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PROFITABILITY RATIOS
A class of financial metrics that are used to assess a business's
ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Some examples of profitability ratios are profit margin, return on assets and return on equity. GROSS PROFIT RATIO- It is a profitability ratio that shows the relationship between gross profit and total net sales revenue. It is a popular tool to evaluate the operational performance of the business . The ratio is computed by dividing the gross profit figure by net sales. Formula: The following formula/equation is used to compute gross profit ratio: When gross profit ratio is expressed in percentage form, it is known as gross profit margin or gross profit percentage. The formula of gross profit margin or percentage is given below:
The Gross Profit Ratio of Asian Paints for the year March 2013 is 15.83% and March 2014 is 15.02%.This indicates that the company may reduce the selling price of its products by 15.83% in March 2013 and 15.02% in March 2014 without incurring any loss. There is no norm or standard to interpret gross profit ratio (GP ratio). Generally, a higher ratio is considered better. NET PROFIT RATIO- Net profit ratio (NP ratio) is a popular profitability ratio that shows relationship between net profit after tax and net sales. It is computed by dividing the net profit (after tax) by net sales. Formula:
The relationship between net profit and net sales may also be expressed in percentage form. When it is shown in percentage form, it is known as net profit margin. The formula of net profit margin is written as follows:
The Net Profit Ratio of Asian Paints for the year March 2013 is 11.54% and March 2014 is 11.03%.
A high ratio indicates the efficient management of the affairs of
business. .
There is no norm to interpret this ratio. To see whether the
business is constantly improving its profitability or not, the analyst should compare the ratio with the previous years ratio, the industrys average and the budgeted net profit ratio.
ACTIVITY RATIOS Accounting ratios that measure a firm's ability to convert different accounts within its balance sheets into cash or sales. Activity ratios are used to measure the relative efficiency of a firm based on its use of its assets, leverage or other such balance sheet items. These ratios are important in determining whether a company's management is doing a good enough job of generating revenues, cash, etc. from its resources. The total assets turnover ratio and inventory turnover ratio are two popular examples of activity ratios used widely across most industries.
ASSET TURNOVER RATIO- The amount of sales or
revenues generated per dollar of assets. The Asset Turnover ratio is an indicator of the efficiency with which a company is deploying its assets. Asset Turnover = Sales or Revenues/Total Assets Generally speaking, the higher the ratio, the better it is, since it implies the company is generating more revenues per dollar of assets. But since this ratio varies widely from one industry to the next, comparisons are only meaningful when they are made for different companies in the same sector. The Asset Turnover ratio is also a key component of DuPont Analysis, which breaks down Return on Equity into three parts, the other two being profit margin and financial leverage. The Asset Turnover Ratio of Asian Paints for the year March 2013 is 2.95 and March 2014 is 2.89. This means that for every dollar in assets, Asian Paints only generates 2.95 cents in March 2013 and 2.89 in March 2014. INVENTORY TURNOVER RATIO- A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days." A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.
The Inventory Turnover Ratio of Asian Paints for the year
March 2013 is 6.06 and for the year March 2014 is 6.26.
LEVERAGE RATIOS Companies rely on a mixture of owners' equity and debt to finance their operations. A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations. There are several different specific ratios that may be categorized as a leverage ratio, but the main factors considered are include debt, equity, assets and interest expenses. DEBT TO EQUITY RATIO- A measure of a company's financial leverage calculated by dividing its total liabilities
by stockholders' equity. It indicates what proportion of
equity and debt the company is using to finance its assets.
Note: Sometimes only interest-bearing, long-term debt is used
instead of total liabilities in the calculation. Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones. A debt to equity ratio of 1 would mean that investors and creditors have an equal stake in the business assets. The Debt to Equity Ratio of Asian Paints for the year March 2013 is 0.02 and for the year March 2014 is 0.01. This indicates that the portion of assets provided by stakeholders is greater than the portion of assets provided by creditors for both the years. INTEREST COVERAGE RATIO- A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period:
The Interest Coverage Ratio of Asian Paints for the year
March 2013 is 50.60 and for the year March 2014 is 66.66. Generally, companies would aim to maintain an interest coverage of at least 2 times. Interest cover of lower than 1.5 times may suggest that fluctuations in profitability could potentially make the organization vulnerable to delays in interest payments. A very high interest cover may suggest the fact that the company is not capitalizing on the relatively cheaper source of finance (i.e. debt) and in such instances an increase in gearing ratio may actually add value to the enterprise.
LIQUIDITY RATIOS A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the
larger the margin of safety that the company possesses to
cover short-term debts. CURRENT RATIO- A liquidity ratio that measures a company's ability to pay short-term obligations. The Current Ratio formula is:
The Current Ratio of Asian Paints of the year March 2013 and for the year March 2014 is 1.18. This indicates that the company may have difficulties for meeting current obligations. QUICK RATIO- An indicator of a companys short-term liquidity. The quick ratio measures a companys ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets, and is calculated as follows: Quick ratio = (current assets inventories) / current liabilities The Quick Ratio of Asian Paints for the year March 2013 is 0.61 and for the year March 2014 is 0.64.
