INDIAN TOBACCO CORPORATION LIMITED (ITC)

Introduction

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India
Ltd. As the company's ownership progressively Indianised the name of the company was
changed from Imperial Tobacco Company of India Ltd to India Tobacco Company Ltd in the
year 1970 and then to I.T.C. Ltd in the year 1974. In recognition of the company's multi-business
portfolio encompassing a wide range of businesses - Cigarettes & Tobacco Hotels Information
Technology Packaging Paperboards & Specialty Papers Agribusiness Foods Lifestyle Retailing
Education & Stationery and Personal Care - the full stops in the company's name were removed
effective September 18, 2001. ITC Ltd is one of India's foremost private sector companies. ITC
has a diversified presence in Cigarettes Hotels Paperboards & Specialty Papers Packaging Agri-
Business Packaged Foods & Confectionery Information Technology Branded Apparel Personal
Care Stationery Safety Matches and other FMCG products. While ITC is an outstanding market
leader in its traditional businesses of Cigarettes Hotels Paperboards Packaging and Agri-Exports
it is rapidly gaining market share even in its nascent businesses of Packaged Foods &
Confectionery Branded Apparel Personal Care and Stationery. ITC's wholly owned Information
Technology subsidiary ITC InfoTech India Ltd provides IT services and solutions to leading
global customers. ITC InfoTech has carved a niche for itself by addressing customer challenges
through innovative IT solutions. ITC's production facilities and hotels have won numerous
national and international awards for quality productivity safety and environment management
systems. ITC was the first company in India to voluntarily seek a corporate governance rating.
Capital structure is a mixture of a company's debts includes debentures, long term loans,
common equity and preferred equity. The most crucial decision of any company is involved in
the formulation of its appropriate capital structure. The design or structure of the capital of a
company helps the management to achieve its ultimate objectives of minimizing overall cost of
capital, maximizing profitability and also maximizing the value of the firm. Optimum capital
structure is that the capital structure or combination of debt and equity that leads to the maximum
value of the firm. Leverage has been used and also to identify the firm’s ability to use fixed cost
assets or funds to increase return to its owners (i.e., equity shareholders). The capital structure
ratio is those financial ratios which measures the long term stability and structure of the firm.

RATIO ANALYSIS

Ratio analysis is defined as the systematic use of the ratio to interpret the financial statements. So
that the strengths and weaknesses of a firm, as well as its historical performance and current
financial condition can be determined. Ratio reflects a quantitative relationship helps to form a
quantitative judgment.

Nature of Ratio Analysis:

Ratio analysis is a technique of analysis and Interpretation of financial statements. It is the

process of establishing and interpreting various ratios for helping in making certain decisions. It
is only a means of understanding of financial strengths and weaknesses of a firm. There are a
number of ratios which can be calculated from the information given in the financial statements,
but the analyst has to select the appropriate data and calculate only a few appropriate ratios. The
following are the four steps involved in the ratio analysis.

 Selection of relevant data from the financial statements depending upon the objective of
the analysis.

 Calculation of appropriate ratios from the above data.

 Comparison of the calculated ratios with the ratios of the same firm in the past, or the
ratios developed from projected financial statements or the ratios of some other firms or
the comparison with ratios of the industry to which the firm belongs.

1) Liquidity Ratios: It is also known as liquidity ratios. it includes the following

1) Measures ability of a company to meet its current obligations.

2) Indicates short term financial stability of a company.
3) Indicates present cash solvency and ability to remain solvent in times of adversities.
 To measure the liquidity of a firm the following ratios can be calculated

 Current ratio

 Quick (or) Acid-test (or) Liquid ratio

(a) Current Ratio: Current ratio is useful to find out solvency of the company. High current
ratio indicates that company will be able to pay its debt maturity within a year. Low current ratio
indicates that company will not be able to meet its short term debts.

Minimum standard current ratio is 2:1.

Current Assets

Current Ratio=

Current Liabilities

(b) Quick Ratio: Quick ratio is also known as acid test ratio. It indicates immediate ability of a
company to pay off its current obligations. And also shows the solvency and financial soundness
of the business. Greater the ratio stronger the financial position of the company.

The standard quick ratio should be 1:1

Quick Assets

Quick Ratio=

Quick Liabilities

2) Profitability Ratios: The primary objectives of business undertaking are to earn profits.
Because profit is the engine, that drives the business enterprise. It measures the overall efficiency
of the business. It indicates whether utilization of business assets and funds are done efficiently
and best way or not, so as to generate adequate profits or returns.

Profitability ratios fall in two categories:

a) Gross Profit Ratio: It shows the operating efficiency of the business. It measures the
efficiency of production as well as pricing. Decrease in the ratio indicates reduction in selling
price or increase in the cost of production or decline in the business activity. Increase in the ratio
indicates increase in the selling price or reduction in the cost of production.
Gross Profit

Gross Profit Ratio = X 100

Sales

b) Operating Profit Ratio: It indicates profitability of entire business after meeting all operating
cost including direct and indirect cost of administrative and distribution expenses.

Operating Profit

Operating Profit Ratio: X 100

Sales

c) Net Profit Ratio: It shows the overall efficiency of the business. Higher the ratio indicates
higher efficiency of business and better utilization of total resources. In addition it indicates
efficiency of financing operations as well as tax management.

Net profit after tax

Net Profit Ratio: X 100

Sales
3) Turnover Ratio: It measures how efficiently the assets are employed. These ratios are
expressed in number of times the assets is used during the period.

a) Inventory Turnover Ratio: It indicates number of times the replacement of inventory during
the given period usually a year. Higher the ratio more efficient is the management of inventory.
But higher inventory turnover ratio is not always good if it is lower level of inventory because it
invites problem of frequency stock outs and loss of sales and customer or goodwill.

Cost of Goods Sold

Inventory Turnover Ratio:

Average Stock in Hand

b) Fixed Asset Turnover Ratio: It indicates efficiency in the utilization of fixed assets like
plant and machinery by management.

Net Sales

Fixed Assets Turnover Ratio =

Fixed Assets

Solvency Ratio

a) Proprietary Ratio: It measures the relationship between funds invested in business by the
owners with the total funds invested in business. It indicates long run solvency of the business.
High ratio means company is less dependent on outside funds and company is quite solvent. Low
ratio indicates company is more dependent on outside funds solvency and solvency may be
danger.

Proprietary Fund

Proprietary Ratio:

Total Asset

FINANCIAL ANALYSIS OF ITC LIMITED DURING THE YEAR 2013 - 2017

Liquidity Ratios

Current Ratio:

(Rupees in lakhs)
Year Current Assets Current Liabilities Ratio

31-3-13 11378.54 6404.43 1.78

31-3-14 12814.27 6921.52 1.85

31-3-15 17147.77 7214.45 2.38

31-3-16 16770.12 8129.22 2.06

31-3-17 8582.71 1.49

12818.76
Quick Ratio
(Rupees in lakhs)
Year Current Assets Current Liabilities Ratio

31-3-13 4778.34 6404.43 0.75

31-3-14 5454.73 6921.52 0.79

31-3-15 9311.01 7214.45 1.29

31-3-16 8250.3 8129.22 1.01

31-3-17 8582.71 0.58

4954.77

PROFITABILITY RATIO

a) Gross Profit Ratio:

(Rupees in lakhs)
1Year Gross Profit Net Sales Ratio

31-3-13 10627.51 42105.51 25.24

31-3-14 12454.8 47068.7 26.46

31-3-15 13437.6 50389 26.74

31-3-16 14238.2 51944.6 27.41

31-3-17 55448.5 26.29

14578
b) Net Profit Ratio:

1Year Net profit Net Sales Ratio

31-3-13 7418.39 42105.51 17.62

31-3-14 8785.21 47068.7 18.66

31-3-15 9607.73 50389 19.07

31-3-16 9844.71 51944.6 18.95

31-3-17 55448.5 18.4

10200.9

c) Operating Profit Ratio:

(Rupees in lakhs)
1Year Operating Profit Net Sales Ratio

31-3-13 10627.51 42105.51 25.24

31-3-14 12454.8 47068.7 26.46

31-3-15 13437.6 50389 26.74

31-3-16 14238.2 51944.6 27.41

31-3-17 55448.5 26.29

14578
d) Operating Ratio:

(Rupees in lakhs)
Year Operating cost Net Sales Ratio

31-3-13 24769.47 42105.51 58.83

31-3-14 27481.8 47068.7 58.39

31-3-15 30314.1 50389 60.16

31-3-16 30249.4 51944.6 58.23

31-3-17 55448.5 57.67

31978.2

Turnover Ratio

a) Inventory Turnover Ratio:

(Rupees in lakhs)
Year Cost of goods sold Average inventory Ratio

31-3-13 24769.47 6119.02 4.05

31-3-14 27481.8 6979.87 3.94

31-3-15 30314.1 7598.15 3.99

31-3-16 30249.4 8178.29 3.7

31-3-17 8191.91 3.9

31978.2
 b)Fixed Asset Turnover Ratio

Year Sales Fixed Asset Ratio

31-3-13 29901.27 11156.59 2.68

31-3-14 33238.6 11960.3 2.78

31-3-15 36507.4 14126.1 2.58

31-3-16 36837.4 14152.1 2.6

31-3-17 14880.2 2.69

40088.7

Solvency Ratio

a) Proprietary Ratio:

(Rupees in lakhs)
Year Proprietor's Fund Total Asset Ratio

31-3-13 790.18 11156.59 0.07

31-3-14 795.32 11960.3 0.07

31-3-15 801.55 14126.1 0.06

31-3-16 804.72 14152.1 0.06

31-3-17 14880.2 0.08

1214.74
FINDINGS
 The normal current ratio is 2:1. The current ratio of ITC is less than 2% in all the years. This
shows that the company is not enjoying credit worthiness.
 The gross profit ratios for all the study periods are very high. So, ITC has sufficient income
to cover all expenses and provide for profit. Generally a higher gross profit ratio is considered
better.
 The sales have been increasing hence the net pro t increasing hence the management has
been taking care of the quality and market situations which bring good profits to the
organization.
 The operating ratios of the company are very high hence it indicates the higher operating
expenditure has been incurred.
 The operating profit ratios of the company are fluctuating and are low. Though the ratios are in
fluctuating trend it has been increasing year by year.
 The company is inefficiently utilizing its inventory because there are no poor sales or excess
inventory.