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RATIO ANALYSIS OF RATIO ANALYSIS OF

Presented By: Vinod Prajapat (63)

Submitted to: Mrs.Vaishali Apte

Faculty of International Finance, Muenchen International Business School, Pune

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 RATIOSBalance

Sheet RatioP&L Ratio or

Income/Revenue Statement

Ratio

Balance Sheet and Profit & Loss Ratio

Financial Ratio Operating Ratio Composite Ratio

Current RatioQuick Asset RatioProprietary RatioDebt Equity Ratio

Gross Profit RatioOperating RatioExpense RatioNet profit RatioStock Turnover Ratio

Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors’ Turnover Ratio,

FORMAT OF BALANCE SHEET FOR RATIO ANALYSISLIABILITIES ASSETS

NET WORTH/EQUITY/OWNED FUNDSShare Capital/Partner’s Capital/Paid up Capital/ Owners FundsReserves ( General, Capital, Revaluation & Other Reserves) Credit Balance in P&L A/c

FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIES Original Value Less DepreciationNet Value or Book Value or Written down value

LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions)Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities

NON CURRENT ASSETSInvestments in quoted shares & securitiesOld stocks or old/disputed book debtsLong Term Security DepositsOther Misc. assets which are not current or fixed in nature

CURRENT LIABILTIESBank Working Capital Limits such as CC/OD/Bills/Export CreditSundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or depositsExpenses payable & provisions against various items

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 expenses, Loans and Advances recoverable within 12 months

INTANGIBLE ASSETSPatent, 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

Long Term Liabilities & Short Term Liabilities are also called Outside Liabilities

Current Assets are Short Term Use 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 current only 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.

Bonus Shares as issued by capitalization of General reserves and as such do not affect the Net Worth. With Rights Issue, change takes place in Net Worth and Current Ratio.

1. 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.

NWC = Current Assets – 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 50,000Debtors 1,00,000Inventories 1,50,000 Current Liabilities 1,00,000Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000 = 3 : 1Quick 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

The 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

inventory is rotated during the relevant accounting period

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 (52 for weeks & 12 for months)

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)

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19

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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.

2121

I Liquidity Ratios

Year 20071 Current ratio: Current assets / Current Liabilities

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.

II.3:Current assets,Loans and advances 6289.72II.4:Current liabilities and provisions 3857.59(II.3/II.4) 1.630479133

2222

I Liquidity RatiosYear 20072 Quick ratio or Acid test ratio: (Current assets-

inventories)/ Current Liabilities

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.

II.3:(Current assets,Loans and advances) 6289.72Less:II.3a:Inventories 3354.03

2935.69II.4:Current liabilities and provisions 3857.59(II.3-II.3a)/(II.4) 0.761016593

2323

I Liquidity Ratios

Year 20073 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)

II.3c:Cash and bank Balances 900.16Add:Marketable securites 0

900.16II.4:Current liabilities and provisions 3857.59(II.3c)/(II.4) 0.233347764

2424

II Solvency Ratios

Year 20071 Debt – equity ratio: Long term debt/ equity (net

worth)

The 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.

I.2:Loan funds 200.88I.1:Shareholders funds 10437.08(I.2)/(I.1) 0.019246763

2525

II Solvency Ratios

Year 20072 Debt ratio: debt (long term)/ (debt (long term) +

equity) or debt/capital employed

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.

I.2:Loan funds 200.88I.1:Shareholders funds 10437.08(I.2)+(I.1) 10637.96(I.2)/(I.2+I.1) 0.01888332

2626

II Solvency Ratios

Year 20073 Interest Coverage ratio : (earnings before interest

and tax) / Interest

The ratio of 7139.4 times is magnificently very high and hence the company has very sound financial position. It has no tension of paying interests over its loans.

P/L:III:profit before taxation and exceptional items 3926.7II.4a-13:Interest accrued but not due on loans 0.55(P.III)/(II.4a-13) 7139.454545

2727

III Turnover Ratios

Year 2007

1 Inventory turnover: Cost of goods sold or net sales/Average (or closing) inventory.

The ratio of 2.13 times signifies that the company is efficient in selling its stocks.

P/L:IB:Net sales 7135.75II.3a:Inventories 3354.03(P/L:IB)/(II.3a:) 2.127515258

2828

III Turnover RatiosYear 20072 Days of Inventory holding: Number of days in the

year (say 360)/ Inventory turnover ratio.

169 days or about five and half months periods for the liquidation of stocks is quiet efficient.

Number of days in a year 360Inventories turnover ratios 2.127(360)/(ITR) 169.2524683

2929

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)

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.

P/L:IB:Net sales 7135.75II.3b:Sundry debtors 636.69(P/L:IB)/(II.3b) 11.20757354

3030

III Turnover RatiosYear 20074 Collection period: Number of days in the year

(say 360)/ Debtors turnover

The debt collection period of 32 days is quiet good and the company is efficient in getting back its dues.

Number of days in the year 360Debtors turnover 11.207(360)/(DTR) 32.12278041

3131

III Turnover RatiosYear 20075 Current assets turnover: Net sales/ Current assets

The ratio of 1.13 times signifies that , in spite of the current liabilities, the company is efficient in making sales revenue.

P/L:IB:Net sales 7135.75II.3: Current assets,loans and advances 6289.72(P/L:IB)/(II.3) 1.134509962

3232

III Turnover RatiosYear 20076 Net current assets turnover: Net sales/ Net current

assets

The ratio of 2.93 times signifies that the company is highly efficient in utilizing its net current assets and generating sales revenue.

P/L:IB:Net sales 7135.75Net Current Assets 2432.13(P/L:IB)/(NCA) 2.933950899

3333

III Turnover RatiosYear 20077 Fixed assets turnover: Net sales/ Net fixed assets

The ratio of 1.27 times signifies that the company is very efficiently utilizing its fixed assets for generating sales revenue.

P/L:IB:Net sales 7135.75II.1:Net Fixed Assets 5610.91(P/L:IB)/(II.1) 1.271763404

3434

III Turnover Ratios

Year 2007

8 Net assets turnover: Net sales/ Net assets or capital employed : (Net assets = all assets – accumulated depreciation)

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.

P/L:IB:Net sales 7135.75II.1:Net Fixed Assets 5610.91II.2: Investments 3067.77Net Current assets 2432.13

Net assets 11110.81(P/L:IB)/(NA) 0.642234905

3535

IV Profitability RatiosYear 20071 Margin: (Profit before interest and tax (PBIT)/ Net

sales)×100

The Profit margin of 55.03% is quiet impressive and the company is making good profits.

P/L:III:Profit before taxation and Exceptional items 3926.7P/L:IB:Net Sales 7135.75(P/L:III)/(P/L:IB)×100 55.02855341

3636

IV Profitability Ratios

Year 20072 Net margin: Profit after tax (PAT) ×100 / Net sales

The net margin of 37.83% is quiet impressive, and the company is performing well.

P/L:III:Profit after taxation 2699.97P/L:IB:Net Sales 7135.75(P/L:III)/(P/L:IB)×100 37.83722804

3737

IV Profitability RatiosYear 20073 Before tax return on investment: (PBIT/Net

assets) ×100

The Return of 35.34% is quiet good and company is performing well.

P/L:III:Profit before taxation and Exceptional items 3926.7II.1:Net Fixed Assets 5610.91II.2:Investments 3067.77Net Current assets 2432.13

Net assets 11110.81(P/L:III)/(NA)×100 35.34125775

3838

IV Profitability RatiosYear 20074 Return on equity: (PAT/Equity (net worth)) ×100

The ratio of 25.86% is quiet good and the company

is utilizing the shareholders funds in a better way.

P/L:III:Profit after taxation 2699.97I.1:Shareholders funds 10437.08(P/L:III)/(P/L:IB)×100 25.869017

3939

V Equity-related RatiosYear 20071 Earning per share (EPS): PAT/Number of ordinary

shares

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

P/L:III:Profit after taxation 2699.97P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907(P/L:III)/(P/L:IV)(×10^7: to convert in per rupee) 7.185287102

4040

V Equity-related RatiosYear 20072 Dividends per share (DPS): Dividends/ Number of

ordinary shares

Dividend per share (DPS) is a simple and intuitive 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.

P/L:IV:Proposed Dividend 1166.29P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907(P/L:III)/(P/L:IV)×10^7(to convert into unit ruppes) 3.10378578

4141

V Equity-related RatiosYear 20073 Pay out ratios: DPS/EPS or Dividends/PAT

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.

DPS 3.1EPS 7.19(DPS)/(EPS) 0.431154381

4242

V Equity-related RatiosYear 20074 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

4343

V Equity-related RatiosYear 20075 Book value per share: Net worth/ Number of

ordinary shares

BV is considered to be the accounting value of each share, drastically different than what the market is 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.”

I.1:Shareholders funds 10437.08P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907(I.1)/(P/L:IV)×10^7(to convert into unit ruppes) 27.77564799

4444

VI Investment-related RatiosYear 20071 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

Earning power of the company, i.e. 19.25% is quiet good and the company is doing well.

P/L:III:Profit after taxation 2699.97Fixed assets 2007 5610.91Investments 2007 3067.77Current assets 2007 6289.72

Fixed assets 2006 4405.13

Investments 2006 3517.01Current assets 2006 5161.9Average total assets 14026.22(PAT/ATA)×100 19.24944853

4545

VI Investment-related RatiosYear 20072 Return on capital employed (ROCE):

(EBIT(PBIT)/ Capital employed) ×100

The ROCE of 35.34% signifies that the company is getting good return out of its investment decisions.

P/L:III:Profit before taxation and Exceptional items 3926.7I:Sources of Funds 11110.81((P/L:III)/I)×100 35.34125775

4646

VII Return on Equity (ROE)Year 20071 ROTSE (return on total shareholders equity):

(PAT/ Total shareholders equity) ×100

The ratio (25.87 times) is same as that of “Return on equity”, since there are no preference shares.

P/L:III:Profit after taxation 2699.97I.1:Shareholders funds 10437.08(P/L:III)/(P/L:IB)×100 25.869017

4747

VII Return on Equity (ROE)

Year 20072 ROOSE (return on ordinary shareholders equity) /

RONW (return on net worth): ((PAT-preferential dividends)/Net worth) ×100

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.

P/L:III:Profit after taxation 2699.97I.1:Shareholders funds 10437.08(P/L:III)/(P/L:IB)×100 25.869017

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DU PONT ANALYSIS

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DU PONT ANALYSIS FOR YEAR 2007:

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DU PONT ANALYSIS FOR YEAR 2006

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DU PONT ANALYSIS FOR YEAR 2005:

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DU PONT ANALYSIS FOR YEAR 2004:

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Du Pont Analysis

22.44

28.55

23.37 22.69

0.00

5.00

10.00

15.00

20.00

25.00

30.00

1 2 3 4

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

Ret

urn

on

to

tal

asse

ts (

%)

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.

1.Uses

ofRatio Analysis

Employees and trade unions

(pay raises / job security)

Managers and directors

(bonuses for reaching targets)

Trade creditors(makes sure

customer has enough working

capital)

Shareholder(capital gain and

dividends)

Potential financiers(looks at

profitability and funds to repay

loans)

Local community

(secure funding for local

projects/jobs)

2.Limitations

ofRatio Analysis

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