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LEARNING OBJECTIVES

BEFORE CLASS
Read the case

Identify the problem


s

evaluate make
Identify facts quantitative
qualitative analysis
Evaluate comment on best course
of
action

Implement constraints
functions etc

SUMMARY
What When
Why
Hour Where who

IN CLASS
Present
your position
Defend your position
Listen to others positron
challenge your peers positions
AFTER CLASS

Reflect
Revisit
Revise
Document
INDUSTRY COMPARISON

Akzo Nobel Asian BASF Berger Paints Godrej Consumer Industry


2015
India Limited Paints India India Limited Products Limited Average

17 Current ratio 1.41 1.52 1.39 1.44 0.89 1.33


Quick ratio 0.94 0.88 0.83 0.81 0.57 0.81
I 74 Days’ Receivables
or debtor collection 38.21 25.30 64.07 39.15 10.95 35.54
period
Days’ Inventory or
inventory holding 44.92 47.77 76.48 54.27 38.15 52.32
period
Days’ payables or
79.85 51.37 87.55 43.26 83.63 69.13
creditor days
Cash conversion
3.28 21.70 53.00 50.16 –34.53 18.72
cycle
Operating profit ratio 9.88 12.81 0.58 9.55 18.41 10.25
Profit before taxes
9.83 12.56 –1.29 8.49 17.59 9.44
ratio
Profit after taxes
6.66 8.63 –1.31 5.56 13.92 6.69
ratio
Return on net worth 21.11 32.51 -6.22 22.30 20.47 18.03
Return on capital
31.33 44.85 1.23 25.15 24.90 25.49
employed
Total debt to equity
ratio 0.00 0.09 1.55 0.48 0.08 0.44
Interest coverage
184.33 50.17 0.31 9.06 22.40 53.25
ratio
Asset turnover ratio 1.46 1.95 1.07 1.79 0.85 1.42

Source: cmie.com / prowess accessed on 25th August, 2019


S.No.8
Anandam Mfg Co
• Let us move onto Ratios:
• Based on various ratio computations and their
comparison with industry ratios, would you, as
the loan officer, grant the loan request?

• Current ratio and the acid test ratio of the


company are declining from year 1 to year 3;

• Similarly, these ratios are also less than the


industry averages for years 2 and 3.
• So, there is a liquidity problem in the company.

• Look @ the inventory turnover ratio and


receivables turnover ratio.

• The slow movement of inventory indicates what?


• High inventory holding by the company.

• Slow recovery of accounts receivable indicates


what?
• Liquidity crunch!
• Liquidity crunch, along with high turnover days
and high recovery days, clearly indicates the poor
management of working capital by the company.

• How about debt-to-equity ratio?

• Continuously increasing, and, in the third year, it


has become more than equity!!

• Compared to the industry, it is too high.


• This indicates what?

• Improper management of funds!

• How about interest coverage ratio?

• Continuously coming down, which indicates a


cash crunch.
• The interest-paying capacity is decreasing, which
is not at all a good indicator for receiving
additional financing.

• How about profitability ratios?

• All the profitability ratios of the company are


decent and in line with the industry due to control
over costs and increases in market share in the
form of revenue.
• Similarly, other operational expenses are also
under control.

• But due to high interest costs, the net profit


margin of the company is continuously coming
down, which is deteriorating the performance of
the company and adding to the reluctance of the
bank to give the new loan.
• How about the use of assets?

• The company is able to effectively use their assets


(assets’ turnover ratios) at par with the industry

• How about RoE?


• It is constant and in line with the industry.
• So, what is the final
call by the Loan
Officer?
Pidilite Industries: Assessing Credit Quality

What is this case all about?


• Gaurav, wanted to do a fair assessment of
company’s ‘financial health’ in its entirety (credit
quality) and specifically financial ‘risk’ profile.

• Credit quality analysis is meant for existing and


potential investors, lenders, and other creditors,
as it aids in making investment decisions about
the company.
• A host of financial ratios need to be calculated,
reflecting the company’s Liquidity, Working
Capital Intensity, Profitability, Capital
Structure/Gearing, Coverage, Efficiency

• These ratios capture the company’s financial


health in its entirety.

• Liquidity ratios: Current Ratio and Quick Ratio


• Working Capital Ratios:
• Days’ Receivables or Debtor Collection Period

• Days’ Inventory or Inventory Holding Period

• Days’ Payables or Creditor Days

• Cash Conversion Cycle (Days Receivables + Days


Inventory — Days Payables)
• Profitability Ratios:
• Gross Profit Ratio
• Operating Profit Ratio (Operating profit = gross
profit – all operating expenses except interest and
taxes; or EBIT)
• Profit before Taxes Ratio
• Profit after Taxes Ratio
• Return on Capital Employed: (EBIT / Total Capital
Employed)
• Total capital employed = shareholders’ funds +
non-current liabilities

• Return on Equity or Return on Net Worth: (PAT-


Pref Dividends / SH Funds or Net worth)
• Capital Structure Ratios
• Total Debt to Equity Ratio: Total Debt / SHF
• (Total debt = long-term borrowings + current
liabilities)

• Long Term Debt (LTD) to Equity Ratio: LTD / SHF


• Coverage Ratios:

• Interest Coverage Ratio (EBDIT/ Int Exp)

• Debt Service Coverage Ratio


• (PAT + Interest Expense + Depreciation) /
(Repayment of LTD + Interest Expense)
• Turnover/Efficiency Ratios:

• Total Asset Turnover Ratio: (Net Sales /Net Fixed


Assets + Current Assets)

• Fixed Assets Turnover Ratio: (Net Sales / Net


Fixed Assets)
INDUSTRY COMPARISON

2015 Akzo Nobel India Limited Asian Paints BASF Berger Paints India Limited Godrej Consumer Products Limited Industry Average
India

Current ratio 1.41 1.52 1.39 1.44 0.89 1.33

Quick ratio 0.94 0.88 0.83 0.81 0.57 0.81

Days’ Receivables or debtor


collection 38.21 25.30 64.07 39.15 10.95 35.54
period

Days’ Inventory or
inventory holding period 44.92 47.77 76.48 54.27 38.15 52.32

Days’ payables or creditor days 79.85 51.37 87.55 43.26 83.63 69.13

Cash conversion cycle 3.28 21.70 53.00 50.16 –34.53 18.72

Operating profit ratio 9.88 12.81 0.58 9.55 18.41 10.25

Profit before taxes ratio 9.83 12.56 –1.29 8.49 17.59 9.44

Profit after taxes ratio 6.66 8.63 –1.31 5.56 13.92 6.69

Return on net worth 21.11 32.51 -6.22 22.30 20.47 18.03

Return on capital employed 31.33 44.85 1.23 25.15 24.90 25.49

Total debt to equity 0.00 0.09 1.55 0.48 0.08 0.44


ratio

Interest coverage ratio 184.33 50.17 0.31 9.06 22.40 53.25

Asset turnover ratio 1.46 1.95 1.07 1.79 0.85 1.42

Source: cmie.com / prowess accessed on 25th August, 2019