Performance Analysis of ICC (Indian Card Clothing Co. Ltd.)
with Its Competitor


By

Dr. Roop Kishore Singhal
FCMA
Assistant Professor
Madhuri D. Rane
MBA F.Y. Finance
Sinhgad Institute of Management
Pune
 


ABSTRACT

The purpose of performance analysis is to know the operational efficiency and profitability of the company. Performance analysis does overall analysis of the company and helps to know the financial position of the company. A company's financial position tells investors about its general well-being. Financial management involves planning and forecasting financials based on the strategic goals of the company and regularly reviewing actual performance against the forecasts, performance analysis helps in this process. Financial statements are referred for the purpose of performance analysis. Tool used is ratio analysis. Ratios give quantitative analysis of information contained in company's financial statements as balance sheet, profit and loss account, income statement and cash flow statement. It is used to evaluate various aspects of a company's operating and financial performance as efficiency, liquidity, profitability and solvency. The trend of these ratios over time is studied to check whether they are improving or deteriorating. Ratios are also compared across different companies in the same sector to see how they stack up, and to get an idea of comparative valuations. Ratio analysis is a cornerstone of fundamental analysis. It also helps investors, managers, lenders, employees, suppliers and customers. Analytical research is used for this purpose. Secondary data which is already available in the annual reports of the company, P&L account, records and balance sheet is used. Sampling size is last five year data. The Indian Card Clothing Co. Ltd. is in existence from 1955. The Indian Card Clothing Co. Ltd. (ICCL) is engaged in the manufacture of flexible and metallic card clothing. The company's manufacturing plants are located at Pimpri (Maharashtra) and Nalagarh (Himachal Pradesh). The company offers basic two products; Tops and Fillets. Their major competitor is Lakshmi Card Clothing Co. Ltd.

Key Words: Liquidity ratio, Performance analysis, Profit & Loss account, Profitability ratio, Ratio analysis, Solvency ratio.

INTRODUCTION

A sustainable business and mission requires effective planning and financial management. In performance analysis, ratio analysis is useful management tools that will improves understanding of financial results and trends over time and provide key indicators of financial performance. The main objective of this project is to know and gain practical knowledge in the field of Finance and to learn about various parameters on which financial health of a company is dependent. Managers need ratio analysis to pinpoint strengths and weaknesses from which strategies and initiatives can be formed. It also helped to understand the decision making strategy, which proves to be very essential before starting actual professional career.  In performance analysis, the main objective is to determine financial health of a company. The trend of various ratios over time is studied to check whether company is improving or deteriorating. Ratios are also helpful to know the position of a company in the industry. Ratios are compared across different companies in the same sector to see how to stack up and to get an idea of comparative valuations. Ratio analysis can provide an early warning of a potential improvement or deterioration in a company's financial situation or performance. As well, ratios are usually only comparable across companies in the same sector since an acceptable ratio in one industry may be regarded as too high in another.

The objective of this research is to measure performance of the organization with respect to various financial ratios and to compare the financial performance of the organization with its competitor.  Ratios are one of the most important logical to express that calculations have importance. It puts light on various aspects and these numbers help in performing the task of management. We can use ratio analysis to tell whether the business,

* Is profitable,
* Has enough liquid cash to pay its bills and debts,
* Could be paying its employees higher wages, remuneration or so on,
* Is able to pay its taxes ,
* Is using its assets efficiently or not,
* Has a gearing problem or everything is fine,
* Is a candidate for being bought by another company or investor and more,
* Where the company stands with its competitors.

But as it is obvious there are many different aspects that these ratios can demonstrate. So for using them first we have to decide what we want to know, then we can decide which ratios we need and them we must begin to calculate them.

REVIEW OF LITERATURE

Many studies have described multi-facets of financial management in order to study the profitability of an organization. Research papers have educated that there are multiples of variables, which contribute into play varying degree of influence on the profitability of the organization. Therefore it is desirable for financial managers to gauge the prime variables exerting substantial influence on the profitability. Following two papers were referred to carry out this project, "An example of the use of financial ratio analysis: the case of Motorola" by H. W. Collier(2007), University of Wollongong.In this paper, they have demonstrated the use of actual financial data for financial ratio analysis. The objective is to show how to compute ratios for an actual company. This paper demonstrates the difficulties in applying the principles of financial ratio analysis when the data are not homogenous as is the case in textbook examples. Therefore in this paper, financial ratio analysis is complicated for companies that do not readily fall into a single industry. Motorola has 6 operating units that fall into several industries with two industries accounting for most of the sales- telecommunication and semi-conductor. However, a more relevant picture of the operating characteristics of Motorola is achieved by increasing the complexity of the analysis, that is, by comparing Motorola to both industries."Financial ratio analysis as a determinant of profitability in Nigerian Pharmaceutical industry" by Department of Accountancy, faculty of Management and Social Science, Caritas University Amorji-Nike, Enugu State, Nigeria. In this paper, a study is done to examine the relationship between the financial ratio analysis and profitability of the Nigerian Pharmaceutical industry. These financial ratio analyses have immense potentials to help organizations in improving their revenue generation ability as well as minimization of costs. Hence, the management of the companies should maintain a high debtor's turnover ratio because it will help in increasing their investment by reinvesting the funds collected from their customers. The inventory of the company should be checked and monitored frequently by the management in order to prevent over storage or scarcity of inventories.

RESEARCH METHODOLOGY

"Performance Analysis of ICC with its Competitor" is considered as an analytical research. Secondary data is used for this purpose. The secondary data are those which have already collected and stored. Secondary data are easily available from records, annual reports of the company etc. It will save the time, money and efforts to collect the data. The major source of data for this project was collected through annual reports; profit and loss account of 5 year period from 2010-2014 & some more information was collected from internet and text sources.

Sampling unit : Financial Statements
Sampling Size: Last five year financial statements
Financial tool: Ratio analysis.

1. Net working capital: An analysis of net working capital will be very helpful for knowing the operational efficiency of the company. The following table provides the data relating to the net working capital of ICC.

Net Working Capital (NWC) = Current Assets Current Liabilities

2. Current ratio: Current ratio may be defined as relationship between current assets and current liabilities. It is also called as "cash asset ratio". It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. It is calculated by dividing the total of the current assets by total of the current liabilities.

Current Ratio= Current Assets / Current Liabilities

3. Quick ratio/ Acid test ratio: Acid test ratio is defined as a stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The true liquidity refers to the ability of a firm to pay its short term obligations as and when they become due. The quick ratio is far more strenuous than the working capital ratio, primarily because of the working capital ratio allows for the inventory assets.

Quick Ratio= (Current Assets - Inventory) / Current Liabilities

4. Inventory turnover ratio: This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Inventory turnover ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not.

ITR= Sales / Average Inventory

5. Debtor's turnover ratio: An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The debt turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. It indicates the velocity of debt collection of a firm. In simple words, it indicates the number of times average debtors (receivables) are turned over during a year.

D.T.R = Sales / Average Debtors

6. Creditor's turnover ratio: Creditor's turnover ratio is an accounting liquidity metric that evaluates how fast a company pays off its creditors (suppliers). The ratio shows how many times in a given period (typically one year) a company pays its average accounts payable. An accounts payable turnover ratio measures the number of times as company pays its suppliers during a specific accounting period.

Creditor's Turnover Ratio = Total Purchases / Average Accounts Payable

There is no single line item that tells how much a company purchased in a year. The cost of sales in income statement shows what was sold, but the company may have purchased either more or less than it eventually sold. The result would either an increase or a decrease in inventory. To calculate the purchases made, the cost of goods sold is adjusted by change in inventory as follows,

Purchases = Cost Of Sales + Closing Inventory Opening Inventory

7. Return on assets: The profitability is measured in terms of the relationship between net profits and assets. The ROA may also be called as profit-to-asset ratio.

Return on Assets = (Net Profit after Taxes and Interest / Total Assets)*100

8. Net profit ratio: Net profit ratio (NP Ratio) is a popular profitability ratio that shows a relationship between net profit after tax and net sales. It is computed by dividing the net profit (after tax) by net sales.

Net Profit (NP) Ratio = (Net Profit after Tax / Net Sales)* 100

ANALYSIS AND INTERPRETATION OF CASE

1. Net Working Capital:

Year

Current Asset

Current Liabilities

NWC

ICC

LCC

ICC

LCC

ICC

LCC

2010-11

2756.53

8453.41

2440.65

(2336.82)

315.87

10790.23

2011-12

2681.56

9862.06

1513.01

(1742.95)

1168.55

11605.01

2012-13

2916.34

7553.66

2694.35

7328.21

221.98

225.45

2013-14

4490.27

7505.09

2358.24

7553.15

2132.02

(48.06)

2014-15

3677.08

-

2110.42

-

1566.65

-


Interpretation: It can be seen that in ICC net working capital was lowest in year 2012-13 and highest in 2013-14. From these changes it can be interpreted that investments and capital expenditure for the year 2013-14 were major. In 2014-15, the value was decreased to some extent but ICC has always sufficient working capital available to pay off its current liabilities.

While, LCC had highest working capital in year 2011-12 and decreased over the period of time going in negative value. This indicates LCC lags in managing working capital and not able to pay its current liabilities. ICC has benefit in this area.

2. Current Ratio:

Year

Current Asset

Current Liabilities

Current Ratio

ICC

LCC

ICC

LCC

ICC

LCC

2010-11

2756.53

8453.41

2440.65

(2336.82)

1.13

(3.61)

2011-12

2681.56

9862.06

1513.01

(1742.95)

1.77

(5.65)

2012-13

2916.34

7553.66

2694.35

7328.21

1.08

1.03

2013-14

4490.27

7505.09

2358.24

7553.15

1.90

0.99

2014-15

3677.08

-

2110.42

-

1.74

-


Interpretation: Acceptable current ratio value varies from industry to industry. Generally, a current ratio of 2:1 is considered to be acceptable. The higher the current ratio is, the more capable the company is to pay its obligations. From the values above of ICC, it is seen that year 2013-14 and 2014-15 shows an increase current ratio due to increase in current assets and decrease in current liabilities. This indicates ICC is improving the standard value for last two years.

LCC had negative values in year 2010-11 and 2011-12 but improved in year 2012-13 and 2013-14 but still less than ICC. This shows ICC has better ability to pay back its short-term liabilities (debts and payables) with its short term assets (cash, inventory, receivables). For LCC, failure to pay loans on time may limit their future access to credit and therefore ability to leverage operations and growth.

3. Quick Ratio:

Year

Current Asset

Inventory

Current Liabilities

Quick Ratio

ICC

LCC

ICC

LCC

ICC

LCC

ICC

LCC

2010-11

2756.53

8453.41

1128.45

2273.23

2440.65

(2336.82)

0.67

(2.64)

2011-12

2681.56

9862.06

1314.91

3228.51

1513.01

(1742.95)

0.90

(3.80)

2012-13

2916.34

7553.66

1659.61

3755.70

2694.35

7328.21

0.47

0.51

2013-14

4490.27

7505.09

1331.63

4570.89

2358.24

7553.15

1.34

0.38

2014-15

3677.08

-

1315.35

-

2110.42

-

1.12

-


Interpretation: Ideally quick ratio should be 1:1. Quick ratio higher than 1:1 indicates that the business can meet its current financial obligations with the available quick funds on hand. By observing the quick ratio of last two years of ICC, it can be concluded that the firm has the ability to pay short term debts immediately.

And from the graph of company LCC, it is seen that company was tied up with slow moving and unsaleable inventory. Though they've improved it in last two years 2012-14, still need to be looked at with extreme caution.

4. Inventory Turnover Ratio:

Year

Net Sales

Avg. Inventory

Inventory Turnover Ratio

ICC

LCC

ICC

LCC

ICC

LCC

2010-11

4912.93

10137.20

1076.21

3983.08

4.57

2.55

2011-12

6769.35

9384.94

1221.68

5501.74

5.54

1.71

2012-13

6237.97

11031.15

1487.26

6984.21

4.19

1.58

2013-14

6924.08

12232.84

1495.62

8326.59

4.63

1.47

2014-15

6783.76

-

1323.49

-

5.13

-


Interpretation: It shows how rapidly the inventory is turning into receivables through sales. For ICC, in year 2012-13 the firm has too low inventory turnover ratio that may be result of excessive inventory levels, so firm may incur high carrying cost. And in the year 2013-14 and 2014-15 the firm has maintained sufficient stock turnover ratio, because the firm has neither a very high nor a very low stock turnover ratio, it should be at satisfactory level.

From the graph it is seen that for LCC, inventory turnover ratio is decreasing over the period of time, indicating company don't have ability to meet customer demands and cop up with requirements. A low turnover of LCC implies poor sales and excess inventory.

5. Debtor's Turnover Ratio:

Year

Net Sales

Average Debtors

Debtors Turnover Ratio

ICC

LCC

ICC

LCC

ICC

LCC

2010-11

4912.93

10137.20

839.82

3827.24

5.85

2.65

2011-12

6769.35

9384.94

890.45

3300.3

7.60

2.84

2012-13

6237.97

11031.15

962.23

1866.17

6.48

5.91

2013-14

6924.08

12232.84

1113.06

3385.25

6.22

3.61

2014-15

6783.76

-

1085.16

-

6.25

-


Interpretation: The higher value of debtor turnover ratio, the more efficient is the management of debtors or more liquid the debtors are. It is reliable measure of the time of cash flow from credit sales. ICC has maintained debtor's turnover ratio over the study period of 5 years while it was highest in year 2011-12 due to equal balance between sales and debtors. It shows debtors get converted into cash 7.6 times in a year.

LCC has less debtor's turnover ratio throughout study period than ICC. It indicates that ICC operates on a cash basis or that its extension of credit and collection of debt is efficient and LCC should re-access its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.

6. Creditor's Turnover Ratio:

Year

Cost of Sales

Closing Inventory

Opening Inventory

Purchases

ICC

LCC

ICC

LCC

ICC

LCC

ICC

LCC

2010-11

5641.51

7938.75

1128.91

2273.23

1023.98

1709.85

5745.98

8502.13

2011-12

5218.63

7930.75

1314.91

3228.51

1128.45

2273.23

5405.09

8886.03

2012-13

5130.63

4439.42

1659.61

3755.7

1314.91

3228.51

5475.33

4966.61

2013-14

6240.6

5280.76

1331.63

4570.89

1659.61

3755.7

5912.62

6095.95

2014-15

6447.31

-

1315.35

-

1331.63

-

6431.03

-


Year

Purchases

Average Creditors

Creditors Turnover Ratio

ICC

LCC

ICC

LCC

ICC

LCC

2010-11

5745.98

8502.13

192.90

(244.01)

29.79

(34.84)

2011-12

5405.09

8886.03

497.56

(566.93)

10.86

(15.67)

2012-13

5475.33

4966.61

417.12

776.211

13.13

6.39

2013-14

5912.62

6095.95

532.02

905.71

11.11

6.73

2014-15

6431.03

-

351.62

-

18.2

-


Interpretation: From the above values, it is seen that creditor's turnover ratio is varying over the years; in year 2010-11 it was maximum because of lower trade payables which signifies that the relative time between purchase of goods and services and payment for them is short. Generally higher creditor turnover ratio is considered as good because it will decrease the average payment period. Creditors turnover ratios was declined sharply over the year 2011-14 but it was improved in last year 2014-15 which shows that the ICC have been making prompt payments to the creditors. But LCC is taking longer to pay off its suppliers as seen from the values.

7. Return on Assets (ROA):

Year

Net Profit after Taxes and Interest

Total Assets

ROA (%)

ICC

LCC

ICC

LCC

ICC

LCC

2010-11

223.91

1440.88

9116.55

11386.40

2.45

12.65

2011-12

1123.76

1223.82

12232.66

13385.96

9.18

9.14

2012-13

463.33

739.96

13436.73

14577.08

3.44

5.07

2013-14

236.25

754.01

13107.45

14197.7

1.80

5.31

2014-15

(382.80)

-

12122.23

-

(3.15)

-


Interpretation: If a company can generate more sales with fewer assets it has a higher return on assets ratio which tells that the company is using its assets efficiently. From the graph it is seen that ROA of ICC has been decreasing over the period of study and it is lowest in the last year.

LCC has higher value of ROA ratio than ICC. Hence, it shows that ICC is facing problems of higher degree of leverage (more debts), therefore higher interest expense and lower net income. ICC needs to look out for decrease in debts and increase in net income.

8.
Net Profit Ratio:

Year

Net Profit After Tax

Net Sales

Net Profit Ratio (%)

ICC

LCC

ICC

LCC

ICC

LCC

2010-11

223.91

1440.88

4912.93

10137.20

4.55

14.21

2011-12

1123.76

1226.82

6769.35

9384.94

16.60

13.07

2012-13

463.33

739.96

6237.97

11031.15

7.42

6.70

2013-14

236.25

754.01

6924.08

12232.84

3.41

6.16

2014-15

(382.80)

-

6783.76

-

(5.64)

-


Interpretation:
Net profit margin is an indicator of how efficient a company is and how well it controls its costs. The higher the margin is, the more efficient the company is in converting revenue into actual profit. ICC's net profit ratio for year 2011-12 was increased as compared to previous year, but it again decreased in next 3 years and it was lowest in the last year showing negative value.

ICC had reduced production line by removing two products which lead to such negative profits/loss. LCC has benefit in this area. They have more net profits than ICC.

CONCLUSION:

The company (ICC) has well maintained liquidity position and good utilization of working capital. The company's overall position is average. Particularly the current year's loss should be recovered. The efficiency of the company is not too high. The company has benefits in other areas than its competitor (LCC). ICC has good liquidity as both current ratio and quick ratio are better as compared to the standard. Return on asset ratio is fluctuating over the period of study but is negative in current year due to losses while same ratio for LCC is decreasing over the study but shows better relationship between net profits and assets. The working capital position of ICC is sound than LCC and the various sources through which it is found are optimal. The inventory management of ICC is better than LCC. But the inventory of LCC has decreased and the decrease is mainly due to lesser lead time of imported parts and a lower work-in-progress since net operating cycle is long. ICC's creditor's payment period is much lesser than debtor's collection period, which is the main reason of low amount of cash and bank balance. But ICC is still better than LCC in creditor's payment period and debtor's collection period.

ICC has accumulated losses at the end of the financial year and it has incurred cash losses in the current financial year, indicates poor financial soundness of the company. The loss is due to removal of two products from the production line of ICC. LCC has only benefit in net profits than ICC while in other parameters of financial soundness of the company ICC is leading. As ICC has accumulated losses in the last year, they should work on reducing losses by improving plant efficiency and productivity. LCC being located at Himachal Pradesh, ICC should concentrate on targeting more customers from Maharashtra than Himachal Pradesh which will reduce their transportation cost. As well as they should lookout for more suppliers from nearby area. Return on investment is fluctuating every year.ICC has to make efforts to increase it by reducing administration, selling and other expenses. It is suggested ICC should increase the credit period, which will help them in increasing the turnover without affecting the working capital of the company.  Holding of excessive and insufficient stock must be avoided by ICC as it results in lost sales and delays for customers.ICC should avoid over purchasing as it could lead to liquidity problems. ICC should focus on profit maximization as it leads to increase in the earning per share, investment and working capital. Hence, the outsiders will also be interested to invest. ICC should target mills with the latest generation of carding machines.

BIBLIOGRAPHY

* Financial management - M.Y. Khan & P.K. Jain, chapter 7: Financial Statements Analysis - Page no: 7.1-7.73
* Financial management - I.M. Pande - Page no: 170-210
* Financial Management - Prasanna Chandra - Third edition, chapter 3: Financial Analysis and Planning- Page no.119-15
* "An example of the use of financial ratio analysis: the case of Motorola" by H. W. Collier(2007), University of Wollongong.
* "Financial ratio analysis as a determinant of profitability in Nigerian Pharmaceutical industry" by Department of Accountancy, faculty of Management and Social Science, Caritas University Amorji-Nike, Enugu State, Nigeria.

Websites:

http://www.sterlitetechnologies.com/
http://www.studyfinance.com/lesson/workcap/
http://www.investopedia.com/terms/c/currentratio.asp
http://www.prenhall.com/divisions/bp/app/cfl/RA/RatioAnalysis.html
http://www.investopedia.com/terms/c/quickratio.asp
http://www.investopedia.com/terms/c/networkingcapitalratio.asp
http://www.investopedia.com/terms/c/netprofitratio.asp
http://www.investopedia.com/terms/c/returnoncapitalemployedratio.asp
http://www.investopedia.com/terms/c/netoperatingcycleratio.asp
http://www.cardindia.com
http://in.reuters.com/finance/stocks/companyProfile?symbol=ICRD.NS
 


Dr. Roop Kishore Singhal
FCMA
Assistant Professor
Madhuri D. Rane
MBA F.Y. Finance
Sinhgad Institute of Management
Pune
 

Source: E-mail April 9, 2016

          

Articles No. 1-99 / Articles No. 100-199 / Articles No. 200-299 / Articles No. 300-399 / Articles No. 400-499 / Articles No. 500-599
Articles No. 600-699 / Articles No. 700-799 / Articles No. 800-899 / Articles No. 900-1000 / Articles No. 1001-1100
Articles No. 1101-1200 / Articles No. 1201-1300 / Articles No. 1301-1400 / Articles No. 1401-1500 / Articles No. 1501-1600
Articles No. 1601 Onward / Faculty Column Main Page

 

 

Important Note :
Site Best Viewed in
Internet Explorer OR Opera
in 1024x768 pixels
Browser text size : Medium