2. Contents
1) Abstract
2) Methodology
3) Sales turnover
4) Current ratio
5) Quick Ratio
6) Gross profit Margins
7) Operating Profit Margin
8) Inventory holding period
9) Debt Equity Ratio
10) Collection Period
11) Conclusion
3. 1) Abstract: Fast moving consumer goods (FMCG) – or Consumer Packaged
Goods (CPG) – products that are sold quickly and at relatively low cost.
Examples include non-durable goods such as soft drinks, toiletries, and
grocery items. Though the absolute profit made on FMCG products is
relatively small, they generally sell in large quantities, so the cumulative profit
on such products can be large. An analysis of the top three FMCG companies
in India are selected for analysis of their financial positions and comparison
among the same is presented in form of graph.
Objectives: To study the financial position of top three FMCG companies in India
and present the comparison among them based on various efficiency parameters
/ratios.
2) Methodology: Top three FMGC companies are selected based on their
turnover and their financial statements are scrutinized on the following
parameters.
1) Sales Turnover
2) Gross profit Margin
3) Operating profit Margin
4) Inventory Turnover Period
5) Credit period
6) Current Ratio
7) Quick ratio
Top three companies based on their sales are:
1) Hindustan unilevers Ltd.
2) ITC Ltd
4. 3) Nestle India Ltd.
3) Sales Turn-over:
Definition:
Total dollar amount collected for goods and services provided. While payment is not
necessary for recognition of sales on company financial statements, there are strict
accounting guidelines stating when sales can be recognized. The basic principle is
that a sale can only be recognized when the transaction is already realized, of quite
easily realized.
ITC has highest sales turnover that includes the cigarettes business
also.
HUL has a huge turnover .
Nestle is on third and far behind the top two.
5. 4) Current Ratio:
An indication of a company’s ability to meet short-term debt obligation: the higher the
ratio, the more liquid the company is. Current ratio is equal to current assets divided
by current liabilities. If the current assets of a company are more than twice the
current liabilities, then that company is generally considered to have good short-term
financial strength. If current liabilities exceed current assets, then the company may
have problems meeting its short-term obligations.
ITC is having highest current ratio and they have quite recently they are
moving into negative working capital.
Nestle has lowest current ratio that means they don’t have to spend on
working capital interest
6. HUL is slightly higher than Nestle and that has increased in last three years
this is because they have amassed cash in last three years that can be
invested.
5) Quick Ratio:
Definition:
A measure of a company’s liquidity and ability to meet its obligations. Quick ratio,
often referred as acid-test ratio, is obtained by subtracting inventories from current
assets and then dividing by current liabilities. Quick ratio is viewed as a sign of
company’s financial strength (higher number means stronger, lower number means
weaker).
Quick Ratio
3.50
3.00
2.50
2.00
1.50 ITC Current ratio
1.00 Nestle Current ratio
0.50 HUL Current ratio
0.00
ITC is again showing highest quick ratio again showing good financial
strength of the company
HUL has lower quick ratio than Nestle compared to current ratio where it was
vice-versa indicating HUL had greater prepaid expenses and inventory.
7. 6) Gross Profit Margin:
Definition:
What remains from sales after a company pays out the cost of goods sold. To obtain
gross profit margin divide gross profit by sales. Gross profit margin is expressed as a
percentage.
Gross profit Margin
50%
48%
46%
44%
Percentage
42% HUL Gross Profit magin in
40% %
38%
Nestle Gross profit magin
36%
in %
34%
32% ITC Gross profit magin in
30% %
ITC has the highest gross profit margin in the range of 42-46% showing a very
high profit margin to cover its basic operating costs and profit margin.
As the gross profit margin represents company’s ability to utilize raw
materials, labour and manufacturing related assets to generate profits. Here
HUL appears to be less efficient than ITC.
Nestle was able to maintain its profit range constant thought the period
performance was least among the three but consistent.
7) Operating Profit margin:
Definition:
8. A measure of a company’s earning power from ongoing operations, equal to
earnings before deduction of interest payments and income taxes also called EBIT
(earnings before interest and taxes) or operating income.
HUL in spite of having grater gross profit margin then Nestle shows less
operating profit margin showing that they have huge operating cost.
Nestle is not showing growth in profit or nor it is showing decline it is more or
less constant hovering around 20% again showing consistent performance.
ITC is showing an increasing trend in profit except its decline in 2007-2008. It
has shown a tremendous increase in profit %(30-35%) than its counter parts
and showing an increasing trend there afterwards indicating its high
ambitions.
8) Inventory holding period:
9. Average inventory period is also referred to as Days Inventory and Inventory
Holding Period. This ratio calculates average time inventory is held
Average inventory period shuld be compared to competitors, the average
inventory period is included in the financial statement ratio analysis.
HUL is showing the least Inventory period of holding on an average indicating
it makes profit on stocks quicker than others pointing towards more
competitive organization.
Nestle is close second and is competitor to HUL in terms of inventory holding
period showing money tied up for less time in stocks
ITC is the worst among the three showing an average inventory holding
period of around 65 days meaning money is tied up for around 50% more time
in stocks than its counterparts
10. 9) Debt-equity ratio:
Definition:
A measure of a company’s financial leverage. Debt/equity ratio is equal to long-term
debt divided by common shareholder’s equity. Typically the data from the prior fiscal
year is used in the calculation investing in a company with a higher debt/equity ratio
is equal to long-term debt divided by common shareholder’s equity. Typically the
data from the prior fiscal year is used in the calculation investing in a company with a
higher debt/equity ratio may be riskier, espically in times of rising interest rates due
to additional interest has to be paid our for the debt.
ITC has a debt-equity ratio hovering around 0-0.5 indicating almost negligible
liabilities compared to its equity. Reason behind this must be it being Public
sector unit.
HUL also is seen to have much less debt-equity ratio indicating it liabilities
being less. Inspite of being Private entity having such a low debt-equity ratio
shows it is funded majorly through equity and negligible debt.
11. Nestle shows a good Debt-equity ratio hovers around 1 indicating its equity
and liability are almost equal. And its performance in the five years shows that
they want to keep it that way.
10) Credit Period:
Definition:
The period of time during which a firm grants credit to a customer. At the end of the
credit period, the customer is expected to have paid for all goods or services he/she
has purchased.
HUL shows highest credit period of around 140 to 160 days shows that it has
a very good reputation in market or else it would not have got such high credit
continuously for 5 yerars
Nestle shows an average credit period of 80 days showing its competitive
ness
ITC shows low credit period again inidication of Public unit.
12. 11) Conclusion
All the three companies are solvent and are able to honour all its
commitments by liquidating all of its assets, i.e. if it ceases its operations and
puts all its assets up for sale. Net assets, i.e. the difference between assets
and total liabilities, are the traditional measure of a company's solvency.
Comparision of all the three companies shows that ITC being an psu is in
better position than the other two.
However all the three companies have shown their performances at par and
are good companies to invest in.
