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FA of Itc
FA of Itc
Neha Rawat
Student, Symbiosis College of Arts and Commerce, Pune, India
Abstract
Financial statements can say a lot about a company’s financial health and earning potential. These
statements are analyzed and reviewed for decision making purposes, this process is known as financial
analysis. Financial analysis help the stakeholders to assess the financial performance of an organization
which helps them in making good investment decisions. This paper provides a detailed financial analysis
of ITC Ltd with an attempt to assess the company’s efficiency and performance. The study has focused
on past and present performance of ITC Ltd over the period of 5years for analyzing the trends.
ITC Ltd. Overview
ITC was incorporated on August 24, 1910 under the name of Imperial Tobacco Company of India
Limited and is currently headquartered in Kolkata, India. The company was renamed, ‘Indian Tobacco
Company’ in 1970 and later to ‘ITC Limited’ in 1974. ITC has a diversified business, with its
products/businesses ranging from Consumer goods to Hotel, IT, Apparel, Cigarettes, Agri-business,
Paperboard and Packaging. It is one of the prominent FMCG Company in India, with an annual turnover
of US$7.3 billion (2019).
Objectives
1. To analyze the financial strength and weaknesses of ITC Ltd.
2. Comparative study of Two year Annual reports
3. To provide a statement of financial health of ITC Ltd.
Research Methodology
This is a descriptive case study of the ITC’s financial performance. The analysis is based on Secondary
data collected from the company’s annual reports from the FY 2015-16 to FY 2018 -2019, newspaper
articles, and websites.
Tools used for data analysis:
The data is compiled and tabulated with the help of MS Excel. Besides charts are also used to present the
data using Excel. The techniques used in analysis are:
1. Comparative Study of Balance sheet and Income Statement
2. Common size Balance sheet and Income Statement
3. Ratio Analysis
4. Trend Analysis
5. Du Pont Analysis
BALANCE SHEET
ITC’s Total assets increased by 12% in 2019, current assets showed an increase of 20% while non-current assets
increased by 6% only. A comparative analysis of balance sheet shows that CWIP decreased by 50%, which justifies
the increase in fixed assets by 7% , which eventually leads to decrease in the proportion of non-current assets to Total
assets from 59% to 56%. Other assets declined by 15% the decrease was mainly due to decrease in other Advances by
42% (including advances with statutory authorities, prepaid expenses, employees, etc.).
Cash & Cash equivalents were 6% of total assets, however they increased by 43% in 2019, growing cash reserves
signal strong company performance as it offers protection during business slowdowns and provides options for future
growth.
Long term borrowings and short term borrowing are 0% of total assets over the two – year period. Generally a ratio
result of less than 0.5 is considered good. Therefore ITC has more assets than debts, indicating that they’re in a better
financial position. The reason for decline in long term debt to assets ratio is either that numerator is declining or the
Cash And Cash Equivalents Begin of Year 63% 123% 96% -1% 100%
Cash And Cash Equivalents End Of Year 187% 95% 185% 144% 100%
Liquidity Ratio
2015 2016 2017 2018 2019
Current Ratio
ITC 2.10 3.73 3.69 2.85 3.17
Godfrey Philips 1.46 2.24 2.34 1.72 1.47
HUL 1.08 1.46 1.32 1.31 1.37
Quick Ratio
ITC 1.40 2.37 2.38 2.03 2.54
Godfrey Philips 0.35 0.61 0.84 0.68 0.60
HUL 0.77 1.08 0.99 1.03 1.08
Inventory Turnover
ITC 1.72 1.50 1.96 2.09 2.19
Godfrey Philips 1.47 1.42 1.95 2.04 1.67
HUL 5.64 5.82 6.42 6.66 7.18
Return on Assets
ITC 21.23 18.36 18.72 17.86 17.86
Godfrey Philips 8.80 7.84 6.18 6.44 9.06
HUL 43.83 40.28 44.26 44.81 50.86
SOLVENCY RATIOS
2015 2016 2017 2018 2019
DEBT TO EQUITY
ITC 0 0 0 0 0
GODFREY PHILIPS 0.16 0.06 0.03 0.02 0.02
HUL 0 0 0 0 0
EFFICIENCY RATIOS
OPERATING RATIO
ITC 0.27 0.30 0.28 0.27 0.28
A lower average collection period is more favorable, indicating that company collects payments faster. Here,
Godfrey Philips has the lowest amongst the other two CO'S, which shows effectiveness of its accounts
receivable mgt. practices.
Average Payment Period measures the avg. number of days it takes a business to pay its vendors for purchases
made on credit. Prompt payments can help business in availing discount offered by suppliers. Here, ITC tales
less number of days as compared to the other two CO's in making payments.
Higher Gross Profit Margin ratio is more favorable. ITC has the higher ratio of 35.54, indicating that Co. is
selling their inventory at a higher profit percentage. A high gross margin would also mean that Co. will have
more money to pay operating expenses.
DU PONT ANALYSIS
Three-Step DuPont:
2019 2018
PROFIT MARGIN 0.38 0.38
ASSET TURNOVER 0.70 0.70
EQUITY MULTIPLIER 1.29 2.45
ROE 34% 65%
2019 2018
PROFIT MARGIN 0.38 0.38
ASSET TURNOVER 0.70 0.70
EQUITY MULTIPLIER 1.29 2.45
TAX RATE 0.33 0.34
Interest expense / Assets 0.00 0.00
ROE 23% 43%
= Net Income (After Tax)/Shareholders Equity
INTERPRETATION
The five-step, or extended, DuPont equation breaks down net profit margin further. From the three-step
equation we saw that, in general, rises in the net profit margin, asset turnover and leverage will increase ROE.
The five-step equation shows that increases in leverage don't always indicate an increase in ROE.
In this case, ROE after including interest and tax rate aspects declined from 34% to 23%. ITC’s competitors
like HUL, has ROE of 77%, we should also keep in mind that high ROE can also be due to excessive debt,
therefore it’s better to examine all the ratios and not just ROE.
HUL has no debts in its books, therefore higher ROE here suggests that the company’s management team is
more efficient when it comes to utilizing investment financing to grow their business (and is more likely to
provide better returns to investors). A rising ROE suggests that a company is increasing its profit generation
without needing as much capital. It also indicates how well a company's management deploys shareholder
capital.
ITC’s ROE is less when compared to its peers, due to low asset turnover which indicates that the company
may be mismanaged and could be reinvesting earnings into unproductive assets.
A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is
considered average, a 20% margin is considered high (or “good”), and a 5% margin is low. Again, these
guidelines vary widely by industry and company size, and can be impacted by a variety of other factors. ITC’s
profit margin is 38% which is quite good when compared with other companies in the same sector (e.g. HUL
and Godfrey Philips, their Net profit margin was 13% and 6% respectively).
References
https://www.itcportal.com/about-itc/shareholder-value/annual-reports/itc-annual-report-2019/pdf/ITC-Report-
and-Accounts-2019.pdf
https://www.investopedia.com/
https://www.moneycontrol.com/
https://en.wikipedia.org/wiki/ITC_Limited