Ratio analysis

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Ratio analysis

  1. 1. RATIO ANALYSIS
  2. 2. Importance of Ratio Analysis• It presents facts on a comparative basis andenables the drawing of inferences regardingthe performance of the firm.• It is relevant in assessing the performanceof a firm in respect of:– Liquidity position.– Long term solvency.– Operating efficiency.– Overall profitability.– Inter-firm comparison.– Trend analysis.
  3. 3. Limitation of Ratio Analysis• Difficulty in comparison:– Situations of two firms are never the same, theymay be operating in different situations.– Industry averages are not easily available.• Impact of inflation:– As financial statements are based on historicalcosts, price level changes due to inflation arenever considered.• Conceptual Diversity.– Difference of opinion of the various conceptsused to compute the ratios.
  4. 4. Liquidity Ratios• Current Ratio:• Acid Test Ratio:Current AssetsCurrent LiabilitiesQuick AssetsCurrent Liabilities – Bank Overdraft
  5. 5. Liquidity Ratios• Cash Ratio:Cash & Bank Balances + Current InvestmentsCurrent Liabilities
  6. 6. Leverage Ratios• Debt-equity Ratio:DebtEquity
  7. 7. Leverage Ratios• Debt-asset Ratio:DebtAssetsDebtTotal Capital
  8. 8. Leverage Ratios• Interest Coverage Ratio:Profit before interest & taxesDebt InterestProfit before interest & taxes + DepreciationDebt Interest
  9. 9. Leverage Ratios• Debt Service Coverage Ratio:Profit after Tax + Depreciation + Interest on termloanInterest on term loan + Repayment of term loan
  10. 10. Turnover Ratios• Inventory Turnover Ratio:• Inventory Holding Period:Cost of goods soldAverage Inventory360 days or 12 monthsInventory Turnover Ratio
  11. 11. Turnover Ratios• Debtors Turnover Ratio:• Debtors Collection Period:Net Credit SalesAverage Debtors360 days or 12 monthsDebtors Turnover Ratio
  12. 12. Turnover Ratios• Creditors Turnover Ratio:• Creditors Payment Period:Net Credit PurchasesAverage Creditors360 days or 12 monthsCreditors Turnover Ratio
  13. 13. Turnover Ratios• Fixed Assets Turnover Ratio:• Total Assets Turnover Ratio:Net SalesAverage net fixed assetsNet SalesAverage total assets
  14. 14. Profitability Ratios• Gross Profit Margin Ratio:• Net Profit Margin Ratio:Gross ProfitNet SalesNet ProfitNet Sales
  15. 15. Profitability Ratios• Return on Assets:• Earning Power:Profit after taxAverage total assetsProfit before interest & taxAverage total assets
  16. 16. Profitability Ratios• Return on Capital Employed:*NOPAT (net operating profit after tax)• Return on Equity:Profit before interest & tax (1-tax rate)*Average total assetsEquity earningsAverage equity
  17. 17. Profitability Ratios• Earnings per share :• Dividends per share:Equity earningsNo. of equity shares issuedDividendsNo. of equity shares issued
  18. 18. Profitability Ratios• Dividend Pay-out Ratio :Dividend Per ShareEarnings Per Share
  19. 19. Valuation Ratios• Price-earnings Ratio:• Yield:Market Price Per ShareEarnings Per ShareDividend + Price ChangeInitial Price
  20. 20. Valuation Ratios• Market Value to Book Value:Market value per shareBook value per share

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