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Ratio Analysis

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?.

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Ratio Analysis

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  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.

  2. How a Ratio is expressed? • As Percentage • As Proportion • As Pure Number /Times

  3. Classification of items for Ratio Analysis • Shareholders Fund/ Net worth: • Share Capital • Reserves (General, Capital, Revaluation ,Other Reserves, Credit Balance in P&L A/c) • Fictitious assets (Debit balance in P&L A/c, Preliminary or Preoperative expenses) • Long term liabilities: • Term Loans (Banks & Institutions) • Debentures/Bonds, • Unsecured Loans, Fixed Deposits, Other Long Term Liabilities • Capital Employed: Shareholders Fund/ Net worth + Long term liabilities:

  4. Classification of items for Ratio Analysis • Current assets : • Cash & Bank Balance, • Marketable securities, • Book Debts/Sundry Debtors, Bills Receivables, • Stocks (RM,WIP,FG) Stores & Spares, • Prepaid expenses, • Loans and Advances recoverable within 12 months • Current liabilities: • Cash Credit/OD/Export Credit • Sundry Creditors/Bills Payable • Short duration loans or deposits • Expenses payable & • Provisions against various items • Working Capital: Current assets - Current liabilities

  5. Fixed assets: • Land & Building, Plant & Machineries etc. • Patent, Goodwill • Original Value Less Depreciation • Net Value or Book Value or Written down value • Investments or non current assets : • Investments in shares & securities • Long Term Security Deposits

  6. Liquidity ratios Leverage/ Capital Structure ratios Asset Based Income Based Profitability ratios Related to sales Related to total Investments Related to equity funds Overall profitability/ Earning power Turnover ratios

  7. Liquidity ratios • Current ratio= current assets/ current liabilities • Acid Test ratio/ Quick Ratio= (Current Assets – Stock – Prepaid Expenses)/ Current Liabilities or (cash + marketable securities + Debtors)/ Current Liabilities

  8. Leverage/ Capital Structure ratios - Asset Based/ Income Based • Debt equity ratio: Long term Debt/ shareholders’ funds (equity share capital + preference share capital+ reserves and surplus) • Debt to total capital ratio = Long Term debt/ total capital employed (shareholders’ fund + long term debt) • Debt to total asset ratio = total debt/ total asset • Proprietary ratio = owners’ fund/ total assets • Interest Coverage ratio = earnings before interest and taxes(EBIT)/ Interest

  9. Leverage/ Capital Structure ratios - Income Based • Capital gearing ratio = (Preference share capital + Debentures + other Borrowed funds)/ Equity Funds • Debt service coverage ratio = (earnings after tax + depreciation + other non cash exp. + interest)/ repayment installment amount + interest

  10. Profitability ratios - Related to sales • Gross Profit Ratio = Gross Profit/ Net Sales • Operating Profit Ratio = Earnings Before Interest Tax/ Net Sales • Net Profit Ratio = Earning after taxes/ Net Sales • Cost of Goods sold ratio = Cost of Goods sold/ Net sales • Operating Expenses Ratio = (Administrative Exp + Selling Exp.)/ Net sales • Operating ratio = (Cost of Goods sold + Operating Expenses ) / Net sales

  11. Profitability ratios - Related to total Investments • Return on total assets = (earnings after tax + interest)/ Total assets • Return on Capital employed = EBIT/ total capital employed • Return on Shareholders’ Equity = EAT/ shareholders’ equity

  12. Profitability ratios – Related to equity funds • Return on Equity Fund = (EAT – Pref. Dividend)/ net worth • Earnings Per Share (EPS) = net profit available to equity shareholders (EAT – preference dividend)/ no. of equity shares • Dividend per share (DPS) = dividend paid to equity shareholders / number of equity shares. • Earnings Yield = EPS/ Market Price per share • Dividend yield = DPS/ Market Price per share

  13. Dividend payout Ratio = EPS/ DPS • Price earning ratio = Market price of a share/ EPS Profitability ratios - Overall profitability or Earning power • Return on investment = EAT / Total assets

  14. Turnover ratios • Inventory turnover ratio = cost of goods sold / average inventory • Inventory holding period = 12 or 52 or 365/ Inventory turnover ratio • Debtors turnover ratio = credit sales/ Avg. Drs + Avg. B.R • Average Collection period = 12 or 52 or 365/ Debtors turnover ratio

  15. Turnover ratios • Creditors turnover ratio = credit purchases/ Avg. Crs + Avg. B.P • Average Payment period = 12 or 52 or 365/ Creditors turnover ratio • Total assets turnover = cost of goods sold / avg. total assets • Fixed Assets turnover = cost of goods sold / avg. fixed assets

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