Ratio Analysis of Asian Paints

Working Capital:

 Generally, companies that maintain a comfortable amount of working

capital are more attractive to conservative investors. A company’s ability to
meet obligations, expand volume and take advantage of opportunities is
often determined by its working capital. Year-to-year increases in working
capital are a positive sign of a company’s growth and health.

 In the case of Asian Paints, we observed that barring 2015, it

consistently increased its working capital 2016-17. This underlined the
improved financial health of Asian paints.
Analysing Liquidity of Asian Paints:

Current Ratio:

 What is a comfortable amount of workingcapital? We use several methods

to judge whether a company has adequate working capital. To interpret
the current position of a company being considered as a possible
investment, the current ratio may be more useful than just the figure of
working capital.

 Generally, companies that have a small inventory and accounts

receivable that are quickly collectible can operate safely with a lower
current ratio than companies having a greater proportion of their current
assets in inventory and that sell their products on longer credit period.
So, in this case though the value of current ratio is less than the rule of
thumb, we concluded that 1.5 is good level considering its low trade
receivable account.

Quick Ratio (aka Acid Test Ratio):

  In addition to working capital and the current ratio, another way to
test the adequacy of working capital is to look at quick assets.

 Quick assets are those current assets that are quickly convertible into
cash. They excludes merchandise inventories ,because such inventories
have yet to be sold and are not quickly convertible into cash.

 It is very important for an investor to find out the ability of the

company to pay the upcoming bills.

 The quick ratio of Asian paints in 2016 is 0.91. Some conclude that a quick
ratio less than 1:1 is of poor quality but considering the very fact that
higher quick ratio is mainly necessary for those companies which face
difficulty in borrowing, and not for the companies like Asian paints, who
consistently perform well, we conclude that this .19 difference from the
benchmark is not a highly damaging point.

Analysing Debt of Asian Paints:

Debt ratios show the extent to which a firm is relying on debt to finance its
investments and operations, and how well it can manage the debt obligation. If
the company does not manage its debt properly, it may bankrupt like in the
case of Kingfisher Airlines. On the other hand, if it uses borrowings efficiently it
can build business by exploring and expanding to new frontiers. There are
various ratios which test the debt repaying ability. They are:

Debt to Equity Ratio:

 A certain level of debt is acceptable and necessary, but too much is a sign
for investors to be cautious. Debt to Equity ratio shows exactly that part.

 The Debt to Equity ratio explains us how much the company is dependent
on the borrowings for its financing.
 In the case of Asian paints, the company showed an outstanding progress
by reducing its debt to equity ratio from 0.05 to 0.07 in 2016. Most
interesting observation is it has consistently reduced the ratio.