Financial Ratio Analysis

Presented By:
Sushil Panigrahi
Nishu Navneet
Shashank Shivhare
Manoj Jhawar

Financial Ratios
Financial Ratio Analysis is a study of relationship
among various factors in a business
It can be used as a preliminary screening tool for
the assessment of a stock or future financial
condition and hence result for a company
Most importantly these ratios are used from the
perspectives of credit rating agency(debt
instruments) , equity research firm(equity
growth) and shareholders or investors(financial
health) and Managers
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Types of Financial Ratios

Liquidity Ratio
Profitability Ratio
Efficiency Ratio
Capital Structure Ratio
Cash Flow Ratio
Activity Ratio

Liquidity Ratio
A financial ratio indicating a companies ability to
meet its short term financial obligations
Its a ratio between Liquid Assets (that can be
converted to cash) to short term liabilities
Greater the coverage the more likely is that a
business will able to pay its debt and vice-versa
Commonly used liquidity ratios are
Current Ratio
Quick Ratio
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Quick Ratio
It measures the ability of a company to use its near cash or
quick assets to extinguish or retire its current
liabilities immediately
Include those current assets that presumably can be quickly
converted to cash
Quick Ratio = (Cash Equivalents + Short term investments +
Accounts receivable )/ current liabilities
18
16
14
12

Investors

10

HDFC

ICICI

Manager

4
2
0
Mar'08

Mar'09

Mar'10

Mar'11

Mar'12

Creditors
5

Interpretation of Quick Ratio

A company with quick ratio < 1 cannot currently payback its
current liabilities
Higher the quick ratio, more likely the company be able to
pay its short term bills
Creditors are most concerned about the quick ratio and a
lesser quick ratio leads to higher creditors concern
The quick ratio for HDFC is 6.2 for Mar 12 which indicates
the banks robustness and financial soundness in paying off
short term obligation though the figure has dipped as
compared to the last year
But ICICI bank has far better liquidity ratio implying ICICI
bank highly robust and hence its ability to extinguish short
term liabilities is better than HDFC
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Efficiency Ratio
Analyzes how effectively the business is managing its
assets to produce sales.
If too much has been invested, the operating capital is
high
If invested too low, it may affect sales hurting the
profitability
There are various efficiency ratios

Inventory Turnover ratio

Revenue per employee
Receivables Turnover
Assets Turnover

Asset Turnover Ratio

The amount of sales generated for every
dollar's worth of assets
It indicates the effectiveness of the firms use
of its total assets to create revenue
Asset turnover = Sales/Assets
Investors

6
5

Creditors

4
HDFC

ICICI
2

Manager

1
0
Mar'08

Mar'09

Mar'10

Mar'11

Mar'12

Interpretation of Asset Turnover Ratio

Low asset turnover might mean that the company has too
much capital tied up in its asset base
High turnover ratio may imply that the firm has too few
assets for potential sales
Owners/Managers use these ratio to gauge the business
performance
There was a fall in assets turnover ratio to 0.12 from 4.65 in
current period. This is due to the lesser rise in Net Revenue
when compared to the rise in assets over the period
We see that the ratio for ICICI bank too has fallen during
the period and is lower than that of HDFC bank indicating
lower efficiency.
The management has to consider this seriously and take
steps to improve the operating efficiency of the HDFC bank
9

Profitability Ratio
Margins
Gross profit margin
Operating profit margin
Net profit margin

Returns

Return on assets
Return on equity

10

Profitability Ratios
Net Profit margin

Net Profit Margin

18
16
14
12
10
8
6
4
2
0

16.09

15.93

14.76
12.82

Investors
Manager

11.35

Net Profit Margin

2008 2009 2010 2011 2012

11

Profitability Ratio Cont..

Return on net worth
20
18
16
14
12
10
8
6
4
2
0

Return on net worth=Net Income/Share holders equity

17.27

RONW(%)

15.47

15.74
13.83
13.7

HDFC
ICICI
Investors
Creditors
2008

2009

2010

2011

2012

12

Profitability Ratio Cont..

Interest spread
8
7
6
5
4

HDFC

ICICI

2
Investors

1
0
2008

2009

2010

2011

2012
13

EPS(Earning Per Share)

The amount of earnings per each outstanding
share of a company's stock
Earning Per Share EPS=PAT/No. of outstanding
shares
Investors

60
50

Manager

40
HDFC

30

ICICI
20
10
0
2008

2009

2010

2011

2012

14

Interpretation of EPS
It decides how much of a company's profit is
allotted to the Companies outstanding stocks.
It can be used as one of the comparison tools
for picking up the stock for investment.
The EPS has increased in 2012, this is due to
increase in net profit Rs 113,413,323 for FY
2011-12 as compared to Rs 84,591,957 in
FY2010-11
From investor point ICICI seems to better than
HDFC as its EPS is considerably high
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Price-to-Earnings ratio
It is a valuation ratio of a company's current share
price compared to its per share earnings
P/E ratio = Average stock price/Earning per share
The P/E ratio for HDFC : 23.51 Investors
The P/E ratio for ICICI : 17.70
Here we can see that HDFC bank has higher P/E
ratio as compared to ICICI bank
A high P/E value suggests that investors are
expecting higher earnings growth in the future
compared to companies with lower P/E
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Capital Structure Ratio

A financial ratio highlighting the capital
structure of a company
There are various capital structure ratios
Assets-to-Equity ratio
Degree of Financial Leverage
Debt-to-Equity ratio
Interest Coverage ratio
Degree of Operating Leverage
Degree of Total Leverage
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Asset-to-Equity Ratio
It shows the relationship of the total assets of the firm to the
portion owned by shareholders
It indicates a company's leverage, the amount of debt used to
finance the firm
Asset-to-Equity Ratio = Total Assets/Total Shareholders' Equity
14
12
10
8
HDFC
6

Investors

ICICI

Creditors

4
2
0
2007-08

2008-09

2009-10

2010-11

2011-12

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Interpretation of Asset-to-Equity Ratio

A relatively high asset/equity ratio may indicate the
company has taken on substantial debt merely to remain in
business
There is a high asset/equity ratio because the return on
borrowed capital exceeds the cost of that capital.
A low asset/equity ratio can indicate a strong firm that
needs no debt, or an overly conservative company, foolishly
foregoing business opportunities.
As we see from the graph the Asset/Equity ratio has
increased as compared to last year due to increase in total
assets of the company indicating high borrowing as
compared to previous year
The ratio is more in case of HDFC than ICICI implying
majority of the asset are financed through debt
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Debt-to-Equity Ratio
A financial ratio indicating the relative proportion of
shareholders' equity and debt used to finance a company's
assets
The two components are often taken from the firm's balance
sheet or statement of financial position (book value)
Debt-to-Equity Ratio = Long Term Debt/Equity
12

Investors
10

Creditors

8
6

HDFC
ICICI

4
2
0
2008

2009

2010

2011

2012

20

Interpretation of Debt-to-Equity Ratio

It indicates the what proportion of equity and debt HDFC is
using to finance its assets
Increase in this ratio suggests greater reliance on debt as a
source of financing and vice versa
Investing in a company with a higher debt/equity ratio may
be riskier, especially in times of rising interest rates, due to
the additional interest that has to be paid out for the debt
if the ratio is greater than 1, the majority of assets are
financed through debt and for less than assets are primarily
financed through equity
As we see the ratio for HDFC bank is higher than that of
ICICI bank and as compared to last year it has been
increased a little bit more indicating majority of assets are
financed through debt.
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Interest Coverage Ratio

A risk ratio that help determining the firm's ability to repay its
debt obligations
Interest coverage ratio = Profit Before Interest and Taxes/
Interest Expenses
1.80

Investors

1.60
1.40
1.20
1.00

HDFC

0.80

Creditors

ICICI

0.60
0.40
0.20
0.00
2011-12

2010-11

2009-10

2008-09

2007-08

22

Interpretation of Interest Coverage

Ratio
The lower the ratio, the more the company is burdened by
debt expense and the firm will have difficulties in meeting
its debt payments
When a company's interest coverage ratio is 1.5 or lower,
its ability to meet interest expenses may be questionable.
An interest coverage ratio below 1 indicates the company
is not generating sufficient revenues to satisfy interest
expenses
Here we see the ratio for HDFC bank is on the lower side
indicating HDFC banks interest expenses are very high as
compared to previous years. This is due to high borrowings
the company has made in FY 2011-12
As compared to ICICI bank,HDFC is better placed indicating
HDFC has less interest expenses as compared to ICICI bank
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Cash Flow Ratio

A companys ability to generate cash flow is one of the
most important indicators of its health
Cash flow ratios examine the flow of money into a
company, it can help to identify struggling companies
and in turn, struggling stocks
A company can demonstrate earnings, but if more
money is pouring out of a company than pouring in,
there will be fiscal problems in the future
There are 2 cash flow ratios
Price-to-Cash Flow Ratio
Free Cash Flow Ratio
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Free Cash Flow Ratio

It represents the cash that a company is able to generate
after laying out the money required to maintain or expand its
asset base
It allows a company to pursue opportunities that enhance
shareholder value. Without cash, it's tough to develop new
products, make acquisitions, pay dividends and reduce debt
Free cash flow taking operating cash flow and subtracting
capital expenditures
0.06
0.05
0.04
0.03

0.02
HDFC Bank

0.01
0
-0.01

2009-10

2010-11

2011-12

-0.02
-0.03

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Summary
Ratio

Investors

Creditors

Manager(Internal)

Liquidity ratio
Profitability ratio
Efficiency ratio
Capital ratio
Cash flow

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References
Accounting for Management, Text & Cases By
S.K.Bhattacharya and John Dearden
http://www.moneycontrol.com
http://www.hdfcbank.com/htdocs/common/pdf/
corporate/Annual_Report11_12.pdf
http://www.icicibank.com/aboutus/annual.html
http://www.investopedia.com
http://en.wikipedia.org/wiki
http://money.rediff.com/companies/HDFC-BankLtd
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Thank You

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