Ratio Analysis-2

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4. Profitability Ratios: Profitability ratios measure the profitability of a concern generally. They are calculated either in relation to sales or in relation to investment.

ü    Return on Capital Employed or Return on Investment (ROI): This ratio reveals the earning capacity of the capital employed in the business.

                                                =PBIT /Capital Employed

ü    Return on Proprietors Fund / Earning Ratio:  Earn on Net Worth

                                                =Net Profit (After tax)/Proprietors Fund

ü    Return on Ordinary shareholders Equity or Return on Equity Capital: It expresses the return earned by the equity shareholders on their investment.

=Net Profit after tax and Dividend / Proprietors fund or Paid up equity Capital

ü    Price Earning Ratio: It expresses the relationship between marketprice of share on a company and the earnings per share of that company.

                     =MPS (Market Price per Share) / EPS

ü    Earning Price Ratio/ Earning Yield:

                                                = EPS / MPS

ü    EPS= Net Profit (After tax and Interest) / No. Of Outstanding Shares.

ü    Dividend Yield ratio: It expresses the relationship between dividend earned per share to earnings per share.

 =    Dividend per share (DPS) / Market value per share

ü    Dividend pay-out ratio: It is the ratio of dividend per share to earning per share.

= DPS / EPS

                                   

DPS: It is the amount of the dividend payable to the holder of one equity share. =Dividend paid to ordinary shareholders / No. of    ordinary shares

                                                C.G.S=Sales- G.P

                                                G.P= Sales – C.G.S

                                                G.P.Ratio =G.P/Net sales*100

Net Sales= Gross Sales – Return inward- Cash discount allowed

Net profit ratio=Net Profit/ Net Sales*100

Operating Profit ratio=O.P/Net Sales*100

Interest Coverage Ratio= Net Profit (Before Tax & Interest) / Fixed Interest Classes

            Return on Investment (ROI): It reveals the earning capacity of the capital employed in the business. It is calculated as,

                                          EBIT/Capital employed.

The return on capital employed should be more than the cost of capital employed.

Capital employed =Equity Capital + Preference sharecapital + Reserves + Longterm loans and Debentures - Fictitious Assets – Non Operating Assets

                        

Ratio Analysis

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           A ratio analysis is a mathematical expression. It is the quantitative relation between two. It is the technique of interpretation of financial statements with the help of meaningful ratios. Ratios may be used for comparison in any of the following ways.

ü  Comparison of a firm its own performance in the past.

ü  Comparison of a firm with the another firm in the industry

ü  Comparison of a firm with the industry as a whole

TYPES OF RATIOS

ü  Liquidity ratio

ü  Activity ratio

ü  Leverage ratio

ü  profitability ratio

1. Liquidity ratio: These are ratios which measure the short term financial position of a firm.

                          i. Current ratio: It is also called as working capital ratio. The current ratio measures the ability of the firm to meet its currnt liabilities-current assets get converted into cash during the operating cycle of the firm and provide the funds needed to pay current liabilities.  i.e

                                                    Current assets

                                               ----------------------------

                                                  Current liabilities

Ideal ratio is 2:1

           

            ii. Quick or Acid test Ratio: It tells about the firm’s liquidity position. It is a fairly stringent measure of liquidity.                            

                                                =Quick assets/Current Liabilities                         

                                                Ideal ratio is 1:1

                        Quick Assets =Current Assets – Stock - Prepaid Expenses 

             iii. Absolute Liquid Ratio:

                                                 A.L.A/C.L

                                    AL assets=Cash + Bank + Marketable Securities.

2. Activity Ratios or Current Assets management or Efficiency Ratios:

These ratios measure the efficiency or effectiveness of the firm in managing its resources or assets

ü    Stock or Inventory Turnover Ratio: It indicates the number of times the stock has turned over into sales in a year. A stock turn over ratio of ‘8’ is considered ideal. A high stock turn over ratio indicates that the stocks are fast moving and get converted into sales quickly.

= Cost of goods Sold/ Avg. Inventory

ü    Debtors Turnover Ratio: It expresses the relationship between debtors and sales.

=Credit Sales /Average Debtors

ü    Creditors Turnover Ratio: It expresses the relationship between creditors and purchases.

=Credit Purchases /Average Creditors

ü    Fixed Assets Turnover Ratio: A high fixed asset turn over ratio indicates better utilization of the firm fixed assets. A ratio of around 5 is considered ideal.

= Net Sales / Fixed Assets

ü    Working Capital Turnover Ratio: A high working capital turn over ratio indicates efficiency utilization of the firm’s funds.

=CGS/Working Capital

=W.C=C.A – C.L.

3. Leverage Ratio: These ratios are mainly calculated to know the long term solvency position of the company.

ü    Debt Equity Ratio: The debt-equity ratio shows the relative contributions of creditors and owners.

                                    = outsiders fund/Share holders fund

Ideal ratios 2:1

ü    Proprietary ratio or Equity ratio: It expresses the relationship between networth and total assets. A high proprietary ratio is indicativeof strong financial position of the business.

                                    =Share holders funds/Total Assets

                                   

                                 = (Equity Capital +Preference capital +Reserves – Fictitious assets) / Total Assets

ü    Fixed Assets to net worth Ratio: This ratio indicates the mode of financing the fixed assets. The ideal ratio is 0.67

                                    =Fixed Assets (After Depreciation.)/Shareholder Fund