Ratio analysis 2
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Ratio analysis 2

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Ratio analysis 2 Ratio analysis 2 Presentation Transcript

  • Variants of Return on investment (ROI)
    • Return on Assets(ROA )= (net profit before interest & after tax/ average total assets or Average tangible assets or Average fixed assets)*100
    • Return on capital employed (ROCE)= (EBIT/ capital employed)*100
    • Capital employed=long term funds supplied by lenders & owners of the firm. Hence interest on Short term loans is deducted to arrive at EBIT.
    • Return on shareholders’ equity
    • Return on total shareholders’ equity=
    • (net profit after taxes/total shareholders' equity) *100
    • Return on ordinary shareholders’ equity(net worth)
    • =(net profit after taxes minus preference dividend /total ordinary shareholders' equity or net worth) *100
    • EPS(earning per share)= net profit available to equity holders/number of equity shares outstanding
  • Shareholders equity
    • =preference share capital + ordinary shareholders equity.
    • Ordinary shareholders equity or net worth= equity share capital+share premium+ reserves & surplus-fictitious assets.
  • Leverage or capital structure ratios
    • Long term soundness means ability to pay interest regularly & repayment of principal on time.
    • Hence ratios may be Based on relationship between borrowed funds & owner’s capital. Coverage ratios based on profit & loss account.
  • Types of solvency ratios Based on balance sheet Based on P & L account Debt- Equity ratio Debt-Assets ratio Equity assets ratio Interest coverage ratio Dividend coverage ratio
  • Debt- equity ratio
    • Shows claims of creditors & shareholders against assets of the firm.
    • =long term debt/shareholders’ equity.
    • =total debt/shareholders equity.
    • Second ratio is better as CL should be included.
    • High D/E ratio means lesser stake of owners in the business which could make them irresponsible
  • Trading on equity or leverage
    • With high debt content in capital structure , return to owners would be more than proportionate to increase in EBIT.
    • Because Debt carries a fixed charge & rest goes to shareholders.
    • TOI means practice of using borrowed funds carrying a fixed charge in expectation of giving higher returns to the equity shareholders.
  • Debt to total capital ratio
    • =long term debt/permanent capital
    • Where permanent capital = shareholders equity + long term debts.
    • Or =total debt/ total assets
    • Where total debt=long term debt+CL
    • Proprietary ratio=(proprietor’s funds/Total assets)*100
    • Indicates the proportion of total assets financed by owners.
    • Capital gearing ratio=fixed income bearing funds/net worth
    • Shows the effect of fixed interest bearing securities on earnings available to equity shareholders.
  • Coverage ratios
    • Interest coverage ratio= EBIT/Interest
    • Before tax profit is used b’coz interest is a tax deductible expense .
    • Dividend coverage ratio=EAT/Preference dividend.
  • Activity ratios
    • These reflect the speed with which assets are converted into sales.
  • Inventory or stock turnover ratio
    • =COGS/Average inventory
    • Or = sales/closing inventory
    • Indicates how fast inventory is sold
    • Inventory holding period=months(days) in a year/ inventory turnover ratio
  • Debtors turnover ratio
    • It shows how quickly debtors or receivables are collected
    • = credit sales/ average debtors & average Bills receivable.
    • Or = sales/closing debtors & bills receivable
    • The second formulae is used when average & credit sales are not given.
  • Average collection period
    • = months(days) in a year/ debtors turnover ratio.
  • Creditors turnover ratio
    • =(average creditors+ average bills payable)/ credit purchases
    • It shows the speed with which payment is made to the creditors.
    • Average payment period= months(days) in a year/ creditors turnover ratio
  • Cash cycle
    • Inventory holding period + debtor’s collection period – creditor’s payment period.
    • The shorter the cash cycle the better is the liquidity position.