Insights of ratio analysis

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Insights of ratio analysis

  1. 1. Insights of Ratio AnalysisAISHVARYA DADHEECH
  2. 2. RELATIONSHIP BETWEEN PROFIT ANDLOSS ACCOUNT AND BALANCE SHEET. PROFIT AND LOSS  BALANCE SHEET ACCOUNT PBIT  TOTAL ASSETS PBT  CAPITAL EMPLOYED PAT  NET WORTH
  3. 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. 4. BALANCE SHEET AMOUNT AMOUNTLIABILITIES ASSETSOWNER FUNDS 360 FIXED ASSESTS 400LONG TERM LIABILTIES 200 INVESTMENTS 80CURRENT LIABILITIES 240 CURRENT ASSESTS 320 800 800
  5. 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. 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. 7. RETURN ON INVESTMENTSTWO MEASURES TO COMPUTE1. RETURN ON TOTAL ASSETS2. RETURN ON EQUITY
  8. 8. RETURN ON TOTAL ASSETS PROFIT BEFORE INTEREST AND TAX _________________________________ TOTAL ASSETSHERE , 112 / 800 = 14 %RETURN ON NET ASSETS=PAT/ FIXED ASSETS + WORKING CAPITAL
  9. 9. COMPUTATION OF RETURN ONTOTAL ASSETS PBIT/ TA = PBIT/ SALES * SALES/ TA ROTA = PROFIT * ASSETS MARGIN TURNOVERROTA = 112/ 112O * 1120/ 800 = 10 * 1.4 = 14 %DUAL ROLE
  10. 10. MARGIN ON SALES DRIVERS SALES 1120OPERATING COSTSMATERIALS 426LABOR 291FACTORY OVERHEADS 168ADMIN/ SELLING ,ETC 123TOTAL 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. 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. 12. RETURN ON EQUITY PAT / OWNER FUNDS 60 / 360 16.6 % Preference dividend
  13. 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. 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. 15. LIQUIDITY MEASURES CURRENT RATIOCURENT ASSETS / CURRENT LIABILITIES320 / 240 =1.33QUICK RATIOCURRENT ASSETS – INVENTORY200/ 240 = .833WORKING CAPITAL / SALES RATIOCA-CL/ SALES80/1120 = .071
  16. 16. FINANCIAL MEASURES DEBT TO EQUITY RATIO Debt over equity and debt over total funds. Interest cover PBIT/ INTEREST

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