only for student

1. Presentation
On
Ratio Analysis

2. CONTENT
 Introduction
 Types of ratio
 Short Term Solvency
 Long Term Solvency
 Terms
 ROI Ratios
 Liquidity Ratios
 Efficiency Ratios
 Profitability Ratios
 Valuation Ratios
 Reference

3. INTRODUCTION
 Ratio analysis is a powerful tool of financial
analysis.
 A ratio is defined as “the indicated quotient
of two mathematical expressions” and “the
relationship between two or more things”.

4. A. Short term solvency
 Current ratio
 Liquid ratio
 Absolute liquid ratio
 Cash ratio
 Cash burn ratio
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr

5. B. LONG TERM SOLVENCY
 Long term debt to equity
 Total debt to equity
 Total debt to total capital ratio
 Fixed assets to equity capital ratio
 Net tangible assets to long debt
 Financial leverage
 Interest coverage
 Cash interest coverage
 Debt service coverage
 Cashflow adequacy

6. C. PROFITABILITY
I.Overall profitability – Net Profit / Total invts
IIComponents of profitability – Net profit / Sales / total
investments
III. Gross margin / Operating ratio / Net margin /
Working capital T.o / Fixed Assets T.o
Iv. Expenses / T.o , CA / CL /T.o

7. TERMS
 Capital employed =
Equity shareholders funds + Preference share
capital + Long term borrowed funds
 Net worth = Equity shareholders funds +/-
Deferred tax
= Equity share capital + Reserves & surplus –
Miscellaneous Expenditure not written off +
Deferred tax
Turnover = Sales

8. ROI RATIOS
1. ROI = NP before tax and interest
Total capital employed
This ratio indicates the return earned by the company on
its total investment. This is very important to
shareholders and other stake holders as it is the ultimate
measure of the company’s overall performance. This
ratio when compared with industry average gives an
indication about the financial performance of the
company.
2. RONW = PAT – Preference dividend * 100
Net worth ( ESHs Fund )
This ratio indicates the return earned by equity
shareholders. High ratio means high dividend , better
growth prospects and high valuation in capital market.

9. 3. EPS = PAT – PREFERENCE DIVIDEND
NUMBER OF EQUITY SHARES
This ratio gives the return earned on each
share. It is an important measure of profitability for
the investors. This ratio is the basis for valuation of
companies in the event of mergers etc, strategic
investments by owners. Higher ratio shows
company in a positive light. Higher ratio indicates
higher returns.

10. Comparative Standards / Benchmarking
 Industry leader
 Industry average
 WACC
 Cost of borrowings
Influencing factors
 Sales
 Cost economies
 Optimum capital structure

11. STRUCTURAL RATIOS / GEARING RATIOS / LONG TERM SOLVENCY RATIOS
1. Debt equity ratio = Long term Debt
Total net worth ( ESHs Funds + PC )
This ratio helps in assessing whether the company is relying on own
funds or borrowed funds. Higher the debt more fixed liabilities by way of
interest. FI s generally look for a D/E of 1.5 :1 while financing projects.
This ratio also indicates whether the company has a optimum capital
structure to improve the returns available to equity shareholders.
2. Debt service coverage ratio = NPBIT
Interest + Loan repayment
This ratio indicates the profits available to service the debts. This ratio is
very important for lenders. Higher the ratio higher is the ability of the
company to finance the debt and less risk of default.
3. Interest coverage ratio = NPBIT
Interest

12. COMPARATIVE STANDARDS / BENCHMARKING
 Industry average
 NAV of industry leader / laggard
 Institutional norms
 Growth / Decline over the previous years
Influencing factors
 ROI & EPS
 Dividend policy

13. LIQUIDITY RATIOS
1. Current ratio = Current Assets, loans & Advances
Current liabilities & Provisions
2. Quick ratio =
Current Assets, loans & Adv – inventories – prepaid Exp
Current liabilities & Provisions– Bank overdraft
These 2 ratios helps in analyzing the current assets and
current liabilities of the company and its ability to
discharge its day to day obligations Quick ratio is more
realistic. It indicates the extent to which the company
has current assets to meet its current liabilities. Higher
the ratio higher is the solvency level of the company and
less risk of default.

14. COMPARATIVE STANDARDS / BENCHMARKING
 Institutional norms
 Effective asset utilisation
 Cost economies
 Proportion of non cash charges in expense
structure
Influencing factors
 Proper asset liability management
 Credit period availed and credit period allowed
 Inventory management / Supply chain management/
level of obsolescence

15. EFFICIENCY RATIOS
1.Fixed assets turnover ratio = Net sales
Net block of fixed assets
Fixed assets are income generating assets for any company.
This ratio indicates the efficiency with which the fixed assets
are used to generate revenue. Higher the ratio better is the
utilization of assets for generating sales.
2. Net worth turnover ratio = Net sales
Net worth
This ratio indicates the overall financial and operational
efficiency of the company
It is an indication about the optimum capital structure and
production efficiencies of the company.
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr

16. 3. DEBTORS TURNOVER RATIO = NET SALES
Avg. Debtors
This ratio indicates the number of times the debtors are
converted into cash.
4. Average debt collection period =
Avg. Debtors * 360 days
Sales

17. 5.INVENTORY TURNOVER RATIO = COGS
Avg. inventories
This ratio shows the number of times a company’s
inventory is turned into sales.
6. Avg. Inventory holding period =
Avg inventories * 360
COGS
0
2
4
6
Category
1
Category
2
Category
3
Category
4
Series 1
Series 2
Series 3

18. Comparative Standards / Benchmarking
 Industry average
 Industry leader
 Trend over a period of time
Influencing factors
 Production efficiencies
 Investment in relevant technologies
 Price and quality of products

19. Profitability ratios
1.GP ratio = GP*100
Sales
2. Net profit ratio = PAT * 100
Sales
These ratios study the profitability in relation to
sales. It helps to assess the business performance
starting from Gross Profit. Multi level profitability
ratios helps to understand the levels at which there
is pressure on margin ( profit )

20. Comparative Standards / Benchmarking
 Trend over a period of time
 Industry average
 Industry leader / laggard
 WACC
Influencing factors
 Qualitative and quantitative growth in sales
 Age of fixed assets ( depn )
 Cost of borrowing
 Efficient tax planning

21. Valuation ratios
1. P/E ratio = Market price of equity share
EPS
This ratio is the most popular ratio for valuation of a
company by the investors. This ratio indicates
market confidence in the company and its future
prospects.
2. Book value per share ( Net Asset Value ) =
Net worth
No. of equity shares
This ratio measure the net worth per equity share.
This ratio indicates the efficiency of the company’s
management in building up reserves and its
prudent financial practices.

22. Comparative Standards / Benchmarking
 Industry average
 Leaders & laggards in industry
 Trend over a period of time
Influencing factors
 Dividend policy
 Size of the company
 Market conditions
 NAV

23. Analysts should take the following precautions
 Analysis of trends over a long period of time
 Interpretation of observation against industry bench
mark
 Analysis of core ratios only
 Inter firm comparison for variations in accounting
policies
 In case of conglomerates comparative performance
of different lines of business

24. REFERENCES
 www.google.com
 www.wikipedia.com
 www.studymafia.org