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Ratio Analysis of ITC Ltd.

and HUL
Financial Accounting Assignment

Aritra Dasgupta Ayan Bandopadhyay Dibyendu Mukherjee Ishani Sikdar Nilankur Jha Satyaki Ray Sourav Sarkar Sudipta Kundu

Tisha Ghosh


1. Liquidity or solvency ratios:

Current ratio=Current assets/Current liabilities

ITC For 2011 =1.189 For 2010 = 1.009 HUL For 2011= 0.79 Current ratio measures the ability of a firm to meet its current obligations. The current ratio of ITC for the year 2011 implies that ITC has current assets which are 1.189 times the current liabilities. The current ratio of ITC for 2011 is much better than that of year 2010 and HUL 2011. We know higher current ratio implies there are sufficient current assets to pay off current liabilities. So from the above ratios we can say that ITC is in a better position so far as debt repayment is concerned.

Quick ratio=Quick assets/quick liabilities

ITC For 2011 =0 .574 For 2010 =0.444

HUL For 2011=0.44 The quick ratio is more stringent measure of liquidity because inventories which are the least liquid of current assets are excluded from the ratio. The quick ratio of ITC 2011 is much better than 2010 and HUL 2011.It means for 1 rupee of quick liability the quick asset is 0.574.Higher the quick ratio, higher is the liquidity of the company.

Debtors velocity = Credit sales/average debtors

ITC For 2011=23.97 For 2010=23.76 HUL For 2011=24 The debtors turnover ratio indicates the ability to convert debts into cash. Higher the turnover is, quicker the collection from debtors. The debtors velocity is almost same in both the years in case of ITC, but still when compared it is higher in 2011.It means that the collection from debtors speed is more in 2011 than the year 2010. The debtors velocity for HUL is greater than ITC for both the years. Inventory turnover ratio=Net sales/average stock ITC

For 2011=4.3 For 2010=3.96 HUL For 2011=7.7 Inventory turnover ratio is the ratio of stock being converted into cash. A high value of the ratio means there is no idle stock lying with the company. The inventory turnover ratio of ITC in 2011 is higher than 2010 which shows more quickly the stock is sold out than in 2010. But the inventory turnover ratio for HUL is higher than ITC. Its an objective of the firm to sell its stock to increase the profit of the firm. So, higher value for the ratio implies better efficiency.

2.Leverage ratios: Debt-equity ratio=debt/equity ITC For 2011=0.006 For2010=0.007 The debt equity ratio is proportion of the debt to equity. The debt equity ratio shows the risk taking ability of the firm. The ratio of the ITC in both the years is almost same still there is a drop of 0.001 in the current year. As per the Balance Sheet HUL has no debt.

Debt asset ratio=Debt/total asset


For 2011=0.389 For 2010=0.0046 The debt asset ratio shows the proportion of companys asset which are financed through debts. If the ratio is less than one then most of the companys asset are financed through equity and if the ratio is more than one most of the companys assets are financed through debt. In case of ITC most of the companys assets are financed through equity. Higher ratio indicates that the company is highly levered. As per the Balance Sheet, HUL has no unsecured loans. Capital turnover ratio=net sales/capital employed ITC For 2011=1.31 times For 2010=1.28 times HUL For 2011=7.78 times The capital turnover ratio of HUL is better than that of ITC as it is high. It means getting more return out of the amount of capital employed in the business. It means the sales are higher or profit return is higher than the initial cost of capital employed in the business. In case of ITC the capital turnover ratio has increased which reflects higher return on the capital. 2.Profitability ratio:

G.P margin ratio=G.P/Net sales

ITC For 2011=0.34 For 2010=0.331 HUL For 2011=0.14 The gross profit ratio of ITC ltd is higher than of HUL. The gross profit ratio measures the operating performance of the company. Higher the G.P ratio higher is the operating performance of the company. The G.P margin ratio for ITC has increased from 2010 to 2011.

N.P margin ratio=N.P/Net sales ITC For 2011=23.56% For2010=22.37% HUL For 2011=11% The N.P ratio measures the net profit of the co. It is the proportion of net profit to net sales of the co. Here the net profits of ITC ltd are much higher than HUL. It shows the increased profitability of the firm. Also the N.P margin ratio has increased from 2010 to 2011.

Assets turnover ratio= net sales / average assets

ITC For 2011=0.87 For 2010=0.85 HUL For 2011=3.84 The assets turnover ratio of ITC in both the years is almost same but HUL is higher. This ratio shows how efficiently the assets are being utilised to generate revenue. This indicates that ITC with an asset base of 1 unit could produce 0.87 units of sales whereas HUL with an asset base of 1 unit can produce 3.84 units of sales. So HUL is in a better position so far as asset turnover ratio is concerned Return On Equity=Net Income/Average Equity ITC For 2011=33.23% For 2010=29.21% HUL For 2011=59% Return on Equity measures the profitability of equity funds invested in the firm. It is important as it reflects the productivity of the capital employed in the firm. In case of ITC we see that the return on equity has increased from 29.21% in 2010 to 33.23% in 2011 indicating productive employment of resources. But the return on equity for HUL is higher than ITC indicating better employment of resources.

Earning power:

Return on asset=EBIT/Average total asset ITC For 2011=30% For 2010=28% HUL For 2011=52% The return on assets of HUL is higher than of ITC ltd.It means that the assets are being properly utilised or properly financed. Also the ratio has increased from 2010 to 2011.

Return on capital employed=EBIT/Average capital employed

ITC For 2011=48% For 2010=42% HUL For 2011=104% It measures the returns of a company realized from its capital.It is calculated as profit before interest and tax divided by the difference between total assets and current liabilities. The ratio shows the efficiency with which capital is being utilized to generate revenue.The ratio is higher in HUL than ITC which implies HUL is

more efficient. The ratio has increased from 2010 to 2011 which reflects better utilization of capital to generate revenue. .

3. Ownership ratio: Earnings Per Share=Net Income/Number of Outstanding Shares ITC For 2011=6.44 For 2010=10.63 HUL For 2011=10.68 For 2010=10.09 Shareholders are concerned with earnings of the firm in two ways. One is availability of funds to pay their dividends and the other to expand their interest in the firm with retained earnings. These earnings are expressed on a per share basis which is in short called EPS. ITC started at a high EPS of 10.68 in 2011 but declined to 6.44 in 2010. But for HUL the EPS increased. Thus by just looking at these two sets of data it can be said that HUL has a brighter future.

Price-earnings ratio=Market price of the share/Earning price of the share

ITC For 2011= 30.5 For 2010=16.58 HUL For 2011=29.99 Price-earnings ratio is the ratio of market price of the share to earning price of the share. Higher the priceearnings ratio, higher is the earnings of the co. in the future. In case of ITC the P-E ratio has increased indicating greater earnings. Also the P-E ratio of ITC is higher than that of HUL which reflects better earnings of ITC.

Capitalization rate=Earning price of share/Market price of share.

ITC For 2011=0.032 For 2010=0.060 HUL For 2011=0.083 This ratio is the assessment of risk of the firm. Higher the capitalization ratio, the greater is the risk for the company. This is because they are at risk of insolvency if they fail to pay the debt on time. The capitalization rate has decreased from 2010 to 2011 for ITC which denotes an improvement. But the capitalization rate for HUL is much higher which makes HUL a more risky company.

ConclusionThe time-series analysis of ITC Ltd. implies that the performance of the company has improved over the previous year.

The cross-sectional analysis of ITC Ltd. with HUL gives the following resultITC has a higher current ratio as compared to HUL which implies it is in a more favourable position than HUL to pay off the current liabilities. Also the quick ratio for ITC is better than that of HUL putting it in a better position. But the debtors velocity of HUL is greater than ITC which indicates HUL is quicker in collecting debt from the debtors. Again the inventory turnover ratio of HUL is higher which reflects better efficiency of the firm In case of debt-equity and debt-asset ratio, HUL has no debt. The capital turnover ratio of HUL is higher which indicates the sales are higher or the profit return on the capital employed is higher.

Analysing the profitability ratios we see that both the G.P Margin ratio and N.P Margin ratio is higher in ITC which reflects better performance of the company. But if we consider the asset turnover ratio we find that assets are more efficiently utilised in case of HUL as compared to ITC. Also, analysing the return on equity, we find, HUL has employed its capital more

productively. Considering return on asset and return on capital employed we find HUL has performed better.

Analysing the ownership ratios we find that EPS indicates a brighter future for HUL whereas the P-E Ratio indicates higher future earnings for ITC. However the capitalisation rate analysis shows HUL is a more risky company.

Thus the overall analysis shows that both the companies are equally competitive.