41860293 Financial Ratio Analysis Finall

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Ratio Analysis

On

Hindustan Unilever Limited

By

L Preethi

J Priyanka

Radhika Pillai

M Pranay Kumar

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Importance of Ratio Analysis

} A very powerful analytical tool used for

measuring performance of an organization

} Concentrates on the inter-relationship among

the figures appearing in the financialstatements

} Helps management to analyze the past

performance and to make further projections} Helps shareholders, investors, creditors etc to

evaluate firms performance

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Advantages of Ratio Analysis

} Shareholders and prospective investors

can use ratio analysis for takinginvestment and disinvestment decisions

}Govt. agencies analyze ratios of a firm forreviewing its performance

} Financial analysts analyze ratios for making comparisons and recommendingto the investing public

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Limitations of Ratio Analysis

} Ratios provide - guidelines to themanagement forcing management todo detailed investigations of situationsunder question

} Standards differ from industry to industry.Comparisons of ratios of firms belongingto different industries - not suggested

} Ratios are calculated from past records-no indicators of future- uncertainty

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BRANDS

} Food Brands-Red Label, Kissan, Knorr

} Home Care Brands-Active Wheel,SurfExcel,Vim

} Personal Care Brands-Liril,Lux,Dove,Lakme

}Water-PureIt

}Nutrition-Aim to act responsibly and havea strong nutrition policy; To be honest andtruthful in advertisements

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FINANCIAL RATIO ANALYSIS

It is the study of ratios between various items or

groups of items or group of items in financialstatements. For our purpose, we divide financial

ratios into five broad categories as follows:

} Liquidity ratios

} Leverage ratios

} Turnover ratios} Profitability ratios

} Valuation ratios

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BALAN

CE SHEET of HUL

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Ratios

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LIQUIDITY RATIOSLiquidity ratios are generally based on the relationshipbetween current assets and current liabilities. Theimportant liquidity ratios are:

}Current Ratio is defined as

Current assets/ Current liabilities

}Acid-test Ratio, also called the Quick ratio is defined

asQuick assets/ Current liabilities

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LIQUIDITY RATIOS of HUL

} The current ratio of HUL is : 0.84

Therefore, we understand that HUL has anegative net working capital position,thereby leading to a current ratio of lessthan one.

} The acid-test ratio of HUL is : 0.46This is a fairly stringent measure of liquidity asit excludes inventories.

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LEVERAGE RATIOSFinancial leverage refers to the use of debt finance. Ithelps in assessing the risk arising from the use of debtcapital. The important leverage ratios are:

} Debt-equity ratio : It is defined as

Debt/Equity

} Debt-asset ratio : It measures the extent to whichborrowed funds support the firms assets. It is definesas

Debt/Assets} Interest Coverage ratio : It is defined as

Profit before interest and taxes/Interest

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LEVERAGE RATIOS of HUL

} The Debt-equity ratio of HUL is : ~0

The lower the debt-equity ratio, the higher the

degree of protection enjoyed by creditors.} The debt-asset ratio of HUL is : ~ 0

The higher the debt-asset ratio, greater theextent to which borrowed funds support theassets.

} Interest coverage ratio of HUL is: 395.13

A high interest coverage ratio means that a firmcan easily meet its interest burden.

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TURNOVER RATIOSTurnover ratios, also referred to as activity ratios,

measure how efficiently the assets areemployed by a firm. The important turnover

ratios are :} Inventory Turnover: It reflects the efficiency of

inventory management. It is defined as

Cost of goods sold/ Average inventory

} Debtors Turnover:

It shows how many timessundry debtors turn over during the year. It is

defined as

Net credit sales/ Average sundrydebtors

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TURNOVER RATIOS

} Fixed Assets Turnover: This ratio measuresthe efficiency with which fixed assets are

employed. It is defined as

Net Sales/Average net fixed assets

} Total Assets Turnover: Akin to the output-

capital ratio in economic analysis, the

total asset turnover is defined as

Net sales/Average total assets

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TURNOVER RATIOS of HUL

} The inventory turnover ratio of HUL is: 8.99

The higher the ratio, the more efficient themanagement of inventories and vice versa.

} The Debtors turnover ratio of HUL is: 29.24

} The Fixed assets turnover ratio of HUL is: 5.35

A high ratio indicates a high degree of

efficiency in asset utilization and vice versa.} The total assets turnover ratio of HUL is : 7.66

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PROFITABILITY RATIOS

Profitability ratios are of 2 types :

1. Profit margin ratios : shows the relationshipbetween profit and sales.

}Gross Profit Margin ratio is defined as

Gross profit/Net sales

}

Net profit Margin ratio is defined asNet profit/Net sales

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2. Rate of return ratios reflect the relationship

between profit and investment.

} Return on assets : It is defined as

Profit after tax/Average total assets

} Earning power : It is a measure of business

performance which is not affected by interest

charges and tax burden. It is defined asProfit before interest & tax/Average total assets

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} Return on capital employed : It is definedas PBIT(1 tax rate)/Average total assets

It considers the effect of taxation.

} Return on Equity : A measure of greatinterest to equity shareholders, the return

on equity is defined as

Equity earnings/average equity

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PROFITABILITY RATIOS of HUL

} The gross profit margin ratio of HUL is :14.70%

This ratio shows the margin left after meetingmanufacturing costs.

} The net profit margin ratio of HUL is: 12.29%

This ratio shows the earnings left for

shareholders as a percentage of net sales.} The return on assets of HUL is: 11.84%

The earning power of HUL is

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PROFITABILITY RATIOS of HUL

} The Return on capital employed of HUL is:

106.78%

It compares directly with the post-tax weighted

average cost of capital of the firm.

} The return on Equity of HUL is: 97.84%

It is the most important measure of profitability of

equity funds invested in the firm.

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VALUATION RATIOS

Valuation ratios indicate how the equity stock of

the company is assessed in the capital market.

The important valuation ratios are :

} Price earning ratio : It is defined as

Market price per share/Earnings per share

} Market value to Book value ratio : It is defined

asMarket value per share/Book value per share

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VALUATION RATIOS of HUL

} The Price earning ratio of HUL is: 26.52

It is summary measure which reflects thefollowing factors : growth prospects, risk

characteristics, shareholder orientation,corporate image and the degree of liquidity.

} The market value to book value ratio is: 20.16

When this ratio exceeds 1 it means that the firmhas contributed to the creation of wealth in thesociety.

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COMPARISON WITH INDUSTRYAVERAGES

HUL COMPANY1. LIQUIDITY

} Current ratio : 0.84

} Acid-test ratio : 0.46

2. LEVERAGE

} Debt-equity ratio : ~0

} Debt-asset ratio:~0} Interest coverage

ratio : 395.13

INDUSTRY AVERAGE1. LIQUIDITY

} Current ratio : 1.26

} Acid-test ratio : 0.69

2. LEVERAGE

} Debt-equity ratio : 1.25

} Debt-asset ratio : 0.56} Interest coverage ratio:

4.14

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HUL COMPANY

3. TURNOVER} Inventory Ratio :8.99

} Accounts receivable :29.24

} Fixed assets :5.35

} Total assets :7.66

4. PROFITABILITY

} Gross profit margin :14.70

} Net profit margin :12.29

} Return on assets :11.84

INDUSTRY AVERAGE

3. TURNOVER} Inventory Ratio : 6.43

} Accounts receivable : 7.50

} Fixed assets : 2.23

} Total assets : 1.26

4. PROFITABILITY

} Gross profit margin : 18.0 %

} Net profit margin : 4.0 %

} Return on assets : 6.9 %

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HUL COMPANY

} Earning power :11.6%} Return on capital

:106.78%} Return on equity :

94.84%5. VALUATION

} Price earning ratio:26.52

} Market value to Bookvalue :20.16

INDUSTRY AVERAGE

} Earning power : 17.7 %} Return on capital : 8.8

%} Return on equity : 11.9

%5. VALUATION

} Price earning ratio :9.26

} Market value to Bookvalue : 1.16

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CONCLUSION

} HUL has a favorable liquidity position.

}

Leverage ratios of HUL are a shade lowerthan the industry average.

} Turnover ratios of HUL are more or lesscomparable with the industry average.

} Profit margin ratios of HUL are somewhathigher than the industry average.

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CONCLUSION (contd.)

} The rate of return measures of HUL arealso higher than the industry average.

} The valuation ratios of HUL compareslightly favorably in relation to industryaverage.

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References

}www.capitaline.com

}www.moneycontrol.com

}www.hul.co.in

}www.money.rediff.com/companies/hindu

stan-unilever-ltd/12520002/bse/year

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41860293 Financial Ratio Analysis Finall

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