Ratio Analysis

Ratio Analysis is the process of

determining
and
interpreting
mathematical relationship based on
financial statements to judge the financial
strength and weaknesses of the concern.
Ratio Analysis is used for the following:
- Inter firm comparison
- Intra firm comparison
- Comparison against industry benchmarks
- Analysis of chronological performance

Discussion on ratios:
Function
Computation
Analytical value and aid to decision
making
Assessment/Bench marking
Strategic key drivers

Classification of Ratios:

Return on Investment ratios (ROI)

Solvency ratios
Liquidity ratios
Resource efficiency or turnover ratios
Profitability/Profit margin ratios
DuPont Analysis
Capital market ratios

1. Return on Investment
ratios:
Return on Net Worth (RONW) (in %)
= (Profit Preference dividend) * 100
Equity Shareholders Fund or Net
worth
Earning per share (EPS) (in Rs)
= Profit Preference dividend
No of equity shares outstanding

 Cash Earning Per Share (CEPS) (IN

Rs)
= Profit Preference dividend + Non
cash charges
No of equity shares
outstanding

2. Solvency Ratios:
Net Asset Value (NAV) (in Rs.)
=
Equity shareholders fund
No. of equity share outstanding
Debt Equity Ratio (times)
=
Long term debt
Total net worth
Total net worth = Equity shareholders fund +
Preference capital

 Interest Cover(times)
= Profit + Interest on long term debt + Non cash
charges
Interest on long term debt
Debt Service Cover Ratio (DSCR) (times)
= Profit + Interest on long term debt + Non cash
charges
Interest on long term debt + Installments of
principal
due

3.Liquidity Ratios:
Current Ratio (in times)
= Current assets, loans and advances + Short term
investments
Current liabilities + Provisions + Short term debt
Quick Ratio (in times)
= (Current assets, loans and advances + Short term
investments) (Prepaid expenses + Inventories)
Current liabilities + Provisions

 Average collection period (in days, weeks or months)

=
365/52/12
Debtors turnover ratio
Average payment period (in days, weeks or months)
=
365/52/12
Creditors turnover ratio
Inventory holding period (in days, weeks or months)
=
365/52/12
Stock turnover ratio

4. Resource Efficiency or Turnover

Ratios:
Fixed assets turnover ratio (in times)
=
Net Sales
Net block of fixed assets (excluding
capital WIP)
Net worth turnover ratio (in times)
=
Net Sales
Net worth or Equity shareholders fund
Debtors turnover ratio
Creditors turnover ratio

5. Profitability Ratios:
Multistep profits to sales ratios
Individual expenses or cost to sales
ratio
Ratios of other income to PBT
Effective tax rate

 Gross profit to sales ratio

= Gross profit * 100
Net sales
Operating profit to sales ratio
= Operating profit * 100
Net sales
Raw material consumed to sales ratio
= Raw material consumed * 100
Net sales

 Effective tax rate

= Current income tax * 100
PBT

6. Valuation ratios or Capital market

ratios:
Price-Earning ratio
= Market price of equity share
EPS
Market price to NAV
= Market price of equity share
NAV
Yield to investors
= (Dividend paid + Market appreciation) * 100
Initial investment