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Insights of Ratio Analysis
AISHVARYA DADHEECH
RELATIONSHIP BETWEEN PROFIT AND LOSS ACCOUNT AND BALANCE SHEET. PROFIT AND LOSS
ACCOUNT
PBIT
PBT
PAT
BALANCE SHEET
TOTAL ASSETS
CAPITAL EMPLOYED
NET WORTH
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
LIABILITIES
AMOUNT ASSETS
AMOUNT
OWNER FUNDS 360 FIXED ASSESTS 400
LONG TERM LIABILTIES 200 INVESTMENTS 80
CURRENT LIABILITIES 240 CURRENT ASSESTS 320
800 800
BALANCE SHEET
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
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.
RETURN ON INVESTMENTS
TWO MEASURES TO COMPUTE
1. RETURN ON TOTAL ASSETS
2. RETURN ON EQUITY
RETURN ON TOTAL ASSETS PROFIT BEFORE INTEREST AND TAX
_________________________________
TOTAL ASSETS
HERE , 112 / 800 = 14 %
RETURN ON NET ASSETS
=PAT/ FIXED ASSETS + WORKING CAPITAL
COMPUTATION OF RETURN ON TOTAL ASSETS PBIT/ TA = PBIT/ SALES * SALES/ TA
ROTA = PROFIT * ASSETS MARGIN TURNOVER
ROTA = 112/ 112O * 1120/ 800 = 10 * 1.4 = 14 %DUAL ROLE
MARGIN ON SALES DRIVERS SALES 1120
OPERATING 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%
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.
RETURN ON EQUITY
PAT / OWNER FUNDS
60 / 360
16.6 %
Preference dividend
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
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
LIQUIDITY MEASURES
CURRENT RATIOCURENT ASSETS / CURRENT LIABILITIES320 / 240 =1.33
QUICK RATIOCURRENT ASSETS – INVENTORY200/ 240 = .833
WORKING CAPITAL / SALES RATIOCA-CL/ SALES80/1120 = .071
FINANCIAL MEASURES
DEBT TO EQUITY RATIO
Debt over equity and debt over total funds.
Interest cover PBIT/ INTEREST