Scribd
Upload
74 views43 pages

Understanding Ratio Analysis Basics

This document discusses various types of financial ratios that can be used to analyze a company's performance and financial health. It outlines ratios that measure liquidity (current ratio, quick ratio), leverage (debt ratio, debt-to-equity ratio), activity (inventory turnover, debtors turnover), profitability (gross profit margin, net profit margin, return on equity), and ratios for shareholders (earnings per share, dividend per share, price-earnings ratio). The document explains how to calculate these ratios and what each can indicate about the company. It also discusses different types of ratio analysis including cross-sectional, time series, and using benchmarks like industry averages.

Uploaded by

sunilsims2
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
74 views43 pages

Understanding Ratio Analysis Basics

This document discusses various types of financial ratios that can be used to analyze a company's performance and financial health. It outlines ratios that measure liquidity (current ratio, quick ratio), leverage (debt ratio, debt-to-equity ratio), activity (inventory turnover, debtors turnover), profitability (gross profit margin, net profit margin, return on equity), and ratios for shareholders (earnings per share, dividend per share, price-earnings ratio). The document explains how to calculate these ratios and what each can indicate about the company. It also discusses different types of ratio analysis including cross-sectional, time series, and using benchmarks like industry averages.

Uploaded by

sunilsims2
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

RATIO ANALYSIS

Why Ratios?
How comfortable are you with Rs. 3210578906.

Now compare it with Rs. 3235678976.

Which figure is better ?

Lets make our job simpler.

Lets study RATIOS.


Why Ratios?
How would you gauge if a company is
running efficiently?
How would you gauge the figures which
appear in the financial statements are
skewed/ lopsided/ unnatural/ balanced?
Ratio Analysis is a very powerful tool
which could be used to identify the above
and deduce inferences.
Types of Ratios
Liquidity Ratios
Leverage Ratios
Activity Ratios
Profitability Ratios
Shareholder’s Ratio
They could be expressed in …
%: 20%
Proportion: 2:1
Fraction: 1/10th of..
Times: 5 times ..
Types of Ratio Analysis
Cross Sectional Analysis: Comparison of Actual
Ratios of one firm with another similar firms belonging
to one industry.
Time Series Analysis: Comparison of ratios of one
period with earlier periods of the same company.
Benchmarks:
a. A Past ratio of the same enterprise
b. Ratio of similar firms
c. Industry Average
d. Rule of Thumb
Ratios
Liquidity Ratios measure the firm’s ability to meet current
obligations.

Leverage Ratios show the proportions of debt and equity


in financing the firm’s assets.
More Ratios……..
Activity Ratios reflect the firm’s efficiency
in utilizing its assets.

Profitability Ratios measure overall


performance and effectiveness of the firm.
More Ratios…
Share holder’s Ratio

These are ratios a shareholder will look at


to assess the return they will achieve for
their shareholding and the earnings
available to the shareholders.
Liquidity Ratios
Current Ratio: Current Assets
………………………………………

Current Liabilities
Quick Ratio/ Acid Test Ratio
Quick Ratio= Current Assets- Inventories
……………………………….
Current Liabilities
Cash Ratio
Cash Ratio= Cash + Marketable Sec.
……………………………….
Current Liabilities
Net Working Capital Ratio
NWC Ratio = NWC
……………………………….
Current Assets
LEVERAGE RATIOS
Debt Ratio = Total Debt
…………………………….
Total Debt + Net Worth

Or
= Total Debt
……………………………..
Total Assets/ Capital Employed
Debt Ratio
Debt Total Assets
Debt/Equity Ratio
Total Debt
……………..
Net Worth
Interest Coverage Ratio
EBIT
……………….
Interest
ACITIVITY RATIOS
Inventory Turnover Ratio

Cost of goods sold


……………………….
Average Inventory
Debtors Turnover
DTO = Credit Sales
…………………….
Average Debtors
Assets Turnover Ratio
ATO = Sales
…………………………..
Net Assets (Gross Block-Dep)
Working Capital Turnover
WCT = Sales
…………………
Net Current assets
PROFITIBILITY RATIOS
Gross Profit Margin:

Sales- Cost of goods Sold


……………………………….
Sales
Net Profit Margin
NPM = Profit after Tax
………………………
Sales
Operating Expense Ratio
= Operating Expenses
……………………………. X 100
Sales

Operating Expenses: Cost of Goods Sold+


Selling and General and Administrative
Expenses (Excluding Interest) or EBIT
Shareholder’s Ratio
EPS
Dividend Per Share/ Dividend Yield
Dividend Cover
Price/ Earning Ratio (P/E)
Return on Equity (ROE)
Earning Per Share (EPS)
= Profit after Tax
……………………………
Number of shares outstanding
Dividend per Share
= Earnings paid to shareholders (Dividends)
………………………………………………..
Number of ordinary shares outstanding
Dividend Payout ratio
Payout Ratio= Equity Dividends
…………………………
Profit After Tax (PAT)
Or

DPS
= ……
EPS
Dividends Yield
= DPS
………………..
MV per share
Price- Earning Ratio

PE= Market Value Per share = MV


……………………………………
Earnings per share EPS
Return on Investment
= EBIT (1-T)
…………….
Total Assets
Return on Equity
= PAT
……………………
NW
[Link]/help/efficie
ncy-ratios

You might also like