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1
Individual Assignment
On
“A financial ratio analysis with interpretations for the past five years
(2005-06 to 2009-10) of Hindustan Unilever Limited”
ByAbhay Kumar ROLL NO-301
Abhijit Sah ROLL NO-302Abhishek Singh ROLL NO-303
Akshat Nemani ROLL NO-305
PGDM (IB) Class of 2011-13
Under the Supervision ofF.M.A KHAN
ACCOUNTING FOR MANAGERS FACULTY
In Partial Fulfillment of Award of Post Graduate Diploma inInternational Business
2
Table of Contents
LIQUIDITY RATIO .................................................................................................................................... 3
Current Ratio....................................................................................................................................... 3
Interpretation.................................................................................................................................. 3
QUICK/LIQUID/ACID TEST RATIO ........................................................................................................ 4
Interpretation.................................................................................................................................. 4
PROFITIBILITY RATIO .............................................................................................................................. 5
GROSS PROFIT MARGIN ...................................................................................................................... 5
Interpretation.................................................................................................................................. 5
NET PROFIT MARGIN........................................................................................................................... 6
Interpretation.................................................................................................................................. 6
OPERATING PROFIT RATIO.................................................................................................................. 7
Interpretation.................................................................................................................................. 7
RETURN ON CAPITAL EMPLOYED........................................................................................................ 8
Interpretation.................................................................................................................................. 8
RETURN ON EQUITY ............................................................................................................................ 9
Interpretation.................................................................................................................................. 9
EARNINGS PER SHARE ....................................................................................................................... 10
Interpretation................................................................................................................................ 10
TURNOVER RATIO ................................................................................................................................ 11
DEBTORS TURNOVER RATIO ............................................................................................................. 11
Interpretations .............................................................................................................................. 11
STOCK TURNOVER RATIO.................................................................................................................. 12
Interpretation................................................................................................................................ 12
TOTAL ASSETS TURNOVER RATIO ..................................................................................................... 13
Interpretation................................................................................................................................ 13
LEVERAGE RATIO .................................................................................................................................. 14
DEBT EQUITY RATIO .......................................................................................................................... 14
3
Interpretation................................................................................................................................ 14
INTEREST COVERAGE RATIO ............................................................................................................. 15
Interpretation................................................................................................................................ 15
VALUATION RATIO ............................................................................................................................... 16
PRICE TO CASH FLOW RATIO ............................................................................................................ 16
Interpretation................................................................................................................................ 16
PRICE TO EARNINGS RATIO ............................................................................................................... 17
Interpretation................................................................................................................................ 17
4
LIQUIDITY RATIO
Current RatioDefined as ratio of current assets to current liabilities. The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better.
i.e. I N V E N T O R Y + CA S H A N D B A N K + D E B T O R S + B I L L S R E C I E V A B L E
CREDITORS + BILLS PAYABLE + O/S EXPENSES + BANK OVERDRAFTS
Year End 2010 2009 2008 2007 2006 2005
ITC 2 3 3 3 2 2HUL 1.01 1.32 0.85 0.99 0.93MARICO 3 2 2 1 2 2
3.5
3
2.5
2
1.5
1
ITC
HUL
MARICO
0.5
0
2004 2005 2006 2007 2008 2009 2010 2011
Interpretation
Current Ratio of HUL is less than that of ITC and MARICO for the last 5 years and is close to 1 for the entire period. However Cash and Bank Balance as a percentage of the Current Asset for HUL (Cash and Bank Balance comprising almost 40% of Current Assets) is more than that of Current Asset for ITC which have Cash and Bank Balance as 16% of current Assets.
QUICK/LIQUID/ACID TEST RATIOA liquidity indicator that further refines the current ratio by measuring the amount of the
most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.
Year End 2010 2009 2008 2007 2006 2005
ITC 1 1 1 1 1 1HUL 0.6 0.72 0.35 0.51 0.49MARICO 1 1 1 1 1 1
1.2
1
0.8
0.6
0.4
ITC HUL
MARICO
0.2
0
2004 2005 2006 2007 2008 2009 2010 2011
Interpretation
Quick ratio for HUL is less than 1 for all years against the conventionally recommended value of
1.Also the ratio is less than that of ITC and MARICO across last five years. Being a major player in FMCG sector HUL do not have to worries in finding creditors. A small value of quick ratio also signifies efficient utilization of cash.
PROFITIBILITY RATIO
GROSS PROFIT MARGINUsed to assess a firm’s financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold.
Year End 2006 2007 2008 2009 2010
ITC 35.98 34.05 28.44 29.17 29.74
HUL 15.8 15.86 13.5 14.7
Marico 9.72 11.21 12.06 13.13 15.37
40
35
30
25ITC
20HUL
15 Marico
10
5
0
2005 2006 2007 2008 2009 2010 2011
Interpretation
Gross profit margin of HUL is closed to 15 and is considerably less than that of ITC for the last 5 years. AS Gross profit margin represent the company’s ability to efficiently utilize its raw materials, labour and manufacturing-related fixed assets to generate profits, here HUL appears to be less efficient as compared to ITC.
NET PROFIT MARGINCalculated as net income divided by revenues or net profits by sales.
It measure how much out of every dollars of sales a company actually keeps in earnings.
Net Profit Margin= N e t I n c o m e
Revenues
Year
End
2006 2007 2008 2009 2010
ITC 22.19 21.4 21.5 21.18 21.3
HUL 14.94 12.58 12.09 12.29
Marico 9.4 8.39 9.06 7.35 11.65
25
20
15ITC HUL
10Marico
5
0
2005 2006 2007 2008 2009 2010 2011
Interpretation
Net Profit Margin of HUL is showing a decreasing trend except for the year 2010.Also it is less than that of ITC for the last 5 years. Analysis of Income statement of HUL and ITC yields that average revenues for HUL is less than that of ITC for the last 5 years. As Net Profit margin represents a comprehensive view of the profitability of the company HUL seems to be less profitable as compared to ITC.
OPERATING PROFIT RATIOOperating profit means profit earned by the concern from its business operation and not from other sources.
Operating Profit Ratio = O pe r a t i n g P r o f i t
Net Sales
Whereas Operating Profit = Gross Profit – Operating Expenses
And Net Sales = Total Sales – Sales Return
Year
End
2006 2007 2008 2009 2010
ITC 34.36 32.51 31.57 32.84 33.02
HUL 14.74 14.95 14.46 15.74
Marico 12.9 13.77 13.26 14.01 16.63
40
35
30
25ITC
20HUL
15 Marico
10
5
0
2005 2006 2007 2008 2009 2010 2011
Interpretation
Operating Profit Ratio for HUL is consistent over the last 5 years and is considerably less than that of ITC.Analysis of Income statement of ITC and HUL yields that for every year total sales of HUL is less that of ITC. As Operating Profit ratio is deemed to be more reliable than Net Profit ratio for comparison between companies, HUL seems to be less profitable in its operational activities as compared to ITC.
RETURN ON CAPITAL EMPLOYEDIndicates the efficiency and profitability of a company’s capital investments.
= N e t I n c o m e
Capital Employed
Capital Employed: Avg Debt Liability + Avg Shareholder Equity
Year
End
2005 2006 2007 2008 2009 2010
ITC 42 38 40 40 37 44
HUL 57 85 109 152 111
Marico 33 27 37 42 35 33
160
140
120
100
80
60
40
ITC HUL Marico
20
0
2004 2005 2006 2007 2008 2009 2010 2011
Interpretation
ROCE for HUL is showing an increasing trend except in 2010.Also it’s more than that of ITC and Marico in last 5 years. Analysis of Balance sheet of HUL and ITC yields that total fund employed for HUL is less than that of ITC for all 5 years. This ratio indicates that HUL is able to generate more returns by using less capital as compared to ITC and Marico.
RETURN ON EQUITYCalculated as the amount of net income returned as a percentage of shareholders equity.
Return on Equity = N e t I n c o m e
Shareholder's Equity
Year
End
2005 2006 2007 2008 2009 2010
ITC 31 27 28 28 25 29
HUL 64 74 93 143 95
Marico 34 36 50 67 49 42
160
140
120
100
80
60
40
ITC HUL Marico
20
0
2004 2005 2006 2007 2008 2009 2010 2011
Interpretation
ROE for HUL is more than that of ITC and Marico in the last 5 years. ROE is showing an increasing trend with a decrease in 2010. Analysis of balance sheet yields that both Net income and total share capital for HUL is less than that of ITC for all years. However since ROE is the ratio of Net Income to Equity, ROE ratio indicates that HUL is able to more effectively use its investor money as compared to ITC in generating profit. Both for ITC and HUL share of equity in total capital is much more than that of debt hence the ROE is an important ratio in determining their profitabilities.
10
EARNINGS PER SHARECalculated as the portion of company’s profit allocated to each outstanding share of common stock.
EPS = N e t i n c o m e - D i v i d e n d o n P r e f e rr e d S t o c k
Average Outstanding shares
Year
End
2010 2009 2008 2007 2006 2005
ITC 11 9 8 7 6 88
HUL 10 11 9 8 6
Marico 4 3 3 2 15 12
100
90
80
70
60
50
40
30
20
10
0
2004 2005 2006 2007 2008 2009 2010 2011
ITC HUL Marico
Interpretation
Earnings per share for HUL is gradually increasing in the last 5 years and is almost equivalent to ITC in last 4 years, however ITC employs more capital in comparison to HUL in generating for generating he earnings hence HUL earnings are not efficient in comparison to ITC.
TURNOVER RATIOTurnover ratio measures the degree to which assets are efficiently employed in the firm. There are also known as activity ratio or asset management ratio and they are important for a business concern to find out how well the facilities at the disposal of the concern are being used.
DEBTORS TURNOVER RATIOIt is a measure as to how well the debtors are being used as current assets or how well assets have been employed in the firm. It is an activity ratio which reflects upon the efficiency of the asset in generating sales flow.
DEBTORS TURNOVER RATIO = S A L E S
DEBTORS
Year End 2010 2009 2008 2007 2006 2005
ITC 34 32 31 32 30 34HUL 29.98 44.17 33.4 27.07 23.67MARICO 20 24 25 27 26 28
50
45
40
35
30
25
20
15
10
5
0
2004 2005 2006 2007 2008 2009 2010 2011
ITC HUL MARICO
Interpretations
Here, the above table indicates that while it was managing it’s debtors in an increasing more efficient fashion before 2008, there seems to have been a jump due to changing in their accounting practises. Right after the change, in 2009-10, the company returned to a more normalized pattern. However, ITC is still tops when it comes to keeping debtors low and payments high.
STOCK TURNOVER RATIOIt is an indicator as to with what efficiency and rapidity a firm is able to move its merchandise. It is basically a measure of liquidity of firm’s inventory.
STOCK TURNOVER RATIO = C O S T S O F G O O D S S O L D
AVERAGE STOCK
Year End 2010 2009 2008 2007 2006 2005
ITC 6 5 6 6 7 8HUL 7.74 9.66 8.43 9.09 8.58MARICO 7 8 8 9 9 9
12
10
8
ITC
6HUL
4MARICO
2
0
2005 2006 2007 2008 2009 2010
Interpretation
As can be seen above, HUL has a higher Stock Turnover Ratio than both ITC and Marico. This means that money is tied up for less time on stocks. A quicker stock turnover also indicates that HUL makes profits on its stocks quicker than the others, pointing towards a more competitive organisation.
TOTAL ASSETS TURNOVER RATIOIt is an indicator that defines whether a firm is utilising its assets efficiently or not. It is an activity ratio which suggests that whether the assets of the firm are operating as desired and is contributing to the sales of the firm.
TOTAL ASSETS TURNOVER RATIO = S A L E S
TOTAL ASSETS
Year End 2010 2009 2008 2007 2006 2005
ITC 3 3 3 3 3 4HUL 7.19 10.79 6.83 5.05 4.04MARICO 7 8 8 9 9 9
12
10
8
ITC
6HUL
4MARICO
2
0
2005 2006 2007 2008 2009 2010
Interpretation
In the period under consideration, HUL achieved its best turnover ratio in the year 2007, when a sharp decrease in total assets did not affect the growth of sales. In 2008, HUL made a heavy investment of about Rs. 900 crore for asset acquisition. However, it used those assets well, making a large jump of Rs. 6200 crore in sales.
LEVERAGE RATIOLeverage Ratio used to calculate the financial leverage of the company to get an idea of the company’s methods of financing or measure its ability to meet financial obligations.
DEBT EQUITY RATIOThe debt-equity ratio is a leverage ratio that compares a company's total liabilities to its
total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed.
DEBT EQUITY RATIO =
A L L O N G T E R M L O A N S
EQUITY SHAREHOLDERS CAPITAL
Year End 2010 2009 2008 2007 2006 2005
ITC 0 0 0 0 0 0HUL 0.09 0.15 0.04 0.03 0.35MARICO 1 1 1 1 1 0
1.2
1
0.8
0.6
0.4
ITC HUL MARICO
0.2
0
2005 2006 2007 2008 2009 2010
Interpretation
Debt/Equity ratio for HUL is not following a trend over the last years. It is much lower than MARICO for the last five years. Analysis of balance sheet of HUL reveals that capital of HUL is funded majorly through equity rather than debt.
INTEREST COVERAGE RATIOIt is the measure that determines whether the firm would be able to service its debt. The ratio is the test of solvency for the firm.
INTEREST COVERAGE RATIO = E B I T
Interest to be paid
Year End 2010 2009 2008 2007 2006 2005
ITC 68 102 187 246 154 61HUL 403.07 120.29 92.81 203.86 87.39MARICO 13 7 8 7 16 23
450
400
350
300
250
200
150
100
ITC HUL MARICO
50
0
2005 2006 2007 2008 2009 2010
Interpretation
Interest Coverage ratio for HUL is much more than that of HUL and MARICO for all years except
2007. This indicates that HUL can easily meet its interest expense. Analysis of Income statement for HUL yields that Interest paid is much less Rs(Cr)6.98 in comparison to EBIT Rs(Cr) 2,997.43 resulting in high value of Interest Coverage Ratio.
VALUATION RATIOValuation ratio measure how cheap or expensive security is as compared to some measure of profit or value.
PRICE TO CASH FLOW RATIOThe price/cash flow ratio is used by investors to evaluate the investment attractiveness, from a value standpoint, of a company's stock. This metric compares the stock's market price to the amount of cash flow the company generates on a per-share basis. Higher the ratio better will be the valuationof the company. Price/cash flow ratio (P/CF) is seen by some as a more reliable basis than earnings per share to evaluate the acceptability, or lack thereof, of a stock's current pricing as it is not easilyManipulated.
Year End 2010 2009 2008 2007 2006 2005ITC 11 11 14 13 19 1HUL 5.11 9.98 8.05 7.43 5.91Marico 13 13 13 8 7 19
20
18
16
14
12
10
8
6
4
2
0
2004 2005 2006 2007 2008 2009 2010 2011
ITC HUL Marico
Interpretation
Price/Cash flow ratio for HUL is showing an increasing trend other than in 2010 when it has decreased/Cf ratio for HUL is less than that of ITC and MARICO for all years. In 2010 there is a
drastic increase in Cash Flow from operating activities (Rs (Cr) 20128 in 2009 to Rs (Cr) 3432 in 2010) which is the reason of decrease in the value of Price/Cash flow ratio in 2010.
PRICE TO EARNINGS RATIOThe PE ratio indicates the growth prospects, risk characteristics, degree of liquidity, shareholder orientation and corporate image of a company.
A stock with a high P/E ratio suggests that investors are expecting higher earnings growth in the future compared to the overall market, as investors are paying more for today's earnings in anticipation of future earnings growth.
P/E ratio = Price per share / Earnings per share
Year End 201003 200903 200803 200703 200603 200503
ITC 12 10 12 10 16 0HUL 24.06 20.69 24.27 25.24 31.92Marico 28 26 29 33 32 19
35
30
25
20 ITC
15HUL
Marico
10
5
0
2004 2005 2006 2007 2008 2009 2010 2011
Interpretation
P/E ratio for HUL is showing a decreasing trend except in 2010 when it has increased. Also P/E ratio for HUL is more than that of ITC in all years indicating a higher confidence of investors in HUL as compared to ITC.Analysis of Income statement of HUL yields that earning has decreased from Rs (Cr)2500 to Rs (Cr) 2202 which is the reason for decrease in EPS in 2010.
