 Dear students, in last 3 or 4 sessions, we are looking at how to analyze financial statements. If you remember, we have already discussed horizontal analysis, vertical analysis followed by ratio analysis. In ratio analysis also, we have done 2 or 3 cases of Indian companies. And currently, in the last session, we have started a discussion on an international company. So, we are looking at a consolidated detailed financial statement of Colgate Parmolio. Let us continue with that today. We will do some more ratios. Then we will go into DuPont analysis, where again, this is one method of in detail analysis of financial statements followed by forecasting of financial statements. So, based on the ratios which we have calculated, we will try to forecast the financial statement, both income statement and balance sheet for the coming years. So, let us once again have a look at Colgate Parmolio balance sheet, which we were seeing from the last time. So, see this is a consolidated financial statement, wherein we have used US gap. This is as is available on Colgate Parmolio website. We will go down, have a look. So, you can see here, how many details are shown. So, we have total current assets, then inventory again broken down into various categories, net account receivables and so on. You can see the format is slightly different than Indian format, because in Indian format we start with fixed assets, whereas as per US gap, they are starting with total current assets followed by fixed investments, followed by fixed assets and so on. Other assets, liabilities are listed, which again start with current assets, then there is a division of current assets followed by non-current assets and the last part of the balance sheet is the shareholders' equity or the owners' equity. So, I think last time you have seen it, but once again have a look at the whole of the financial statements. Today, we are going to do some more ratios. So, after balance sheet, you can see income statement, wherein again it starts with gross revenue as a visual, various types of profits are given. In the last session, we had done a few ratios. The first type of ratios, which we had started with were short term liquidity. So, you know these ratios now, current ratio, quick ratio, account receivable turnover, inventory turnover, then followed by days sales receivables, wherein we try to convert the receivables into number of days. We have also tried to convert inventory into number of days and then we have done short term ratios like cash to current assets and cash to current liabilities. This was followed by capital structure ratios. So, we have done two ratios there. One is a solvency ratio, the second one is a gearing ratio. In capital structure ratio, we try to find the relationship between the equity versus debt. So, how is the company finance? What is a percentage of debt? What is the percentage of equity that we were trying to find? Now, going on the similar lines, we will try to do some more ratios. Where you can see, this is a financing pattern of the company. Let us try to find the capital structure and solvency ratios. The first is debt to equity ratio. So, what is the formula of debt to equity ratio? Do you remember now? Because in two, three cases, we have done it before. It is very simple. As the name suggests, it is debt upon equity. So, we will look at the total debt of the company versus the total equity of the company. It is very simple to do. You can see here, we have current and non-current liabilities given. The total of them could be considered as a total debt and the shareholders fund is the total equity. So, let us try to now do the debt to equity ratio. So, total debt, we have to take the total of these two items. I hope you are getting. So, I have tried to add the current plus non-current liabilities, which is the total debt on the company divided by the shareholder's equity. So, we get 3.18. If we drag down further, we can see that the ratio has first gone down from 2008, from 4.19 to 2.57. Again, it has slightly gone up. So, what does it mean to you? You can very clearly understand that company is heavily indebted for every 1 rupee of equity. They had 4 rupees of debt in 2004. We are talking of total debt, current plus non-current. Then it come down, they are able to control that debt and again in 2010, it has somewhat gone up. So, what will you infer from this? If there is a higher debt burden, it puts some pressure on the solvency of the company. So, it is not advisable. Of course, we cannot generalize, we cannot tell exactly how much ratio is good. But generally, we can say that higher the debt equity ratio means there is more burden on the company and it becomes slightly difficult for the company to manage that debt. The second ratio is long term debt to equity. As the name suggests now, we will not look at the current liabilities. We will only look at long term liabilities or as they are known in US as non-current liabilities. So, we will take non-current liabilities divided by the shareholder's equity. So, ratio is 1.78. If I drag down to earlier years, you can see that in 2008, the ratio was much higher. It was 2.66, then it was brought down and now it is somewhat in control. So, 1.78 is the current ratio in 2010. One more ratio can be found, where we will try to see how, what is the composition of liabilities? How are the liabilities composed? So, we have current liabilities to total liabilities. So, current liabilities is this figure divided by we have to take the total of again current plus non-current, which is the total external liabilities. So, you can see it is 0.44. The ratio is more or less constant. It was 0.37 in 2008. It has slightly increased. What does it mean? Is it good to have the higher ratio or lower ratio in this case? Now, what happens is, if current liability to total liability ratio is high, it means that a large proportion of debt is due immediately, which is not a so good sign. So, if this ratio is going on a higher side, it is not good. In this case, you can see it has slightly increased, because company has taken some steps to reduce its long term debt, but current debt has not gone down. In fact, it has increased. So, the ratio has increased, which is not a very good sign. Now, what happens if long term debt to equity ratio is high? Should it be high or low? What will you infer? In this case, you can see it has gone down from 2.66 to 1.78. Is it a good sign? The answer is mixed. We cannot definitely tell, because if the ratio is high, that means the proportion of debt to equity is high, which puts some pressure on solvency of the company. But higher ratio helps the company in increasing profitability. That is why we cannot say that somewhat high ratio is bad. So, it needs to be balanced. Too high ratio will mean too much pressure on the solvency, a very low ratio will affect the profitability. That is why in case of long term debt to equity ratio, companies are required to keep some balance. Are you getting it? Let us go ahead. Let us try to see the utilization ratios, which are also popularly known as turnover ratios. Here certain ratios are enlisted. You can see it is sale to cash equivalent, sale to receivable, sale to inventory, sale to fix assets and so on. So, these ratios are intending. They are trying to find how effectively, how many times we are able to use the assets in converting them into revenue, in converting them into sales. So, the first one is sales to equity. Let us go to the basic data. Sales is, we can take gross sales, but generally we take net sales divided by the first one we are trying to find how effectively the cash is used. So, sales divided by cash and cash equivalents, so 31 times the ratio. You can see the ratio has slowly increased, which is a good sign. That means company is able to manage with less cash, while their revenues are increasing. You can see the data. You can see that the cash and cash equivalents of the company, which were 554, increased to 600 and now they have been somewhat reduced to 490, while the sale turnover of the company is good. It is, it has not gone down, though it has not increased substantially, but it does show some increase. Are you able to get? So, company is able to manage a good amount of sales with lesser cash. That is why this ratio has increased. Now, let us look at sales to receivable ratio. Again it is net sales divided by receivables, which we have to see in the current assets. We have used gross receivables. Some people can also use net receivables. Gross are the total receivables, whereas net are the gross receivables minus doubtful accounts. But it is more relevant to look at the gross receivables here, because that shows they are the real receivables, which the company is using to convert them into sales. So, you can see it is 9 times and the ratio is somewhat stable. It was 9.35, it went down to 9.13 and again it has increased to 9.36, which shows that company's efficiency of managing its debtors is somewhat good and it is more or less stable. Now, sales to inventories, again we will pick up the net revenue and divide it by the inventories. Now, a detailed breakup of inventory is given. In this case, we will take the net stated inventory or the total inventory. So, the ratio is 12 and if you drag to earlier years, you can see it has almost remained constant. So, it was 12.87, 68, 74, which shows that company's efficiency in managing inventory is more or less same. Higher ratio would be advisable, because a ratio of 12 indicates that they keep about one month inventory, if they can reduce inventory while increasing the sales, that will be better for them. Now, let us look at sales to fix assets. So, again we are picking up net sales. Now, if you look at the breakup of their assets, they have given the fixed assets, total of intangibles, then other fixed assets and so on. So, we will look at all the fixed assets. So, we will just take the total fixed assets, which include both tangible and intangible. Now, here you can see some not so good picture, because company's efficiency was 2.47 only, it has further gone down to 2.09. So, what does it show? It shows that relatively company has very high assets, company is not able to convert them into sales to the extent it would have like to. So, the sales has is hardly two times its fixed assets. We will go back, you can look at the figures again. See, these are the values of fixed assets. 6269 was the total and now it has increased to 7442. But if you look at the sales, the position is not that good. It is around hovering around 15. So, company is able to just convert two times its fixed assets to sales. If you look at fixed assets little more in detail, you will realize that company has lot of property, land, etc. It also has huge amount of plant and machinery and it has around 3193 of intangibles. But the efficiency of using of all these assets is really very low. It is just two times of that of fixed assets and further it has gone down over the years because sales is more or less stagnant while the fixed assets values are fixed assets are rising. Now, let us look at the sales to total assets ratio. Once again I will pick up the net sales divided by the total assets of the company and the ratio is very low. It is only 1.54 and over last two years it has further gone down to 1.39. So, if you take a look at all these ratios, you will realize that the total asset ratio is very low, which is mainly contributed by low utilization of fixed assets. Because fixed asset utilization is just 12, whereas utilization of it current assets is slightly better. On the whole it is just 1.39 times, which is not a very good thing. Now, let us look at how effectively the, how is the relationship between sales and its liabilities. So, we will look at sales to short term liabilities. Once again we take the net sales. You can see here the breakup of current and non current liabilities is given. So, we will take the short term liabilities. So, the ratio is has again gone down from 5 to 5.19 to 4.17. Is it a good or bad sign? Again it is not a good sign, because it shows that company sales are not very high, but their level of liabilities are pretty high, they are about 25 percent. Because sales to short term liabilities is just 4.17 and company will have to look into it to improve its performance. Now, look at the payables turnover. In payables turnover we will try to relate sales to its payables or craters. So, net sales divided by look at the current liabilities. You will observe there is an item called trade craters. So, these are the payables in the short term. We will just try to reduce the decimal points to make it more readable. So, it is clear to all. It has also gone down from 14 to 13.36, but the position is not very bad. It means about one month is a time to pay its craters. So, all these were asset utilization ratios. So, last two were trying to link the liabilities. Essentially, we are looking at how effectively the company is using its assets to convert them into sales. Now, we will look at the profit margins. For that we need to have figures like sales and cost of sales. So, let us try to bring those figures here. So, this is the sales. We are essentially looking at the net sales. If you go to income and expenditure settlement, you can see the cost of goods sold figure. It is in the minus. So, we have to put a minus sign. So, this is the cost of goods sold now. And we have. So, we need to find three things. We are going to find profit ratio, gross margin and a beta. So, here we will try to bring in EBITDA, popularly known as a beta. Now, in profit margin, the first ratio, we try to link the net profit or the final profit from two sales. And usually we multiply by 100 because it is in percentage terms. So, you can see here the earnings after tax figure is given. That is nothing but the net profit. We will divide it by net sales. So, are you able to see? We have just converted it as a percentage. So, we got 14.86 in last year it was 15 and in current year it is I mean last year it is 13. So, the margin is more or less same. We can say there is a slight improvement in 2009, but again it has somewhat gone down. But overall 14.86 could be considered a good margin because this is the net profit margin which is usually low, but company is able to generate good profit margin from its sales. Now, the gross margin. How do you calculate gross margin? For gross margin, we try to relate the gross profit to sales. And how to calculate gross profit? It is essentially sales minus cost of sales. So, we have the sales figure here minus cost of sales. We will put it in bracket divided by sales. So, you can see here the success of Colgate-Pamolive lies in void. What? It is really able to maintain a very high gross margin. Gross margin is 56 percent. Currently, it has increased to 60 percent. So, company is able to sell its goods at a premium prices. That is why its margins are high and from that margin it is able to maintain a good amount of net profit margin as well. Now, look at a beta margin. So, we will divide a beta upon sales. So, this also shows almost a similar trend. A beta which was about 20 percent, it has slightly increased to 23.8. And now it has remained high at 22.56. So, company is able to somewhat increase its beta margin. Now, what does it convey? What is a beta? Do you remember? What do you mean by a beta? E, B, I, T, D, A. What does it really mean? Full form is earning before interest, tax, depreciation and amortization. So, this could be viewed as a operating cash profit. Are you getting me? So, this is the earning that is profit before paying interest, taxes, depreciations and amortizations. So, this is a profit at a operations level. So, what we have reduced from sales really, maybe you can go to P and L account. So, you have got gross sales. We remove the cost of goods sold. We also remove other operating items that is regular expenses to get a beta. But the depreciation and amortization is still not reduced. So, this is the total amount of profit generated in cash terms by the company from its operations. So, it is very important especially if you want to study the profitability of the business of the company. It gives a better insight because net profit gives the final profit, the ultimate profit. But there we have to consider interest, taxes and certain extraordinary items which might affect that year. There may be some prior adjustments which all affect the net profit. Whereas, EBITRA really tells how is the business or how is their operations performance. So, you can see here the company's profitability is really good. It is able to maintain about 22 percent profit. Now, let us try to do one more ratio that is known as CAPEX to sales ratio. For that you need to know CAPEX that is capital expenditure which is available from cash flow statement. We have already brought it here and I think cash flow statement is not available here. But we have tried to bring the CAPEX and it is in the negative for the company. We will try to divide it by sales. So, in all the years it is very low it is minus 0.04. Now, what does it convey to you? What you will understand from this is if the ratio is high, it will mean that company is spending lot of money into capital expenditure which is good for the future of the company because it is likely to give higher capacity. It means there are expansions taking over of new companies which is all counted in CAPEX. So, high positive figure of CAPEX shows the growth of the company and it is a ratio which attempts to link the CAPEX to sales. So, what percentage is the money company spending for future growth? In this case you see not a very good picture because first of all the CAPEX is in negative. It means that there is no much growth in fact company is selling some of it existing assets and if you relate it to sales you will know that it is just 0.04. That means company is more or less stagnant in terms of it is growth there is not much of new addition to assets in fact the existing assets are slightly shrinking. Are you getting? Now this series of ratios are over we have done short term liquidity then we have done some capital structure, asset utilization and profitability ratios. Now, let us go to one more analysis that is known as DuPont analysis. This is a very interesting analysis wherein we try to find the returns. If you see here we have looked it from the operations view point. How is the day to day liquidity? How is the financing pattern and how is the asset utilization and how is the final profit? But we have not tried to calculate the returns. In DuPont analysis we will try to calculate various types of returns. So how effectively the company is able to use it is the money which is invested to generate the profit that is the return. So we will calculate these ratios that is R n O A etcetera and we will also try to disaggregate R O C E. I hope you know these figures but even if you do not know they are shown over here. So you can have a look at it before we go ahead. These terms you should know that is N O A which means net operating assets for the company. I hope it is clearly visible now perhaps we will go through these terms. So that it is clear to you what is done in DuPont analysis. So N O A refers to net operating assets where we are trying to find the total assets minus operating current liabilities minus half of the deferred tax liabilities considering them as operating. So idea is what is the assets which are really used for operations? So from the total assets we remove the operating current liabilities and also remove half of the deferred tax liabilities to get the N O A. Operating current liabilities are total current liabilities minus other short term liabilities. Then we need to find shareholder's equity which we are already aware. Then we will also find net financial obligations which is N O A minus S E. So out of the net operating assets whatever is financed by shareholder's equity will be reduced. What remains is a net financial obligation that is a money company has to pay to outsiders. Then one important figure is NO PAT which is net operating profit after tax. I hope you all know operating profit. This is a profit which is generated from operations from that we will so for calculating NO PAT will take a bid which is earning before interest and tax into 1 minus tax. So whatever is a tax which would have been charged on this profits we will try to reduce. Next is N I net income I think you all know net financial expenses in other terms expenses like interest paid etcetera. So which we calculate as N F E that is net financial expenses as NO PAT minus N I. So NO PAT is a total profit or net operating profit after tax we reduce the final profit or the net income. So the difference is considered as net financial expenses. Then we have R N O A which is a return on net operating assets wherein we try to calculate NO PAT divided by average N O A. Then one more important term is LEV which indicates the leverage which is N F O upon S E. We have just now seen what is N F O. N F O is a net financial obligation that means these are the outsider's liabilities versus S E. So this is something like our debt equity ratio where we will try to calculate debt versus equity. But this is slightly different because it is not the total debt here we are looking at net financial obligations versus the shareholder's equity. Then N B C this is the net borrowing cost where we look at N F E. N F E you know now net financial expenses divided by average of N F O. Next is spread by way of spread we will try to find R N O A minus N B C. So in N B C you can see here we have tried to link net financial expenses which are like out go on account of interest as a average of N F O. N F O is a financial obligation or money which company is using from outsiders. So we are trying to find what percentage of cost we have to pay like as a interest cost. So N F E upon average N F O gives us N B C spread tries to link how much is a total earning on the assets so R N O A minus N B C. Now let us assume that company is able to earn 20 percent as return on its assets and it has to pay 15 percent at interest that means 5 percent will be the spread. So 5 percent is a additional earning which owners get that is called as spread. One more is R O E which you know return on equity it is calculated as R N O A plus leverage into spread. If you remember earlier we have tried to calculate R O E as P A T that is profit after tax upon the owners fund. But in DuPont analysis we try to slightly calculate in different manner because we have already calculated a figure of R N O A which is a total return available on assets to which we add leverage into spread. Because spread is a extra money which is being generated on the by using the debt funds or border funds we multiplied by leverage. So if company has say 70 percent of outsiders fund that spread into leverage will give it that much of extra money to the owners that is why it is R N O A plus leverage into spread. Next is equity growth rate where we try to find what is a growth rate available to the equity. So we take net income minus dividend paid upon average common equity. So here what is being found is out of your profit if you distribute entire profit as dividend the numerator will be 0. If you say distribute half the profit as dividend then net profit minus half your net profit the remaining net profit is being reinvested for growth. That is why we find net income minus dividend paid and divided by the common equity. I hope there are lot of new terms but they are getting clear to you now. So this is a very special type of analysis which is known as dupe on analysis where we in detail look at the returns of the company and segregate them. Now here we will try to calculate now whatever we have discussed I hope you are clear you are comfortable with it. So this is already done but I will try to redo it for you so that it is more clear to you. So the first thing we want is N O A if you remember we will go there so that you can see it this is net operating assets where we will try to find the total assets minus operating current liabilities minus half of the deferred tax liabilities. So how will you calculate N O A now go back to balance sheet you know the formula now this is net operating assets. So I am sorry let us look at it once again to give it more clarity. So we are going to look at total assets minus operating current liabilities. So if you go to balance sheet you can readily see the total assets from this total assets we will only reduce the operating current liabilities. Now these are the total current liabilities look at them and tell me which are the operating current liabilities. So you have got current long term debt which is not operating liabilities. So loans will not be counted then you have got trade craters which is a operating current liability then other short term debt which could be treated as a operating current liability income tax payable perhaps will not be counted as a operating current liability then you have got other current liabilities which are counted. So total assets minus operating current liabilities and we will also try to get the deferred tax liability which is shown here. So minus as you know what we are going to minus is half of the deferred tax liability. So here you can see the deferred taxes half of this figure will be considered so in 2.5 so this is the figure of N O A I hope it is clear to you we will try to drag it down are you getting. There are different views some people even take the taxation figures into account which we have not taken I think it may be better to add even the taxes liability. So here you can see in our liabilities we have taken the trade craters we have also taken short term debt we have not taken income tax paid but let us add it. So this is the net operating assets second we want to know the operating current liabilities which we have already captured. So I suppose we can just copy it down so these are the operating current liabilities then second is SE SE you know is shareholders equity the figure will be readily available from the balance sheet. So this is the total shareholders equity. Next is NFO which if you remember is net financial obligations this is the special calculation which is done for new point analysis. So we try to calculate NFO as N O A minus SE we have just calculated or picked up the shareholders equity that is SE and we also know N O A so it is very easy for us to calculate now NFO. So net financial obligations signify something like total money payable to outsiders that is why it is called as financial obligation. Next is NO PAT which you are aware it is net operating profit after tax. So 1 minus tax so I think we have to first go to PNL account and look at the tax rate. If you go to PNL account you will see that income taxes and earning before tax we will try to relate it to calculate the tax rate. So you get around 0.32 for all the years so you can take 0.32 as a applicable rate for this company. Now for calculating NO PAT we need to know a bit and we will multiply it by 1 minus tax rate. So a bit is earning before interest and tax into it is 1 minus now here you can see in all these years the tax rate is around 0.325 so I have taken it as 1 minus 0.33. You can make a judgment some people can take it as 30 percent or 35 percent but since 33 percent is the closest rate so we have taken 1 minus 0.33. So this becomes your NO PAT. Now look at NI net income this figure will be readily available from profit and loss account so this is nothing but earning after tax. Now NFE next calculation this is the net financial expenses in simple terms it is something like asset interest paid but here we calculate it slightly differently we calculate it as NO PAT minus NI. So NO PAT is a total profit from operations but after tax from that we reduce the net income. So remaining becomes the amount which is paid for interest. Now what happens is whenever you pay interest you also get some tax benefit so here instead of calculating the total interest we have tried to look at the total operating profit minus applicable taxes. So if there would have been no borrowed funds this would have been the net profit from that we reduce the net profit to know the interest obligation. So which you can see is a pretty low figure I think net profit figure is this figure we have taken some other value that has caused some problem. So net income I will just replace if you go to this is the correct net income I got a doubt because we are seeing relatively a very low amount of NFE now it is somewhat correct are you getting me. So net income should be the net profit as is calculated here we have done that now. Now go to calculation of RNOA that is return on the assets which you are using RNOA formula again you can see this is return on net operating assets. So in Dupont analysis it is defined as no pat upon average NOA now you already know no pat we will divide it by average NOA. So for average we have to take 2 years figures so here we have taken these 2 years figures the last one is somewhat wrong I hope now it is clear. So we are trying to what we are trying to do is we are taking for RNOA the no pat which we have already calculated net profit after taxes but at operations level and we divided by the average of NOA for 2 years. So we have taken 2 years figure and divided it by 2 the last figure there is a problem because we do not have earlier years figure. So we are not taking average as far as 2.8 is concerned but now you can see it is almost a stable figure it is around 0.30 which is a good return on the assets which are used. Now let us try to look at leverage leverage we try to relate NFO upon AC. So NFO is like a outsider's liability which we divide by the shareholders funds. So NFO divided by AC so you can see that company has a high leverage relatively and earlier it was even more high if you remember earlier we have discussed the debt equity ratio this matches with that so 2.68 now it has somewhat gone down to 1.97. Next calculation we have to do is NBC in NBC we are looking at the net borrowing cost so we take it as NFE upon average of NFO. So NFE is nothing but the interest burden which we divide by NFO because NFO is the out go so it will come to around 0.03 but if we do averaging it will be somewhat a better word I hope so you understand here that it is around it shows that around 3 percent is an interest rate since this is an international company the interest rates are fairly low and this is after tax cost that is why it is the amount will be something like 3 percent we will do a little correction because instead of taking only year end figures we will try to take average of the 2 years figures it has not made any great difference it continues to be about 0.03. Now let us look at the spread so by spread we are trying to see how much extra profit the equity holders are getting so it is RNOA minus NBC which is now ready with us so you can see that company has a substantial advantage its return is 30 percent it has to pay just 3 percent to the outsiders so 26 percent is a spread and the final figure now ROE in ROE we try to get RNOA plus leverage into spread so RNOA will be anyway available to shareholders plus that is why ROE is really very high it is 0.81 percent and in 2008 it was as high as 100 percent this is the return available to the owners now almost all the figures are already calculated so this RNOA is what we have done we will just try to replicate now ROCE you are aware it is return on capital employed then we try to also link it to return on long term debt and equity and equity growth rate I think the other things we have done so we will not repeat equity growth rate is available here that is net income minus dividend paid upon average common equity so let us try to calculate it so net profit is what is the total money available to the company minus the dividend paid I am adding it because anyway the dividend figure is given in minus so net income divided by sorry net income minus dividend paid this is the numerator and we are going to divide it by you can see here what we are doing trying to do the average of common equity so which figure again will be available from the balance sheet so you can see here the common stock or shares that represents the common equity so 1.60 comes the rate because net income minus the dividend is fairly large figure divided by common equity right now I have not taken average because in the last year we do not have figures for the 2 years so this will be the figure so I think we will not go ahead into desegregation that you can do on your own but these calculations which were very important and that was a new learning to all of you which I think you have got so we have we will stop here and we have done today a complete analysis of one global company which the figures are as per US gap and I think that would have given you some more insights into how the ratios can be analysis and analyzed and particularly how Dupont analysis is done ok thank you so much so we will stop here.