Ratio Analysis

Ratio basics
Ratio Analysis compares one figure in one financial statement (say P&L account or Balance Sheet) with another figure in the same financial statement or in another financial statement of the company. A ratio is expressed in the numerator denominator format. hus the numerator and denominator can !e either from the P&L account or the Balance sheet of the same company. Ratios gi"e colour to a!solute figures. #or example a profit of Rs.$%% la&hs means "ery little to an analyst !ecause he needs to &now what the sales was or what the networth was against which the Rs.$%% la&hs was earned. 'ore than the profit( the ratio of profit to sales and the ratio of profit to networth is useful to understand the performance of a company. hus if profit grew from Rs $%% la&hs to Rs $)* la&hs( while it is good( what is more important is how it stac&ed up against the sales achie"ed or the networth deployed.

LE AR NIN G

OV ER VIE W
$. Rati
o basics

). Co
mputing ratios a. Sh ort ter m sol ven c b. Lo ng

term solvenc c. Asset management !. "ro#itabilit e. $ar%et

&. Interpreting ratios a. Common si'e anal sis b. (ren! anal sis c. )u"ont chart !. Limitations

+ence( ratio analysis facilitat es intra firm compa rison. i.e. compar ison of your compan y,s perform ance in the current year with your compan y,s perform ance in the pre"iou s year. -t also facilitat es inter firm compa rison. i.e. compar ison of your compan y,s perform ance in the current year with your competi tor,s perform ance in the current

year. Peer re"iew( as this is called( helps you !enchmar& your performance with your peers. Ratios help in ascertaining the financial health of the company and also its future prospects. hese ratios can !e classified under "arious heads to reflect what they measure. here may !e a tendency to wor& a num!er of ratios. But we !elie"e that !eing thorough in the computation and interpretation of a few ratios (Say )%.)*) would !e ideal( since too much of analysis could lead to paralysis.

Computing Ratios
/hen a ratio has a P&L figure !oth in the numerator and in the denominator or has a !alance sheet figure !oth in the numerator and in the denominator it

is called a straigh t ratio. /here it has the P&L figure in the numera tor and the !alance sheet figure in the denomi nator or the !alance sheet figure in the numera tor and the P&L figure in the denomi nator it is called a cross or hybrid ratio.

A: Liqui dity or Short Term Solve ncy Ratio s

Li0uidit y refers to the speed

and ease with which an asset can !e con"erted to cash. Li0uidity has two dimensions1 ease of con"ersion "ersus loss of "alue. Remem!er any asset can !e 0uic&ly con"erted to cash if you slash the price. A house property "alued at Rs )* la&hs can !e con"erted to cash within )2 hours if you slash the price to Rs * la&hs3 So a li0uid asset is really one which can !e con"erted to cash without ma4or loss of "alue. An illi0uid asset is one that cannot !e en.cashed without a ma4or slash in price. 5urrent assets are most li0uid. #ixed assets are least li0uid. angi!le fixed assets li&e land and !uilding and e0uipment aren,t generally con"erted to cash at all in normal !usiness acti"ity. hey

are used in the !usines s to generat e cash. -ntangi !les such as tradema r& ha"e no physica l existen ce and aren,t normall y con"ert ed to cash. Li0uidit y is in"alua !le. he more li0uid a !usines s is( the less is the possi!il ity of it facing financia l trou!les . But too much of li0uidit y too is not good. hat,s !ecause li0uidit y has a price tag. Li0uid

assets are less profita!le to hold. herefore there is a trade off !etween the ad"antages of li0uidity and foregone potential profits. Li0uidity or Short term sol"ency ratios pro"ide information a!out a firm,s li0uidity. he primary concern is the firm,s a!ility to pay its !ills o"er the short run without undue stress. +ence these ratios focus on current assets and current lia!ilities. hese ratios are particularly useful to the short term lenders.

A ma4or ad"antage of loo&ing at current assets and current lia!ilities is that their !oo& "alues approximate towards their mar&et "alues. 6ften these assets and lia!ilities do not li"e long enough for the two to step out of line. 1. Current Ratio: his is the ratio of current assets to current lia!ilities. 5urrent Assets 7 5urrent Lia!ilities Because current assets are con"erti!le to cash in one year and current lia!ilities are paya!le within one year( the current ratio is an indicator of short term sol"ency. he unit of measure is 8times9. #or instance if the current ratio is $.2 we say that the ratio is $.2 times. -t means that current assets are $.2 times the current lia!ilities. o a short term lender( including a creditor( a high current ratio is a source of comfort. o the firm( a high current ratio indicates li0uidity( !ut it also may mean inefficient use of cash and other current assets. A ratio of $.:: is considered welcome. he current radio is affected !y "arious types of transactions. #or example suppose the firm !orrows o"er the long term to raise money. he short term effect would !e an increase in cash and an increase in long term de!t. So the current ratio would rise. #inally( a low current ratio is not necessarily !ad for a company which has a large reser"oir of untapped !orrowing. !. "uic# or Acid test Ratio: his is the ratio of 0uic& assets to current lia!ilities or to 0uic& lia!ilities.

; ;

<uic& Assets 7 5urrent Lia!ilities <uic& Assets 7 <uic& Lia!ilities

hree points merit attention. a. $nventory1 he !oo& "alues of in"entory are least relia!le as measures of realisa!le "alue !ecause o"er time they may !ecome lost( damaged or o!solete. #urther( to an external analyst the mar&et "alue of in"entory may not !e a"aila!le since they are carried in the !oo&s at cost. Large in"entories are often a sign of short.term trou!le. he firm may ha"e o"erestimated sales and conse0uently may ha"e o"er!ought or o"erproduced leading to a su!stantial part of the li0uidity loc&ed in low mo"ing in"entory. +ence in"entory is eliminated from current assets to arri"e at 0uic& assets. !. %repaid e&penses. Prepaid expenses too are deducted from current assets since they are not really con"erti!le into cash. hey are only ad4ustments against future payments. c. 'verdraft1 -n practice( o"erdraft is not exactly repaya!le within $) months !ecause it is almost always renewed. herefore there is a "iew that in computing 0uic& lia!ilities we must deduct o"erdraft from current lia!ilities.

(. Ca sh Res erv oir Rat io: =o es a co mp any ha" e eno ugh cas h or cas h e0u i"al ent s to me et its cur rent lia! iliti es> he 5as h res er" oir rati o me asu res this .

5ash Reser"oir 7 5urrent Lia!ilities 5ash Reser"oir ? 5ash @ Ban& @ 'ar&eta!le securities. Alternati"ely( 5ash Reser"oir ? 5urrent Assets . -n"entory. But the former one is more appropriate. A "ery short term creditor (one who gi"es money for say a wee& or $* days) should !e interested in this ratio.

): Capital Structure or Long Term Solvency Ratios

Long term sol"ency ratios measure the firm,s long term a!ility to meet its payment o!ligations. hey are also referred to as le"erage ratios. Bac& in the

chapter 5apital Structur e Plannin g you learnt a!out financia l le"erag e as arising out of the existen ce of de!t in the capital structur e. -n -ntrodu ction to #inanci al 'anage ment we underst ood this as !eing the first 0uadran t of the !alance sheet. *. Total debt ratio: his is the ratio of total de!t to total assets.

=e!t 7 otal assets he term 8total de!t9 means all de!tA !oth long term and short term i.e. it includes current lia!ilities. he term 8total assets9 means all assetsA !oth fixed assets and current assets. here are two "ariants to this ratio namely de!t.e0uity ratio and e0uity multiplier. a. he de!t e0uity ratio is measured as total debt to total equity. !. he equity multiplier is the ratio of total assets to total e0uity he e0uity multiplier is $ plus de!t e0uity ratio. Bi"en any one

ot al

of these three ratios( you can immedi ately comput e the other two so they all say the same thing. +. Times interes t earned ,$ntere st covera ge ratio-: his is the ratio of CBto -nterest .

loan. he ratio measures how much earnings are a"aila!le to co"er interest o!ligations. -f co"erage is computed only for long term interest then only long term interest should !e considered in the denominator and the CBwill mean earnings !efore long term interest and taxes. here are "arious "ariants to the a!o"e ratio. #or instance( there is a "iew that the earning should !e recorded after tax i.e. earnings !efore interest !ut after tax. And that the denominator will !e unchanged at -nterest. +owe"er we ha"e stuc& to the more traditional and more popular "iew.

CB - 7 -nte rest he interest referre d to here is the interest on !oth long term and short term

.. Cash coverage: his is the ratio of DCB- plus depreciation, to -nterest . (CB- @ =epreciation ) 7 -nterest /eed to compute cash cover /hile interest is a cash measure( CB- is not. hat,s !ecause it has ta&en into account depreciation which is a non.cash charge. his ratio is considered as a measure of the firm,s a!ility to generate cash from operations and is used as a measure of cash flow a"aila!le to meet financial o!ligations.

C: Asset 0anagement or Turnover Ratios

he Asset management ratios (a & a Asset turno"er ratios) measure the efficiency with which a company deploys its assets to generate sales. 1. Total Assets turnover ratio1 his is the ratio of sales to total assets. Sales 7 otal Assets /hile 8total assets9 is technically more correct( a"erage assets could also !e used. A"erage asset is the simple a"erage of opening and closing assets. -f the total assets turno"er ratio is 2( it means that for e"ery rupee in"ested we ha"e generated Rs.2 of sales. he term total assets would !e the sum of fixed assets and current assets. he higher the ratio the !etter it is for the company. he reciprocal of the total assets turno"er ratio is the 2Capital $ntensity ratio3. -t can !e interpreted as the rupee in"ested in assets needed to generate Re.$ of sales. +igh "alues correspond to capital intensi"e industries. $ 7 otal assets turno"er ratio he total assets turno"er ratio can !e split into #A 6 and /5 6 ratio. 4. 5i&ed Assets turnover ratio ,5AT'-1 his is the ratio of sales to fixed assets. he fixed assets should typically !e on net !asis i.e. net of accumulated depreciation. Sales 7 Eet fixed assets A"erage fixed assets i.e. the simple a"erage of opening and closing fixed assets can also !e used. -f the fixed assets turno"er ratio is :( it means that for e"ery rupee in"ested in fixed assets we ha"e generated Rs.: of sales. he higher the ratio the !etter it is for the company.

6. 7or#i ng capital turnov er ratio ,7CT '-1 his is the ratio of sales to net wor&in g capital. Eet wor&in g capital would mean current assets less current lia!iliti es.

closing wor&ing capital can also !e used. -f the wor&ing capital turno"er ratio is F( it means that for e"ery rupee in"ested in wor&ing capital we ha"e generated Rs.F of sales. he higher the ratio the !etter it is for the company. his ratio !ecomes more understanda!le if we con"ert it into num!er of days. -f we turned o"er our wor&ing capital F times a year( it means that the wor&ing capital was unloc&ed e"ery F% days. his is called the 8or#ing capital days9 ratio and is gi"en !y the following formula1 :F* 7 /or&ing capital turno"er ratio he lower this ratio( the !etter it is for the company. he wor&ing

Sal es 7 Eet /o r&i ng 5a pita l A"erag e wor&in g capital i.e. the simple a"erage of openin g and

capital turno"e r ratio can now !e !ro&en into its compon ent parts. 1:. $nvent ory turnov er ratio1 his is the ratio of cost of goods sold to closing in"ento ry.

/hile closing in"entory is technically more correct( a"erage in"entory could !e used since an external analyst is unsure whether the year end num!ers are dressed up. he numerator is 85ost of goods sold9 and not sales !ecause in"entory is "alued at cost. +owe"er to use 8Sales9 in the numerator is also a practice that many adopt. -f the in"entory turno"er ratio is :( it means that we sold off the entire in"entory thrice. As long as we are not running out of stoc& and hence losing sales( the higher this ratio is( the more efficient is the management of in"entory. -f we turned o"er in"entory o"er : times during the year( then we can say that we held

5os t of goo ds sol d7 -n" ent ory -t can also !e express ed as the ratio of cost of goods sold to a"erage in"ento ry.

in"ento ry for approxi mately $)$ days !efore selling it. his is called the averag e days9 sales in $nvent ory and is gi"en !y the followi ng formula 1

measure the same thing. 11. Receivable ; <ebtors turnover ratio1 his is the ratio of sales to closing de!tors. Sales 7 =e!tors

:F* 7 -n" ent ory tur no" er rati o he ratio measur es how fast we sold our product s. Eote that in"ento ry turno"e r ratio and a"erage days, sales in in"ento ry

/hile closing de!tors is technically more correct( a"erage de!tors could !e used since an external analyst is unsure whether the year end num!ers are dressed up. -f the de!tors, turno"er ratio is G( it means that we collected our outstanding G times a year. As long as we do not miss out sales( the higher this ratio is( the more efficient is the management of de!tors. his ratio is far easier to grasp if we con"erted it into num!er of days. -f we turned o"er de!tors G times a year( we can say that de!tors on an a"erage were 2* days. his is called the average days9 sales in receivable and is gi"en !y the following formula1 :F* 7 Recei"a!le turno"er ratio he ratio is often called the Average Collection period. 1!. %ayables ; Creditors turnover ratio1 -n so far as we wanted to &now how well we used our de!tors we must also &now how well we utilise the creditors. owards this we compute the 5reditors turno"er ratio which is the ratio of purchases to closing creditors. 5redit Purchases 7 5reditors A"erage creditors could also !e used since an external analyst is unsure whether the year end num!ers are dressed up. -f the creditors, turno"er ratio is *( it means that we paid our outstanding * times a year. As long as we do not miss out purchases( the smaller this ratio is( the more efficient is the management of creditors. his ratio !ecomes more understanda!le if we con"ert it into num!er of days. -f we turned o"er creditors * times a year( we can say that creditors on an a"erage were H: days. his is called the average days9 purchases in payables and is gi"en !y the following formula1 :F* 7 5reditors turno"er ratio he ratio is often called the Average %ayment period.

<: %rofitability Ratios

he profita!ility ratios measure how efficiently a company manages it assets and how efficiently it manages its operation. he focus is on profits. All of these ratios are expressed in terms of a percentage. 1(. =ross profit margin1 his is the ratio of gross profit to sales. Bross Profit 7 Sales he term gross profit refers to the difference !etween sales and wor&s cost. +igher the percentage the !etter it is for the company.

1*. 'perating profit margin1 his is the ratio of operating profit to sales. 6perating Profit 7 Sales he term operating profit is the difference !etween gross profit and administration and selling o"erheads. Eon operating income and expenses are excluded. -nterest expenditure is also excluded !ecause interest is the reward for a particular form of financing and has nothing to do with operational excellence.

+igher the percentage the !etter it is for the company. 1+. /et profit margin1 his is the ratio of net profit to sales. Eet Profit 7 Sales he term net profit refers to the final profit of the company. -t ta&es into account all incomes and all expenses including interest costs. +igher the percentage the !etter it is for the company. 1.. Return on total assets1 his is the ratio of CB- to otal Assets. CB- 7 otal Assets he term 8total assets9 refers to all assets namely net fixed assets and current assets. +igher the percentage the !etter it is for the company. 11. Return on capital employed ,R'C>- 1 ratio of CB- to capital employed CB- 7 5apital employed he term 8capital employed9 refers to the sum of net fixed assets and net wor&ing capital. his ratio measures the producti"ity of money. +igher the percentage the !etter it is for the company. 14. Return on net?8orth1 his is the ratio of PA to Eet worth. PA 7 Eet worth he term 8Eet.worth9 means money !elonging to e0uity share holders and includes reser"es net of fictitious assets awaiting write off. -t measures how much income a firm generates for each rupee stoc&holders ha"e in"ested. +igher the percentage the !etter it is for the company. his is the more popular ratio and is the

>: 0ar#et Ratios

As these ratios are !ased on the mar&et price they !ecome crucial num!ers to analyse a company.

16. >arnings per share1 his is the ratio of profit after tax and preference di"idends to num!er of e0uity shares outstanding. (Profit after tax . Preference di"idend) 7 Eo. of e0uity shares outstanding his measures the amount of money a"aila!le per share to e0uity shareholders. he CPS has to !e used with care. wo companies raising identical amounts of money and ma&ing identical after tax profits can report su!stantially different CPS. 5onsider this example. A Ltd. raises Rs.$%% la&hs of e0uity with each share ha"ing a face "alue of Rs.$%. he premium on issue is Rs.I% implying that $(%%(%%% shares are raised. -n accounting spea&( Rs.$% la&hs goes to e0uity account and Rs.I% la&hs goes to share premium account. Suppose the company ma&es a profit after tax of Rs.*% la&hs. Since there are $ la&hs shares outstanding the CPS is Rs.*%. he return on net.worth is *%J. Eow B Ltd. raises Rs.$%% la&hs of e0uity with each share ha"ing a face "alue of Rs.$%. he premium on issue is Rs.2% implying that )(%%(%%% shares are raised. -n accounting spea&( Rs.)% la&hs goes to e0uity account and Rs.G% la&hs goes to share premium account. Suppose the company ma&es a profit after tax of Rs.*% la&hs. Since there are ) la&hs shares outstanding the CPS is Rs.)*. he return on net.worth is *%J. Both companies ha"e the same R6E/( the same face "alue per share( !ut the first company returns an CPS of Rs.*% and the second an CPS of Rs.)* !:. %ayout and retention ratio1 he payout ratio is the ratio of di"idend per share to earnings per share.

; =i"idend per share 7 CPS ; Retention ratio is $ . Payout ratio.

!1. %rice >arnings ratio1 his is the ratio of mar&et price per e0uity share to earning per share. Also &nown as the PC multiple( the following is the formula1 'ar&et price per share 7 Carnings per share. Suppose the PC' is $). ypically( this means that if all earnings are distri!uted as di"idends then it would ta&e the in"estor $) long years !efore he reco"ers his initial in"estment. -f that !e so( why do in"estors in"est in companies with high PC'> Reason1 -n"estors expect the company,s earnings to grow. he PC' can hence !e loo&ed upon as an in"estor,s confidence in the growth prospects of the company. !!. 0ar#et to boo# ratio1 his is the ratio of mar&et price per e0uity share to !oo& "alue per e0uity share. he following is the formula1 'ar&et price per share 7 Boo& "alue per share.

Boo& "alue refers to net. worth. Since !oo& "alue is an account ing num!er it reflects historic al costs. -f the "alue is less than $ it means that the firm has not !een success ful o"erall in creating "alue for the shareho lders.

Interp reting Ratio s

/e would li&e to compar e the perform ance of one compan y with another

(Peer re"iew). -f we do that we could immediately run into a pro!lem. #or instance( if you wanted to compare -nfosys with Satyam you will ha"e to rec&on with the fact that -nfosys is !y far a much larger company. -t is difficult to e"en compare -nfosys )%%) with -nfosys )%%H as the company,s siKe would ha"e changed. -f you compare -nfosys with 'icrosoft( you ha"e !oth a siKe pro!lem (-nfosys is a pigmy compared to 'icrosoft) and a currency pro!lem (-nfosys reports in Rs. and 'icrosoft reports in dollars). he solution lies in standardising the financial statements and this is done !y con"erting all the items from Rs. to percentages. Such statements are called common si@e statements.

Comm on Si@e )alanc e sheet: All items in the Balance sheet are express ed as a percent age of total assets. Comm on si@e $ncome statem ent: All items in the Profit and Loss account are express ed as a percent age of total sales. his stateme nt tells us what happen s to each Rupee of sales. Trend Analysi s1 6ne could fall !ac& on the past. Li&e( ta&e a

loo& at the ratios across the last fi"e years to understand whether li0uidity( sol"ency( profita!ility etc. ha"e gone up or come down. his is at the heart of inter.firm comparison. %eer Revie81 he !enchmar& could !e the industry leader or some company in the industry which your company wants to catch up with. By comparing your ratios with the !enchmar& company( you understand whether you are performing !etter than the !enchmar& company or not. /hat is most important in the case of ratio analysis is that not all ratios would indicate things in the same direction. Some would !e healthyA others wouldn,t !e all that healthy. -t ta&es practice and experience to ascertain

trend and interpre t. -n other words you need to !ecome a good financia l doctor. -t is hence importa nt that one !ecome s thoroug h in the comput ation( underst anding and interpre tation of a few select ratios than in trying to crac& them all. Ratio Analysi s is more an art than a science.

ed ratio. But imagine a year when the company decides to write off a ma4or part of its manufactu ring facility. Both PA and Eet worth will come down !y identical amounts there!y increasing the ratio3 ). hen there is the issue of !oo& "alue. Boo& "alue is dangerousl y suscepti!le to accounting 4ugglery and pyro. techni0ues .

Limit ations
$.
he R6 E / is a sacr

:. 2. *. F. H.

here is "ery little theory to help us identify which ratios to loo& at and to guide us in esta!lishing !enchmar&s. Lery little theory is a"aila!le to suggest what constitutes a high ratio or a low ratio. =ifferent firms use different accounting procedure. Li&e "aluation of in"entory. =ifferent firms end their fiscal year at different times. Trouble 8ith ratios: =ifferent people compute a ratio differently leading to confusion. he specific definitions we use must !e spelt out. hose which we are using in this !oo& are the popular usage. /hen you use ratios to do peer re"iew ma&e sure that the ratios in the two companies are computed in the same way.

The <u%ont $dentity

Ratios !y themsel"es mean precious little. -f you can understand the lin& !etween ratios and how some ratios can !e decomposed to identify the underlying lin&ages your appreciation of financial statements and corporate performance will !e total. he =uPont 5ompany used to do 4ust that. /e present !elow a few famous =uPont identities. 1. Return on >quity he Return on Assets or its cousin the Return on 5apital Cmployed tal&s a!out the producti"ity of money. he Return on C0uity is generally higher than the Return on 5apital Cmployed. his is on account of the use of de!t financing. #or instance( if the R65C is $*J( it means that !oth de!t money and e0uity money are earning $*J. Eow( if de!t is rewarded at GJ( it means that the surplus or !alance HJ accrues to the e0uity shareholders. -f the de!t e0uity ratio is $1$ the Return on e0uity will turn out to !e the $*J it earns plus the HJ surplus that it poc&ets from de!t namely ))J. Return on C0uity is decomposed as under1 R6C ? PA 7Eet.worth ? PA 7 Eet.worth x Assets 7 Assets ? PA 7 Assets x Assets 7 Eet.worth ? PA 7 Assets x C0uity 'ultiplier R'> A R'A & ,1B<ebt?>quity ratio!. Return on >quity A second decomposition wor&s as under1 R6C ? PA 7 Eet.worth ? PA 7 Eet.worth x Assets 7 Assets ? PA 7 Assets x Assets 7 Eet.worth ? PA 7 Assets x Sales 7 Sales x Assets 7 Eet.worth ? Pat 7 Sales x Sales 7 Assets x Assets 7 Eet.worth

R'> A %rofit 0argin & TAT' & >quity multiplier he R6C is thus the function of operating efficiency (as measured !y profit margin)( Asset use efficiency (as measure !y total asset turno"er) and financial le"erage (as measured !y e0uity multiplier. R'AC R'> and =ro8th -s it possi!le to &now how rapidly a firm can grow3 /e must remem!er that o"er the long

haul( if sales ha"e to grow assets too ha"e to grow !ecause there is only so much that you can mil& out of an asset. -f assets are to grow the firm must find money to fund these purchases. he money can come either from internal sources (retention) or external sources (de!t or fresh e0uity). $nternal gro8th rate: -f a company does not want to tap external sources of financing and uses only retained earnings to fund new assets( the rate at which sales can grow is gi"en !y the following formula1 -nternal growth rate ? R6A x ! $? R6A x !

Sustainable gro8th rate ,S=R-: -f a firm relies only on internal financing( o"er time( the de!t e0uity ratio will decline. 'any companies would li&e to maintain a target de!t e0uity ratio. /ith this in mind we now lay down the sustaina!le growth rate on the twin assumptions that (a) company wishes to maintain a target de!t.e0uity ratio and (!) it is unwilling to raise fresh e0uity. Bi"en these assumptions the maximum growth rate will !e Sustaina!le growth rate x $?R6C x !

Piecing all these together( we now identify the four dri"ers of sales growth.

$. %rofit margin1 -f the profit margin increases( the internal resources go up. his
increases the SBR.

). TAT'1 An increase in A 6 increases the sales per rupee of in"estment.

his decreases the firm,s need for new assets as sales grow and thus increases the sustaina!le growth rate. :. 5inancial policy1 An increase in the de!t e0uity ratio m a"aila!le( thus increasing the SBR.

2. D<ividend policy1 A reduction in di"idend payout inc3 increases internally generated

funds and thus increases3

Ratio Analysis

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Ratio Analysis

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F.) 2

I . * * J

u d 5ost r i of n t Boo o o ds " r Sold e s A"er age r u R r -n"e a n nory t o i " ales o e A"era :r ge F R =e!to * a rs = t 6 5 e i A ! o urch o Eo.of Shares ases r 'ar&et A"er s pri age ce 5red u CP itors r S n = : o " i"i F e de * r nd R ' n a ar " ti &e e o t n : pri t t

H.H %

$ 2 . % J

+ow much money !loc&ed in =e!tors.

2H.2 days

P r

F L

share. Eo. of times a share is !eing 0uoted in relation to its earnings. =i"idend recei"ed per share Eo. of times in"entory is +ow much for e"ery !loc&ed in apaid year. rupee earned.

+ow many days for which the purchases are outstanding.

Ratio Analysis

11 /umerator and <enominator

Ratios $. Liquidity Ratios: $. 5urrent Ratio

5ur 5urre

). <uic& Ratio

<

<ui 6R

<u 5urr :. 5ash Reser"oir Ratio

5a 5urr

2.-nter"al 'easure

<

A"er opera

$$. Capital
P r

14

Ratio Analysis S t r u c t u r e R * ( i ) a s r a t i o ( i i ) a s p e r c e n t a g e

Long term loan @ Short term loan1

C0uity share capital @ Preference share if it is not paya!l e capital @ Reser" es w i t h i n a y e a r e " e n o t h e r w i s e w h e n t h e

& Surplus .#ictitious assets

0 F =e!t . , = G Pr 5 I S a $ p ( 6 S i , $ t E x a Sales $%% l Preference share capital @ =e!entures @ Long term loans

C0ui r ty shar

x $%%

B e a r i n g R a t i o

capi tal @ Res C0uity share capital @ er"e Preference hare capital @ s & Reser"es & Surplus Sur .Accumulated loss plus .P &L acco unt (=r. !ala Bross profit as nce) rading Account

x $%% opearting expenses @ Eon.

H . P r o p r i e t a r y R a t i o

Eon. #ixe d Ass opearating income Eet profit as per Profit & ets @ Loss account 5urr ent asse ts (exc ludi ng ficti tiou Bross profit . asse ts)

$ $ $ .

p e r S a l e s n e t o f

t r u

P r

F L

Ratio Analysis

16
(i) Pre. tax

5apit

(ii) Post . tax

PA

5apit

CB5apita

$). Return on C0uity

PA .

di"id Shereh

$E. Coverage ratios: $:. -nterest co"erage ratio

PA

PA B

=epr

B Eon $2. =e!t . ser"ice co"erage ratio

PA @ @=ep

B Eon Princ E. Turnover Ratios

P r

!:

Ratio Analysis $ * . A s s e t s u r n o " e r R a t i o i o"er o Ratio

$ H .
/ o r & i n g $I. =e!tor s urno "er Ratio

5 a p i t a l )%. 5redit u ors urno r "er n o Ratio " e r R a t i o

$ F . # i x e d A s s e t s u r n o " e r R a t

$ G .
n " e n t o r y u r n

Sales o e r r a o t & g a i e = l n e A g ! t s o s e 5 r t a s s p 6 6 i R R t 5 S os a a t l l of e sa s le 5 a s A" a l era p e ge =e i s !t ors t A a P " l u e rc r C a h m g a s p e e l s o A y n " " e er e d a n S o g e Sr 5 a y re l 6 di e to s Sales A rs / "

net of return SalesSales net of return Eet credit sales 6R Sales net of return 6R5ost of goods sold @ Administration exp. @ Selling & =istri!ution Sales net of return exp. 5ost of production .5losing stoc& of Eet credit purchases finished goods ) E $. E el o ci ty R at io s ) $. -n " e nt or y L el o ci ty

6p 5lo

6pe @5

:F* -n"e ntor y urn o"er Rati o

P r

F L

Ratio Analysis

!1
)). =e!tors Lelocity ):. 5reditors Lelocity E$$. Capital 0ar#et Ratios )2. CPS

=e!t Rati

5redito Ratio

PA .

di"ide
)*. PC 'ultiple )F. =i"idend Oield )H. Payout Ratio

Eo

'

'ar&e share =i"id CPS

Ratio Anal ysis com pares one finan cial figur e with anot her. he curre nt ratio is affec ted !y "ario us

types of transactions. #or example suppose the form !orrows

Prime Academy

FL in CAFM