RATIO
ANALYSIS
INTRODUCTION:-
We have learnt about the financial statements (Income Statement and Balance
Sheet) of companies. Basically, these are summarized financial reports which provide the
operating results and financial position of companies, and the detailed information
contained therein is useful for assessing the operational efficiency and financial soundness
of a company. This requires proper analysis and interpretation of such information for which
a number of techniques (tools) have been developed by financial experts. These are as
follows;
❑ Comparative Statements
❑ Common Size Statements
❑ Trend Analysis
❑Ratio Analysis
❑ Cash Flow Analysis
Comparative Statements
These are the statements showing the profitability and financial position of a firm for
different periods of time in a comparative form to give an idea about the position of two or more
periods.
Common Size Statements
These are the statements which indicate the relationship of different items of a financial
statement with a common item by expressing each item as a percentage of that common item. The
percentage thus calculated can be easily compared with the results of corresponding percentages
of the previous year or of some other firms, as the numbers are brought to common base.
Trend Analysis
It is a technique of studying the operational results and financial position over a series
of years. Using the previous years’ data of a business enterprise, trend analysis can be done to
observe the percentage changes over time in the selected data.
Cash Flow Analysis
It refers to the analysis of actual movement of cash into and out of an organization. The
flow of cash into the business is called as cash inflow or positive cash flow and the flow of cash out
of the firm is called as cash outflow or a negative cash flow.
Ratio Analysis:-
The most important tool for Financial analysis is Ration analysis. It is
useful in understanding the Financial Statements and drawing conclusions
about financial position of the firm. Ratio analysis is the process of determining
and interpreting numerical relationships based on financial statements. This
relationship can be expressed as percent.
The persons interested in the analysis of financial statements can be
grouped under three heads:
Investors desire a primary basis
(i)Owners or investors for estimating earning capacity.
Creditors are concerned primarily with
(ii)Creditors liquidity and ability to pay interest and
redeem loan within a specific period.
Management is interested in evolving analytical tools
(iii)Financial executives that will measure costs, efficiency, liquidity and
profitability with a view to making intelligent decisions.
ADVANTAGES:-
a) To measure the liquidity position
b) To know the solvency position
c) To assess the profitability position of the firm
d) Operating efficiency or turnover of the firm
e) Inter - firm and intra – firm comparison
f) Trend Analysis
Classification of Ratios :-
Liquidity Ratios:-
Current Ratio Current Asset
Or
Working Capital Ratio Current Liabilities
Quick Ratio
Or Quick Asset
Acid Test Ratio
Or Quick Liabilities
Liquid Ratio
Cash Ratio Absolute liquid Asset
Or
Absolute Liquid Ratio Current Liabilities
Quick or liquid Asset
Interval Measure Ratio
Avg. expenses per Day
Turnover Ratios:-
Stock turnover Ratio COGS
Or
Inventory turnover Ratio Average Stock/Inventory
COGS:- Sales – Gross Profit or Opening Stock + Purchase – Closing Stock
Average Stock:- (Opening Stock + Closing Stock) / 2
Stock Conversion Period:- Number of days or Month / Inventory or Stock turnover Ratio
Debtor turnover Ratio Credit Sales Sales
Or or
Receivable turnover Ratio Average trade Debtor Closing sundry Debtor
Trade Debtor:- Sundry debtor + Bills Receivable
Debtor collection Period:- No. of days or month / Debtor turnover Ratio
Credit Purchase Purchase
Creditor turnover Ratio or
Avg. trade Creditor Sundry Creditor
Sundry Creditor:- Sundry creditor + Bills Payable
Purchase:- COGS + Closing Stock- Opening stock
Creditor Payment Period:- No. of Days or Month / Creditor Turnover Ratio
COGS
Fixed Assets T.R.
Fixed Assets
COGS
Working capital T.R.
Working Capital
COGS
Current Assets T.R.
Current Assets
Solvency Ratios:-
Debt Outsiders fund
Debt Equity Ratio or
Equity Owners fund
Funded Debt
Funded Debt to
total Capitalization
Total Capitalization
Funded debt = Long term outsiders funds
Total capital = Share holders funds + Total funded debt
Proprietary Ratio Share holders Funds
Or
Equity Ratio Total Assets
Interest Coverage Ratio EBIT
Or
Debt service Ratio Fixed Int. Charges
Solvency Ratio Total liabilities of outsiiders
Or
Total liabilities to total Total Assets
assets Ratio
Profitability Ratios:-
Gross Profit
Gross profit Ratio
Sales
OP Cost
Operating Ratio O.C. = COGS + Office Exp. + Selling Exp.
Sales
OP Profit O.P. = Net profit
Operating profit Ratio + Non. OP Exp
Sales – Non. OP Income ( sales – o.c)
Net Profit
Net profit Ratio
Sales
Given Exp.
Expenses Ratio
Sales
Cash profit
Cash Profit Ratio
Sales
Overall Profitability Ratios:-
Net Profit after Int.& tax
Return on Sh. holder Fund or Net
worth Shareholder Fund
Net Profit Avail. To equity Sh. Holder
Return on equity Sh. capital
Equity Share Capital
Net Profit Avail. To equity Sh. Holder
EPS
Equity Share Capital
Return on Capital Employed:-
Operating Profit Gross Cap. Employed = Total Assets
Gross - Fictitious,
Tangible &
Gross Capital Employed Idle Assets
Operating Profit
Net Net Cap. Employed =Gross Cap. Employed
-Current Liabilities
Net Capital Employed
Cost of Revenue or Sales
Capital Turnover Ratio
Capital Employed
Dividend per Equity Share
Dividend Payout Ratio
EPS
Dividend per Equity Share
Dividend Yield Ratio
M.V. Per Share
MP per Equity Share
Price Earning Ratio
EPS
EPS
Earning Yield Ratio
MP per share
MP per Share CF. Per Sh.= Profit + Dep.
MP to CF Ratio
No. of equity Share
Cash flow per share
Introduction:-
Leverage have different meaning in different subjects such as;
➢ In Mechanics leverage means a instrument that helps us in lifting heavy
objects, which may not be otherwise possible.
➢ In financial management, the firm’s ability to use fixed cost funds to magnify
the return of its owners.
➢ The leverage may be defined as the,
% change in one variable
Leverage =
% change in some other variable or variables.
Types of Leverage :-
Leverage
Operating Financial Combined
Leverage Leverage Leverage
The leverage Leverage Associated Operating Leverage
associated with with financing + Financial Leverage
investment, asset activities is called
acquisition activities Financial Leverage.
is referred as
Operating Leverage.
Operating Leverage:-
❖ Operating Leverage reflects the impact of change in sales on the level of operating
profits of the firm.
❖ The fixed cost don’t change with the change in sales, any increase in sales fixed cost
remains the same, will magnify the Operating Revenue.
❖ Here the fixed cost is treated as “ Fulcrum of a Leverage”
Contribution
Operating Leverage= EBIT – Earning Before Interest & Tax
EBIT
DOL ( Degree of Operating Leverage ) is higher where contribution is high.
Financial Leverage:-
❖ While operating Leverage measures the change in the EBIT of a company to a
particular change in the output , the financial leverage measures the effect of change
in EBIT on the EPS of the company.
❖ It is defined as the ability of a firm to use fixed financial charges to magnify the effects
of changes in EBIT on the earnings per share.
EBIT
Financial Leverage=
EBT
Combined Leverage:-
A combination of the operating and financial leverages is the total or combined leverage.
Combined Leverage= OL x FL
Particulars Amount ₹
Sales xxx
(Variable cost) xxx
Contribution xxx
(Fixed Cost) xxx
Calculation of (Earning Before Interest and Tax) EBIT xxx
leverage (Interest) xxx
(Earning Before Tax) EBT xxx
(TAX) xxx
(Earning After Tax) EAT xxx
(Preference Share Dividend) xxx
(Profit Available For Equity Share Holders) xxx
PAFESH
THANK YOU
