The Economics & Finance Society

2017-18
Gyaan Capsule | The Finance Dossier
Ratio Analysis
Ratios
Ratios are used for expressing relationships among financial data that can be used for:
1. Comparison within firm
2. Comparison of firm with industry
3. Comparison across firms (within the same industry)
4. Comparison across industries

Sr. Category Description

1. Activity Ratios Measures how efficiently a firm performs day-to-day tasks
2. Liquidity Ratios Measures a firms ability to meet short-term obligations
3. Solvency Ratios Measures a firms ability to meet long-term obligations
4. Profitability Ratios Measures a firms ability to generate profits from its sales
5. Valuation Ratios Measures quantity of an asset or flow associated with ownership of a specified claim
Activity Ratios (1/3)
Activity Ratio
Receivables turnover
Days of sales outstanding
Inventory turnover
Days of inventory outstanding
Payables turnover
Days of payables outstanding
Total asset turnover
Fixed asset turnover
Working capital turnover
Operating cycle
Cash conversion cycle
Numerator Denominator
Revenue/Credit Sales Average receivables
365 Receivables turnover ratio
Cost of goods sold Average inventory
365 Inventory turnover ratio
Purchases Average payables
365 Payables turnover ratio
Revenue Average total assets
Revenue Average fixed assets
Revenue Average working capital
- -
- -
Activity Ratios (2/3)
( )
) =

365
) =


) =

365
) =

) =

365
) Days of payables outstanding =

 Activity Ratios (3/3)

) =

) =

) =

) = +

) =
Liquidity Ratios
Liquidity Ratio Numerator Denominator
Current ratio Current Assets Current Liabilities
Quick ratio Cash + current investments + receivables Current Liabilities
Cash ratio Cash + current investments Current Liabilities

) =

+ +
) =

+
) =

Solvency Ratios
Solvency Ratio Numerator Denominator
Debt-to-capital Total debt Total debt + Total equity
Debt-to-equity Total debt Total equity
Debt-to-assets Total debt Total assets
Interest coverage EBIT Interest payments

) =
+

) =

) =

) =

Profitability Ratios
Profitability Ratio Numerator Denominator
Return on Sales
Gross profit margin Gross profit Revenue
Operating profit margin Operating profit Revenue
Net profit margin Net profit Revenue
Return on Investment
Return on assets Net Profit + Interest (1-tax) Average Total Assets
Return on capital employed EBIT Debt + Equity
Return on equity Net Profit Average Equity
+ (1 )
) = ) =


) = ) =
+

) = ) =

Valuation Ratios
Valuation Ratio Numerator Denominator
Price-Earnings Market Price per share Earnings per share
Price-Sales Market Capitalization Sales Value
Price-Book Value Market Capitalization Book Value
Enterprise Value - EBITDA Enterprise Value EBITDA

) =

) =

) =

) =

Other Important Ratios
Other Ratios Numerator Denominator
Earnings per share Net Income Shares outstanding
Book value per share Shareholders Equity Shares outstanding
Dividend payout ratio Dividend per share Earnings per share
Dividend yield ratio Dividend per share Market price per share
Example (1/3)
Mar '16 Mar '15 Mar '16
(Rs. Crores) (Rs. Crores) (Rs. Crores)
Assets Sales (Revenue) 4,200
Cash and marketable securities 115 110 Cost of Goods Sold (COGS) 3,200
Receivables 215 210 Gross Profit 1,000
Inventories 320 305 Operating Expenses 640
Total Current Assets [A] 650 625
Operating Profit (EBIT) 360
Property, plant and equipment (PPE) 1,830 1,730
Interest Expenses 60
Accumulated Depreciation 375 355
Net PPE [B] 1,455 1,375 Earnings Before Taxes (EBT) 300
Total Assets [A+B] 2,105 2,000
Sample Income Taxes 100
Liabilities Statement Net Income 200
Payables 120 105 Common Dividends 60
Short-term debt 170 155
Current portion of long-term debt 65 60
Current liabilities [C] 355 320
Long-term debt 615 695
Deferred taxes 115 105
Total non-current liabilities [D] 730 800
Total liabilities [C+D] 1,085 1,120
Shareholder's Equity
Common stock (at par) 300 300
Additional paid in capital 400 400 Sample Balance
Retained Earnings 320 180 Sheet
Total Shareholder's equity [E] 1,020 880
Total liabilities and equity [C+D+E] 2,105 2,000
Example (2/3)
650
) = = = 1.83
355

+ + 115 + 215
) = = = 0.93
355

365 365
) = = = 18.47
4200
( ) ( )
(215 + 210)/2

3200
) = = = 10.24
(320 + 305)/2

4200
) = = = 2.05
(2105 + 2000)/2
 Example (3/3)
4200
) = = = 14
( 650 355 + (625 320))/2
1000
) = = = 23.8%
4200
200
) = = = 4.8%
4200
360
) = = = 19.7%
+ ( 170 + 65 + 615 + 1020 + (155 + 60 + 695 + 880))/2
200
) = = = 0.21
(1020 + 880)/2
170 + 65 + 615
) = = = 0.83
1020
360
) = = =6
60
Questions??