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COMPARATIVE FINANCIAL ANALYSIS

CONTENTS

1.

Introduction

2.

Ratio Analysis

3.

The working capital Model

1

2

1.

Introduction

1

2

Ratio Analysis
5

2.

Ratio Analysis

Financial Ratios: Ratio of two selected numerical
values taken from an enterprise's financial statements.

Financial ratios allow for comparisons
• • • • between companies between industries between different time periods for one company between a single company and its industry average

1.

Activity ratios measure how quickly a firm converts non-cash assets to cash assets.
a. Average collection period = Accounts receivable / (Annual credit sales / 365 days) b. Average payment period = Accounts payable / (Annual credit purchases / 365 days)

– Inventory Turnover
A ratio showing how many times a company's inventory is sold and replaced over a period. Inventory Turnover = Sales/Inventory Inventory Turnover = Cost of goods sold/Average inventory



Debtor turnover ratio or accounts receivable turnover ratio
It indicates the number of times average debtors (receivable) are turned over during a year. Debtors Turnover Ratio = Total Sales / Debtors

– Asset Turnover
The amount of sales generated for every ruppee's worth of assets. Asset Turnover = Revenue / Assets

3.

Debt ratios measure the firm's ability to repay longterm debt.
Interest Coverage Ratio A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period Debt/Equity Ratio A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. D/E Ratio : Total liabilities/Shareholders Equity

• •





4.

Liquidity ratios measure the availability of cash to pay debt a. Current ratio = Current assets / Current liabilities
measures a company's ability to pay short-term obligations

3.

Ratio Analysis

Liquidity Ratio DABUR
CURRENT ASSETS CURRENT LIABLITIES CURRENT RATIO

BRITANNIA

HUL

P&G

18525 14576
1.3

7299 6839
1.1

63169 75089 0.8

6797

2742
2.5

6

3.

Ratio Analysis

Debt Ratio DABUR
Interest coverage

BRITANNIA

HUL

P&G

29.7 0.6

5.2 1.4

2737.1 0

52

D/E Ratio

0

6

3.

Ratio Analysis

Turnover Ratio DABUR
Inventory Turnover Inventory period

BRITANNIA

HUL

P&G

63 5.79

28
13.04

53 6.89

24

15.21

Debtors Turnover Collection Period

32 11.41

6 60.83

18 20.28

11 33.18 6

3.

Ratio Analysis

Liquidity Ratio DABUR
Asset Turnover Total assets

BRITANNIA

HUL

P&G

2.96 38217

4.91 16366

75.48 100285

17.65

8777

6

The Working Capital Model
11

5.

The working capital Model

The short term operating activities of the firm & their impact on cash & working capital

15

5.

The working capital Model

THE OPERATING CYCLE & THE CASH CYCLE - Short Term Operating Activities :

1
2

Buying raw-material
Paying cash & purchases

How much inventory to order
To borrow / draw down cash balance

3

Manufacture the product

Choice of production technology

4 5

Selling the product Collecting cash

Offer cash / credit term to the customer How to collect cash

15

Net working capital (NWC) • NWC refers to the difference between current assets and current liabilities. • NWC can be positive or negative.
– Positive NWC = CA > CL – Negative NWC = CA < CL

Concepts of working capital
27

Gross Operating Cycle (GOC)

28

Inventory conversion period
• Inventory conversion period is the total time needed for producing and selling the product. • It is the time required for the conversion of raw materials into finished goods sales. • Typically, it includes:

29

Debtors (receivables) conversion period (DCP)
• Debtors conversion period (DCP) is the average time taken to convert debtors into cash. • It is the time required to convert the credit sales into cash realization. • It is calculated as follows:

30

Creditors (payables) deferral period (CDP)
• Creditors(payables) deferral period (CDP) is the average time taken by the firm in paying its suppliers (creditors). CDP is given as follows:

31

Cash Conversion or Net Operating Cycle
• Net operating cycle (NOC) is the difference between gross operating cycle and payables deferral period. • Deferral period is the period for which the payments to creditors are deferred or delayed

• Net operating cycle is also referred to as cash conversion cycle.

5.

The working Capital Model

DABUR

Inventory Period 7.59
Operating Cycle 25.9

Receivable Period 18.31
A/c Payable period 10.11 HUL

Operating Cycle 25.9 days
Cash Cycle or NOP 15.85 days

Inventory Period 74.87 Operating Cycle 91.09

Receivable Period 16.22 A/c Payable period 217.87

Operating Cycle 91.09 days Cash Cycle -126.78 days 14

5.

The working Capital Model

P&G

Inventory Period 21.55
Operating Cycle 43.94

Receivable Period 22.39
A/c Payable period 72.42 BRITANNIA

Operating Cycle 43.94 days
Cash Cycle -28.48days

Inventory Period 26.07 Operating Cycle 29.94

Receivable Period 3.87 A/c Payable period 31.48

Operating Cycle 29.94 days Cash Cycle -1.54days 14

INEVNTORY CONVERSION PERIOD

RECIEVABLES CONVERSION PERIOD

A/c PAYABLE PERIOD

NET OPERATING CYCLE

HUL

74.87

+ 16.22 -

217.87

= -126.78 days

P&G

21.55

+ 22.39 -

72.42

= -28.48 days

DABUR

7.59

+ 18.31 -

10.11

= 15.85 days

BRITANNI A

26.07

+ 3.87 -

31.48

= -1.54 days

18

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