, Bangalore

Presented By: Prit Ranjan Jha

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

I Liquidity Ratios Year 2007 1 Current ratio: Current assets / Current Liabilities
II.3:Current assets,Loans and advances 6289.72 II.4:Current liabilities and provisions 3857.59 (II.3/II.4) 1.630479133
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 shortterm debt obligations; the higher the ratio, the more liquid the company is.
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I Year 2

Liquidity Ratios 2007 Quick ratio or Acid test ratio: (Current assetsinventories)/ Current Liabilities
6289.72 3354.03 2935.69 3857.59 0.761016593

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

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.
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Liquidity Ratios

Year 2007 3 Cash ratio or Absolute liquidity ratio: (Cash +Marketable securities)/Current liabilities
II.3c:Cash and bank Balances Add:Marketable securites II.4:Current liabilities and provisions (II.3c)/(II.4) 900.16 0 900.16 3857.59 0.233347764

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 7 interest to short-term creditors)

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Solvency Ratios

Year 2007 1 Debt equity ratio: Long term debt/ equity (net worth) I.2:Loan funds 200.88 I.1:Shareholders funds 10437.08 (I.2)/(I.1) 0.019246763 The 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 support from the shareholders.
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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.
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II

Solvency Ratios

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

P/L:III:profit before taxation and exceptional items

3926.7 II.4a-13:Interest accrued but not due on loans 0.55 (P.III)/(II.4a-13) 7139.454545
The ratio of 7139.4 times is magnificently very high and hence the company has very sound financial position. It has no tension of paying interests over its loans.
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III Year 1

Turnover Ratios 2007 Inventory turnover: Cost of goods sold or net sales/Average (or closing) inventory.

P/L:IB:Net sales II.3a:Inventories (P/L:IB)/(II.3a:)

7135.75 3354.03 2.127515258

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

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

Number of days in a year Inventories turnover ratios (360)/(ITR)

360 2.127 169.2524683

169 days or about five and half months periods for the liquidation of stocks is quiet efficient.

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III Year 3

Turnover Ratios 2007 Debtors turnover ratio: Credit sales or net sales/ Average (or closing) debtors (or accounts receivable (total debtors +bills receivable)

P/L:IB:Net sales II.3b:Sundry debtors (P/L:IB)/(II.3b)

7135.75 636.69 11.20757354

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

Number of days in the year Debtors turnover (360)/(DTR)

360 11.207 32.12278041

The debt collection period of 32 days is quiet good and the company is efficient in getting back its dues.

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

P/L:IB:Net sales 7135.75 II.3: Current assets,loans and advances 6289.72 (P/L:IB)/(II.3) 1.134509962
The ratio of 1.13 times signifies that , in spite of the current liabilities, the company is efficient in making sales revenue.

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

P/L:IB:Net sales Net Current Assets (P/L:IB)/(NCA)

7135.75 2432.13 2.933950899

The ratio of 2.93 times signifies that the company is highly efficient in utilizing its net current assets and generating sales revenue.
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III Turnover Ratios Year 2007 7 Fixed assets turnover: Net sales/ Net fixed assets

P/L:IB:Net sales II.1:Net Fixed Assets (P/L:IB)/(II.1)

7135.75 5610.91 1.271763404

The ratio of 1.27 times signifies that the company is very efficiently utilizing its fixed assets for generating sales revenue.

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III Year 8

Turnover Ratios 2007 Net assets turnover: Net sales/ Net assets or capital employed : (Net assets = all assets accumulated depreciation)
P/L:IB:Net sales 7135.75 II.1:Net Fixed Assets 5610.91 II.2: Investments 3067.77 Net Current assets 2432.13 Net assets 11110.81 (P/L:IB)/(NA) 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.
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IV Profitability Ratios Year 2007 1 Margin: (Profit before interest and tax (PBIT)/ Net sales)100

P/L:III:Profit before taxation and Exceptional items

P/L:IB:Net Sales (P/L:III)/(P/L:IB)100

3926.7 7135.75 55.02855341

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

Profitability Ratios

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

P/L:III:Profit after taxation P/L:IB:Net Sales (P/L:III)/(P/L:IB)100

2699.97 7135.75 37.83722804

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

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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.

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

P/L:III:Profit after taxation I.1:Shareholders funds (P/L:III)/(P/L:IB)100

2699.97 10437.08 25.869017

The ratio of 25.86% is quiet good and the company is utilizing the shareholders funds in a better way.

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

2699.97 P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907 (P/L:III)/(P/L:IV)(10^7: to convert in per rupee) 7.185287102
In comparison to the face value of Re.1/share the EPS of Rs.7.18 is very good.

P/L:III:Profit after taxation

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V Equity-related Ratios Year 2007 2 Dividends per share (DPS): Dividends/ Number of ordinary shares

P/L:IV:Proposed Dividend
P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding

(P/L:III)/(P/L:IV)10^7(to convert into unit ruppes)

1166.29 3757636907 3.10378578

Dividend per share (DPS) is a simple and intuitive 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.
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V Equity-related Ratios Year 2007 3 Pay out ratios: DPS/EPS or Dividends/PAT

DPS EPS (DPS)/(EPS)

3.1 7.19 0.431154381

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 support the dividend payments: the lower the ratio, the more secure the dividend because smaller dividends are easier to pay out than larger dividends. 25 So the value of 0.43 times is quiet good.

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
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V Year 5

Equity-related Ratios 2007 Price/Earning ratio: Market value per share/ EPS
We have to get the Market value per share of the relevant period .

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V Equity-related Ratios Year 2007 6 Earning Yield: EPS/ Market value per share
We have to get the Market value per share of the relevant period .

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V Equity-related Ratios Year 2007 7 Book value per share: Net worth/ Number of ordinary shares

I.1:Shareholders funds
P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding

(I.1)/(P/L:IV)10^7(to convert into unit ruppes)

10437.08 3757636907 27.77564799

BV is considered to be the accounting value of each share, drastically different than what the market is 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.
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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
2699.97 5610.91 3067.77 6289.72 4405.13 3517.01 5161.9 14026.22 19.24944853

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

Earning power of the company, i.e. 19.25% is quiet good and the company is doing well.
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VI Investment-related Ratios Year 2007 2 Return on capital employed (ROCE): (EBIT(PBIT)/ Capital employed) 100

P/L:III:Profit before taxation and Exceptional items

I:Sources of Funds ((P/L:III)/I)100

3926.7 11110.81 35.34125775

The ROCE of 35.34% signifies that the company is getting good return out of its investment decisions.

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

P/L:III:Profit after taxation I.1:Shareholders funds (P/L:III)/(P/L:IB)100

2699.97 10437.08 25.869017

The ratio (25.87 times) is same as that of Return on equity, since there are no preference shares.

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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:Profit after taxation I.1:Shareholders funds (P/L:III)/(P/L:IB)100

2699.97 10437.08 25.869017

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.

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Du Pont Analysis

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Du Pont analysis for year 2007:

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Du Pont analysis for year 2006

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Du Pont analysis for year 2005:

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Du Pont analysis for year 2004:

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Du Pont Analysis
Return on total assets (%)

30.00 25.00 20.00 15.00 10.00 5.00 0.00 1 22.44

28.55 23.37 22.69

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 39 trend in its ROA in the following years.

 Class notes of Sudha madam, books from the liabrary of IIPM.

http://www.investopedia.com/terms/d/debt equityratio.asp http://www.icmrindia.org/casestudies/icmr_ case_studies.htm http://www.econ.uconn.edu/ http://www.morningstar.com http://www.morningstar.com

References

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