Ratio Analysis of

Submitted to:
Mrs.Vaishali Apte
Faculty of International Finance, Muenchen
International Business School, Pune

Presented By:
Vinod Prajapat (63)
1
 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 1/4th of the sales.
Classification of Ratios
Balance Sheet P&L Ratio or Balance Sheet
Ratio Income/Revenue and Profit & Loss
Statement Ratio Ratio

Financial Ratio Operating Ratio Composite Ratio

Current Ratio Gross Profit Ratio Fixed Asset
Quick Asset Ratio Operating Ratio Turnover Ratio,
Proprietary Ratio Expense Ratio Return on Total
Debt Equity Ratio Net profit Ratio Resources Ratio,
Stock Turnover Ratio Return on Own
Funds Ratio,
Earning per Share
Ratio, Debtors’
Turnover Ratio,
 Format of balance sheet for ratio analysis
LIABILITIES
NET WORTH/EQUITY/OWNED FUNDS
Share Capital/Partner’s Capital/Paid up
Capital/ Owners Funds
Reserves ( General, Capital, Revaluation &
Other Reserves)
Credit Balance in P&L A/c
LONG TERM LIABILITIES/BORROWED
FUNDS : Term Loans (Banks & Institutions)
Debentures/Bonds, Unsecured Loans, Fixed
Deposits, Other Long Term Liabilities
CURRENT LIABILTIES
Bank Working Capital Limits such as
CC/OD/Bills/Export Credit
Sundry /Trade Creditors/Creditors/Bills
Payable, Short duration loans or deposits
Expenses payable & provisions against various expenses, Loans and Advances recoverable
items
ASSETS
FIXED ASSETS : LAND & BUILDING,
PLANT & MACHINERIES
Original Value Less Depreciation
Net Value or Book Value or Written down value
NON CURRENT ASSETS
Investments in quoted shares & securities
Old stocks or old/disputed book debts
Long Term Security Deposits
Other Misc. assets which are not current or
fixed in nature
CURRENT ASSETS : Cash & Bank Balance,
Marketable/quoted Govt. or other securities,
Book Debts/Sundry Debtors, Bills Receivables,
Stocks & inventory (RM,SIP,FG) Stores &
Spares, Advance Payment of Taxes, Prepaid
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
 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 = 2 : 1
 The ideal Current Ratio preferred by
Banks is 1.33 : 1


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 Current Liabilities.
3 . ACID TEST or QUICK RATIO : It is the ratio between
Quick Current Assets and Current Liabilities.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6

months + Quickly realizable securities such as Govt. Securities or
quickly marketable/quoted shares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets / Current

Liabilities

Example :
Cash 50 , 000
Debtors 1 , 00 , 000
Inventories 1 , 50 , 000 Current
Liabilities 1 , 00 , 000
Total Current Assets 3 , 00 , 000

Current Ratio = >

3 , 00 , 000 / 1 , 00 , 000 = 3 : 1
Quick Ratio = >
1 , 50 , 000 / 1 , 00 , 000 = 1.5 : 1
4 . DEBT EQUITY RATIO : It is the relationship between
borrower’s fund (Debt) and Owner’s Capital (Equity).
Long Term Outside Liabilities / Tangible Net
Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less

Intangible Assets

For instance, if the Firm is having the following :

Capital
= Rs . 200 Lacs
Free Reserves & Surplus = Rs . 300
Lacs
Long Term Loans / Liabilities = Rs . 800 Lacs

Debt Equity Ratio will be => 800 / 500

i.e. 1.6 : 1
5 . PROPRIETARY RATIO : This ratio indicates the extent
to which Tangible Assets are financed by Owner’s Fund.
Proprietary Ratio = ( Tangible Net Worth / Total
Tangible Assets ) x 100
T he ratio will be 100% when there is no Borrowing
for purchasing of Assets.
6. GROSS PROFIT RATIO : By comparing Gross Profit percentage
to Net Sales we can arrive at the Gross Profit Ratio which
indicates the manufacturing efficiency as well as the pricing
policy of the concern.

Gross Profit Ratio = ( Gross Profit / Net

Sales ) x 100
Alternatively , since Gross Profit is equal to Sales
minus Cost of Goods Sold, it can also be interpreted as below
:

Gross Profit Ratio = [ ( Sales – Cost of goods

sold )/ Net Sales ] x 100
A higher Gross Profit Ratio indicates efficiency in production
of the unit.
7 . OPERATING PROFIT RATIO :
It is expressed as => ( Operating Profit /
Net Sales ) x 100
Higher the ratio indicates operational
efficiency

8 . NET PROFIT RATIO :

It is expressed as => ( Net Profit /
Net Sales ) x 100
It measures overall profitability .
 9. STOCK / INVENTORY TURNOVER RATIO :

( Average Inventory / Sales ) x 365 for

days
( Average Inventory / Sales ) x 52 for
weeks
( Average Inventory / Sales ) x 12 for
months

Average Inventory or Stocks = ( Opening

Stock + Closing Stock )

-----------------------------------------

2
. This ratio indicates the number of times the
 10 . DEBTORS TURNOVER RATIO : This is also
called Debtors Velocity or Average Collection Period or
Period of Credit given .

( Average Debtors / Sales ) x 365 for days

( 52 for weeks & 12 for months )

11 . ASSET TRUNOVER RATIO :

Net Sales / Tangible Assets

12 . FIXED ASSET TURNOVER RATIO :

Net Sales / Fixed Assets

13 . CURRENT ASSET TURNOVER RATIO : Net

Sales / Current Assets

14 . CREDITORS TURNOVER RATIO : This is also

called Creditors Velocity Ratio, which determines the
creditor payment period.
( Average Creditors / Purchases ) x365 for days
15 . RETRUN ON ASSETS : Net Profit after
Taxes / Total Assets

16. RETRUN ON CAPITAL EMPLOYED :

( Net Profit before Interest & Tax / Average

Capital Employed ) x 100

Average Capital Employed is the average of the

equity share capital and long term funds
provided by the owners and the creditors of the firm
at the beginning and end of the accounting period.
 Composite Ratio
17 . RETRUN ON EQUITY CAPITAL ( ROE ) :
Net Profit after Taxes /
Tangible Net Worth

18 . EARNING PER SHARE : EPS indicates the quantum

of net profit of the year that would be ranking for
dividend for each share of the company being held
by the equity share holders.

Net profit after Taxes and Preference

Dividend / No . of Equity Shares

19 . PRICE EARNING RATIO : PE Ratio indicates the

number of times the Earning Per Share is covered by
its market price.

Market Price Per Equity Share / Earning

Per Share
20 . DEBT SERVICE COVERAGE RATIO : This ratio is
one of the most important one which indicates the
ability of an enterprise to meet its liabilities 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 )
PAT + Depr . + Annual Interest on Long
Term Loans & Liabilities

-------------------------------------------------------------
--------------------
Annual interest on Long Term Loans &
Liabilities + Annual Installments payable on
Long Term Loans & Liabilities

( Where PAT is Profit after Tax and Depr. is

Depreciation)
18
19
Notes
All amounts worked here are in terms of
Rupees in Crores (1 crore
=10000000=10^7).
MS Excel sheet has been used for

computing the ratios.

20
20
I Liquidity Ratios
Year 2007
1 Current ratio: Current assets / Current Liabilities
II.3 :C u rre n t a s s e ts ,L o a n s a n d a d v a6 n2 c8 e9 s.7 2
II.4 :C u rre n t lia b ilitie s a n d p ro v is io n3s8 5 7 .5 9
(II.3 /II.4 ) 1 .6 3 0 4 7 9 1 3 3

The current ratio 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.

21
21
I Liquidity Ratios
Year 2007
2 Quick ratio or Acid test ratio: (Current assets-
inventories)/ Current Liabilities
II.3:(Current assets,Loans and advances) 6289.72
Less:II.3a:Inventories 3354.03
2935.69
II.4:Current liabilities and provisions 3857.59
(II.3-II.3a)/(II.4) 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 or
more is accepted by most creditors; however, quick ratios vary
greatly from industry to industry and ITC does not have as such any
worries in getting creditors.
ITC has strong financial positions in many other aspects.

22
22
I Liquidity Ratios

Year 2007
3 Cash ratio or Absolute liquidity ratio: (Cash
+Marketable securities)/Current liabilities

The cash ratio 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 implications. (The ratio is of
interest to short-term creditors)
23
23
II Solvency Ratios
Year 2007
1 Debt – equity ratio: Long term debt/ equity (net
worth)

I.2:Loan funds 200.8

I.1:Shareholders funds 10437.0
The(I.2)/(I.1) 0.01924676
ratio of 0.02 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.

24
24
II Solvency Ratios
Year 2007
2 Debt ratio: debt (long term)/ (debt (long term) +
equity) or debt/capital employed

I.2:Loan funds 200.88

I.1:Shareholders funds 10437.08
(I.2)+(I.1) 10637.96
(I.2)/(I.2+I.1) 0.01888332

The ratio of 0.02 times signifies that the company has

employed more capitals over its debts. Thus the company
is efficiently utilizing its loan funds.

25
25
II Solvency Ratios
Year 2007
3 Interest Coverage ratio : (earnings before interest
and tax) / Interest

P /L :III:p ro f it b e f o re ta x a tio n a n d e x c e p tio n a l3ite

9 m2 6s
II.4 a - 1 3 :In te r e s t a c c r u e d b u t n o t d u e o n lo0 a. 5n
( P . I I I ) / ( I I . 4 a - 1 3 ) 7 1high
The ratio of 7139.4 times is magnificently very 3 9 and
.4 5 4
hence the company has very sound financial position. It
has no tension of paying interests over its loans.

26
26
III Turnover Ratios
Year 2007
1 Inventory turnover: Cost of goods sold or net
sales/Average (or closing) inventory.

P/L:IB :N e t s ale s 7135.75

II.3 a:In ven tories 3354.03
(P/L:IB )/(II.3 a:) 2 .1 275 152 58
The ratio of 2.13 times signifies that the company is
efficient in selling its stocks.

27
27
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 360
In v e n to rie s tu rn o v e r ra tio s 2 .1 2 7
169 days or about five and half months periods for the
(3 6 0of)/(IT
liquidation R ) is quiet efficient.
stocks 1 6 9 .2 5 2 4 6 8

28
28
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 7 1 3 5 .7 5
II.3 b :S u n d ry d e b to rs 6 3 6 .6 9
(P /L :IB )/(II.3 b ) 1 1 .2 0 7 5 7 3
The ratio of 11.2 times signifies that the company is
getting good returns and has no visible risk but benefits
out of its debtors.

29
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 360
D e b to rs tu rn o v e r 1 1 .2 0 7
The
( 3 6 debt
0 ) / ( Dcollection
TR ) period of 32 days
3 2 . 1 2is2quiet
7 8 0 4good
1
and the company is efficient in getting back its dues.

30
30
III Turnover Ratios
Year 2007
5 Current assets turnover: Net sales/ Current assets

P / L : I B : N e t s a le s 7 1 3 5 .7 5
I I . 3 : C u r r e n t a s s e t s , lo a n s a n d6 2a 8d 9v a. 7n2c e s
(P /L :IB )/(II.3 ) 1 . 1 3 4 5 0 9 9 6 2
The ratio of 1.13 times signifies that , in spite of the
current liabilities, the company is efficient in making sales
revenue.

31
31
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 7 1 3 5 .7 5
N e t C u rre n t A s s e ts 2 4 3 2 .1 3
( P / L : I B ) / ( N C A ) 2 . 9company
The ratio of 2.93 times signifies that the 3 3 9 5 0 8 is9 9
highly efficient in utilizing its net current assets and
generating sales revenue.

32
32
III Turnover Ratios
Year 2007
7 Fixed assets turnover: Net sales/ Net fixed assets

P / L : IB :N e t s a le s 7 1 3 5 .7 5
I I. 1 : N e t F ixe d A s s e t s 5 6 1 0 .9 1
( P / L : IB )/ ( I I . 1 ) 1 .2 7 1 7 6 3 4 0 4
The ratio of 1.27 times signifies that the company is very
efficiently utilizing its fixed assets for generating sales
revenue.

33
33
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 7135.75
II.1:Net Fixed Assets 5610.91
II.2: Investments 3067.77
Net Current assets 2432.13
Net assets 11110.81
(P/L:IB)/(NA) 0.642234905
The ratio of 0.64 times signifies that the company has still to be
more efficient in utilizing its net assets in generating sales revenue.

34
34
IV Profitability Ratios
Year 2007
1 Margin: (Profit before interest and tax (PBIT)/ Net
sales)×100

P /L :III:P ro f it b e f o re ta x a tio n a n d E x c e p tio3n 9a l2ite

6 .m7 s
P / L : I B : N e t S a le s 7 1 3 5 .7 5
( P / L : I I I ) / ( P ×1
/ L :0I B0 ) 5 5 .0 2 8 5 5 3 4 1
The Profit margin of 55.03% is quiet impressive and the
company is making good profits.

35
35
IV Profitability Ratios
Year 2007
2 Net margin: Profit after tax (PAT) ×100 / Net sales

P / L : I I I : P r o fit a ft e r t a x a t io n 2 6 9 9 .9 7
P / L : I B : N e t S a le s 7 1 3 5 .7 5
( P / L : I I I ) / ( P ×1
/ L 0: I 0B ) 3 7 .8 3 7 2 2 8 0 4
The net margin of 37.83% is quiet impressive, and the
company is performing well.

36
36
IV Profitability Ratios
Year 2007
3 Before tax return on investment: (PBIT/Net assets)
×100
P/L:III:Profit before taxation and Exceptional items 3926.7
II.1:Net Fixed Assets 5610.91
II.2:Investments 3067.77
Net Current assets 2432.13
Net assets 11110.81
(P/L:III)/(NA)×100 35.34125775

The Return of 35.34% is quiet good and company is

performing well.

37
37
IV Profitability Ratios
Year 2007
4 Return on equity: (PAT/Equity (net worth)) ×100

P / L : I I I : P r o fit a ft e r t a x a t io n 2 6 9 9 .9 7
I . 1 : S h a r e h o ld e r s fu n d s 1 0 4 3 7 .0 8
( P / L : I I I ) / ( P /×1
L :0I B0 ) 2 5 .8 6 9 0 1 7
The ratio of 25.86%is quiet good and the company is
utilizing the shareholders funds in a better way.

38
38
V Equity-related Ratios
Year 2007
1 Earning per share (EPS): PAT/Number of ordinary
shares

P /L : II I: P ro fit a fte r t a xa tio n 2 6 9 9 .9 7

P /L :IV -1 9 ( iv ):W e ig h te d a v e ra g e N u m b e r o f o rd in a ry s h a re s 3o u7ts5ta 7
n d6
in g3 6 9 0 7

(P /L :III)/(P /L×1 :IV0 )(^ 7 : to c o n v e rt in p e r 7ru.1p 8e 5e )2 8 7 1 0 2

In comparison to the face value of Re.1/share the EPS of
Rs.7.18 is very good.

39
39
V Equity-related Ratios
Year 2007
2 Dividends per share (DPS): Dividends/ Number of
ordinary shares

P/L:IV:Proposed D ividend 1166.29

3 757636907
P /L:IV-19(iv):W eighted average Num ber of ordinary s hares outs tanding
Dividend per share
(P/L:III)/(P/L:IV) ×10^7 (DPS) isunitaruppes
(to c onvert into simple
) and intuitive
3.10378578
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 is quiet good.

40
40
V Equity-related Ratios
Year 2007
3 Pay out ratios: DPS/EPS or Dividends/PAT

D PS 3 .1
EPS 7 .1 9
(D P S )/(E P S ) 0 .4 3 1 1 5 4 3 8 1
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 times is quiet good.
41
41
V 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

42
42
V Equity-related Ratios
Year 2007
5 Book value per share: Net worth/ Number of
ordinary shares

I.1 :S h a re h o ld e rs fu n d s 1 0 4 3 7 .0 8
BV is considered
P /L:IV-19(iv):W to be
eighted average Num ber the accounting
of ordinary 3 value
7 5 7 6 3 6of9 0each
s hares outs tanding 7
share,
(I.1drastically
)/(P/L :IV)× 1different
0 ^7
(to
than what the
c onvert into unit ruppes ) 2 7 .7market
7 5 6 4 7 9 is
9 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.”

43
43
VI Investment-related Ratios
Year 2007
1 Return on assets or earning power (ROA): (PAT/ Average
total assets (of the given years, here 2006&07)) ×100 or
((PAT+ Interest)/Average fixed assets) ×100

P/L:III:Profit after taxation 2699.97

Fixed assets 2007 5610.91
Investments 2007 3067.77
Current assets 2007 6289.72
Fixed assets 2006 4405.13
Investments 2006 3517.01
Current assets 2006 5161.9
Average total assets 14026.22
(PAT/ATA) ×100 19.24944853
Earning power of the company, i.e. 19.25% is quiet good and the
company is doing well.

44
44
VI Investment-related Ratios
Year 2007
2 Return on capital employed (ROCE): (EBIT(PBIT)/
Capital employed) ×100

3 9n 2a l6it. e7m s
P /L : II I:P r o f it b e f o r e ta x a tio n a n d E x c e p tio
I:S o u rc e s o f F u n d s 1 1 1 1 0 .8 1
The ROCE
( ( P / L of I35.34%
: I I×1
) /0I )0 signifies that the
3 5 .company
3 4 1 2 5 7 7is5
getting good return out of its investment decisions.

45
45
VII 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 fit a ft e r t a x a t io n 2 6 9 9 .9 7
I . 1 : S h a r e h o ld e r s fu n d s 1 0 4 3 7 .0 8
( P / (25.87
The ratio L : I I I ) / ( times)
P×1/ L0: I0B )is same as that2 5of. 8“Return
6 9 0 1 7 on
equity”, since there are no preference shares.

46
46
VII 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 :III:P ro fit a fte r ta xa tio n 2 6 9 9 .9 7

I.1 :S h a re h o ld e rs fu n d s 1 0 4 3 7 .0 8
(P /L :III)/(P /L×1:IB0 )0 2 5 .8 6 9 0 1 7
The ratio (25.87 times) is same as that of “Return on
equity”, and “return on total shareholders equity” since
there are no preference shares.

47
47
Du Pont Analysis

48
Du Pont analysis for year 2007:

49
Du Pont analysis for year 2006

50
Du Pont analysis for year 2005:

51
Du Pont analysis for year 2004:

52
 Du Pont Analysis

30.00 28.55
Return on total assets (%)

25.00 22.44 23.37 22.69

20.00

15.00

10.00

5.00

0.00
1 2 3 4
Years:1~2004:2~2005:3~2006:4~2007

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 of sales.
So as per the analysis, the company has to maintain more consistent and increasing
trend in its ROA in the following years. 53
 Thank
you

Give this great opportunity again to us

!

56
56