Ratio Analysis -3

8/7/2019 Ratio Analysis -3

1/11

MMS-2nd Semester

Batch 2010 2011VESIMSR


2/11

Profitability Ratiosy Return on Investments ( ROI):

y It has three variants:

y 1)ROA= PAT/Avg Total assets *100y Also called profit to assets ratio, i.e. the net earnings

available to owners of the total assets.

y It measures the profitability of the total funds/

investment of a firm.


3/11

Profitability Ratiosy Second type ofROI: ROCE

y Here profits are related to the capital employed, i.e.

the long term funds supplied by the creditors and theowners of the capital

y ROCE: EBIT/Avg total cap employed *100

y The higher the ratio, the more efficient is the use of

capital employed


4/11


5/11

Return on Equity Fundsy This is another variant of the previous ratio.

y It is the single most important ratio to judge whether

the firm has earned a satisfactory return for its equityholders or not

y Return on EQUITYFunds = (PAT pref.dividend)/Avg Net worth *100


6/11

Return on Equity Fundsy Its adequacy can be judged by:

y Comparing it with the past records of the same firm

y Inter firm comparisony Comparisons with the overall industry average


7/11

Return on Equity Fundsy EPS: PAT/ No. of shares outstanding

y It measures the profit available to the equity

sharehol

ders on a per share basis, i.e. the amount theycan get on every share held

y As the EPS does not reveal how much is paid to theowners as dividends, which is measured by DPS

y DPS: Dividends per share to ordinary shareholders /No. of shares outstanding


8/11

Return on Equity Fundsy Dividend Payout Ratio: DPS/EPS *100

y It measures the relationship between the earnings

bel

onging to the ordinary sharehol

ders and thedividend paid to them

y Earning yield: EPS/ Mkt value per share*100

y DividendYield: DPS/ Mkt value per share *100


9/11

P/E ratioy This ratio is closely related to the earnings yield/

earnings price ratio

P/E ratio: Mkt price of share/ EPS

It reflects the price currently being paid by the marketfor each rupee of currently reported EPS. It measuresinvestors expectations and the market appraisal of theperformance of a firm.


10/11

Earning Power- Overall ProfitabilityThe profitability ratios discussed so far thro light on the

profitability of a firm from the view point of:1) The owners of the firm2) The operating efficiency of the firmThe overall operating efficiency of a firm can be assessed

on the basis of a combination of the two. This isreferred as : earnings power, return on enterprise

Earning Power: Net profit Margin*InvestmentTurnover


11/11

Du Point Analysis

Ratio Analysis -3

Documents