Relating 2 financial variables to derive to a meaningful conclusion

FINANCIAL RATIOS

Liquidity Ratios
Shows short term solvency or liquidity position of the co.

Current Ratio = Current Assets Current Liabilities

High

: + High solvency (-) Longer conversion cycle , High Carrying cost, Longer Payback period , High Opp. Cost

 Quick Ratio = (acid test ratio)

Quick (liquid) Assets Current Liabilities

High : + High short term solvency (-) high idle (unutilized) cash balance

 Inventory Turnover Ratio =

C.O.G.S. . Avg. Inventory

low :

+ Ample inventory (-) high carrying cost

High : + low carrying Cost (-) fatal in case of Inventory shortage mkt. may be captured not able to acchieve Economies of scale

 Debtor Turnover Ratio =

Net Credit Sales Avg. Debtors

High : + Lower avg. payback period, less opp. cost. (-) Fatal in a buyers market

Creditors Turnover Ratio = Net Credit purchases

Avg. Creditors

High : + Lower avg. payback period to creditors, high opp. cost. Builds goodwill, helps in sellers mkt.

 Defensive Interval Ratio =

Quick (liquid) Assets Projected Daily Cash Req*.

Tells the number of days till which we can carry operations out of our quick assets if cash flow stops.

LEVERAGE OR CAPITAL STRUCTURE RATIOS

Useful for Long Term Creditors and Lenders and

also management.
DEBT/EQUITY RATIO = Long Term Debt Shareholders Equity or Total Debt Shareholders Equity

 DEBT/EQUITY RATIO (contd.) High : +benefits of leverage

(-) perceived Financial Risk , higher lending rate

Low : + low risk , expansion opp.

(-) loss of benefits of leverage Owners can behave in irresponsible manner because there is less/no stake

 Debt to Capital Ratio : Same implications as that of D/E Ratio

 Interest Coverage (times):

EBIT Interest

Higher (EBIT) is always good.

 Dividend Coverage (times) :

EAT
PREF. DIV.

Higher (EAT) is always good

 Total Coverage =

EBIT

Total Fixed Charges*

*TFC : intt. on loan + [(pref div.) / (1-t) ] + [(repayment of principal) / (1-t) ]

PROFITABILITY RATIOS
Gross Profit Margin (%) : Gross Profit * 100

Sales Net Profit Margin (%) : NPAT * 100 Sales

Is higher always good ?

 Operating Ratio(%) :

(COGS + Other oper. Exp.) * 100 Sales Lower represents Economies of scale

 COGS Ratio(%) :

COGS *100 Sales

Lower represents Economies of scale

 Specific Expense(%) :Specific Expense * 100

Sales

 Operating Profit Margin :

PBDIT * 100 Sales

or

PBIT * 100 Sales

Higher OPM is always good.

 Return on Assets (%):

NPAT * 100
Avg. Total Assets

Higher ROA shows that Fixed assets are efficiently utilised

 R.O.E. (%)
Return on Sh. Holders Equity :

NPAT * 100
Avg. Total Sh.holders equity

Return on Ord. Sh.holders Equity : (NPAT- Pref Div. ) * 100

Avg Ord. Sh.holders Equity

 Earnings Per share:

EFE or (NPAT Pref Div) Wt. Avg. No of Equity Shares *diluted EPS
Dividend Per share:

Dividend Paid to equity sharesholders No. of Equity shares

 Dividend Pay-out Ratio(%) :

DPS

or

EPS

Total Div. Eq. Shares EFE

 Price Earning ratio:

(times)

Mkt. Price of Share

EPS

Shows the confidence of secondary mkt. investors in the co.

 Earning Yield (%):

EPS * 100 Mkt. Price of Share

Dividend Yield (%):

DPS * 100 Mkt. Price per share

ACTIVITY RATIO
Total Asset Turnover Ratio :

Sales Avg. Total Assets Sales Avg. Fixed Assets Sales

Avg Current Assets

Fixed Assets Turnover Ratio :

Current Assets Turnover Ratio :