Financial Ratio Analysis

Dabur India Limited

Team : Aayush, Akash, Anurag, Lakshmi, Sachin & Jaspreet - 17PT001,03, 04, 08, 13, 23 PDM-PT (17’20)
 Financial Ratio Analysis - Dabur
Liquidity Ratios
Capital Structure Ratios
• Current Ratio
• Interest Coverage Ratio
• Quick Ratio
• Debt To Equity Ratio

Profitability Ratios
• Gross Profit Ratio
• Operating Profit Ratio Efficiency Ratios
• Net Profit Ratio • Asset Turnover Ratio
• Return On Equity
o Dupont Analysis (R.O.E)
Working Capital Ratios • Return on Capital Employed
• Debtor Turnover Ratio
o Debtor Days
• Creditor Turnover Ratio
o Creditor Days
• Inventory Turnover ratio
o Inventory Days
• Cash Conversion Cycle
 Liquidity Ratios
Liquidity ratios are financial ratios that measure a company’s ability to repay both short- and
long-term obligations. Common liquidity ratios include the following:
The current ratio measures a company’s ability to pay off short-term liabilities with current
assets:
Current ratio = Current assets / Current liabilities
For the company to be healthy – the ideal Current Ratio should be 2 : 1.
The Quick ratio measures a company’s ability to pay off short-term liabilities with quick
assets:
Quick ratio = Current assets – Inventories / Current liabilities
For the company to be healthy – the ideal Quick Ratio should be greater than 1
Title Ratios Mar’18 Mar’17
Current Ratio 1.67 1.55
Liquidity Ratio
Quick Ratio 1.07 1.03

In Dabur Case, both in 2017 & 2018 Current Ratio is near to 2 and Quick Ratio is more than
1. That is satisfactory number.
 Profitability Ratios
Profitability ratios measure a company’s ability to generate income relative to revenue,
balance sheet assets, operating costs, and equity. Common profitability financial ratios
include the following:
The Gross Profit Ratio compares the gross profit of a company to its net sales to show
how much profit a company makes after paying off its cost of goods sold:
Gross Profit Ratio = Gross profit / Net sales or Total Revenue
 
The Operating Profit Ratio compares the operating income of a company to its net
sales to determine operating efficiency:
Operating Profit Ratio = Operating income / Net sales
Operating Profit = Gross Profit – All Operating expenses (except Interest and Taxes)
 
The Net Profit Ratio compares the operating income of a company to its net sales to
determine operating efficiency:
Net Profit Ratio = NP or PAT / Net sales
 Profitability Ratios - Dabur
Title Ratios Mar’18 Mar’17
Gross Profit Ratio 0.40 0.39

Profitability Ratios Operating Profit Ratio 0.25 0.24

Net Profit Ratio 0.19 0.19
By looking at all the profitability ratio’s we can conclude that DABUR limited has almost same
profitability position in both 2017 and 2018, as the Gross Profit, Operating Profit and Net
Profit Ratios are almost same.

In 2018, Even though there is increase in Total Revenue, there is also high Finance Cost and
Depn. expenses incurred. In 2018 (21.89 & 102.50 Crs) as compared to 2017 (16.23 & 75.43
Crs). That is one of the reason for low NP Ratio of Dabur in 2018.

But, Inventories of Finished goods got reduced in 2018 ( - 74.03 Crs) as compared to 2017
(-8.19 Crs.)

Gross profit and Gross Margin are important two metrics of profitability. But, Net Profit
Margin, which includes a company's total expenses, is a far more definitive profitability metric,
and the one most closely scrutinized by analysts and investors.
 Working Capital Ratios
Working Capital Ratio is commonly used to assess a company's financial performance. Low
working capital ratio values, near one or lower, can indicate serious financial problems with a
company. The working capital ratio reveals whether the company has enough short-term
assets to pay off its short-term debt. Working Capital Ratio includes:

Debtor Turnover Ratio (DTO) and Debtor Collection Period (DCP)

 
DTO Formula = Sales / Average Debtors or Trade Receivables
DCP Formula = 365 days / DTO
 
DCP signifies how efficiently a company manages its Debtors. Lower the DCP is better
 
Creditor Turnover Ratio (CTO) and Creditor Collection Period (CCP)
 
CTO Formula = Purchase / Average Creditors or Trade Payables OR
= Purchase or COGS / Closing Creditors or Closing Trade payables
CCP Formula = 365 days / CTO
 
CCP signifies how efficiently a company manages its Creditors. Higher the CCP is better
 Working Capital Ratios
Inventory Turnover Ratio (ITO) and Inventory Conversion Period (ICP)

The inventory turnover ratio measures how many times a company’s inventory is sold and
replaced over a given period:

Inventory Turnover Ratio Formula= Cost of goods sold / Average inventory

Cost of Goods Sold = Cost of Material consumed + Purchase of Stock-in Trade + Increase or
Decrease in Stock – Not sold this year + last year product sold this year

Inventory Conversion Period Formula = 365 Days / ITO

Lower the ICP is better

 
Cash Conversion Period (CCP) or Cash Conversion Cycle (CCC)
 
CCP Formula = DCP + ICP - CCP

Negative CCP is good. It means the company is doing good and has better stand with
Debtors and Creditors. It will outperform in the market
 Working Capital Ratios - Dabur
Title Ratios Mar’18 Mar’17
Debtor Turnover Ratio 17.46 16.11
Debtor Conversion Period (DCP) 20.91 22.65
Working Capital Ratios Creditor Turnover Ratio 3.02 3.04
Creditor Conversion Period (CCP) 120.79 120.09
Inventory Turnover ratio 4.12 4.64
Inventory Conversion Period (ICP) 88.62 78.69
Cash Conversion Cycle (CCC) -11.26 -18.75

In case of Dabur

• DCP is lower in 2018 as compared to 2017. This is good

• CCP is slightly higher in 2018 as compared to 2017. This is good
• ICP is slightly higher in 2018 as compared to 2017. This is due to high inventory in 2018
(704.79 Crs) as compared to 2017 (599.27 Crs) . But, in the fast-moving FMCG sector,
optimal inventory turnover Ratio is usually 8 or above. Hence this ratio of Dabur is OK.
• Negative CCP is good.
 Capital Structure Ratios
Capital Structure ratios measure the amount of capital that comes from debt and this is
used to evaluate a company’s debt levels, which includes the following:

The Debt to Equity ratio calculates the weight of total debt and financial liabilities against
shareholders equity:

Debt to equity Ratio = Total liabilities / Shareholder’s equity

High D/E Ratio is high risk for any company. Which indicates that the company is
aggressive in financing its growth with debt

The Interest Coverage Ratio determines how easily a company can pay its interest
expenses:

Interest Coverage Ratio = EBIT / Interest expenses or Finance Cost for the year

Decreasing ICR is concern for any company, as it increases the company’s Debt burden
and Higher the ICR is good
 Capital Structure Ratios - Dabur
Title Ratios Mar’18 Mar’17
Debtor to Equity Ratio (D/E) 0.07 0.08
Working Capital Ratios
Interest Coverage Ratio (ICR) 64.39 80.75

In case of Dabur

Debtor to Equity Ratio is almost same in both 2018 and 2017, which is less than 1.
This shows that Dabur’s assets are more funded by equity and not by debt. This is
good sign

Decreasing ICR is concern. ICR in 2018 (64.39) less than 2017 (80.75). This is due
to high interest cost in 2018 (21.89 Crs) as compared to 2017 (16.23 Crs). But as it is
Consumer
 Efficiency Ratios
Efficiency ratios are used to measure how well a company is utilizing its assets and
resources. Common efficiency ratios include:

The asset turnover ratio measures a company’s ability to generate sales from assets:

Asset Turnover Ratio (ATR) = Net sales or Total Revenue / Total assets.

Higher the ATR is better. ATR measures how efficiently a company is using its assets to
generate profit.

The Return on Capital Employed Ratio (ROCE) measures how efficiently a company is
using its Capital to generate profit.

Return on Capital Employed Ratio = EBIT or OP / Capital Employed

Higher the ROCE is better. ROCE measures how efficiently a company is using its
capital employed to generate profit.
 Efficiency Ratios
The Return on Equity (ROE) Ratio measures how efficiently a company is using its equity
to generate profit:

Return on Equity Ratio = Net income (PAT – Pref. Dividend) / Shareholder’s equity
(Share Capital + Reserves & Surplus)

Under Dupoint method - ROE be calculated as (NP margin x Asset TO) x Leverage
Or
Net Profit / Total Equity

Higher the ROE Ratio, higher the leverage

Increase in ROE through Net Profit Margin and Asset Turnover shows that company is
sustainable. ROE due to Leverage shows that there is some issue in the company.
 Efficiency Ratios - Dabur
Title Ratios Mar’18 Mar’17
Asset Turnover Ratio 1.01 1.08
Working Capital Ratios Return on Capital Employed 0.30 0.30
Return on Equity 0.25 0.27

In case of Dabur, there is no much change in ATR, ROCE and ROE in 2018 and 2017
 Overall Analysis - Dabur
• Looking at Financials, Dabur is having strong financial position to pay off its
current liabilities.
• After comparing balance sheet and profit and loss account of Dabur India ltd., for
2016-17 and 2017-18, we can say that both the years are profitable years for the
company.
• Dabur’s Efficiency ratios are good in both 2017 & 18, which shows that the
company is efficiently using its Asset, Capital and Equity to generate profit.
• As per Price/Book value which is 0.0766 as per Balance sheet for the FY year
ending 2017-18. The Price to earning ratio comparison of Dabur India shows that
in the FY ending Mar-2017 the P/E was 48.32 & 53.153 in next year(Mar 2018) .
This clearly shows the earning multiples for the stock.
• Investors should hold the stock for long, as we expect the P/E to reach
somewhere in the range of 70-75 in a span of 10 years.

Disclaimer : The views and investment tips expressed are our own . We advise
users to check with certified experts before taking any investment decisions.