India

Ratios- Colgate Ltd.

19 June 2011

Ratio Analysis
Income Statement
Gross Profit:-

Gross profits have been increasing by 3% every year from the base year

Gross profit margin

62%
60%

58%
56% 54% 52% 2006 2007 2008 2009 2010

The gross profit margin is between56% to 61% and is constantly improving Y-o-y, and is comparatively higher to other players in the industry. The gross profit margin is high because the sales are increasing to a greater extent as compared to the cost of goods sold.

EBITDA:EBITDA figures are decreasing initially by 5% and then increasing by 5% Y-o-y the decrease in EBITDA is due to a very high increase in cogs as compared to the sales for the year 2007 and then afterwards all expenses increase to a lesser extent as compared to the sales. Operating Profit (EBIT):The operating profit margin is fluctuating and that is because of a new expense VRS a part of Employee cost and Increases in Rates and taxes as part of Other expenses ,however it has improved considerably in the last year due to a reduction in expenses and has increased by 6% compared to the base year of 2006. PBT:Profit before tax fell in the beginning and then it has been increasing by 4% y-o-y which is caused due to decrease in depreciation. Its increased from 17% to 25%. Net Income:The net income has improved by 10%in 2010 from the base year 2006 which is due to decrease in deferred tax liability, so the company is performing better consistently.

Profit before tax showed a 48% growth based on the sale of intellectual property rights

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EPS:Page 1 of 5

India

Sector Review

09 May 2011

The EPS is increasing consistently and this is because of the increase in net income and a constant no of shares.

Horizontal Analysis
Net sales have increased consistently over the years. However, the growth rate is increasing or decreasing by 1 % on a y-o-y basis. Other Income was more than double in the year 2007 as compared to 2006 that was due to export duty drawback and increase in the service income; thereafter it has been increasing y-o-y gradually. The cost of goods sold increased largely in the year 2007 cause of increase in opening stock and purchase of finished goods, after that there is a steady increase in the COGS expenditure. The employee cost doubled in the year 2007 compared to 2006 due to the amount spent on voluntary retirement schemes given to the employees

The positives of decreasing material costs are nullified due to increase in mfg. expenses

Vertical Analysis
Cost of goods sold is the main driver for expenses contributing around 44% of the net sales and around 54% of the total expenses. Even the other expenses constitute to 30% of the net sales so the major contributors to the expenses are cost of goods sold and other expenses. Other expenses have been in the range of 30% to 34 % of the sales they vary in the range with an increase in the processing and fuel charges. The depreciation amount in the year 2007 was half of the amount in 2006 as machinery was sold.

Difference between the operating profit margin and net income margin is significantly less indicating that financing costs of the company are low. Effective Tax Rate: The effective tax rate is reducing y-o-y it has almost reduced from 27% in the base year to 13% in the year 2010. Dividend Payout Ratio: The dividend payout ratio is increasing for 2 years and then it is falling for 2 years so it has a fluctuating trend Dividend Tax Rate: Dividend tax rate was increasing for 2 years in the beginning and thereafter has remained constant at 17%.

Balance Sheet

Vertical Analysis
Major part of the capital is contributed by Equity, which forms 98-99% of total funds invested, debt contributes only negligibly. The composition of Reserves and Surplus are increasing consistently. It constituted almost 51% in 2006 and has now increased to 95% of total shareholders fund in 2010 Deferred tax liabilities are nil
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India

Sector Review

09 May 2011

A major part of the capital has been invested in the fixed Assets, which is good. Long term investments are showing a decreasing trend. they are more or less constant for an year till 2007 but are reducing to half every year thereafter. A major part of the current assets are the inventories and loans and advances which is 68% and cash and bank balance which comprise of nearly 28% of the total current assets. The remaining 4% is other current assets. Deferred tax asset increased by 3 times in the year 2007 as compared to the base year and then it remained more or less similar and further showed a decreasing trend in 2009 and again increased in 2010. Current Liabilities are also as high as the current assets and are increasing due to increase in provisions. Current Liabilities are higher than Current assets giving rise to a negative working capital. It means that the company is currently unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory). However it has improved significantly in 2010 and has turned positive, which is a good sign.

Debt & Interest Costs

The debt is almost constant in the range of 43 to 46 million The interest paid by the company is in the range of 23 to 33% which is quite high and has been increasing y-o-y.

Solvency Ratios

Current ratio The currents ratio is less than 1 in case of the company, however in most of the FMCG companies its similar so as per the industry it is proper and is improving considerably this is mainly because of the rise in cash and cash equivalents. Quick ratio The quick ratio is also less than 1 and also not improving to a great extent this is mainly due to constant increase in the inventories. Cash ratio The cash ratio is very less however it is rising steadily, this is due to improvement in the cash flows which is due to increase in cash generated from operating activities. The solvency ratios of the company are in line with the industry average

Cipla has a high current ratio driven by increased levels of inventory

Turnover Ratios
Lower days of receivables turnover, inventory turnover decrease cash conversion cycle

Receivables turnover:

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Sector Review

09 May 2011

Receivables turnover is around 153 times or approximately 2 days which is slightly higher than the industry average. This means that Colgate has tight credit policies. This might lead to loss of some customers as well. Inventory turnover: Inventory Turnover is normally calculated as the ratio of Cost of Goods Sold by average inventories. It denotes the number of times in a financial year that the inventory is converted to cash. It is around 7 to 8 times Payables turnover: Payables Turnover is 3 or approximately 141 days in 2007 which is comparatively higher and is becoming longer thereafter. This indicates that Colgate Ltd. has to pay suppliers at a slower rate than the rate at which customers pay them. This leads to reduction in the cash conversion cycle. Cash Conversion Cycle: The lower debtor collection period and higher creditor collection period has resulted into a negative cash conversion cycle, which is a very rare and desirable trend.

Operating Efficiency
Total asset turnover: Total asset turnover ratio measures the companys overall ability to generate revenues with a given set of assets. This ratio has been increasing for Colgate. It increased from 4.6 in 2006 to 7 in 2010.A higher ratio indicates better efficiency. Net fixed asset turnover: It measures how efficiently the company generates revenues from its investments in fixed assets. Generally a higher level of fixed assets turnover indicates a better management of fixed assets in generating revenues. This ratio decreased in the beginning but then again has risen. The equity turnover ratio has been rising a constant rate and has come up to 7.2 in 2010 from 4.6 in the base year 2006

Equity turnover:

Operating Profitability
Return on total capital: Return on total capital showed a 50% y-o-y increase this is a positive sign and Colgate will be looking forward to sustain this trend. However, one of the chief reasons for the increased returns is the lower level in the total debt and hence the capital employed which increased the returns. Return on total equity: Return on total equity has also been increasing at a faster rate for the year 2008 and 2009 it increased by 40% till 2009 and then it increased by 10%

Financial Leverage: Financial leverage measures the total amount of a companys assets relative to the equity capital. A higher ratio indicates better operational efficiency. Colgate Ltd. has shown a nearly consistent level of financial leverage with an average of 1. It can be expected to stay at a similar level.

Financial Risk Ratios

Debt to equity ratio:

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India

Sector Review

09 May 2011

It measures the amount of debt capital relative to the amount of equity capital. The ratio is been more or less constant at 0.2 on an average its due a constant level of debt maintained by the company. Debt ratio: The debt ratio measures the amount of companys capital contributed by debt. It totally depends on the company and the industry as different industries have different debt ratios. Colgate has a debt ratio of 0.1 as of 2010 i.e. 10% of the total capital is contributed by debt. The remaining 90% is contributed by equity. Interest coverage ratio: It is the number of times the companys EBIT can cover the interest payments. It is of primary interest to the creditors or suppliers. The interest ratio for Colgate is around 290 times which is due to lower amount on debt.

Cash Flow Ratios

Cash Flow from Operations: Cash flow from operations has shown a fluctuating movement it fell in the year 2007 and has been rising thereafter. The fall in the year 2007 was mainly due to lower depreciation amount and also the fluctuations in cash flow from operations are due to fluctuations in working capital and PBT. Cash Flow from Investments: Cash flow in investing activities has consistently increased .One of the major reason for the increase in the cash from investing activity is due to sale of investment and reduction in expenditure on fixed assets. Cash Flow from Financing: Cash flow from financing activity is negative and is increasing further due to repayment of debt or increasing in the dividend and dividend tax paid. The cash flow from financing activity is leading to a reduction in the cash and the bank balance for the year ending.

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