Transcript Financial Ratio Analysis

July 8, 2011
Financial Ratio Analysis
 Financial ratios combine different financial parameters.
 They are based on the financial data drawn from the
balance sheet and the P&L account.
 Each ratio is studied both by itself and along with other
ratios, in order to gain critical insights.
 Different ratios are used to analyse the different
dimensions of a business.
TCS Financial Ratios ( 2009-10)
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TCS Financial Ratios ( 2009-10)
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Wipro Financial Ratios ( 2009-10)
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Profitability ratios
 These ratios measure how profitable the
business is with respect to sales and assets.
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Gross Profit Margin
 = (Sales – Cost of Goods Sold) ÷ (Sales)
Operating profit margin
 (Gross Profit – SG&A - R&D ) ÷ (Sales)
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Net Profit Margin
 = (Profit After Tax) ÷ (Sales)
Return on Assets
 = (Profit After Tax) ÷ (Total Assets)
Return on Investment (ROI)
 The return on investment is computed as under:
 ROI = [(PBIT) ÷ (Total Capital Employed)]

= [(PBIT) ÷ (Shareholders’ Net Worth + Borrowings)]
Activity ratios
 These ratios measure how efficiently the
assets of the business are being used.
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Inventory Turnover Ratio

= (Cost of Goods Sold) ÷ (Inventory)
Average Collection Period (Debtors
Turnover)

= (Debtors) ÷ (Average Daily Sales)
Capital Employed Turnover

= (Sales) ÷ (Capital Employed)
Fixed Assets Turnover

= (Sales) ÷ (Net Fixed Assets)
Liquidity Ratios
 These ratios measure to what extent the
business has funds available to meet its
obligations.
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Current Ratio
 = (Current Assets) ÷ (Current Liabilities)
Quick Ratio or Acid Test Ratio
 = (Quick Assets) ÷ (Current Liabilities)
 Quick assets = Current assets - Inventory
Leverage ratios
 These ratios measure the extent of financial
risk assumed by the business, ie the level of
debt in relation to equity.
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Debt-Equity Ratio
 = (Long Term Debt) ÷ (Shareholders’ Net Worth)
Total Debt to Total Capital
Employed Ratio
 = (Total Debt) ÷ (Total Capital Employed)
Coverage ratios
 These ratios measure the availability of
funds to meet various financial obligations.
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Interest Coverage
 = (Profit Before Interest and Tax) ÷ (Interest Charges)
Dividend Cover
 = (Profit after Tax less Preference Dividend)
(Equity Dividend)
÷
Debt Service Coverage Ratio
 = (Profit Before Interest and Tax)
÷
(Loan Installments + Interest)
Shareholder Returns
 These ratios measure how well the
shareholders are being rewarded by the
company.
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Return on Shareholders’ Net Worth
 = (Net Profit After Tax – Pref. Dividend) ÷
(Equity Shareholders’ Net Worth)
Earnings Per Share (EPS)
 = (Net Profit After Tax – Pref. Dividend) ÷
(Number of Equity Shares)
Dividend Per Share
= (Dividends paid to Equity Shareholders) ÷
(Number of Equity Shares)
Dividend Pay-out Ratio
= (Dividend per share) ÷ (Earnings per Share)
Dividend Yield
= (Dividend per share) ÷ (Market Value per share)
Earnings Yield
= (Earnings per share) ÷ (Market Value per share)
Valuation ratios
 These ratios are useful in arriving at a
realistic valuation of the business.
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Price/Earnings Ratio (P/E ratio)
= (Market Value per Share) ÷ (Earnings per share)
Book Value per Share
= (Net Worth – Preference Share Capital) ÷ (No of shares)
Market Price to Book Value
= (Market Price per Share)÷ (Book Value per share)
Thank You
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