Dear students, in last few sessions we are

discussing about Financial Statement Analysis. I hope you have understood the basics, now

we were going into details of ratio analysis. Ratio is a relationship between two items

in the financial statements. There can be 100s

and 100s to ratios, wherein we try to link one item to another. For example, it could be

profitability ratios like net profit to sales or operating profit to sales. It could be solvency

ratios like, equity to date or date to equity and so on. In the last session, we were solving a rather

longish problem on Colgate Palmolive, where we had taken their global consolidated

financial statements prepared as per US gap. And then, we were trying to do a variety of

ratios. We will continue to do that, we

will do a few more ratios today, followed by we will also see how the ratios can be

used for forecasting. And then, perhaps we will take one more case

and then we would complete this financial statement analysis, which is going on for

last 4 or 5 sessions. So, let us go back to

Colgate balance sheet and profit and loss account, which we were discussing.

Just have a look at their P and L and balance

sheet statements once again. See this is the

global detail format for Colgate Palmolive as per US gap. You can see the balance sheet

items, which are categorized as first current assets, followed by fixed assets, followed

by current liabilities, then non-current liabilities

and lastly the equity. This is next is income

statement, wherein total revenue and detailed expenses are given.

Now, we will go to ratios, we have in the

last session done a number of ratios, which you

can have a few you have calculated the ratios like current ratio, quick ratio, account

receivable turnover, which were all short term solvency ratios. Then, you had done at

looked at financial ratios. We had also looked at the profitability ratios

and asset utilization ratios and so on. In the last session, we were looking at the

DuPont analysis for the company. In the

DuPont analysis if you remember, we have again calculated some of the ratios like NOA,

operating current liabilities SE and so on.

And this much calculation we had done in the

last session, we were to do the ROIC ratios and disaggregation of ROC and so on. Have

a look at some of the key terms, so NOA is nothing but, Net Operating Assets which is

calculated as total assets minus operating current liabilities minus half of the deferred

taxes. Then, SE is nothing but, Shareholders Equity,

which we generally define as net worth or the owners fund. Then, NFO that is Net Financial Obligations,

this is NOA minus AC. So, what it is looking at the money in the

nature of long term depth is tried to we calculated by NFO. Then, NOPAT, NOPAT refers to Net Profit After

Tax. So, NOPAT

is calculated as EBIT into 1 minus tax. So, what is the operating profit and from

which we deduct the taxation at the rate. So, we calculate the net profit after tax

NI is Net Income. NFE, that is Net Financial Expenses. This is similar to impress expense, but instead

of taking the actual interest expense it is calculated

notionally as NFE as NOPAT minus NI.

Then, we did RNOA, that it Return on Net Operating

Assets. You are aware of NOPAT,

which is the return generated divided by average NOA. NOA you are aware now, Net Operation Assets. So, this is the profit generated by using

those assets. Next is LEV, that

is the Leverage Financial Leverage, which is NFO upon SE. NFO refers to debt, SE refers to equity. So, it is like a debt equity ratio. Next was NBC,

that is Net Borrowing Cost. Here, it is calculated as NFE upon average

NFO. So, NFE is

a sort of interest divided by the debt used, that is why it is NFE upon NFO. Spread is a

profit earned by the owners by using the debt money. That is why it is NRNOA minus

NBC. Because, NBC is a interest or the financial

cost, RNO is the total returned, ROE is a Return on Equity, which is RNOA plus LEV

into spread, because ROE is a return available to the equity owners. So, equity owners essentially get the return

on net assets plus they also make money by leveraging, which

is equivalent to spread, so it is LEV into spread.

And the last calculation is the equity growth

rate, which is net income minus dividend paid upon average common equity. So, net income is a total profit earned from

that the dividend is paid rest of the money is reinvested. So, that is a earning reinvested

divided by the net worth. So, it is estimated at that rate the company

is expected to grow. Now after once again looking at the terms. Now, let us go for actual calculation in this

case. We had started the calculation of

RNOA as you are aware it is written on net operating assets. So, it is equal to D 30, you

have already calculated this RNOA, if you remember. So, here we have calculated it as

D 27 upon D 23 plus E 23. So, D 27 is nothing but, NOPAT wherein NOPAT

upon NOA is the RNOA, we already have the figure. So, let us drag it for the 3 years. So, it is round

about around 30 percent slightly it went up to 32 in 2009. Now, let us see what is ROE, ROE is again

calculated by us.

So, we will just pick it up

from the calculation. So, you can see that ROE is much higher, which

is pretty expected, because equity owners are the residual owners. So, after paying interest to the debt

owners or to the providers of the debt all the remaining profit goes to ROE. So, you can

see ROE was as high as 1 that is 100 percent in 2008 it went down to 0.77. And now it

has somewhat improved to 0.81. Equity growth rate is automatically calculated

here. You can see, how it is calculated? It is we pick up a figure from balance sheet. So, I will

just take back to the legend to make it more clear . So, what we are

doing in equity growth rate is we pick up the net income and minus the dividend and

divide it by the average common equity. So, we have this average common equity and

the other figures from the balance sheet from where I have picked up.

So, equity growth

rate is you can see is 1.54 in 2008 it slightly increased and now it has again gone down to

1.60. Now, we try to disaggregate ROCE, I hope you

know what is ROCE, that is written on capital employed. It consists of this sub parts. First is RNOA, which we are very much

aware. So, which

was roughly 30 percent as you are aware, then we look at LEV that is

leverage. So, by leverage we are trying to find out

the relationship of debt funds to equity funds. In this case there is much more reliance of

debt funds, you can see in 2008 it was as high as 2.68 now it has gone down to 1.97. By spread as you know, we try to find the

additional earnings, which equity shareholders make.

So, we have already calculated it in the last

session. So, spread is 0.26 and ROE is

also calculated by us earlier. So, you have to just extract it here. So, what it tries to tell is

overall return on assets is 0.30 or about 30 percent. The amount which is paid to debt

holders is very, very negligible, you can see this NBC. That is the borrower the money

paid to on the borrowed funds, which is just 3 percent. So, roughly you can say after reducing that

3 percent, 26 percent becomes the spread. And if you add the effect of this 26 percent

for calculating the ROE, we get the ROE as high as 0.81. So, this is how you are able to explain, why

the returns to the owners is as high as 0.81. We will also try to disaggregate the RNOA,

which is a return on net assets. That how the company is able to maintain that

level of net assets.

So, first we will try to

look at NOPAT margin. So, we have already calculated the NOPAT margin. So, basically that figure is to be taken. So, you know that NOPAT has been calculated

as net profit after tax. We will try to relate it to the turnover. So, we will get in relative

terms how much is a NOPAT. So, this NOPAT is this figure, we will divide

it by the revenue earned. So, you will see that around 15 percent is

a profit earned on the sales. Next we are trying to look at NOA turnover.

So, how effectively we are able to use our

net operating assets. So, we try to link the sales and take them

as a percentage of NOA. Earlier we have done

this calculation of turnover ratio. So, I hope you are remembering it. So, what we are

trying to do is? How many times the sales over NOPAT, so over

NOA. So, NOA is say

roughly 7951000s, so for those many assets how many times is the turnover, is our NOA

turnover. So, it is 1.96 in 2008 it was slightly higher

2.7. So, it is you can say roughly 2 times. So, now we know that company is able to make

about 2 times the sales of it is assets. And on the assets it makes roughly 15 percent

profit. So, if you relate these 2 figures multiply

these 2 figures, you will get RNOA. So,

you can see it is roughly about 30 percent. So, this is very close to the figure, which

we calculated earlier.

Are you able to see, it around 30 percent,

there will be some difference marginal difference because of the rounding

of figures. And because of the earlier data sometimes

you have done average data. But, you can see

that roughly 30 percent is a return earned on net assets. How we are able to explain? Because 15 percent is a profit on sales. And company makes about 2 times the sales

of it is assets. That is how they make 30 percent return per

year on the assets.

And further,

because of the leverage which is very high, they can make as much as 80 percent return

for the equity owners. I hope is it clear? What we have done now is known as DuPont analysis. Wherein, we have definitely

calculated ratios, we have also tried to show the relationship of those ratios. Like on one

hand you have written ratios and on other hand you have turnover ratios.

Both of them

ultimately tell, how you are able to calculate the return to the equity owners. If this is

clear. We will also try to look at forecasting. I will not go into actual details of how do

you forecast, but ratios definitely help you to

forecast. So, I have already done this calculation I

would like to show it here. So, this

where the actual figures of turnover as you can see from 2006 to 2009, there is a slow

increase of turnover.

Now, if you want to project, how much will

be the turnover in 2011, because up to 2000 data is available. So, for 2011 we have to calculate CAGR. So,

if you calculate the Cumulative Average Growth Rate on annualized basis, which has

already been calculated. So, these are the figures of CAGR. So, CAGR is calculated for sales net income

dividend as well as equity. You can see that there is around 6 percent

growth in the sales on compounded and annualized growth rate basis. And there is slightly higher growth rate

as far as the net income or the profits are concerned. And equity has been increasing at a

higher rate, which is about 14 percent . Now, for forecasting purposes this CAGR are

going to be used. So, for forecasting the

sales, we have taken this C 13, that is the sales of 2010 as a base. And applying the

average growth rate for 5 years, we will be able to calculate the projected figures, which

come to this number. Are you able to see? You can also see the formula used it is C

13, that is this into 1 plus CAGR.

Maybe I can write this for more clarity. So, what we have done is we have taken sales

for the earlier year, which is 2010 plus we have added the CAGR figure in percentage terms. That is why we get a projection for

these sales. And then, the same has been dragged over the

years. In the later years, it is

assumed that, if the sale growth remains constant this will be the level of sales. Now,

next important figure is cost of goods sold. Now, herein again we have already

calculated the ratio of C 70. I will just show you the ratio. So, that it is more clear to you. So, we have calculated the figure of gross

margin, which tells us as to what is a percentage of margin, which is about 60 percent

and remaining 40 percent is the cost. Now, for forecasting the income statement,

we have used the same ratio, so we have assumed that on the forecasted sales, which

is forecasted as per the CAGR of sales. If the

gross margin remains constant. The cost of goods sold will be approximately

40 percent and 60 percent is going to remain the margin

are you able to get me? Now, next figure is we are also tried to link

the other operating items, wherein you have calculated C 20 upon C 13 as you can see for

this.

So, C 20 is the figure for 2010. So,

whatever is the percentage of operating items maintained in 2010? If it is maintained

same at a same level for the projected statements, we are able to calculate other operating

items, keep in mind there are 2 major expenses. One is a cost of goods sold, which we have

calculated using the gross margin, because, it

is related to sales. In the same way, we have also calculated the

other operating expenses as a percentage of sales as in 2010. And the same figure is linked now for 2011. And the

calculation is made for the remaining years. Now, the next important figure which we would like to calculate each is EBITDA. As you know in EBITDA, we are basically tried

to link the earlier figures, which we have already calculated. So, we have you know that we would like to

get the, EBITDA figure as sales minus cost of goods sold minus other operating expenses. So, you get this figure I will drag it over

the balance years. So, again using the earlier track record of

gross margin and operating expenses.

We are able to get the EBITDA. Next important calculation is depreciation,

wherein again we will go to ratios C 81. If you remember, we have calculated the figure

of depreciation earlier. That figure we can use and using that figure

we are able to calculate the projected deprecations for the coming years. Next figure is operating income. So, we have just

taken EBITDA minus depreciation as operating income. And earnings before interest

and tax. Since, we do not have any other unusual item

in over all these years. This

operating income after depreciation is nothing but, earnings before interest and tax,

which is the operating profit for the concern. So, this is the way we can calculate a projected

operating figures based on our estimates. And using the ratios we have learnt. I hope it is clear to you? So, once you are able to

calculate the CAGR and project the turnover.

The other figures can be taken as a

percentage of turnovers. However, depreciation we have calculated based

on the assets and the relationship of depreciation, which

we have. Now, let us go for projections of

balance sheet. Here, the balance sheet figures are given

for projections. So, we have the data of current

assets etcetera for the earlier years. Now, while projecting what has been done is

forecasted H 13 is used. And ratio used is C 55. So, if you remember we have tried to

link, the sales to inventory, sales to fixed assets and so on earlier, which are known

as asset utilization ratios. Now, for calculating balance sheet, we look

at the projected turnover. And we assume that the same asset utilization

will continue. So, for generating that level of turnover,

how much of current assets are needed. So, we

are able to calculate the inventory and other information using those figures. So, we have

estimated inventory, debtor others. Others have been assumed to be constant. Because,

other fixed assets need not be link to turnover. So, they have been assumed to remain constant. Cash is taken as a balancing figure, fixed

assets again we have looked at fixed asset turnover ratio and fixed assets have

been estimated.

Other fixed assets are assumed to remain constant. Though next is current liabilities, so

current liabilities have also been alone is estimate to remain the constant, whereas

current items like creditors are assumed to link to the turnover. So, once you calculate

this figures, certain items like long term debt and other non-current liabilities we

cannot estimate. So, again they are estimated to remain constant. Even shareholders equity is

estimated to remain constant. This is how the total some of the important

items of balance sheet have been estimated. Are you able to see? So, what essentially we are doing is items,

which are related to sales, like inventory, like debtors, creditors,

fixed assets, you are able to estimate.

Other

figures we have assumed to remain constant. And the balancing figure is taken as the

equity. This is how in a simple way, we can project

and balance sheet and P and L using the earlier data and the ratios for the same. Is it clear to you? So, this was rather a longish

case, because lot of data was available. And we have tried to calculate both the ratios

and also the forecast. Now, let us go to one more case. This will be our last case. So, see that now all your

doubts are cleared. In this we have the information about a leading

pharma company, dabur India. So, you can see here, income statement for

dabur India is given for a long time. That is from 2002 to 2011 for a better estimate

it is always better to take a longer time period of about 10 years, that is what

has been done in this case.

And based on that we will try to project the

information. But, before going for

projections let us try to calculate the ratios. Please have a look at the income statement. So, typically you are provided with sales

turnover, excise duty, net sales, stock adjustments, then various expenditure like

raw material, we will see that raw material consists of a major expense. So, 1228 crores that is 1200 crores is a raw

material cost for a sale of 3300 crore. Another major expense is selling and admin

expense. Total expenditure is about 2700 crores for

giving a net profit of 646 in your 2011.

And

they have a profit after tax, which is known as reported profit to the tune of 400 crores. This the data for last 10 years, as far as

the profit and loss account is concerned. Now,

have a look at their balance sheet, balance sheet again the last 10 years balance sheet

is considered. So, we have share capital reserves, then secured

and unsecured loans. You can see that company is largely equity

financed 1000 crores of equity and you have just 257 of debt, that to a large portion

is unsecured debt, which is recently raised in

2011. Otherwise, in earlier years the proportion

or debt was even less. We will anyway

calculate it by ratios. If you look at the assets or the application

of funds, you can see that the major assets are in the form of gross

block, which could be the planted machinery being a pharma manufacturer they will need

a lot of planted machinery.

So, company has it is steadily increasing

it is gross block. They also have good amount

of investments, which are also increased in recent years. You can see that, investments

were about 270, then they became 436, 348 and now it is 519.Then, inventories also

currently you can see as rather than on higher side 460 sundry debtors, loans the total

current assets are 1295, the net current assets are about 1000 crores. So, this is the overall

position as far as the assets and liabilities of the financial health of the concern is

concerned. Now, let us try to calculate the ratios. So, I have tried to take only a limited ratios,

now because now you know now number of ratios can be calculated.

But, we will try to do some important ratios. And if there is time

we will try to do some more ratios. As far as the liquidity is concerned the most

important ratio is current ratio I will add the heading for more clarity. So, liquidity ratios

is important ratio is current ratio. So, what is the formula for current ratio. You are right. Current ratio tries to link current assets

to current liabilities. So, it is CA upon CL. So, we will go to balance sheet, here you

can see directly we are given the total current assets. And we will divide it by the total current

liabilities wherein we take both current liabilities and provision. So, 1.26 if you drag to earlier years, you

will know that current ratio is more or less constant. Though in recent years it has somewhat, only

in the recent year 2011 it has increased. Now, let us go to quick ratio, what is the

formula for quick ratio. It is QA upon QL that is quick assets upon

quick liabilities.

Now, let us go to balance sheet to find out,

which are the quick assets. So, you look at

the current assets will you include inventory as a quick asset. Answer is no. Inventory

cannot be a quick asset. Will you included sundry debtors? Yes, sundry debtors is one of

the quick assets. So, that is the first item we are including

cash and bank obviously, it is a quick asset. Will you include loans and advances? No, so we have two items as far as the

quick assets are concerned. So, I hope there is a clarity sundry debtors

and cash you have added as quick assets.

Now, as far as the liabilities are concerned

we will take entire current liabilities that is

quick liabilities, because except bank over drafts all other liabilities usually, fall

and they are payable anytime. So, you have taken debtors plus cash divided

by the total current liabilities. It gives a ratio of 0.38. So, you can see it is more or less constant. But, it has

slightly increased now how will you interpret these ratios. As far as current assets is concerned it is

just above 1 in the recent year it has somewhat increased, which is a good sign. And you can also see the quick ratio also

is not very high, but it has somewhat increased in the

recent years. Now, let us look at the activity or

the turnover ratio. So, what do the turnover ratios try to calculate,

they try to link the sales to a particular asset wherein how effectively,

the company is able to use that particular asset is evaluated.

So, first is inventory turnover, so we will

get the sale figure from the P and L account. So, we will take net sales divided by the

inventories. Now, there are two ways sometimes

we can take it as sales upon average inventory or sometimes we can take it as sales upon

closing inventory. Both the ways are acceptable right now I have

take it as sales upon average inventory. You can see that the ration has gone down

in the recent years is it good or bad sign.

It is not a very good sign, because it shows

that company has more accumulation of stock in 2011 particularly, as the stocks are slightly

moving faster than the moment in sales. So, it is not a good sign that company is

able to turnover it is inventory only 7 times as

far as the current data is considered. Now, let us to the sale turnover debtors. So, what

was the formula of inventory turnover? I will just write the formula for your benefit

so it sales upon inventory. Now, what is the formula for debtors turnover? It is similar here it is sales upon debtors. So, again we will go to profit and loss account. We have picked up net scales divide by

the figure of debtors. So, you can see the ratio was as high as 26

in 2007 it has gone down to 16. Is it good or bad sign? It is not a very good sign, it shows that,

company’s management of debtors has slightly gone down.

So, it is not able to increase it is sales

as much as it is debtors arising, either they are

required to give more credit period. Or there are not able to collect the money

in the prescribed credit period. There is also one more ratio on which is known

as net asset turnover ratio. So, what will be the formula? You are right it is a similar formula. Here,

we will try to find sales divided by net assets. So, what will you take as net assets now? So, we will take the total assets minus the

liabilities. There are different ways some people take

only operation assets, some people will take the assets minus current liabilities. That is how I think we will try to take the

net assets, as that is what is as by the ratio. So, we have a sales figure.

Go to balance sheet, here you

can see the total assets. Since, net assets has many quenotations I

think it may make sense if we call total assets turnover. Keep in mind that. Even if it is called total assets

we do not literally take total of all assets. We have taken it as assets minus liabilities,

which is the total of assets which are used for

the business. So, you can see the ratio was relatively higher

in the earlier years it was about 3.78 and 3.82. Then it had gone down and in current year

it is much lesser. So,

which again is shows that the growth of sales is not as much as growth of assets. While

the assets are going faster sales are going at a slower rate, the companies efficiency

using the asset has somewhat declined. That is why what it is reflected by a fall

in the total asset turnover ratios.

The next two

ratios are gross profit and net profit. So, there are, which type of ratios? You are right

they are called as profitability ratios. So, in profitability ratios there is a linkage

between profits and the sales. So, basically both the figures will be available

from P and L account. Now, here you can see there is no figure for

gross profit. So, you will have to

calculate. So, we take the net sales minus raw material

cost, minus power and fuel, minus employee cost, minus manufacturing cost. I hope everybody is clear. This is the gross

profit I will put it in bracket. So, the items which were directly related

to sales, directly related to production have been deducted. What we have not deducted is selling and

admin expenses and miscellaneous expenses. So, sales minus raw material, power fuel,

employee and manufacturing costs gives us the

gross profit, we will divide it by the sales turnover.

So, 0.38 we can convert it as a

percentage, because, usually it will be used as a percentage. So, the ratio is more or less

same, but you can see in the recent year 2011 somewhat it has fallen. It was about 40 percent in earlier years. Now, it is slightly gone down indicating that

there is some pressure on the margin company’s profitability

has somewhat fallen. Now, on similar lines we try to, so what was

the formula for GP margin, it was gross profit divided by sales.

Now, what is the formula for NP margin, you

are right it is quite similar. But, instead of gross profit we will look

at the net profit. So, here we try to

calculate net profit after tax, that is after all charges what profit remains as a proportion

of sales. So, here the information of reported profit

that is a final profit as earned by the company divided by net sales, this is also

we will make it in as a percentage figure. So, again you can see that there is slight

pressure on the profit profits were above 15

percent now it is 14.44 percent. Still it shows a good profitability, but slight

pressure and there is a some fall in the profitability

as is evident. Now, two more ratios ROI and

ROCE, they are what type of ratios basically they are called as return ratios. So, what do

return ratios try to calculate? Essentially, return ratios are trying to link

the profitability to sales. So, we have a profit figure and it is not

profitability to sales there are essentially trying to

link profitability to the capital employed.

So, owners are putting some money we try to

find how much return they earn, that is the return of equity. The total money invested in

the business and how much it returns is a ROI or return on investment. So, what is a

formula of ROI? Here, we take PBIT in the numerator, which

is a total profit earned divided by the capital employed, that is why

it is also popularly known as ROCE. So, PBIT we will get from profit and loss

account. Here you can

see we have a figure of operating profit, which is profit before interest and taxes. So, we

have taken that figure divided by the total capital employed. So, we have two forms of

capital, shareholders fund plus total fund, that is a total money or the capital employed. This is also generally put as a percentage. So, you can see really a very good return

on the profit on the investment currently it is 47

percent though it has gone down.

Earlier it was as high as 23 percent, every

year it is falling somewhat and currently it is below

50 percent still it is a excellent return on the

money employed in the business. Now, let us look at ROE. So, what is the formula of

ROE. Very similar to ROCE, but both numerator and

denominator will change instead of profit before interest and tax. Now, we will take profit after tax and in

place of capital employed we will divide it by

equity or the owners fund as it is popularly called. So, from P and L account we take the

reported profit, reported net profit or the profit after tax. And from the balance sheet we

get this total shareholder funds or network. So, you can see this also has fallen earlier

it was about 62 percent now it is gone down to

42 percent. Now, we are also trying to

calculate the operating profit margin, which is one of the profitability ratios.

So, I am trying to take it in profitability

line. So, what will be the formula for operating

profit margin? Very similar to NP margin, so here instead

of NP try to take OP that is operating profit. So, from P and L account you have the figure

of operating profit, we will divide it by net sales. So, again a similar picture it was about 20

percent somewhat it has gone down. So, you can see three levels of profitability

here. Gross profit is a total

profit, from their manufacturing and trading activities. Operating profit is a profit from operations

and profit after tax is a final profit. So, here

all the important profitability related ratios we have found. So, you can see here we have

done four types of ratios now, liquidity, turnover, profitability and return.

Now, we will

do one or two more types of ratios, what are the remaining type of ratios do you

remember. One more ratios are related to long term solvency,

which are the ratios in this category long term solvency. Just try to remember the popular ratio is

debt equity ratio. So, what is the formula of debt equity ratio? In debt equity ratio we try to link the

profitability as a proportion of sales, so how to find. Do you remember? It is debt equity

as the name suggest. So, we are trying to link debt that is borrowed

funds to owner’s funds. So, it is borrowed funds upon owner’s funds

or debt upon equity. So, from the

balance sheet you can see the total debt divided by the owners

fund. So, you can see, over the years the debt had

increased. In 2007 it was negligible it was just 0.05

of equity of late it is gone up to 0.23 or about

25 percent of the equity is now the borrowed fund.

This shows that the financing pattern

of the company has slightly changed. And now company is relying on the borrowed

fund than on the owner’s fund. Now, let us try to do some other type of… So, what are the

remaining types of ratios? Any other types of ratios you would like to

do? Just try to

remember? What else is remaining? We can still evaluate, how is company operating

by looking at the expenditure ratios of the company. So, expenditure ratios are mainly for internal

purpose, where company tries to find out how much is a proportion

of expenditure on sales. So, one of the popular

major is known as COGS ratio. As the name suggest it tries to link, the

cost of goods sold or COGS as a proportion of sales. So, if you go to P and L account, if you remember

you had taken the figures of raw material plus power plus sorry we will do it once again.

We have to take raw material plus power plus

employee cost plus other manufacturing expenses. So, these all I will put in brackets. So, these are the expenses, which are related

to the production and supply of goods. We will divide it by the nexus. Typically, this is

shown as a percentage, so 0.62 and now it has in the current year earlier it was slightly

below 60 percent. That to an extent it explains why profitability

has gone down, because, the proportion of expenses has slightly gone

up. If you go to P and L there are one more important

expense, which is known as selling and admin expenses. So, we will also try to see, how that is linked. So, we can take

selling and admin expenses ratio. So, as the name suggest here it is selling

and admin expenses divided by sales. So, selling and administration expenses upon

net sales, this will also be in percentage terms.

So, you can see that it is more or less same. It was 19.99

about 20 percent it has gone down. So, it is a good sign, that means company

is able to more or less control its selling and

administration expenses. But, it is cost of goods sold are likely increasing,

which is putting in turn the pressure on it is gross

profit. Due to reduction of gross profit the

operating profit and net profit has also gone down, in turn affecting the return of the

company. This is how you should try to find the linkage,

from expenditure ratio to profitability ratio to turnover ratio. There is also another linkage which you can

see, expenditure ratio to profitability to return. You can also see another linkage that is from

turnover. So, the companies

efficiency in use of asset is falling. Particularly, if you look at the inventory

turnover ratio and the total asset turnover ratio. The company is not able to use assets as

effectively as it was using in earlier. That is causing a fall in turnover ratios,

because of this fall the final profit earned by the company

is also falling.

This could somewhat explain why the return

has somewhat gone down. So, you can see,

ROI has gone down from 73 to 47 and ROE has also gone down from 63 to 42. And

companies reliance on debt funds is slightly increasing. So, this was a brief discussion

about the performance of dabur, for the last 4, 5 years using some important ratios. I

hope now you have grasped the major concepts of ratio analysis, how the ratios can be

used to analyze the performance and sometimes also to project the performance. So, we

will stop here in our next session we will go into discussion about the cost accounting,

how the cost are evaluated, how the cost are estimated and how also how the costs are

controlled.

Thank you so much..