Ratio Analysis of
Submitted to: Mrs.Vaishali Mrs.Vaishali Apte Faculty of International Finance, Muenchen International Business School, Pune
Presented By: Vinod Prajapat (63)
Ratio Analysis It’s a tool which enables the banker or lender to arrive at the following factors : Liquidity position Profitability Solvency Financial Stability Quality of the Management Safety & Security of the loans & advances to be or already been provided
How a Ratio is expressed?
As Percentage -
such as 25% or 50% . For example if net profit is Rs.25,000/and the sales is Rs.1,00,000/- then the net profit can be said to be 25% of the sales. As Proportion - The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4. As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4 th of the sales.
Classification of Ratios Balance Sheet Ratio
P&L Ratio or Income/Revenue Statement Ratio
Balance Sheet and Profit & Loss Ratio
Financial Ratio
Operating Ratio
Composite Ratio
Current Ratio Quick Asset Ratio Proprietary Ratio Debt Equity Ratio
Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio
Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors’ Turnover Ratio,
Format of balance sheet for ratio analysis LIABILITIES
ASSETS
NET WORTH/EQUITY/OWNED FUNDS
FIXED ASSETS : LAND & BUILDING,
Share Capital/Partner’s Capital/Paid up Capital/ Owners Funds Reserves ( General, Capital, Capital, Revaluation & Other Reserves) Credit Balance in P&L A/c
PLANT & MACHINERIES Original Value Less Depreciation Net Value or Book Value or Written down value
LONG TERM LIABILITIES/BORROWED NON CURRENT ASSETS FUNDS : Term Term Loans Loans (Banks (Banks & Institutions) Investments in quoted shares & securities
Debentures/Bonds, Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities
Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. assets which are not current or fixed in nature CURRENT LIABILTIES CURRENT ASSETS : Cash & Bank Balance, Bank Working Capital Limits such as Marketable/quoted Marketable/quoted Govt. or other securities, CC/OD/Bills/Export Credit Book Debts/Sundry Debtors, Bills Receivables, Sundry /Trade Creditors/Creditors/Bills Stocks & inventory (RM,SIP,FG) Stores & Payable, Short duration loans or deposits Spares, Advance Payment of Taxes, Prepaid Expenses payable & provisions against various expenses, Loans and Advances recoverable recoverable items within 12 months INTANGIBLE ASSETS
Patent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses
Some important notes Liabilities have Credit balance and Assets have Debit balance
Current Liabilities are those which have either become due for payment or shall fall due for payment within 12 months from the date of Balance Sheet
Current Assets are those which undergo change in their shape/form within 12 months. These are also called Working Capital or Gross Working Capital
Net Worth & Long Term Liabilities are also called Long Term Sources of Funds
Current Liabilities are known as Short Term Sources of Funds Funds
Some important notes Assets other than Current Assets are Long Term Use of Funds
Installments of Term Loan Payable in 12 months are to be taken as Current Liability only for Calculation of Current Ratio & Quick Ratio.
If there is profit it shall become part of Net Worth under the head Reserves and if there is loss it will become part of Intangible Assets
Investments in Govt. Securities to be treated currentonly if these are marketable and due. Investments in other securities are to be treated Current if they are quoted. Investments in allied/associate/sister units or firms to be treated as Non-current.
2.
3.Current Ratio : It is the relationship between the current assets and current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 Rs.4,00,000/Rs .2,00,000 = 2 : 1
The ideal Current Ratio preferred Banks is 1.33 : 1
by
2.Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses, alternatively it is the difference of Current Assets and Curr Current ent Liabilities.
It is the ratio between Quic Quick k Curr Curren ent t Asse Assets ts and and Curre Current nt Liabilit bilitie ies s.
:
Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt . Securities or quickl quickly y market marketabl able e/quot quoted ed share shares s and Bank Bank Fixed Fixed Deposi Deposits ts
borrower’s
It is the rela elations onship hip between fund (Debt) and Owner’s Capital (Equity).
For For inst instan ance ce, if the the Firm irm is havi having ng the foll follow owin ing g
:
This This rati ratio o indi indica cate tes s the the exte extent nt to whic which h Tang Tangib ible le Assets sets are are fina financ nced ed by Owne Owner r’ s Fund Fund. he ratio will be 100% when there is no Borrowing for purch purchas asing ing of Asse Assets ts. 6.
By comp compari aring ng Gross Gross Prof Profit it perc percent entag age e to Net Sales we can arrive at the Gross Profit Ratio which indi indica cate tes s the the manu manufa fact ctur urin ing g effi effici cien ency cy as well well as the the pric pricin ing g poli policy cy of the the conc concer ern n.
:
since ince Gross Profit is equal to Sal Sales Cost Cost of Good Goods s Sold Sold, it can can also also be inte interp rpre rete ted d as belo below w
A high higher er Gros Gross s Prof Profit it Rati Ratio o indi indica cate tes s effi effici cien ency cy in prod produc ucti tion on of the unit.
It is expr expres esse sed d as
It is expr xpressed sed as
=>
=>
(
This
ratio
indicates
the
number
of
times
the
This his is also call called ed Debt Debtor ors s Velo Veloci city ty or Aver Avera age Coll Collec ecti tion on Peri Period od or Peri Period of Cred Credit it give given n .
called Creditors Velocity Ratio, credito creditor r payment payment period period.
This is also which determines the
16.
Average Capital Employed is the average of the and provided by the owners and the creditors of the firm at the the begi beginn nnin ing g and and end end of the the acco accoun unti ting ng peri period od.
EPS EPS indi indica cate tes s the the quan quantu tum m of net profit of the year that would be ranking for dividend for each share of the company being held by the the equi equity ty shar share e hold holder ers s
PE Ratio indicates the num number of times the Ear Earning Per Shar hare is covered by its its mark market et pric price e
This ratio is one of the most important one which indicates the ability of an enterp erprise to meet its liabi abilities ies by way of payment of installments of Term Loans and Interest thereon from out of the cash accruals and forms the basis for fixation of the repayment schedule in respect of the Term Loans raised for a project. ( The Ideal DSCR Ratio is considered to be 2
)
Where PAT is Profit after Tax and Depr. is Depreciation)
Notes All amounts work worked ed here are in terms te rms of Rupees in Crores (1 crore =10000000=10^7). MS Excel sheet has been used for computing the ratios.
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I
Liquidity Ratios
Year 2007 1 Current ratio: Current assets / Current Liabilities I I . 3 : C u r re r e n t a s s e t s ,L , L o a n s a n d a d v a6 n2 c8e9s. I I. I . 4 : C u r r e n t l i a b i l i t ie i e s a n d p r o v i s io i o n3s 8 5 7 . (II.3/II.4) 1.6304791
The current ratio of 1.63 of 1.63 times says that the company is in relatively good short-term financial standings. The ratio is an indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is.
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I Year 2
Liquidity Ratios 2007 Quick ratio or Acid test ratio: (Current assetsinventories)/ Current Liabilities
II.3:(C II.3 :(Current assets sets,L ,Lo oans and advances) Less:II.3a:Inventories
6289.7 .72 2 3354.03 2935.69
II.4:Current liabilities and provisions (II.3-II.3a)/(II.4)
3857.59 0.761016593
The small ‘Quick ratio’, i.e. 0.76 times says that the company's financial strength is not so strong. In general, a quick ratio of 1 of 1 or more is accepted by most creditors; however, quick ratios vary greatly from industry to industry and ITC does not have as such any orries in getting creditors. ITC has strong financial positions in many other aspects. 22
I
Liquidity Ratios
Year 2007 3 Cash ratio or Absolute liquidity ratio: (Cash +Marketable securities)/Current liabilities
The cash ratio of 0.23 of 0.23 times says that the company is not in the position to very quickly liquidate its assets and cover short-term liabilities. But there is no such liquidity need for the company and so the small value of the ratio has no such important important implications. (The ratio is of interest to short-term creditors) 23
II
Solvency Ratios
Year 2007 1 Debt – equity ratio: Long term debt/ equity (net worth)
I.2:Loan funds 2 00 . I.1:Shareholders I.1:Shareholders funds 10437. 0.0192467 The(I.2)/(I.1) ratio of 0.02 of 0.02 times, times, which means that the company has not been aggressive in financing its growth with debt. Thus its earnings are stable. The company has better support from the shareholders.
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II
Solvency Ratios
Year 2007 2 Debt ratio: debt (long term)/ (debt (long term) + equity) or debt/capital employed I.2:Loan funds I.1:Shareholders I. 1:Shareholders funds (I.2)+(I.1) (I.2)/(I.2+I.1)
200.88 10437.08 10637.96 0.01888332
The ratio of 0.02 of 0.02 times signifies that the company has employed more capitals over its debts. Thus the company is efficiently utilizing its loan funds.
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II
Solvency Ratios
Year 2007 3 Interest Coverage ratio : (earnings before interest and tax) / Interest
2 6s P / L : I I I : p r o f iti t b e f o r e ta t a x a t io i o n a n d e x c e p t i o n a l3i t9e m I I . 4 a - 1 3 : I n t e r e s t a c c r u e d b u t n o t d u e o n l o0 a. 5n
( P . I I I ) / ( I I . 4 a 1 3 ) 7 1 3 9 . 4 5 The ratio of 7139.4 of 7139.4 times is magnificently very high and hence the company has very sound s ound financial position. It has no tension of paying interests over its loans.
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III
Turnover Ratios
Year 2007 1
Inventory turnover: Cost of goods sold or net sales/Average (or closing) inventory.
P / L : I B : N e t s a le s II.3a:Inventories (P/L:IB)/(II.3a:)
7 1 3 5 .7 3354.0 2.1275152
The ratio of 2.13 of 2.13 times signifies that the company is efficient in selling its stocks.
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III Turnover Ratios Year 2007 2 Days of Inventory holding: Number of days in the year (say 360)/ Inventory turnover ratio.
N u m b e r o f d a y s in a y e a r 36 I n v e n t o r ie i e s t u r n o v e r r a t io io s 2.12 169 days or about about five and half months periods for the ( 3 6 0of ) / (stocks I T R ) is quiet efficient. 169.2524 liquidation
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III
Turnover Ratios
Year 2007 3
Debtors turnover ratio: Credit sales or net sales/ Average (or closing) debtors (or accounts receivable (total debtors +bills receivable)
P / L : I B : N e t s a le s II.3 b :S u n d ry d e b to rs (P/L:IB)/(II.3b)
7135 636. 1 1 .2 0 7 5
The ratio of 11.2 of 11.2 times signifies that the company is getting good returns and has no visible risk but benefits out of its debtors. 29
III Turnover Ratios Year 2007 4 Collection period: Number of days in the year (say 360)/ Debtors turnover
N u m b e r o f d a y s in t h e y e a r 36 D e b to rs tu rn o v e r 1 1 .2 The period of 32 of 32 days good ( 3 6 debt 0 ) / ( collection DTR) 3 2 . 1 2is2quiet 7
and the company is efficient in getting back its dues.
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III Turnover Ratios Year 2007 5 Current assets turnover: Net sales/ Current assets
P / L : I B : N e t s a le s 7135. I I . 3 : C u r r e n t a s s e t s , l o a n s a n d6 2a 8d 9v . (P/L:IB)/(II.3) 1 .1 3 4 5 0
The ratio of 1.13 of 1.13 times signifies that , in spite of the current liabilities, the company is efficient in making sales revenue.
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III Turnover Ratios Year 2007 6 Net current assets turnover: Net sales/ Net current assets
P / L : I B : N e t s a le s 7135. N e t C u rre n t A s s e ts 2432. ( P / L : I B ) / ( N C A ) 2 .9 3 3 9 5 The ratio of 2.93 of 2.93 times signifies that the company is highly efficient in utilizing its net current assets and generating sales revenue.
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III Turnover Ratios Year 2007 7 Fixed assets turnover: Net sales/ Net fixed assets P / L : I B : N e t s a le s 7135. I I . 1 : N e t F ix e d A s s e t s 5610. (P/L:IB)/(II.1) 1.271763 The ratio of 1.27 of 1.27 times signifies that the company is very efficiently utilizing its fixed assets for generating sales revenue.
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III
Turnover Ratios
Year 2007 8
Net assets turnover: Net sales/ Net assets or capital employed : (Net assets = all assets – accumulated depreciation) P/L:IB:Net sales II.1:Net Fixed Assets II.2: Investments Net Current assets Net assets (P/L:IB)/(NA)
7135.75 5610.91 3067.77 2432.13 11110.81 0.642234905
The ratio of 0.64 of 0.64 times signifies that the company has still to be more efficient in utilizing its net assets in in generating sales revenue. revenue.
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IV Profitability Ratios Year 2007 1 Margin: (Profit before interest and tax (PBIT)/ Net sales)×100 sales)×100 P / L : I I I : P r o f iti t b e f o r e t a x a t i o n a n d E x c e p t i o3n9a l2 i 6t e
P / L : I B : N e t S a le s ( P / L : I I I ) / ( P ×/ L1:0I 0B )
7135. 5 5 .0 2 8 5 5
The Profit margin of 55.03% of 55.03% is quiet impressive and the company is making good profits.
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IV
Profitability Ratios
Year 2007 2 Net margin: Profit after tax (PAT) ×100 / Net sales
P / L : I I I : P r o f it a ft e r t a x a t io n P / L : I B : N e t S a le s ( P / L : I I I ) / ( P×/ L1 :0I0B )
2699. 7135. 3 7 .8 3 7 2
The net margin of 37.83% of 37.83% is quiet impressive, and the company is performing well.
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IV Profitability Ratios Year 2007 3 Before tax return on investment: (PBIT/Net assets) ×100 P/L:III:Prof it before bef ore taxation and and Exceptional items
II.1:Net Fixed Assets II.2:Investments Net Current assets Net assets (P/L:III)/(NA)×100
3926.7 5610.91 3067.77 2432.13 11110.81 35.34125775
The Return of 35.34% of 35.34% is quiet good and company is performing well. 37
IV Profitability Ratios Year 2007 4 Return on equity: (PAT/Equity (net worth)) ×100
P / L : I I I : P r o f it a ft e r t a x a t io n I . 1 : S h a r e h o l d e r s fu n d s ( P / L : I I I ) / ( P /×L1:0I B0 )
2699. 1043 7. 2 5 .8 6 9
The ratio of 25.86% of 25.86%is is quiet good and the company utilizing the shareholders funds in a better way.
is
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Equity-related Ratios Year 2007 1 Earning per share (EPS): PAT/Number of ordinary shares
P / L : II I I I: I : P r o fif i t a f t e r t a x a t io io n
2699. P / L :I:IV - 1 9 ( iv iv ) :W :W e ig i g h t e d a v e r a g e N u m b e r o f o r d in i n a r y s h a r e s 3o u7t s5 t a n7d 6 in i n g3 6 ( P / L : I I I ) / ( P / L×: 1I V0)^( 7 : to t o c o n v e r t i n p e r 7ru r u. 1p 8e 5e )2 8 7 In comparison to the face value of Re.1/share Re.1/share the EPS of Rs.7.18 is very good.
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Equity-related Ratios Year 2007 2 Dividends per share (DPS): Dividends/ Number of ordinary shares P / L : I V : P r o p o s e d D iv id e n d
1 1 6 6 .2 37576369 P/L:IV-19(i P/L:IV-19(iv):W v):W eighted average Num ber of ordinary shares outstanding Dividend per share (DPS) isunitaruppes) simple and (P/L:III)/(P/L:IV) ×10^7 (to convert into 3 . 1 0intuitive 37857
number. It is the amount of the dividend that shareholders have (or will) receive, over an year, for each share they own. In compared to the face value of the shares, i.e. Re.1.00/share. DPS of Rs.3.10 of Rs.3.10 is quiet good. good.
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Equity-related Ratios Year 2007 3 Pay out ratios: DPS/EPS or Dividends/PAT D PS EPS (DPS)/(EPS)
3 .1 7 .1 0 .4 3 1 1 5 4
a very low payout ratio indicates that a company is primarily focused on retaining its earnings rather than paying out dividends. The payout ratio also indicates how well earnings support the dividend payments: the lower the ratio, the more secure the dividend because smaller dividends are easier to pay out than larger dividends. So the value of 0.43 of 0.43 times is quiet good. 41
Equity-related Ratios Year 2007 4 Dividend Yield: DPS/Market value per share We have to get the Market value per share of the relevant period .
Market Price Per Share The closing price of the common or preferred stock as reported on the applicable stock exchange consolidated tape as of the date indicated
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Equity-related Ratios Year 2007 5 Book value per share: Net worth/ Number of ordinary shares
I.1:Sha I. 1:Sha reholders rehol ders f unds
1043 7.0 BV is considered to be theordiaccounting 3value 7 5 7 6 3 of 6 9 each P/L:IV-19(i P/L:IV-19(iv): v):W W eighted eighted average N um ber of ordinary nary sha res o utstanding share, drastically different than what the (I.1)/(P/L:IV)×10^7 (to convert convert into unit ruppes ) 2 7 . 7market 7 5 6 4 7 is valuing
the stock at. The book value, i.e. Rs.27.77 is far higher than the face value of each share, i.e. Re.1.00. “Here “diluted” value in considering numbers of shares is not considered.” considered.”
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I Investment-related Ratios Year 2007 Return on assets or earning power (ROA): (PAT/ Average 1 total assets (of the given years, here 2006&07)) ×100 or ((PAT+ Interest)/Average fixed assets) ×100
P/L:II /L:III: I:P Profit after taxation taxation Fixed assets 2007 Investments 2007 Current assets 2007
2699 2699.97 .97 5610.91 3067.77 6289.72
Fixed assets 2006
4405.13
Investments 2006 Current assets 2006 Average total assets (PAT/AT /ATA) ×10 ×100
3517.01 5161.9 14026.22 19.24944853
Earning power of the company, i.e. 19.25% is quiet good and the company is doing well.
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I Investment-related Ratios Year 2007 2 Return on capital employed (ROCE): (EBIT(PBIT)/ Capital employed) ×100
P / L : I I I : P r o f iti t b e f o r e t a x a t io i o n a n d E x c e p t3i o9n 2a l6i
I:S o u rc e s o f F u n d s 11110 The ROCE of signifies that the is ( ( P / L :of 35.34% I I ×I35.34% 1) /0I )0 3 5 company .3 4 1 2 getting good return out of its investment decisions.
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II Return on Equity (ROE) Year 2007 1 ROTSE (return on total shareholders equity): (PAT/ Total shareholders equity) ×100
P / L : I I I : P r o f it a ft e r t a x a t io n 2699. I . 1 : S h a r e h o l d e r s fu n d s 10437 ( P / (25.87 : I I I ) / (times) P×/1L0: I0B) )is same as that2 5of. 8“Return 69 The ratio (L25.87 times on equity”, since there are no preference shares.
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II
Return on Equity (ROE)
Year 2007 2 ROOSE (return on ordinary shareholders equity) / RONW (return on net worth): ((PAT-preferential dividends)/Net worth) ×100 P / L : I III I : P r o fif i t a f t e r t a x a t io io n I .1 .1 : S h a r e h o ld e r s fu n d s ( P / L : I I I ) / ( P / L×: 10 I B )0
26 99 .9 104 37. 25.8690
The ratio (25.87 (25.87 times) times) is same as that of “Return on equity”, and “return on total shareholders equity” since there are no preference shares.
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Du Pont Analysis
Du Pont analysis for year 2007:
Du Pont analysis for year 2006
Du Pont analysis for year 2005:
Du Pont analysis for year 2004:
Du Pont Pon t Analysi Analysis s ) 30.00 % ( s 25.00 t e s s 20.00 a l a t 15.00 o t n 10.00 o n r u t 5.00 e R
28.55 22.44
23.37
22.69
3
4
0.00
1
2
Years:1~2004:2~2005:3~2006:4~200
Du Pont chart portrays the earning power of a firm. The ROA ratio is a central measure of the overall profitability and operational efficiency of a firm it shows the interaction of Profitability and activity Ratios, It implies that the performance of a firm can be improved either by generating more sales volume per rupee of investment or by increasing the profit margin per rupee r upee of sales. So as per the analysis, the t he company has to maintain more consistent and increasing trend in its ROA in the following years.
Thank you Give this great opportunity again to us !
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