Amtek Auto-Financial Ratios

Liquidity Ratios

Current Ratio

=current assets/current liabilities = 221818.97/166268.17 =1.33

Interpretation: The current ratio helps investors and creditors understand the liquidity of a company and how easily that company will be able to pay off its current liabilities. This ratio expresses a firm's current debt in terms of current assets. So a current ratio of 4 would mean that the company has 4 times more current assets than current liabilities.

Acid test Ratio

=current assets-inventories-prepaid expenses/current liabilities = 221818.97 – 70362.96/166268.17 = 0.91

Interpretation: This ratio measures the amount of assets that can be quickly converted into cash without any diminution in value (hence inventories subtracted) .This ratio provides a better insight into the liquidity position of the company.

Financial Leverage (Debt) Ratios

Total debt to Equity Ratio =Total Debt/Shareholder’s Funds = 871965.62/(4406.36 + 508952.45) =1.69

Interpretation: This ratio gives the proportion of outsider’s claim to owner’s capital. It tells how much is invested from an outsider compared to the firm’s owner. This also includes current liabilities which are to be paid in a year.Ratio of 0.46 indicates that the company uses outsider’s funds in equal proportion to owner’s funds.

Long term debt to equity ratio

=Long Term Debt/Shareholder’s Funds = 2,269.02/5307.32 =0.43

Interpretation: Ratio of 0.43:1 indicates that for every Rs 0.4 to be paid to an outsider in the long-term the company has Rs. 1 to be paid with.

Debt to Total Assets ratio

=Total Debt/Total Assets =2,457.06/7764.38 =0.32

Interpretation: This ratio measures the share of total assets financed by the total debt. This means that 0.32% of total assets is financed by debt.

Activity Ratios

Total Asset Turnover ratio = Net Sales/Total Assets =8,529.87/7764.38 =1.10

Interpretation: For instance, a ratio of 1 means that the net sales of a company equals the average total assets for the year. In other words, the company is generating 1 dollar of sales for every dollar invested in assets. This ratio indicates how fast the use of total assets are converted into revenue(sales) for the company. Ratio of 1.10 indicates that the total assets in use are generating sales revenue.

Fixed Asset Turnover =Net Sales/Fixed Assets =8,529.87/2048.97 =4.16

Interpretation: This ratio indicates how fast the use of fixed assets are converted into revenue(sales) for the company. Ratio of 4.16 indicates that the total assets in use are generating sales revenue.

Working Capital Turnover =Net Sales/Working Capital =8,529.87/4504.33-2919.12 =8529.87/1585.21 =5.38

Working Capital = current assets-current liabilities =4504.33-2919.12 = 1585.21

Profitability Ratios

Gross Profit Margin =Net Sales-COGS/Net Sales *100 =8529.87/8529.87*100 =100

Operating Profit Margin =EBIT/Sales*100 =1028.62/8529.87*100 =10.06%

Pre-tax Margin =net profit after taxes/net sales*100 =643.32/8529.87*100 =7.54%

Profitability in return to investment

Rate of return or return on asset or return on investment =net profit after taxes/total assets*100 =643.32/7764.38*100 =8.28%

Return on Equity =net profit after taxes/shareholder’s equity *100 =643.32/5037.32*100 =12.77%

Du Pont Approach

A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). It is also known as "DuPont identity".

DuPont analysis tells us that ROE is affected by three things: - Operating efficiency, which is measured by profit margin- Asset use efficiency, which is measured by total asset turnover- Financial leverage, which is measured by the equity multiplier(how many times equity multiplied in assets)

This method is mostly used to compare the performance of two companies.

ROE =net profit after taxes/net sales * net sales/total assets * total assets/shareholder’s equity =643.32/8529.87 * 8529.87/7764.38 * 7764.38/5037.32 =0.13

Why is Ratio Analysis required?

Financial statements provide a clear picture of the financial position of a firm. Thus, analysis of financial statements is an important aid to financial analysis.Ratio analysis is a widely used tool for financial analysis. Ratio analysis makes related information comparable.A single figure by itself has no meaning, but when expressed in terms of another-reveals more information.Ratio analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency. The trend of these ratios over time is studied to check whether they are improving or deteriorating. Ratios are also compared across different companies in the same sector to check their performance relatively, and to get an idea of comparative valuations. Ratio analysis is a cornerstone of fundamental analysis.