Insights of ratio analysis

Insights of Ratio Analysis

AISHVARYA DADHEECH

RELATIONSHIP BETWEEN PROFIT AND LOSS ACCOUNT AND BALANCE SHEET. PROFIT AND LOSS

ACCOUNT

PBIT

PBT

PAT

BALANCE SHEET

TOTAL ASSETS

CAPITAL EMPLOYED

NET WORTH

PROFIT AND LOSS ACCOUNT. Sales 1120 Operating cost 1008 ___________________________________ PBIT 112 LESS INTEREST 20 PBT 92 LESS TAX 32 PAT 60 LESS DIVIDENDS 24 RETAINED EARNING 36

LIABILITIES

AMOUNT ASSETS

AMOUNT

OWNER FUNDS 360 FIXED ASSESTS 400

LONG TERM LIABILTIES 200 INVESTMENTS 80

CURRENT LIABILITIES 240 CURRENT ASSESTS 320

800 800

BALANCE SHEET

Corporate valuation

Market capitalization Share values , nominal, book, market Earning per share Dividend per share Dividend cover and the pay out ratio Earning yield Dividend yield PE ratio Market to book ratio Cash earning per share CEPS = PAT – Preferred dividend + non-cash charges / no. of equity shares o/s

P E ratio ( Earning Multiple) Red flag to measure how expensive or cheap

The lower the P/E, the less you have to pay for the stock, relative to what you can expect to earn from it. The higher the P/E the more over-valued the stock is.

Example.

Changes in the market price and EPS.

Trailing and projected P E Ratio

N/A 0-13 14-20 21-28 28 + disparate interpretation.

Averages and Market P E Ratio.

RETURN ON INVESTMENTS

TWO MEASURES TO COMPUTE

1. RETURN ON TOTAL ASSETS

2. RETURN ON EQUITY

RETURN ON TOTAL ASSETS PROFIT BEFORE INTEREST AND TAX

_________________________________

TOTAL ASSETS

HERE , 112 / 800 = 14 %

RETURN ON NET ASSETS

=PAT/ FIXED ASSETS + WORKING CAPITAL

COMPUTATION OF RETURN ON TOTAL ASSETS PBIT/ TA = PBIT/ SALES * SALES/ TA

ROTA = PROFIT * ASSETS MARGIN TURNOVER

ROTA = 112/ 112O * 1120/ 800 = 10 * 1.4 = 14 %DUAL ROLE

MARGIN ON SALES DRIVERS SALES 1120

OPERATING COSTSMATERIALS 426LABOR 291FACTORY OVERHEADS 168ADMIN/ SELLING ,ETC 123TOTAL OPERATING COST 1008__________________________________MATERIALS COST % 426/1120 = 38%LABOUR COST % 291/1120 = 26%FACTORY OVERHEADS COST % 168/1120 = 15%ADMIN SELLING COST % 123/1120 = 11%Total 90%

SALES / TOTAL ASSETS DRIVERS SALES / FIXED ASSETS 1120/ 440 = 2.5 TIMES

SALES( cogs) / INVENTORIES 1120 / 128 = 8.7 TIMES

SALES / ACCOUNT RECEIVABLES

1120 / 160= 7.0 TIMES

Purchases/ account payables

OTHER WAY AROUND…………….!

INVENTORY DAYS. DEBTOR DAYS.

RETURN ON EQUITY

PAT / OWNER FUNDS

60 / 360

16.6 %

Preference dividend

RETURN ON CAPITAL EMPLOYED ROCE= PBIT / CAPITAL EMPLOYED.

Return on Capital Employed ratio measures the efficiency of the business in using the capital invested in it to make a profit. Therefore, the higher the percentage the more efficient the company is

Du pont trend

ROE = NI / TE Multiply by 1 and then rearrange

ROE = (NI / TE) (TA / TA) ROE = (NI / TA) (TA / TE) = ROA * EM

Multiply by 1 again and then rearrange ROE = (NI / TA) (TA / TE) (Sales / Sales) ROE = (NI / Sales) (Sales / TA) (TA / TE) ROE = PM * TAT * EM

ROE = PM * TAT * EM Profit margin is a measure of the firm’s operating efficiency – how

well does it control costs Total asset turnover is a measure of the firm’s asset use

efficiency – how well does it manage its assets Equity multiplier is a measure of the firm’s financial leverage

LIQUIDITY MEASURES

CURRENT RATIOCURENT ASSETS / CURRENT LIABILITIES320 / 240 =1.33

QUICK RATIOCURRENT ASSETS – INVENTORY200/ 240 = .833

WORKING CAPITAL / SALES RATIOCA-CL/ SALES80/1120 = .071

FINANCIAL MEASURES

DEBT TO EQUITY RATIO

Debt over equity and debt over total funds.

Interest cover PBIT/ INTEREST