Ratio Analysis

Lecture 29 & 30

Learning Objectives

Meaning Classification of ratios Formulae for calculating different ratios

Meaning

Ratio analysis is a comprehensive tool of analysis in that it seeks to measure and establish cause and effect relationships between either two items of balance sheet or of profit and loss account.

Classification of Ratios

Return on investment (ROI) ratios Solvency Ratios Liquidity Ratios Resources Efficiency or Turnover Ratios Profitability/Profit Margin Ratios Du Pont Analysis Valuation or Capital Market Ratios

ROI Ratios
1. 2. 3. 4. 5.

Return on Net Worth RONW Earning Per Share EPS Return on Equity - ROE Cash Earnings per share (CEPS) Rate of return on investment ROI

1.

RONW (%)

(PAT Preference Share Dividend) * 100 Equity Shareholders Funds or Net Worth NW = eq. cap. + Res. & Surplus Misc. Exp. Not written off PAT Preference Dividend________ Weighted Average No. of Equity shares O/s PAT Preference Dividend * 100 Total Equity Capital

2.

EPS (Rs.)

3.

ROE (%)

4.

CEPS (Rs.)

PAT Preference Dividend + Non cash charges Weighted Average No. of Equity shares O/s EBIT * 100 Total Assets

5.

ROI (%)

Solvency Ratios
1. 2. 3. 4. 5. 6.

Net Asset Value NAV Debt Equity D/E Interest Cover Debtservice coverage ratio DSCR (Capital) Gearing Ratio Equity ratio or Proprietory ratio

1.

NAV (Rs.)

__Equity Shareholders Funds__ No. of Equity Shares O/s

2.

Debt Equity (Times)

_______Long- term Debt__________________ Total Net Worth (Equity Shareholders Funds + Preference Capital)

3.

Interest Cover (Times)

PAT + interest on long term debt + non cash charges Interest on Long term Debt

4.

DSCR (Times)
PAT + interest on long term debt + non cash charges Interest on Long term Debt + Installments of Principal Due

5.

(Capital) Gearing Ratio

Equity share capital___ Pref. Cap. + Debentures

6.

Proprietory Ratio

Net worth______ Total Capital Employed Total capital employed = Eq. Cap. + Pref. Cap. + R & S + Debentures + Long term Debt Misc. Expenses

Liquidity Ratios
1. 2. 3. 4. 5.

Current Ratio Quick Ratio Collection Period Allowed to Customers Suppliers Credit Inventory Holding Period

1.

Current Ratio (Times)

C.A.+ L & A + Short term Investments C.L. + Provision + Short term Debt

2.

Quick Ratio (Times)

C.A+ L & A Inventory + Short term Investments C.L. + Provision + Short term debt net of WC limit OR Current Assets Inventory Current Liabilities - BOD

3.

Collection Period Allowed to Customers(Days)

(Avg. B/R + Avg. Debtors) * 365 Credit Sales (Avg. B/P + Avg. Creditors) * 365 Credit Purchases ____Avg. Inventory * 365_____ Cost of Goods Sold (COGS)

4.

Suppliers Credit (Days)

5.

Inventory Holding Period (Days)

Resources efficiency/ Turnover Ratios

1. 2. 3. 4. 5. 6.

Total Assets Turnover Ratio Fixed Assets Turnover Ratio Net working Capital Turnover Ratio Net Worth Turnover Ratio Debtors Turnover Ratio Inventory Turnover Ratio

1.

Total Assets Turnover Ratio (Times)

Net Sales_ Total Assets Net Sales______ Net Block of fixed Assets

2.

Fixed Assets Turnover Ratio (Times)

3.

Net Worth Turnover Ratio (Times)

Net Sales______________ Equity Shareholders funds or Net worth

4.

Net Working Capital Turnover Ratio (Times)

Net Sales_____ Net working capital Credit Sales______ Avg. B/R + Avg. Debtors COGS____ Avg. Inventory

5.

Debtors Turnover Ratio (Times)

6.

Inventory Turnover Ratio (Times)

Profitability/Profit Margin Ratios

1. 2.

3.

4.

Multi-step Profit Margin to sales ratios Ratios of individual costs and expenses to sales Ratios of other income, extraordinary items and prior year adjustments to PBT and/or Net Sales Effective Tax Rate

1.

Multi-step Profit Margin to sales ratios

Gross Profit (GP) Profit before depreciation, interest & tax (PBDIT) Operating Profit (OP or PBIT) Profit before tax & extraordinary items (PBTEOT) Profit before tax (PBT) Net Profit (PAT)

GP (%) = GP * 100 Net Sales

2.

Ratios of individual costs and expenses to sales (%)

Individual Costs & Expenses * 100 Net Sales

3.

Ratios of other income, extraordinary items and prior year adjustments to PBT and/or Net Sales (%)

Other income * 100 PBT / Net Sales Current Income Tax * 100 PBT

4.

Effective Tax Rate (%)

Valuation or Capital Market Ratios

1. 2. 3. 4. 5. 6.

EPS Price Earning Ratio P/E NAV Market Price to NAV Market Capitalization Yield to Investors

1.

Price Earning Ratio P/E (Times)

Market Price of the equity shares EPS Market Price of the equity shares NAV No. of equity shares O/s * Market Price

2.

Market Price to NAV (Times)

3.

Market Capitalization (Rs.)

4.

Yield to Investors (%)

(Dividend Received + Market Appreciation ) * 100 Initial Investment

DU PONT ANALYSIS
RONW (PAT Pref. Divd.) * 100 Net Worth

= =

Net Profit Margin (PAT Pref. Divd.) * 100 Net Sales

* *

Net worth turnover Net Sales Net Worth