FINANCIAL RATIOS

1. Describe Debt Service Coverage Ratio. Why is EBITDA used in as a numerator while
calculating DSCR? What if EBIT or Net Income is used as a numerator while calculating DSCR.
a. ability of a company to use its operating income to repay all its debt obligations
b. The TIE/ICR formula uses EBIT in its numerator, while the DSCR uses EBITDA. For the
denominator, the TIE makes use of the interest due on debt. However, while
calculating DSCR, we need to also take into account any debt and lease repayments
due within the next 12 months in the denominator. It can also include preference
dividend due
c. A DSCR below 1.0x would indicate that a company's current debt obligations are
more than their operating income. For example, a ratio of 0.9x would indicate that a
company's operating income would only cover 90% of its debt and lease obligations
for the year.
d. The different ways to calculate the DSCR are as follows:
DSCR = EBITDA / Interest + Principal
DSCR = (EBITDA – Capital Expenditure) / Interest + Principal
DSCR = EBIT / Interest + Principal
2. Can EBIDTA be considered in calculation of DSCR and Interest Coverage Ratio?
a. Yes, I think. But, using EBIT in the interest coverage ratio will often give you a better
result, as the calculation excludes depreciation and amortisation.
b. company’s ability to cover its interest payments using its cash flows. The higher the
interest coverage ratio, the better (ideally, >2.0x).
c. Usually EBIT is used. The main difference between EBITDA coverage and the interest
coverage ratio, is that the latter uses earnings before income and taxes (EBIT), rather
than the more encompassing EBITDA.
3. From EBIDTA or EBIT which will be more relevant in calculation of DSCR and Interest
Coverage Ratio?
a. using EBIT in the interest coverage ratio will often give you a better result, as the
calculation excludes depreciation and amortisation.
b. The numerator needs to be comparable to the expense that is being covered, so in
the case of the interest coverage ratio, we use EBIT, while in the case of DSCR, we
use adjusted EBITDA, i.e. the net operating income in the numerator.
4. Why are cash and debt excluded in the calculation of net working capital (NWC)?
a. In practice, cash and other short-term investments (e.g., treasury bills, marketable
securities, commercial paper) and any interest-bearing debt (e.g., loans, revolver,
bonds) are excluded when calculating working capital because they're non-
operational and don't directly generate revenue. Net Working Capital (NWC) =
Operating Current Assets − Operating Current Liabilities Simply put, organic growth
is the optimization of a business from the internal efforts of management and their
employees. As a company begins to mature and its growth stagnates, a greater
proportion of its total capex will shift towards maintenance. Cash & cash equivalents
are closer to investing activities since the company can earn a slight return (~0.25%
to 1.5%) through interest income, whereas debt is classified as financing. Neither is
operations-related, and both are thereby excluded in the calculation of NWC.
5. What are the types of Ratios?
6. List the Liquidity Ratios. Why is 2:1 the ideal current ratio?
 a. If a company's current ratio is in the range 2:1, then it
is generally considered to have good short-term financial
strength. If current liabilities exceed current assets (the
current ratio is below 1), then the company may have
problems meeting its short-term obligations. If the current
ratio is too high, then the company may not be efficiently
using its current assets or its short-term financing
facilities.
7. DP Ratio = 40%, ROE = 12%, Calculate growth?
8. Investment 40000, Cash flow for year 4000, Rate of Return 12% what is profitability Index?
9. What ratio would you use to calculate the vulnerability of a firm takeover
10. Turnover 12000, Long Term Assets 12500 Current Assets 2500, Liabilities 2000 Calculate
Asset-turnover ratio
11. PER 15x CMP 60 ROE 12% Shares O/S 50million calculate P/BV
12. P/S, P/CF, P/E, P/BV which ratio does not give best of the results
13. What are the ratios used for evaluation? Is P/E ratio one of them?
14. Lets say HUl has a P/E ratio of 15X and Infosys has the same of 29X. In which company would
u advice your client to invest? why?
15. ROCE and ROI
16. What are leverages ratios?
17. What are solvency ratios?
18. What about EPS.? What is Basic and diluted eps?
19. What is PE ratio? Pls Expain with example. What will be your recommendation where PE
ratio of a company is less than industry average?
20. Convertible debt – Impact on PE ratio
21. Debt covenants?
22. What is p/e ratio and which company to invest in making comparison on the basis of P/E
23. What is EPS? In depth knowledge
24. Complete understanding of Ratio Analysis?
25. From EBIDTA or EBIT which will be more relevant in calculation of DSCR and Interest
Coverage Ratio?
Important Ratios:

 Quick Ratio: Otherwise known as the acid-test ratio, the quick ratio measures short-term
liquidity, but uses stricter policies on what classifies as a liquid asset. Therefore, it
includes only highly liquid assets that could be converted to cash in less than 90 days
with a high degree of certainty
 Cost Ratio = Cost of Goods Sold / Sales
 Effective Tax Rate = Income Tax Expense / Pre-tax Income
The Effective Tax Rate will differ from the statutory rate of 35% due to differences
between GAAP income and taxable income.
 Cash Ratio = Cash + Cash equivalents / Current Liabilities
ability to repay its short-term debt with cash or near-cash resources, such as easily
marketable securities.
 Leverage = Total Assets / Owners' Equity
Also called the equity multiplier and the debt burden ratio, leverage shows how the
assets are financed. The higher the ratio, the more debt that is used, relative to equity.
 Sustainable Growth Rate = ROE * (1 - Dividend Payout Ratio)
The Sustainable Growth Rate shows the growth that the firm can finance from within,
that is, without having to issue more external financing
 EVA = Economic Value Added = ROA - WACC
EVA measures the firm performance in terms of ROA but subtracts the cost of capital.
EVA should be positive. If EVA is negative, then the returns on assets deployed did not
cover the cost of debt and equity financing
 If a firm has negative earnings, then the P/E ratio is meaningless. Thus some analysts
turn to Price to Cash Flow or even Price to Sales as alternative valuation multiples.
 Market-to-Book = (Common Shares Outstanding x Price per share) / Owners' Equity
 Dividend Payout Ratio = Total Dividends / Net Income
or, on a per share basis, = Dividends per share / Earnings per share.
 Dividend Yield = Dividend per Share / Price per share
The Dividend Yield relates a dividend on a share of stock to the stock's price. Most
investors buy stocks for appreciation in price, rather than a dividend.
 Buyback Yield = ((Stock repurchase amount / No. of outstanding shares) / Current
Market Price )
The repurchase of outstanding shares (repurchase) by a company in order to reduce the
number of shares on the market. Companies will buy back shares either GAAP to
increase the value of shares still available (reducing supply), or to eliminate any threats
by shareholders who may be looking for a controlling stake.
 The relationship between ROA and ROE is tied to the use of leverage. In the absence of
debt in the capital structure, the two metrics would be equal. But if the company were
to add debt to its capital structure, its ROE would rise above its ROA due to increased
cash, as total assets would rise while equity decreases.
 When using metrics such as ROA and ROE, why do we use averages for the
denominator? The numerator, usually net income, comes from the income statement.
The denominator, either assets or equity, comes from the balance sheet. The income
statement covers a specific period, whereas the balance sheet is a snapshot at one
particular point in time. Thus, the average between the beginning and ending balance of
the denominator is used to adjust for this mismatch in timing.
 ROA and ROE ratios are most useful when compared to a peer group of companies with
similar growth rates, margin profiles, and risks. This approach would be best suited for
established companies operating in mature, low-growth industries with many
comparable companies to accurately track the management team's profitability and
efficiency
 ROIC: How much in returns is the company earning for each dollar invested?" Return on
Invested Capital (ROIC) = NOPAT/ Invested Capital
A company that generates an ROIC over its cost of capital (WACC) suggests the
management team has been allocating capital efficiently
 ROCE and ROI
 Difference between ‘capital employed’ and ‘invested capital’
o Invested capital is the amount of capital that is circulating in the business while
capital employed is the total capital it has. Invested capital is, therefore, a subset
of capital employed. Capital employed includes every aspect of capital in the
entity, such as debts and shareholders’ capital. Invested capital includes the
active capital in circulation, and it excludes non-active assets, especially those
outside the business, such as securities held in other companies.