Financial ratio analysis


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Financial ratio analysis

  1. 1. Ratio AnalysisManagerial Finance
  2. 2. PresentersOmer Shahzad MB-12-08Ali Asghar MB-12-34Zeeshan Ahmad MB-12-09Babar Chaudhary MB-12-5454321Saleem Malik MB-12-23
  3. 3. FinancialRatios
  4. 4. Market RatiosProfitability RatiosDebt RatiosActivity RatiosLiquidityRatios
  5. 5. AliAsgharMB-12-34
  6. 6. Liquidity RatiosFirm’s ability to satisfy its short-term obligations as they comedue.
  7. 7. Current RatioLiquidity RatiosQuick Ratio
  8. 8. Current RatioLooks at the ratio betweencurrent assets and currentliabilities.
  9. 9. Mostly Current Ratio of 2 is consider acceptable. ForAtlas Honda, current ratio is less than acceptable butimproved during last 5 years and remain stable in last 2years at level of 1.45 which is quite acceptable.
  10. 10. 1.311.251.491.45 1.451. 2009 2010 2011 2012Current RatioCurrent Ratio
  11. 11. Quick RatioIs similar to the current ratiobut it excludes inventoryfrom current assets.
  12. 12. A Quick Ratio of 1 or greater is acceptable. For AtlasHonda, Quick Ratio mostly remain below 1 and remaindeteriorating.
  13. 13. 0.840.71.020.9100. 2009 2010 2011 2012Quick RatioQuick Ratio
  14. 14. 1.311.251.491.45 1.450.840.71.020.9100. 2009 2010 2011 2012Liqidity RatiosCurrent Ratio Quick Ratio
  15. 15. According to company financial statement theyare in Strong Liquidity position but their liquidityposition is not as good as they stated. Companyliquidity position appear to have remain stablebut below acceptable criteria. Company mayhave problem to satisfy its short term obligationswhen they come due. But, it is also a fact thatcompany do not have pay all its short termobligations at the same time so company shouldmanage to pay its short liabilities.Liquidity Ratios
  16. 16. OmerShahzadMB-12-08
  17. 17. Activity RatiosMeasures the speed with whichvarious accounts are converted intosales or cash-inflows or cash-outflows.
  18. 18. InventoryTurnover RatioActivity RatiosAverageCollection PeriodAveragePayment PeriodAssetTurnover Ratio
  19. 19. Inventory Turnover RatioMeasures the activity of afirm’s inventory.
  20. 20. Inventory turnover for ATLAS HONDA is improved very fastduring last 5 years and a level of 16.3 is quite remarkable.Higher Inventory Turnover leads to reducing holding cost andincrease the net income and profitability. But company need toremain conscious about inventory turnover because higherlevel of inventory turnover may indicate inadequate inventorylevel, which may leads to a loss for the business.
  21. 21. 7.1310.3614.151516.30246810121416182008 2009 2010 2011 2012Inventory TurnoverInventory Turnover
  22. 22. Asset Turnover RatioIndicates the firm’sefficiency to use assets forgenerating sales.
  23. 23. It is generally consider that the higher the firm total assetturnover, the more efficiently its assets have been used.Asset turnover for ATLAS HONDA is improving and haveexcellent level.
  24. 24. 2.391.8433.383.4700.511.522.533.542008 2009 2010 2011 2012Asset TurnoverAsset Turnover
  25. 25. 7.1310.3614.151516.32.391.8433.38 3.470246810121416182008 2009 2010 2011 2012TurnoversInventory Turnover Asset Turnover
  26. 26. Average Collection PeriodShows the time needed tocollect accounts receivables.
  27. 27. ATLAS HONDA have very good credit and collectionpolicies. Average collection period of less than 1 week isamazing.
  28. 28. 78.564.5601234567892008 2009 2010 2011 2012Average Collection PeriodAvg. Collection Period
  29. 29. Average Payment PeriodShows the time needed topay accounts payables.
  30. 30. Average payment period is decreased as compared to2009. But company still using its credit worth very welland taking full advantage of credit period from suppliers.
  31. 31. 61764851 50010203040506070802008 2009 2010 2011 2012Average Payment PeriodAvg. Payment Period
  32. 32. 78.564.5661764851 50010203040506070802008 2009 2010 2011 2012PeriodsAvg. Collection Period Avg. Payment Period
  33. 33. Activity RatiosThe company asset performance appears tobe in a good shape. It is clear that companyhas efficiently use the various componentsof working capital cycle. It has been able toeffectively control the receivables andinventories.
  34. 34. ZeeshanAhmadMB-12-09
  35. 35. Debt RatiosIndicates the amount the firmuses to generate profits fromothers’ money.
  36. 36. Debt RatiosDebt RatioFixed-PaymentCoverage RatioTimes InterestEarned Ratio
  37. 37. Debt RatioMeasures the proportion oftotal assets financed by thefirm’s creditors.
  38. 38. The higher degree of debt ratio shows the greater thefirm’s degree of indebtedness. Debt ratio for Atlas Hondain 2008 was nearly 61% which was not very favorablefor the organization. But during the last 5 years, the debtratio decrease continuously and reach to nearly 50%which is not very good but fair enough.
  39. 39. 60.8955.6354.3351.9550.540102030405060702008 2009 2010 2011 2012Debt RatioDebt Ratio
  40. 40. Times Interest Earned RatioMeasures the firm’s ability to makecontractual interest payments. It isalso called Interest Coverage Ratio.
  41. 41. Interest Coverage Ratio of Atlas Honda increase duringthe last 5 years but you can see a surprising increase inthis ratio in 2012. You can understand this increase bycomparing Debt and Interest coverage ratio.
  42. 42. 4.982.410.5616139.260204060801001201401602008 2009 2010 2011 2012Interest Coverage RatioInterest Coverage Ratio
  43. 43. 60.8955.63 54.3351.95 50.544.982.410.5616139.260204060801001201401602008 2009 2010 2011 2012Debt RatiosDebt Ratio Interest Coverage Ratio
  44. 44. Debt RatiosIn this graph you can see a negative relationshipbetween Debt and Interest coverage ratio. As thecompany debt ratio decrease, the company timesinterest earned ratio increase rapidly. It is due tocompany policy introduced in 2010 to reshape itsbalance sheet approach and worked to reduce theinterest bearing liabilities to improve its balancesheet. The outcome of this policy is theAchievement of “DEBT FREE STATUS” in 2012.
  45. 45. M. SaleemMB-12-23
  46. 46. Profitability RatiosMeasures the firms’ profits withthe given level of sales.
  47. 47. Gross-ProfitRatioProfitability RatiosNet-ProfitRatioEarningPer ShareOperating-ProfitRatioReturn onTotal AssetsReturn onCommon Equity
  48. 48. Gross-Profit RatioMeasures the percentage of eachsales dollar remaining after thefirm has paid for its goods.
  49. 49. Gross profit margin for ATLAS HONDA is unstable andmostly deteriorating. But separate using gross profitmargin for measuring company profitability is not a goodmeasure.
  50. 50. 7.467.027.827. 2009 2010 2011 2012Gross Profit MarginGross Profit Margin
  51. 51. Operating-Profit RatioMeasures the percentage of each salesdollar remaining after all costs &expenses other than Interests and Taxesare deducted.
  52. 52. Operating profit margin for ATLAS HONDA decreased in2009, but remain quite stable after that.
  53. 53. 4.624.3012345672008 2009 2010 2011 2012Operating Profit MarginOperating Profit Margin
  54. 54. Net-Profit RatioMeasures the percentage of eachsales dollar remaining after all costs &expenses including Interests andTaxes are deducted.
  55. 55. Net profit margin also decreased during 2009 butcompany recovered very well and its net profitcontinuously increasing from last 3 years.
  56. 56. 3.371.632.783.083.1600.511.522.533.542008 2009 2010 2011 2012Net Profit MarginNet Profit Margin
  57. 57. 7.467.027.827. 4.624.33.371.632.783.08 3.1601234567892008 2009 2010 2011 2012Profitibility RatiosGross Profit Margin Operating Profit Margin Net Profit Margin
  58. 58. Earnings Per Share (EPS)Represents the dollar amount earnedon behalf of each outstanding share ofcommon stock.
  59. 59. Over the years, the company is focused on maintainingsteady growth in EPS. In 2012, company delivered EPSof Rs.16.74 which is outstanding.
  60. 60. 4.7514.8611.3916.0316.740246810121416182008 2009 2010 2011 2012Earning Per ShareEarning Per Share
  61. 61. Profitability RatiosThe Company’s Gross profit margin declinedbut it is due to the higher cost of goods sold.While the Operating and Net profit margin isimproving so we can evaluate that companyprofitability is improving.
  62. 62. BabarHussainMB-12-54
  63. 63. Return on Total Assets (ROA)Measures the overall effectiveness of themanagement in generating profits with itsavailable assets. It is also called Returnon Investment (ROI).
  64. 64. The higher the firm’s return on total asset consider thebetter. Return on total asset of ATLAS HONDA appear tobe improved in last 3 year and rose to 11% despitesignificant in assets base on account of capacityexpansion.
  65. 65. 8.0738.3610.4210.980246810122008 2009 2010 2011 2012Return on AssetReturn on Asset
  66. 66. Return on Common Equity (ROE)Measures the return earned on thecommon stockholders’ investmentin the firm.
  67. 67. Return on equity also have the same case like ROA. It isalso improved after declining in 2009 and now rose to22% due to steady income growth.
  68. 68. 20.656.7618.321.6822.2105101520252008 2009 2010 2011 2012Return on EquityReturn on Equity
  69. 69. 8.0738.3610.4210.9820.656.7618.321.6822.2105101520252008 2009 2010 2011 2012ReturnsReturn on Asset Return on Equity
  70. 70. Market RatiosRelates the firms’ market value asmeasured by its current shareprice, to certain accounting values.
  71. 71. Price/EarningsRatioMarket RatiosMarket/BookRatio
  72. 72. Price/Earnings Ratio (P/E)Measures the amount that investorsare willing to pay for each dollar of afirm’s earnings.
  73. 73. The higher level price earnings ratio consider the better.Price earnings ratio for ATLAS HONDA decrease duringprevious years but it not due of low earning but due tothe higher market price of ATLAS HONDA’s shares.
  74. 74. 14.118.710.98.88.5024681012141618202008 2009 2010 2011 2012Price Earning RatioPrice Earning Ratio
  75. 75. DuPont System of AnalysisSystem used to dissect the firm’s financialstatement and to assess its financialcondition.The two measures of this this system are:1.Return on total assets (ROA)2.Return on common equity (ROE)
  76. 76. DuPont FormulaMultiplies the firm’s net profit margin by itstotal asset turnover to calculate the firm’sreturn on total assets.
  77. 77. Modified DuPont FormulaRelates the firm’s return on total assets toits return on common equity using financialleverage multiplier.