Ratio Analysis


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Ratio Analysis

  1. 1. PERFORMANCE EVALUATION<br />Financial ratio analysis is employed for Income Statement Analysis and Balance Sheet Analysis and is incorporated in the Financial Scorecard Tool, to provide a unique picture of a company's financial position. Key financial ratios measured by analysis-one represent standard performance measures used by the accounting profession on a daily basis, and seek to analyze the income statement and balance sheet from a variety of financial performance perspectives, which include - Profitability, Liquidity, Efficiency, Asset Usage and Gearing. <br />
  2. 2. ROCE<br />The prime objective of making investments in any business is to obtain satisfactory return on capital invested. <br />Hence, the return on capital employed is used as a measure of success of a business in realizing  this objective.<br />Return on capital employed establishes the relationship between the profit and the capital employed.<br /> It indicates the percentage of return on capital employed in the business and it can be used to show the overall profitability and efficiency of the business.<br />
  3. 3. What Does Return On Capital Employed - ROCE Mean?<br />A ratio that indicates the efficiency and profitability of a company's capital investments.Calculated as:<br />
  4. 4. Detail Method- For Calculating ROCE.<br />If it is calculated from the assets side, It can be worked out by adding the following:<br />The fixed assets should be included at their net values, either at original cost or at replacement cost after deducting depreciation. In days of inflation, it is better to include fixed assets at replacement cost which is the current market value of the assets. <br />Investments inside the business <br />All current assets such as cash in hand, cash at bank, sundry debtors, bills receivable, stock, etc. <br />To find out net capital employed, current liabilities are deducted from the total of the assets as calculated above. <br />Gross capital employed = Fixed assets + Investments + Current assets<br />Net capital employed = Fixed assets + Investments + Working capital*.<br />*Working capital = current assets − current liabilities.<br />
  5. 5. ROCE cont....<br />ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.A variation of this ratio is return on average capital employed (ROACE), which takes the average of opening and closing capital employed for the time period. <br />
  6. 6. What Does Return On Investment - ROI Mean?<br />Return on investment - or ROI - is the rate of revenues received for every dollar invested in an item or activity. In a marketing sense, knowing the ROI of your advertising and marketing campaigns helps you to identify which techniques are most effective in generating income for your business.<br />A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. <br />
  7. 7. Calculate ROI<br />The return on investment formula:<br />In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest.  Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken<br />
  8. 8. <ul><li>The ROI is important in any type of investment. It is one aspect of the risk/reward of an investment. An investment that involves little risk will have little reward, but a larger risk by the investor should lead to a larger reward in the form of an ROI.</li></ul>Problem<br /><ul><li>One serious problem with using ROI as the sole basis for decision making, is that ROI by itself says nothing about the likelihood that expected returns and costs will appear as predicted.
  9. 9. ROI by itself, that is, says nothing about the risk of an investment. ROI simply shows how returns compare to costs if the action or investment brings the results hoped for</li></li></ul><li>
  10. 10. This ratio is useful to determine the amount of sales that are generated from each dollar of assets. As noted above, companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover. <br />Cory's Tequila Co.'s asset turnover seems to be relatively low, meaning that it makes a high profit margin on its products. For companies in the retail industry you would expect a very high turnover ratio - mainly because of cutthroat and competitive pricing.<br />
  12. 12. INVENTORY TURNOVER<br />
  13. 13. LIQUIDITY RATIO<br />Current Ratio<br /> Current Ratio = Current Assets / Current Liabilities<br />Net Working Capital Ratio<br /> Net Working Capital Ratio = Net Working Capital / Total Assets Where Net Working Capital = Current Assets - Current Liabilities<br />Quick Ratio (Acid Test Ratio)<br /> Quick Ratio = Quick Assets / Current Liabilities Where Quick Assets = Current Assets - Inventories - Prepayments<br />
  14. 14. CURRENT RATIO<br />
  15. 15. QUICK RATIO<br />