Ratio Analysis by Svm

8/14/2019 Ratio Analysis by Svm

1/18

RATIO ANALYSISRATIO ANALYSISBY:-SAGAR.V.MORADIYABY:-SAGAR.V.MORADIYA


2/18

What is ratio analysis? Tool of financial analysis. Compare the risk and return relationships. It is a systematic use of ratios to interpret/assess

the performance and status of the firm. Interpret financial statements so the strength

and weakness as well as historical performanceand current financial condition can bedetermined.


3/18

Basis of comparisonBasis of comparison

ratio make the related informationcomparable. a single figure by itself has nomeaning, but when expressed in terms of

related figure, it yields significant inferences. Thus, ratios are relative figures reflecting therelationship between related variables.

Three types of comparisons are generally

involved: namely, (1)trend analysis (2)interfirm comparison (3) comparison withstandards or industry average.


4/18

Trend analysisit involve evaluation of financial performance over aperiod of time using financial ratio analysis.Present ratios are compared with past ratios for thesame firm.

Forexample:-

year Gross profit sales Gross profitratio

2007 25000/- Rs.300000 8.33%2008 48000/- Rs.450000 10.67%


5/18

Inter firm comparisonInter firm comparison

Comparison of the ratios of a firm with those of Comparison of the ratios of a firm with those of others in the same line of business.others in the same line of business.

For example:-For example:-

Interpretation:- the profit of Interpretation:- the profit of ABCABC steel ltd is bettersteel ltd is betterthan xyz steel ltd but here xyz steel ltd hasthan xyz steel ltd but here xyz steel ltd hasopportunity to increase profit but reducing costs.opportunity to increase profit but reducing costs.

Year (2007) ABC STEEL LTD. XYZ STEEL LTD.

gross profit 6.89% 7%net profit 4.2% 4%


6/18

Comparison with standardComparison with standardor planor plan

In this method the ratios willIn this method the ratios willbe compare with the standardbe compare with the standardmeasurement or plan.measurement or plan.For example:- suppose, theFor example:- suppose, thestandard rate of net profit of standard rate of net profit of oil and gas industry is 20%. if oil and gas industry is 20%. if any firm make profit moreany firm make profit morethan 20% is better for thatthan 20% is better for thatfirm and if less than it thenfirm and if less than it thenthey have to focus to reachthey have to focus to reachup to average 20% profit of up to average 20% profit of industry.industry.Comparison of what theyComparison of what theyhave decide while planninghave decide while planningand now we where.and now we where.

0

510

1520

2530

net profit

Abc ltd standard Xyz ltd

0

5

10

15

20

25

net profit

Abc ltd planned xyz ltd


7/18

types of ratiostypes of ratios

ratios can be classified into six broadgroups:-

1. Liquidity ratios.2. Capital structure/leverage ratios.3. Profitability ratios.4. Activity/efficiency ratios.5. Integrated analysis of ratios6. Growth ratios.


8/18

Ratio Formula Location Explanation

Current Ratio (:) Current AssetCurrent Liabilities

For example. A B=18000/12000 30000/10000

=1.5:1 =3:1

Good very good

B.S. Asset portionB.S. Liability portion

it indicate the firms ability tomeet its short termobligation.(2:1)

Quick Test (:) Quick Asset (C.A-inventory)Current Liabilities

For example:- A B= 4000/8000 =12000/6000

= 0.5:1 = 2:1

Not satisfactory appreciate

B.S. Asset portionB.S. Liability portion

it indicate the firms instantdebt paying ability.(1:1)

Liquidity ratioLiquidity ratio


9/18

Ratio Formula Location Explanation

Inventory to Net WorkingCapital (:)

Inventory(Current Assets Current Liabilities)

For example:-

= 30000/(300000-100000)

= 0.15:1 (good)

B.S. Asset portionB.S. Liability & Asset portion

To indicate the cushionof excess currenassets over currenliabilities may bthreatened bunfavorable changesin inventory

Cash Ratio (:) Cash + Cash EquivalentsCurrent Liabilities

For example.

= 50000+20000/140000

= 0.5:1 (50%)

B.S. Cur. AssetB.S. Liability portion

To indicate how mancurrent obligationscan be met withcash or cash

equivalents


10/18

Profitability ratioProfitability ratioRatio Formula Location Explanation

Net Profit Margin (%) Net profit After Taxes Net Sales

For example:-

= 500000/3000000= 16.67%

Income StatementIncome Statement

Indicates the net profit after tax in compare to net sales.

Gross Profit Margin (%) Sales Cost of Goods Sold Net Sales

For example:-=30000/400000

=7.5%


Indicates the profit availablefor non-manufacturingoverhead

Return On Investment (%) Net Profit After taxesTotal Assets

For example:-=25000/300000= 8.33%

Income StatementBalance sheet

Indicates the efficiency thatmanagement uses thecompanies assets


11/18

Return On Equity (%) Net Profit After taxesShareholders Equity(preference & equity share capital+ordinary+share premium+ reserve and surplus)

For example:-

=39000/200000=19.5%


Indicates the how profitably the ownersfund have beenutilized by the firm.

Earnings per Share ($)(equity)

Earning available to equity share holders Number of equity shares.

For example:-

= 25000/5000= RS .5

(Income Statement-B.S)B.S. (sometimes)

Indicates the profitavailable to the equityshareholders on a per share basis.


12/18

Activity ratioActivity ratioRatio Formula Location Explanation

Inventory Turnover (times) Net SalesClosing Inventory

For example:-= 20000/5000= 4 times


measures theactivity/liquidity of inventory of a firm; thespeed with whichinventory is sold.

Net Working Capital Turnover (:) Net Sales Net Working Capital

For example:-=20000/40000=0.5:1

Income StatementBalance sheet (CA-CL)

assess effectively the NetWorking Capital is used togenerate sales

Asset Turnover (:) SalesTotal Assets

For example:-=27500/19250=1.43:1


the efficiency with whichthe firm uses all its assetsto generate sales.


13/18

Receivable (debtors) Turnover (days)

Annual Credit SalesAverage debtors + average billsreceivables

For example:-

=1200000/(140000+160000)/2=8 times

Work sheet or Sub.LedgersBalance Sheet

The average amount of time needed to collectaccounts receivables.

Average debt Collection Period(days)

Accounts ReceivableSales for Year/365Or 12 months / debtors ratio.

For example:-= 12/8= 1.5 months

Balance SheetIncome Statement

It indicates the gap of days to collect the debt.

Creditor (payables) turnover ratio(days)

Credit purchase(Creditors + bills payables)2

For example:-

= 50000/(9000+11000)/2= 5 times

Work sheet & sub.ledger Balance Sheet

Average amount of timeneeded to pay account

payables.

Accounts Payable Period Accounts PayablePurchases for year/365

For example:-=12/5times (2.4months)

Balance SheetWork sheet &/or Sub.Ledgers

It indicates the period gapto pay money to creditorsfor credit purchase.


14/18

Leverage ratioLeverage ratioRatio Formula Location Explanation

Debt to Asset Ratio (%) Total DebtTotal assets

For example:-=20000/22000= 0.91:1 (good)

Balance SheetBalance Sheet

it indicate the portion assetswhich company have to meet thetotal debt.

Proprietary ratio Proprietor's fundTotal assets

For example:-= 50000/200000= 25% (neither high nor low)


it indicates the extent to whichassets are financed by ownersfunds.

Long term debt to CapitalStructure ratio (%)

L T debtPermanent capital

For example:-= 200000/500000= 40%


It indicates the what portion permanent capital of a firmconsists of long term debt.


15/18

Time Interest Earned(interest coverage ratio)

EBITInterest Charges

For example:-=270000/27000(.09*300000)

= 10 times


Indicates theability of thecompany tomeet its annualinterest

payment.

Coverage of Fixed Charges EBIT+ Lease paymentInterest + lease payments +( preference dividend +installment of principal) /

(1-t)

for example:-= 50000+20000/1000+20000+(25000)/(1-.35)= 1.18 times


Assess thecompanysability to meetall of its fixedexpenses.

Dividend coverage ratio EATPreference dividend

For example:-

= 50000/10000= 5 times ( higher-better)

Income statementBalance Sheet

It measures theability of a firm to

pay dividend on preference shares

which carry a statedrate of return


16/18

Other ratiosOther ratiosRatio Formula Location Explanation

Price/Earnings Ratio Market price per ShareEarnings per share

For example:-= 40/3.04= 13.2 times

Stock Market ReportsIncome Statement

Assess the amountinvestors are willingto pay for eachrupee of earnings

Dividend Payout Ratio (%) Annual dividends per ShareAnnual Earnings per Share

For example:-= 4/11= 36.37%


Indicates the percentage of profitthat is paid out asdividends

Dividend Yield on CommonStock (%)

Annual dividends per ShareCurrent Market price per share

For example:-= 4/40= 10%

Income StatementStock Market Indicates thedividend rate of return to commonshareholders at thecurrent market price


17/18

Importance and limitation of Importance and limitation of ratio analysisratio analysis

advantagesadvantages Liquidity position.Liquidity position. Long term solvency.Long term solvency.

Operating efficiency.Operating efficiency. Overall profitability.Overall profitability. Inter-firm comparison.Inter-firm comparison. Trend analysis. Trend analysis.

disadvantagesdisadvantages Difficulty inDifficulty in

comparison.comparison.

Impact of inflation.Impact of inflation. ConceptualConceptualdiversity.diversity.


18/18

Thank : youThank : youFor your feedback kindly mailFor your feedback kindly mail

toto [email protected]@[email protected][email protected]
mailto:[email protected]:[email protected]:[email protected]

Documents

Ratio Analysis by Svm