RATIO ANALYSISThe relationship of one item to another expressed in a simple mathematicalform is known as the “RATIO”. A ratio is a quotient to two numbers. It mustbe interpreted against some standard. In assessing the financial stability of afirm, a management should, part form profitability, be interested in relativefigures. A ratio is of major importance for financial analysis; it engagesqualitative measurement & shows precisely how adequate is one key item inrelation to another. To evaluate the financial condition & the purpose of thefirm the financial analyst needs certain yardsticks. The yardsticks frequentlyused in ratio or an index relating two pieces of financial data to each other’s.UTILITY OF RATIO ANALYSIS: 1. Probability. 2. Liquidity. 3. Efficiency. 4. Inter – Firm Comparison. 5. Indicates Trend. 6. Useful of Budgetary Controls. 7. Useful for Decision Making.This ratio analysis contains five types of ratio as below: 1. Profitability Ratios. 2. Liquidity Ratios. 3. Assets Turnover Ratios. 4. Finance Structure Ratios. 5. Valuation Ratios.Profitability Ratios:Profitability ratio measures the degree of operating success of a company inan accounting period. Two types of profitability ratios are there. 1. Profit Margin Ratios. 2. Rate of Return Ratios.A profit margin ratio shows the relationship between profit & sales. Threepopular profits margin ratios are:
Gross Profit Margin Ratios. Net Profit Margin Ratios. Operating Profit Ratios. Gross Profit Margin Ratio:It shows the margin left after meeting manufacturing costs. It measures theefficiency of production as well as pricing.Gross Profit Margin Ratio = Gross Profit/ Sales X 100 Mar 11 Mar 10 Mar 09 Mar 08 Mar 07GP Ratio 56.58 39.82 58.30 55.41 58.91 The table shows that gross profit has been increased continuously increased over the years with the exception of last year which had decreased because of less sales. The reason for increase in the gross profit is due to increase in sale. Sale has been continuously increased over the yearsAlthough the gross profit has been increased over the years it has beenfound that gross profit ratio has been increased continuously. Net Profit Margin Ratios:It is most significant of all revenue ratios as it indicates the ultimateprofitability of the firm. This ratio is useful to the shareholders for knowingthe EPS and to investors in judging the prospects of return on theirinvestments higher ratio indicated higher profitability.Net Profit Margin Ratio = Net Profit / Sales x 100. Mar 11 Mar 10 Mar 09 Mar 08 Mar 07NP Ratio 31.37 23.87 40.36 42.49 28.38 In above showing continues increase in net profit till 2009 but then it significantly decreased in year 2010 because of substantial increase in raw materials cost and labourcosts.Company has then made up a bit in
2011 because of strong demand in real estate sector that is continuously riding high on back of developing india.So we can say that company is smoothly & gradually growing & strong backup. Return on assets or Return on investments:This is measure of profitability from a given level of investments. It is anexcellent indicator of overall performance of a company. It is also calledreturn on capital employed or return on investment. It measures howefficiently the capital is employed.Return on Assets = Net Profit / Average Total Assets X 100 Mar 11 Mar 10 Mar 09 Mar 08 Mar 07ROI Ratio 81.35 75.59 72.91 66.10 4.27 The ROA goes increasingevery year . This is showing the efficiency in the use of capital. The company can earn more profit by optimizing the use of assets. The ROA has increased every year because of increase in profit every year.Liquidity Ratios:Liquidity is the ability of a company to meet its short-term obligations whenfall due. A company should have enough cash % other current assets, whichcan be converted in to cash so that it can pay its suppliers & lenders ontime.In evaluating Ashok Leyland Ltd’s liquidity five ratios are presented. Current Ratio. Quick Ratio or Acid-test Ratio. Net Working Capital. Cash Generated Per Rupee of Sales. Bank Finance Gap Ratio. Current Ratio:Current ratio indicates the firm’s ability to pay its current liabilities, i.e. day-to-day financial obligations. It shows the strength of credit, strength of
working capital & capacity to carry on effective operations. Higher ratio i.e.more than 2:1 indicates sound solvency position.Current Ratio = CurrentAssets/ CurrentLiabilities.Where,Current Assets = Inventories + Debtors + Cash & Bank Balance + Loan &Advances.Current Liabilities = Liabilities + Provision Mar 11 Mar 10 Mar 09 Mar 08 Mar 07 CR 3.51 5.03 2.96 2.34 1.75 Composition of current ratio is very important at the time of interpretation. Current ratio indicates the sound short term finance from the creditor’s point of view. But on the other hand the higher ratio indicates blocking of funds in current assets. As a conventional rule, current ratio of 2:1 or more is considered satisfactory. To through more light on the quality of current assets the percentage of the current assets is to be calculated. However, an arbitrary standard of 2:1 should not be blindly followed. Firm’s wit less then 2:1 current ratios may be doing well, while firms with 2:1 or even higher may be finding great difficulties in paying their bills. This is because the current ratio is a test of quantity not quality. Current Ratio is 5.03 in 2010& decreased up to 3.51 in 2011 because current liabilities increased rapid than the increase in current assets. In the Current ratio it has been found decreasing than the base year, so it is not a favorable sign for the company, it should take certain measure to increased. Quick Ratio or Acid Test Ratio:The Quick Ratio is a more absolute test of a firm’s ability to meet itsimmediate liabilities. It base on those current assets, which are highly liquidinventories, is excluded from the numerators of this ratio becauseinventories are deemed to be the least liquid component of current assets.Quick Ratio = Quick Assets / Liquid Liability. Mar 11 Mar 10 Mar 09 Mar 08 Mar 07 QR 2.49 3.56 3.83 3.28 1.36 Generally a quick ratio of 1:1 is considered to represent a satisfactory current financial condition. A quick ratio of 1:1 or more does not necessarily imply sound liquidity position.
A company with a high value of quick ratio can flounder if it has slow-paying, doubtful and stretched out-in-age receivables. On the other hand, a company with a low value of quick ratio may be prospering and paying its current obligation in time, if it has been managing its inventories very efficiently wit a continuous stability. It has same effect as Current Ratio.In year 2007 the ratio was 1.36 , which was highest & also satisfactory level.But then in year 2010, it was increased to 3.56 because of rapid increase inliquid assets. FINANCE STRUCTURE RATIOS:It indicates the relative mix or blending of owner’s funds and outsider’s debtfunds in the total capital employed in the business. Financial leverage refersto the use of debt finance. While debt capital is a cheater source of finance,it is also a riskier source of finance. Two types of ratio are commonly used to analyze financial leverage 1. Structural Ratios. 2. ConvergeStructure ratio is base on the proportion of debt and equity in the financialstructure of the firm. Important structural ratios are: - Equity Ratio or proprietary Ratio Debt equity Ratio Debt Ratio Debt equity ratio:This ratio indicates the relationship between borrowed funds and owner’scapital. It shows the proportion of long-term external equities and internalequities. i.e. proportion of funds provided by long-term creditors and thatprovided by shareholders or proprietors.Debt Equity Ratio = (Total long term debt/Net worth) x 100. Mar 11 Mar 10 Mar 09 Mar 08 Mar 07Debt to equity 1.09 0.99 0.78 0.74 10.37
The company has been properly able to manage its debt-equity ratio whichshould be idealy 1:1.The company has been able to pay large amount of its debtwhich was substantially high that is 10.37 in 2007. Debt ratio: It shows the relationship between long-term debt and total capital employed. Equity ratio and debt ratio summation is always 1. Debt ratio = long-term debt / total capital employed Mar 11 Mar 10 Mar 09 Mar 08 Mar 07Debt Ratio 0.21 0.25 0.33 0.43 0.32 Interest coverage Ratio:Thisratio indicates the use of interest bearing debt funds in generatinghigher operating profit. Higher is the ratio better is the utilization of deptfund. Higher interest cover ratio, enhance the equity earning is passed overto the equity finance portion of the capitalization.Interest Coverage Ratio = EBIT / Interest. Mar 11 Mar 10 Mar 09 Mar 08 Mar 07ICR 2.40 2.45 3.52 8.38 3.22Company can actually go for increasing its interest coverage ratio which wassignificantly better that is 8.38 in Mar 08. Turnover RatiosTurnover Ratios are basically Production ratios which measures the outputproduced from the given input deployed. The relationship of productivity isequal to output divided by input & assets turnover is equal to sales dividedby Assets.
Debtors turnover. Fixed Assets Turnover. Total Assets Turnover. Inventory Turnover ratio.Total Assets Turnover:It shows the relationship between total assets to sales. The sales areaffected through investment in fixed assets to earn profit. The higher ratioshow that with less amount of investment in total assets, the business hascapacity to sell more as such its probability is also more.Total Assets Turnover = Sales / Total Assets Where Total Assets = Fixed Assets + Investments + Net Current Assets + Misc. Expenses. Mar 11 Mar 10 Mar 09 Mar 08 Mar 07TAT 0.12 0.11 0.20 0.28 0.15 Total assets turnover ratio has started decreasing from 2009 which is not a good sign for the company. The company should look for increasing its use of fixed assets over sales. Fixed Assets Turnover Ratio:The Fixed Assets Turnover shows the efficiency & profitability of business bycomparing the fixed assets with sales. The higher ratio shows that the fixedassets are using efficient manner to increase the sales.Fixed Assets Turnover Ratio = Sales / Net Fixed Assets. Mar 11 Mar 10 Mar 09 Mar 08 Mar 07FAT 1.18 1.11 1.08 1.23 1.44 A fixed assets turnover ratio has been increased in 2011 compared to 2010. It indicates that fixed assets utilized more efficient in business.
Debtor’s Turnover:The debtor’s turnovers suggests the number of times the amount of creditsales is collected during the year, while debtors ratio indicates the no. ofdays during which the dues for credit sales are collected. Debtor’s Turnover = Credit Sales / Average Debtors. Mar 11 Mar 10 Mar 09 Mar 08 Mar 07Debt Tur.R 6.64 5.62 4.95 9.96 11.0The companys debtor turnover ratio has increased from last year which is agood sign but company should look for further increasing the ratio. Inventory Turnover Ratio:Inventory Turnover Ratio is the ratio of cost of goods sold to averageinventory.It is an activity efficeiency ratio and it measures how many timesper period a company sells and replaces its inventory.Inventory turnover ratio=Cost of goods sold/average inventory. Mar 11 Mar 10 Mar 09 Mar 08 Mar 07ITR 0.42 0.41 0.33The companies performance on this front is not good.The lower inventoryturnover ratio indicates that there is obolosence risk for inventories as thereis overstocking of inventory.Valuation Ratios:Valuation ratios are the results of the management valuation ratio aregenerally presented on a per share basis and that are more useful to theequity invertors. The per share valuation are popular presented as Earning per share (EPS). Dividend pay out Ratio (DPS) Divided yield
P/E Ratio. Earning per share (EPS).Earning per Share is an important major of corporate performance forshareholders & potential investor. EPS figures are commonly presented inprospectus & other material send to investor, press reports & reports ofequity analyst. AS 20 sets out the requirements for computation of EPS*EPS is reported only foe equity share capital.Earning Per Share = Profit after Tax / No. Of Equity Shares Mar 11 Mar 10 Mar 09 Mar 08 Mar 08EPS 7.48 4.51 9.12 15.10 2.65Companies EPS have increased over last year significantly which is realy agood sign . Dividend pay out Ratio (DPS):This ratio indicates the spilt of EPS between cash dividend & reinvestment ofprofits. Ashok Leyland Ltd has profitable projects; show it is prefer to D/Pratio lower, i.e. it will reinvest higher proportional profits in the business.Dividend pay out Ratio = Dividend per Share / Earning per Share. Mar 11 Mar 10 Mar 09 Mar 08DPS 26.74 45.86 23.79 30.99Company has maintained a more manageable dividend payout ratio thisyear as company is on expansion track and looking for growthopportunities. Dividend Yield:The Dividend Yield represents the current cash return to share holders. It iscomputed by dividing the dividend per share by the average market price of share.Dividend Yield = Dividend per Share / Average Market Price of Share X 100.
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07YIELD 23.41 37.62 21.67 30.19 96.07 P/E Ratio:This is popular measure extensively used in investment analysis. In a recentserved, 40% of well-known institutional portfolio managers and analysts inthe U.S ranked P/E ratio as the key factor in picking stocks.P/E ratio = current market price of share/Earning per share Mar 11 Mar 10 Mar 09 Mar 08 Mar 07P/E Ratio 26.57