Attribution Non-Commercial (BY-NC)

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Attribution Non-Commercial (BY-NC)

- Ratio Analysis
- Ratio Analysis
- Billabong Case Study
- Ratio Analysis
- Nestle Ratio Analysis
- Bextex Ltd Report (Ratio Analysis)
- Ratio van
- Notes
- Fundamentals Spreadsheet
- salvo-far
- Ratio Calculations (Worksheet)
- akpi (2)
- Company Profile
- klbf
- Apx Tannery
- Ankit+Project
- Max's Ratio Analysis
- Indian Oil Corporation Project 2
- Performance of beximco
- _0951cac979f3932877fde22564672b99_Slides-4.4

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1. Liquidity ratios: Liquidity ratios measure the firm’s ability to fulfill short-

term commitment out o its liquid assets. Assets are liquid if they are either cash

or relatively easy to convert into cash. Short term creditors are generally very

interested in the liquidity ratios. Two commonly used liquidity ratios are

discussed in this season.

A. Current Ratio: This ratio measures the firm’s ability to meet its short-

term obligations. Current ratio is defined as

and inventories. Current liabilities consist of sundry creditors, bill payable, bank

loans, provision for taxation, proposed dividend and outstanding expenses.

Generally, the higher the current ratio more liquid the firm is considered to be. A

current ratio of 2:1 should be considered as standard.

B. Acid test Ratio or quick ratio: this ratio measures the ability of a

company to meet its immediate liabilities. Acid test ratio is calculated as

follows :

= quick assets/ current liabilities

Quick assets are cash and near cash assets like debtors, bills,

receivable, and marketable securities which can readily be converted

into cash. While calculating this ratio inventories are excluded from

quick assets because these are not often converted into cash

sufficiently quickly to help pay creditors. A ratio of 1:1 usually

considered satisfactory.

2. Activity Ratios: The second group of ratios, the activity ratio, measures how

effectively the firm is managing its assets. If a company has excessive

investments in assets, then its operating assets and capital will be unduly high

which will reduce its free cash flow and its stock price. On the other hand, if a

company does not have enough assets, it will lose sales, which will hurt

profitability, free cash flow and the stock price. Therefore it is important to have

the right amount invested in assets. Ratios that analyze the different types of

assets are described in this section.

or stock turnover ratio measures how fast the inventory is moving through

the firm an generating sales. It is defined as:

The cost of gods sold means sales minus gross profit. The average inventory

refers to the simple average of the opening and closing inventory. A high ratio is

good from the viewpoint of liquidity and vice versa a low ratio would signify that

inventory does not sell fast and stays on the shelf or in the ware house for a long

time. The standard ratio is 8 times.

period is a measure of how long it takes from the time the sale is made to

the time the cash is collected from the customer. This ratio also called ‘days

sales outstanding’. It is expressed as follows

per day

360

This ratio is useful to evaluate the effectiveness of the firm’s credit and

collection policies. The standard collection period is 60 to 90 days.

C. Evaluating fixed assets: fixed assets turnover ratio: this ratio measures

how effectively the firm uses its fixed assets. This is the ratio of sales to

fixed assets. It is computes as follows

(plant and equipment ) relative to the value of the output being produced. In such a

case, the firm might be better off to liquidate some of those fixed assets and invest

the proceeds productively.

D. Evaluating total assets: Total assets turnover ratio: Total assets turnover

ratio reflects how well the company’s assets are being used to generate

sales. This ratio also called as sales to total assets ratio. It is calculated as

follows:-

A low turnover ratio reflects liberal credit terms granted by suppliers, while a

high ratio shows that accounts are to be settled rapidly.

3. Coverage / capital structure ratio: Coverage ratio measure the extent of the

firms’ total debt burden. They reflect the company ability to meet its long-term

debt obligations. The main ratios calculated in this area are:

A. Debt Equity Ratio = this ratio indicates the relative proportions of debt and

equity in financing the assets of a firm. This ratio can be shown n different

ways. Thus

stability of a firm. It has important implications from the view point of the creditors,

owners and the firm itself. A high ratio shows a large share of financing by the

creditors of the firm. A low ratio implies a smaller claim of creditors’.

B. Total debt to total assets ratio: this ratio generally called the debt ratio,

measures the percentage of funds provided by creditors. It is calculated by

dividing total debt by total assets. Thus :

Total debt includes both current liabilities and long term debt. Creditors

prefer low debt ratios because the lower the ratio, the greater the cushion against

creditors losses in the event of liquidation. Stockholders on the other hand, may

want more leverage because it signifies expected earnings. A ratio 1: 2 is

considered to be satisfactory.

c. Interest coverage ratio: it is also known as time interest earned ratio. This

ratio reflects the firm’s ability to pay interest out of earnings. Failure to meet

this obligation can bring legal action by the firm’s creditors, possibly resulting

in bankruptcy. The standard ratio is 8times.

d. Cash coverage ratio: this ratio measures the extent to which interest is

covered by the cash flow from the firms operations. This is calculated as

follows:

measures enable the analyst to evaluate the firm’s profits with respect to a given

level of sales, a certain level of assets, or the owner’s investment. Without profits a

firm could not attract outside capital. Owners, creditors, and management pay close

attention to boosting profits because of the great importance placed on earning in

the market place. Major profitability ratios are:

A. Gross profit Margin: this ratios measures the degree of success in gross

earning on sales. The higher the gross profit margin, the better. The gross

profit margin is calculated as follows

B. Net profit Margin: This ratio measures the relationship between net profits

and sales of a firm. The net profit margin is indicative of management ability

to operate the business with sufficient success. A hig net profit margin would

ensure adequate return to the owners as well as enable a firm to tackle

adverse situations. The net profit margin is calculated as follows:

Or = Eat/ sales

Or Operating profit margin= (Sales- Cost of Goods sold- total operating

expenses) / sales

This ratio indicates the profitability of sales before taxes and interest expense. Non

operating revenues ( such as interest on marketable securities and royalties) are

not included in the returns and non operating expense are not deducted. The

purpose of this ratio is to measure the effectiveness of production and sales of the

company’s product in generating pre-tax income for the firm.

relating the profits of a firm to its investment. Such ratios are popularly

termed as return on investments. There are three different concepts of

investments in financial literature: asets , shareholders equity and capital

employed. Based on each of them there are three broad categories of ROIS.

They are return on assets, return on share holder’s equity and return on

capital employed. These are discussed below

measured in terms of the relationship between net profits and assets.

It is calculated as follows:

Total assets * 100

ii. Return on Equity (ROE) : The most important profitability ratio is the

ratio of net income to common equity which is measured as follows:

Equity *100

Share holders invest to get return on their money and this ratio tells how well

they are doing in an accounting sense.

iii. Return on capital employed (ROCE): It relates the income earned from

the company’s activities to the resources employed by the company.

This ratio measures the abilty to earn a reasonable income for the firm

with the resources employed. It is calculated as follows

E. Earnings Per share (EPS): EPS measure the profit available to the equity

shareholders on a per share basis. That is, the amount that they can get on

every share hold. This ratio can be computed in two ways :

shares outstanding

360

14.Proprietary ratio = share holders/ total assets

bearing fund

expenses) / sales *100

shareholders/ total assets *100

25.Price earnings ratio ( PE) = market price per share / earnings per share

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