Financial Analysis by Return on Equity (ROE) and Return on Asset (ROA) - A Comparative Study of HUL and ITC

Abstract

The financial performance of the top two companies of the FMCG sector HUL and ITC are analyzed in this research paper by using the two most popular financial tools of analysis i.e., ROE and ROA. Similar to the DuPont method, components of Return on Equity (ROE) and Return on Asset (ROA) are segregated to do the analysis of financial performance and to accomplish the objective. To calculate ROE and ROA, ratios such as net profit ratio (NPR), total asset turnover ratio (TATR), and equity multiplier (EQM) will be used. It is observed that the use of financial leverage was mainly responsible for the whole decrease in return on equity (ROE). In terms of return on equity, we found that the Asset Turnover Ratio increases somewhat, while in the case of ITC, the ratio either remains the same or slightly decreases in value. As a result, HUL’s total asset turnover ratio (TATR) is greater than that of ITC, suggesting that HUL is more efficient in its asset use. We were able to demonstrate statistically, via the use of the One-way Anova test, that there is a significant meaningful association among the ratios.

Keywords: Financial Analysis, Return on Equity (ROE), Return on Asset (ROA), ITC, HUL, Du Pont Analysis