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of profit a company generates with each dollar of shareholders' equity. For high growth
companies, return on Equity is high. Here, we see that Emami in 2015
showed a de-growth in returns as compared to 2014, but in 2016 the returns
have increased. ITC has showed a de-growth throughout the three year.
Falling ROE for three consecutive years is a problem for the company.
Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage, calculated
by dividing a companys total liabilities by its stockholders' equity. The D/E ratio indicates
how much debt a company is using to finance its assets relative to the amount of value
represented in shareholders equity. A lower D/E ratio indicates a high business stability. ITC
has a very low D/E ratio indicating a very high business stability. Emami also has a very low
debt to equity ratio in 2014 and 2015 but there is a significant increase in the D/E ratio
because the firm had raised around Rs 950 crore to partially fund the acquisition of Kesh
King for Rs 1,684 crore last year
Current Ratio signifies the ability of the company to meet its current liabilities in the short
term. Thus a higher current ratio is preferred from a lenders perspective. Both ITC and
Emami have a current ratio greater than 1 and less than 3 in the given financial year, which
indicates they are managing their working capital well and will easily be able to meet their
short term liabilities. In 2016, Emami faces a drop in the current ratio because they are
investing heavily in new products and making new acquisitions to reap in the promise of the
herbal age to compete with Patanjali.
Interest Coverage Ratio signifies the ability of a company to meet its interest obligations from
its revenues earned during the year. A high interest coverage ratio means better position of a
company to meet its financial obligations and also ensures a better security for lenders. Both
ITC and Emami have a very high interest coverage ratio which indicates a better ability of the
enterprise to fulfill its obligations to its lenders. ITC had a significant decrease in the interest
coverage ratio because it raised capital for its business expansion.
The fixed-asset turnover ratio is, in general, used by analysts to measure operating
performance .It implies the efficiency of management in utilizing its fixed assets and
generating revenues from it. A higher ratio is shows the greater efficiency of the
company in managing fixed-asset investments. In the above graph, the fixed asset
ratio of ITC has decreased consistently in the last three years while that of Emami has
increased year on year. Each year, the fixed asset ratio of Emami is greater
than that of ITC. Hence it can deduced that Emami is more efficiently
utilizing its fixed assets for generating revenue.
inventory turnover ratio measures the rate at which inventory is used over a
measurement period. It measures how fast a company is selling inventory and is generally
compared against industry averages. A low turnover implies weak sales and, therefore, excess
inventory, which is not good from a managements perspective. A high ratio implies either
strong sales and/or large discounts. It further results into higher operational efficiency which
a management desires of.In the above graph, Inventory turnover ratio of Emami is higher
than that of ITC for the last three years. Hence it can be interpreted that Emami is more
efficient than ITC in term of Inventory Turnover.
The
Debtors turnover ratio measures the capacity of a company to extend the credit as well
as collection of debts. A high debtors turnover ratio implies that either a company
operates on a cash basis or has an effective and efficient policy. Hence the high the
debtors turnover ratio, higher are the chances of management efficiency. A low ratio,
in a similar way, can also suggest a few things about a company, such as that the
company may have poor collecting processes, a bad credit policy or none at all, or bad
customers or customers with financial difficulty. In the above graph, debtors ratio of
Emami is increasing while that of ITC has first decreased and then increased a bit.
Overall the ratio of Emami each year is higher than that of ITC. Hence Emami shall
be the most efficient company in terms of debtors and credit policy.