Profitability analysis of dabur nepal

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Profitability Analysis of Dabur Nepal

Seminar in Working Capital Management

Chhitiz ShresthaBBA-BI ‘B’

Symbol no: 10450077Ace Institute of Management

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Introduction to Dabur Nepal

Dabur Nepal Private Limited was established as an Independent Group Company in 1992

CEO: Mr. Udyan Ganguly General Products:

Health Care• Dabur Chyawanprash• Dabur Honey

Personal Care• Dabur Amla Hair Oil• Vatika Shampoo

Food• Real Juice• Homemade Cooking Paste

Annual Turnover: 52142.18 lacs (Approx.)

Total Assets: 23784.33 lacs (Approx.)


Introduction to Dabur Nepal

Estd.in198

9

Started with the prodn. of oil,

dantmanjan & other herbal

products

1992

Bought 300 acres

plot in Banepa for

Nursery

Won the best

exporter award

Increased

turnover by 19 %

Best manufacturin

g & marketing company

Certified for

HACCP

SAPFirst

FMCG to launch

its online

shopping portal

19941998

20022004

20062009

2012


Working Capital Management

WCM is a managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other

Working capital requirement decides the liquidity and profitability of a firm

Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses

Key Aspects include, Liquidity Leverage Profitability Cash Conversion Cycle Size of the Firm


Objectives of the Study

To analyze the relationship between Working Capital Efficiency and Profitability in Dabur Nepal

To analyze the relationship between Liquidity and Profitability in Dabur Nepal

To examine the relationship between Liquidity and Leverage of Dabur Nepal

To examine the relationship between the size of the firm and profitability of Dabur Nepal


Issues

The working capital policy is the firm’s policy about its working capital level and how its working capital should be financed… decisions about how much to keep in its cash account, what level of inventory to maintain, and how much to allow receivables to build up” (Danh, 1999)

New Zealand Department of Treasury (2007) concluded that operating with more working capital than is necessary leads to over-investment which represents an unnecessary cost

Vijaykumar and Venkatachalam (1995) concluded that liquidity was negatively associated with profitability

Shin and Soeven (1998) and Koperunthevi (2010) found a negative relationship between cash conversion cycle and profitability

Koperunthevi (2010) concluded that the working capital management very much influences profitability of manufacturing companies and increase in the cash conversion cycle leads to less profitability.


Methodology

Population: 18 manufacturing companies listed in the Nepal Stock Exchange(NEPSE) market

Sample: 1 sample company Observation: 5 Study Period: 2006-2010 (5 years) Data Extraction: Use of many secondary data,

mainly the Annual Reports Balance Sheets Income Statements

Techniques: Descriptive Statistics, Correlation Analysis and Regression Analysis

Tools: MS - Excel


Variables

Return on Assets (ROA) = Net Profit/ Total Assets Return on Equity (ROE) = Net Profit/ Total Equity Current Ratio = Current Assets / Current Liabilities Quick Ratio = (Current Assets – Inventories) /

Current Liabilities Accounts Receivable Period (ARP) = (Accounts

Receivable x 365) / Sales Inventories Turnover Period (ITP) = (Inventories x

365) / Cost of Goods Sold Account Payable Period (APP) = (Accounts Payable

x 365) / Cost of Goods Sold Cash Conversion Cycle (CCC) = (ITP + ARP – APP) Debt Ratio (DR) = Total Debt/ Total Assets Size of the Firm = ln (Total Sales)


Study Models

Current Ratio

ROA

ROE

Model 2ROA = α + β1QR+ β2CR+ β3Size+€

Model 1CR = α + β1ROE+ β2DR+ β3CCC+€ Model 3

ROE = α + β1ITP+ β2APP+ β3ARP+€


Statistical Result and Analysis

Performance of Dabur Nepal


Liquidity

2006 2007 2008 2009 2010

2.025

2.710

1.621 1.618

2.794

Current Ratio

Current Ratio


Cash Conversion Cycle

2006 2007 2008 2009 2010

32.651 34.42031.050

24.627

49.522




Profitability

2006 2007 2008 2009 2010

15.4% 14.6%

27.0% 29.4%35.6%

ROA

ROA


Leverage

2006 2007 2008 2009 2010

0.169 0.140

0.413 0.389

0.262

Debt Ratio

Debt Ratio


Size of the Firm

2006 2007 2008 2009 2010

9.8739.998

10.10510.211 10.227

Size of the Firm

Size of the Firm



Descriptive Statistics &Correlation Analysis


Descriptive Statistics

Current Ratio

Quick Ratio

ROA ROE Debt Ratio

ITP APP ARP CCC Size

Mean 2.154 0.977 0.244 0.759 0.275 107.587

112.756

39.623 34.454 10.083

Standard Error

0.256 0.141 0.041 0.007 0.056 8.567 8.699 4.049 4.114 0.067

Median 2.025 0.870 0.270 0.765 0.262 101.172

117.718

36.276 32.651 10.105

Standard Deviation

0.572 0.315 0.092 0.017 0.124 19.155 19.451 9.054 9.198 0.149

Minimum 1.618 0.762 0.146 0.733 0.140 93.200 90.721 28.275 24.627 9.873

Maximum 2.794 1.528 0.356 0.774 0.413 141.050

136.674

50.117 49.522 10.227


Correlation Analysis

Current Ratio

Quick Ratio

ROA ROE Debt Ratio

ITP APP RP CCC Size

Current Ratio

1.000

Quick Ratio

0.634 1.000

ROA -0.058 -0.673 1.000ROE 0.314 -0.054 -0.103 1.000

Debt Ratio

-0.719 -0.754 0.675 -0.359 1.000

ITP -0.134 -0.244 -0.371 0.612 -0.372 1.000APP -0.798 -0.478 -0.310 -0.006 0.213 0.665 1.000

ARP -0.613 -0.407 0.502 -0.690 0.890 -0.677 0.035 1.000

CCC 0.805 0.102 0.377 0.608 -0.348 0.010 -0.696 -0.500 1.000

Size -0.024 -0.449 0.923 -0.426 0.669 -0.667 -0.448 0.674 0.223

1.000



Regression Analysis


Model 1

Here, liquidity (current ratio) is dependent variable. The Cash Conversion Cycle, Debt Ratio and ROE are independent variables

This means that 97% (approx) change in the dependent variable is explained by the change in the other 3 dependent variables

19% is the adjustment factor for the accuracy of the data

Positive changes in the CCC would increase Current Ratio by 11.798 units

ROE is negatively related with Current Ratio

The Debt ratio is also negatively correlated with Current Ratio by 2.617 units

The p-values of all CCC, ROE and Debt ratio have a p-value greater than 0.05

Regression StatisticsMultiple R 0.99R Square 0.97Adjusted R Square 0.88Standard Error 0.19Observations 5.00

Coefficients

Standard Error

t Stat P-value

Intercept

11.798 5.523 2.136 0.279

CCC 0.053 0.014 3.944 0.158ROE -14.179 7.520 -1.885 0.310Debt Ratio

-2.617 0.851 -3.074 0.200


Model 2

In this model, ROA, a measure of profitability is the dependent variable and the independent variables are Quick Ratio, Current Ratio and the Size of the Firm

99% (approx) change in the dependent variables are explained by the change in the other 3 dependent variables

At a level of 2%, which is the adjustment factor for the accuracy of the data

With negative fluctuation in the profitability measure, Quick Ratio would increase by -0.17

Current Ratio also seems to have a positive relationship with ROA

The size of the firm is positively correlated with ROE as well.

The level of risk present in this model is 0.02, i.e. 2%.

Regression StatisticsMultiple R 1.00R Square 0.99Adjusted R Square 0.96Standard Error 0.02Observations 5.00

Coefficients

Standard Error

t Stat P-value

Intercept -3.873 0.744 -5.203 0.121Quick Ratio -0.168 0.045 -3.749 0.166Current Ratio 0.052 0.022 2.351 0.256Size of the Firm

0.413 0.073 5.657 0.111


Model 3

In this model the ROE is the dependent variable and the other independent variables are inventory turnover period, account payable period and account receivable period

74% change in the dependent variables is explained by the change in the other 3 dependent variables

2% is the adjustment factor for the accuracy of the data

Positive changes in the ITP would increase ROE by 0.017 units

The APP is negatively related with ROE

Account receivable period is positively correlated with ROE

Level of risk presented in this model is 0.02, i.e. 2%.

Regression StatisticsMultiple R 0.86R Square 0.74Adjusted R Square -0.05Standard Error 0.02Observations 5.00

Coefficients

Standard Error

t Stat P-value

Intercept 0.653 0.166 3.931 0.159ITP 0.002 0.002 1.001 0.500APP -0.001 0.001 -

0.9250.525

ARP 0.001 0.003 0.473 0.719


Conclusion

Dabur Nepal has significant Return of Assets as well. This is reflected in increasing profitability of Dabur Nepal. Average ROA is 0.244 (Approx)

Leverage has negative correlation with liquidity as shown by negative correlation with Quick ratio and Current Ratio at -0.719 and -0.754 respectively.

ROA, being a measure of profitability shows a negative correlation with both measures of liquidity, Current ratio as well as quick ratio, in -0.058 and -0.673.

The Level of debt in Dabur Nepal had reached high levels some years ago, yet it has regained a better position recently. Average debt level lies at 0.275 (Approx)

The size of the firm is increasing annually due to rise in sales of various products offered by Dabur Nepal. The Average size of the firm relative to its level of sales is

10.083 (Approx)


Conclusion

Cash Conversion Cycle and Profitability: Positive Relationship

Liquidity and Profitability : Negative Relationship

Liquidity and Leverage : Negative Relationship Size of the firm and Profitability : Positive

Relationship

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Profitability analysis of dabur nepal

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