Insights of ratio analysis
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The document discusses various ratios used to analyze the financial position and performance of a company. It provides the profit and loss account and balance sheet of a company, showing revenues of 1120, profits of 60, assets of 800. It then defines key ratios like return on assets (14%), return on equity (16.6%), current ratio (1.33), and debt-to-equity. The document outlines how these ratios can be used to evaluate margins, asset usage, financial leverage, liquidity, and debt levels.
Insights of ratio analysis
- 1. Insights of Ratio Analysis AISHVARYA DADHEECH
- 2. RELATIONSHIP BETWEEN PROFIT AND LOSS ACCOUNT AND BALANCE SHEET. PROFIT AND LOSS BALANCE SHEET ACCOUNT PBIT TOTAL ASSETS PBT CAPITAL EMPLOYED PAT NET WORTH
- 3. PROFIT AND LOSS ACCOUNT. Sales 1120 Operating cost 1008 ___________________________________ PBIT 112 LESS INTEREST 20 PBT 92 LESS TAX 32 PAT 60 LESS DIVIDENDS 24 RETAINED EARNING 36
- 4. BALANCE SHEET AMOUNT AMOUNT LIABILITIES ASSETS OWNER FUNDS 360 FIXED ASSESTS 400 LONG TERM LIABILTIES 200 INVESTMENTS 80 CURRENT LIABILITIES 240 CURRENT ASSESTS 320 800 800
- 5. Corporate valuation Market capitalization Share values , nominal, book, market Earning per share Dividend per share Dividend cover and the pay out ratio Earning yield Dividend yield PE ratio Market to book ratio Cash earning per share CEPS = PAT – Preferred dividend + non-cash charges / no. of equity shares o/s
- 6. P E ratio ( Earning Multiple) Red flag to measure how expensive or cheap The lower the P/E, the less you have to pay for the stock, relative to what you can expect to earn from it. The higher the P/E the more over-valued the stock is. Example. Changes in the market price and EPS. Trailing and projected P E Ratio N/A 0-13 14-20 21-28 28 + disparate interpretation. Averages and Market P E Ratio.
- 7. RETURN ON INVESTMENTS TWO MEASURES TO COMPUTE 1. RETURN ON TOTAL ASSETS 2. RETURN ON EQUITY
- 8. RETURN ON TOTAL ASSETS PROFIT BEFORE INTEREST AND TAX _________________________________ TOTAL ASSETS HERE , 112 / 800 = 14 % RETURN ON NET ASSETS =PAT/ FIXED ASSETS + WORKING CAPITAL
- 9. COMPUTATION OF RETURN ON TOTAL ASSETS PBIT/ TA = PBIT/ SALES * SALES/ TA ROTA = PROFIT * ASSETS MARGIN TURNOVER ROTA = 112/ 112O * 1120/ 800 = 10 * 1.4 = 14 % DUAL ROLE
- 10. MARGIN ON SALES DRIVERS SALES 1120 OPERATING COSTS MATERIALS 426 LABOR 291 FACTORY OVERHEADS 168 ADMIN/ SELLING ,ETC 123 TOTAL OPERATING COST 1008 __________________________________ MATERIALS COST % 426/1120 = 38% LABOUR COST % 291/1120 = 26% FACTORY OVERHEADS COST % 168/1120 = 15% ADMIN SELLING COST % 123/1120 = 11% Total 90%
- 11. SALES / TOTAL ASSETS DRIVERS SALES / FIXED ASSETS 1120/ 440 = 2.5 TIMES SALES( cogs) / INVENTORIES 1120 / 128 = 8.7 TIMES SALES / ACCOUNT RECEIVABLES 1120 / 160= 7.0 TIMES Purchases/ account payables OTHER WAY AROUND…………….! INVENTORY DAYS. DEBTOR DAYS.
- 12. RETURN ON EQUITY PAT / OWNER FUNDS 60 / 360 16.6 % Preference dividend
- 13. RETURN ON CAPITAL EMPLOYED ROCE= PBIT / CAPITAL EMPLOYED. Return on Capital Employed ratio measures the efficiency of the business in using the capital invested in it to make a profit. Therefore, the higher the percentage the more efficient the company is
- 14. Du pont trend ROE = NI / TE Multiply by 1 and then rearrange ROE = (NI / TE) (TA / TA) ROE = (NI / TA) (TA / TE) = ROA * EM Multiply by 1 again and then rearrange ROE = (NI / TA) (TA / TE) (Sales / Sales) ROE = (NI / Sales) (Sales / TA) (TA / TE) ROE = PM * TAT * EM ROE = PM * TAT * EM Profit margin is a measure of the firm’s operating efficiency – how well does it control costs Total asset turnover is a measure of the firm’s asset use efficiency – how well does it manage its assets Equity multiplier is a measure of the firm’s financial leverage
- 15. LIQUIDITY MEASURES CURRENT RATIO CURENT ASSETS / CURRENT LIABILITIES 320 / 240 =1.33 QUICK RATIO CURRENT ASSETS – INVENTORY 200/ 240 = .833 WORKING CAPITAL / SALES RATIO CA-CL/ SALES 80/1120 = .071
- 16. FINANCIAL MEASURES DEBT TO EQUITY RATIO Debt over equity and debt over total funds. Interest cover PBIT/ INTEREST