Financial Analysis & Planning - Ratio Analysis By: CA PRAKASH PATEL
Chapter- 3: Financial Analysis & Planning -
Ratio Analysis
1. BASIC:
Statement of Capital Employed
Particulars ₹
Equity Share Capital xx
Add: Reserve & Surplus (All Reserves) xx
Less: Misc. Expenditure
- P/L A/c (Dr.)
- Deferred Exp. (x)
Equity Shareholders Fund xx
Add: Preference Share Capital xx
Net Worth/ Shareholders Fund/ Proprietor Fund xx
Add: Long Term Debt & Borrowings (Debenture, Bank Loan, etc.) xx
Capital Available xx
Less: Non-Trade Investment (x)
Capital Employed xx
Note: Investment
Trade Non-Trade
Investment in main line of business. Investment in Shares, Debentures, Capital
For e.g. sinking fund investment, WIP, etc.
assets replacement investment etc.
Statement of Profit and Loss
Particulars ₹
Sales xx
Less: COGS
- Material xx
- Labour xx
- Manufacturing Overhead xx (x)
Gross Profit xx
Less: Operating Expenses
- Administrative Expenses
- Selling Expenses (x)
Operating Profit (PBIT) xx
Less: Interest (x)
PBT xx
Less: Tax (x)
PAT xx
Less: Preference Dividend (x)
Earnings available for Equity Shareholders xx
Less: Equity Dividend (x)
Retained Earning xx
Note: Net Profit = Operating Profit + Non-operating Income – Non-operating Expense
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Financial Analysis & Planning - Ratio Analysis By: CA PRAKASH PATEL
Advantages and Disadvantages of Ratio Analysis
S No. Advantage Limitation
1 It helps in decision making & cost It is based on historical cost.
control.
2 It helps to analyze past & forecast It is not easy to understand.
future.
3 It summaries accounting figures. It may not be accurate sometimes.
4 It simplifies financial statement. Different interpretation by different
person.
2. TYPE OF RATIOS
A. Ratio Analysis:
Financial Ratio Activity Ratio Profitability Market Test Ratio
1. Short Term Solvency *Stock Turnover *GP & COGS *EPS & DPS
Liquidity
*Current Ratio *Debtor Turnover *NP *P/E Ratio
*Liquid/Acid-test/Quick *Creditor Turnover *Operating Profit *Dividend Payout &
Ratio Retention Ratio
*Super Quick *Holding Period *Operating Ratio *Dividend Yield
*Cash/Basic Defense *Fixed Asset/ Total * Operating Expense *Earning Yield
Internal Assets/ Ratio
Working Capital
Turnover
*Net Working Capital *Capital Turnover *ROI/ROA/ROCE & * Market Value/
Ratio (Sales to Capital ROE Book Value
Employed)
2. Long Term Solvency - *Return on equity -
shareholder’s fund
(ROE)
*Equity Ratio *Cash Profit Ratio -
*Debt Ratio - - -
*Debt-Equity Ratio - - -
*Proprietary Ratio - - -
*External Liabilities to - - -
Assets
*Gearing/Leverage - - -
Ratio
*Capital Gearing Ratio - - -
*Fixed Asset Ratio - - -
*Interest Coverage - - -
Ratio
*Dividend Coverage - - -
*Debt Service Coverage - - -
Du-Point Chart:
1. ROI/ROCE = Operating Profit Ratio x Capital Turnover
= EBIT x Sales
Sales CE
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Financial Analysis & Planning - Ratio Analysis By: CA PRAKASH PATEL
2. ROE = NP Ratio x Assets Turnover x Equity Multiplier
= PAT x Sales x Net Assets
Sales Net Assets Net Worth
1. Short Term Solvency/Liquidity Ratio:
a. Current Ratio = Current Assets (Standard 2:1)
Current Liabilities
b. Liquid /Acid Test/ Quick Ratio = Liquid Assets*
Liquid Liabilities**/Current Liabilities
*Liquid Assets = CA – Stock – Prepaid Expense
**Liquid Liabilities = CL- Bank Overdraft – Cash Credit
c. Super Quick Ratio = Cash + Bank + Marketable Securities
Current Liabilities
d. Cash Interval Ratio = Cash + Bank + Marketable Securities
Average Daily Cash Expense
Where, Average Daily Cash Expense = Total Cash Expense /365 days
e. Net Working capital = Current Assets- Current Liabilities.
2. Long term Solvency Ratios:
a. Equity Ratio = Shareholder’s fund
Capital Employed.
b. Debt-Ratio = Long Term Debt or, Total Outside Liability (LT + CL)
Capital Employed Total Debt + Net Worth
c. Debt-Equity Ratio = Long Term Debt/Total Debt
Shareholders Fund
d. Proprietary Ratio= Proprietary Fund/ Shareholders Fund (Higher Better)
Total Assets ( or Net Assets)
e. Outside Liabilities to Asset Ratio = Total Liabilities
Total Assets
= 100% - Proprietary
f. Capital Gearing Ratio = Fixed Cost Capital
Variable Cost Capital
= Debt + Preference Share Capital
Equity Shareholder Fund
g. Gearing (Leverage) Ratio = Fixed Cost Capital
Total Capital
h. FA Ratio = Fixed Assets
Long Term Debt
i. Dividend Coverage:
Equity = Profit for Equity (EAE)
Equity Dividend
Preference = PAT
Pref. Dividend
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Financial Analysis & Planning - Ratio Analysis By: CA PRAKASH PATEL
j. Interest Coverage = EBIT
Interest
k. Debt. Service Coverage = (PBIT + Non-Cash Expense ) – Tax
Annual Installment (Principle + Interest)
= PBIT (1-tax) + Non-cash expense
Annual Installment (Principle + Interest)
l. Fixed Charges Coverage Ratio = EBIT + Depreciation
Interest + Repayment of Loan/(1-t)
3. Activity Ratio:
a. Stock Turnover = COGS/Sales
Average Stock
Velocity/Holding Period = Avg. Stock x 12 months/ 365 days
COGS
b. Debtor Turnover Ratio = Credit Sales / Sales
Average Receivables
Holding Period = Average Receivable x 12 months/ 365 days
Credit Sales
c. Creditor Turnover Ratio = Credit Purchase
Average Payable
Holding Period = Avg. Payable x 12 months/ 365 days
Credit Sales
d. FA/Total Assets /WC Turnover = Total Sales
Average FA/ Total Assets/ WC
e. Capital Turnover = Turnover
Average Capital
4. Market Test Ratio:
a. EPS = Earning for Equity (EAE)
No. of Equity Shares
b. DPS = Equity Dividend
No. of Equity Shares
c. Earning/ Market Yield = EPS x 100
MPS
d. Dividend Yield = DPS x 100
MP
e. P/E Ratio = MP
EPS
f. Dividend Payout Ratio = DPS x 100
EPS
g. Retention Ratio = Retained Earning x 100
EAE
= 100% – Payout Ratio
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Financial Analysis & Planning - Ratio Analysis By: CA PRAKASH PATEL
h. Market Value/Book Value Ratio = Market price per share
Book value per share
Where,
Book value per share (BVPS) = Net worth
No. of equity shares
5. Profitability Ratio:
Particulars ₹
Sales xx
Less: Sales Returns (x)
Less: Indirect Tax (x)
Net Sales xx
a. Gross Profit = Gross Profit x 100
Sales
b. COGS Ratio = COGS x 100
Sales
c. Net Profit = PAT x 100
Sales
d. Operating Profit = PBIT x 100
Sales
e. Operating Ratio = Operating Cost* x 100
Sales
= 100% - Operating Profit Ratio
*Operating Cost = COGS + Operating Expenses
f. Operating Expense Ratio = Operating Expense x 100
Sales
g. ROI/ROCE/ROA = PBIT x 100 = (PBIT – (1-T) x 100
Avg. CE Avg. CE
h. ROE/Shareholders Fund = Profit After Tax x 100
Avg. Shareholders’ Fund
= PAT x 100
Net Worth/ Shareholders Fund
i. Return of Equity Shareholders Fund
= PAT – Preference Dividend x 100
Avg. Equity Shareholders’ Fund
j. Cash Profit Ratio = PAT + Non-Cash Expenses x 100
Sales
Or,
= PBIT + Non-Cash Expenses x 100
Sales
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