unit i.3-ratio analysis

7/31/2019 Unit I.3-Ratio Analysis

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Unit I.3 Ratio Analysis


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Classification of Ratios:

Traditional Classification Functional Classification

Income Statement Ratios

Balance Sheet Ratios

Composite Ratios

Liquidity Ratios

Profitability Ratios

Turnover Ratios

Solvency Ratios


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Liquidity Ratios

1.

2.

Where, QA = CAstockprepaid expensesQL = CLbank overdraft

Note: Instead of QL, current liabilities may be used as it isfor quick ratio as well


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Profitability Ratios

Profitability ratios measures the efficiency of a

business and can be broadly categorised into

two types:

I) Profitability ratios in relation to sales

II) Profitability ratios in relation to investment


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I a) Gross profit Ratio/Gross Profit Margin


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I c) Operating Ratio


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II Profitability Ratios related to investment.

a) Return on Investment (ROI) or

Return on Capital Employed (ROCE)

Where, cap employed= equity + preference capital +

res & surplus + long term loans, bonds, debentures

fictitious assets

non-operating assets

Or

Cap employed= Net fixed assets + working capital


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b) Return on Shareholders Funds

Where, Shareholders Funds = Equity Capital

+ Preference Capital

+ Capital Reserves+ P&L Account


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c) Return on Equity Capital (ROE)

Where, Equity shareholders fund is equal to

shareholders funds as in the earlier formula

except preference capital.


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c) Earnings Per Share (EPS)


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c) Dividend Per Share (DPS)


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c) Dividend Payout Ratio (D/P Ratio)


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Turnover Ratios

Also referred to as activity ratios these ratios

indicate the efficiency with which the assets

and resources of the firm are being utilised.

These are usually stated in terms of no. of times

e.g. 4 times, 6.3 times etc.


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a) Inventory/stock Turnover Ratio (STR)

Where, avg stock = (op + cl stock)/2

Note 1: If it is not possible to determine COGS

then net sales can be taken in the numerator.

Note 2: If opening and closing stock is notavailable then the formula is simply

COGS/closing stock.


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b) Debtors Turnover Ratio (DTR)

Where, avg stock = (op + cl) /2

Note 1: Here debtors refer to both trade debtors andbills receivable, thus if these items are separatelymentioned then they should be summed up.

Note 2: If it is not possible to determine Credit Salesthen net sales can be taken in the numerator.


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Average Collection Period:


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c) Fixed Assets Turnover Ratio (DTR)

Where,

net fixed assets = gross fixed assets - depreciation

Note : If it is not possible to determine COGSthen net sales can be taken in the numerator.


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d) Capital Turnover Ratio

Where, cap employed= equity + preference capital +

res & surplus + long term loans, bonds, debentures

fictitious assets

non-operating assets

Or

Cap employed= Net fixed assets + working capital

Note : If it is not possible to determine COGS then net

sales can be taken in the numerator.


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Solvency Ratios

Also referred to as capital structure ratios or

leverage ratios

These are used to analyse the long term

solvency of a firm and involve:

- Determining the firms ability to repay the

principal amount when due.

- Determining the firms ability to pay interest

regularly.


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1. Debt-Equity Ratio


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2. Proprietary Ratio

Where,

Total Assets = All tangible assets

+ Intangible assets with realisable

value


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3. Interest Coverage Ratio / Debt Service Ratio


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4. Capital Gearing Ratio

Where,Fixed income securities include:

all long term debt

+ preference share capital

Note: Preference shares are included in the numeratoras a firm is committed to pay a fixed rate of return, inthe form of dividend, to preference shareholders


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DuPont Control Chart


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Return on Investment (ROI)

Net Profit Ratio

Capital Turnover Ratio

X


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Return on

Investment(ROI)

Net Profit Ratio

Net Profit

Net Sales

CapitalTurnover

Ratio

Net sales

Capitalemployed

X


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Return onInvestment(ROI)

Net Profit

Ratio

Net Profit Net Sales

ExpensesNet Sales

CapitalTurnoverRatio

Net Sales

Fixed Assets

Working

CapitalCapital

employed

X

-

+


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Return onInvestment (ROI)

Net ProfitRatio

Net Profit

Net Sales

Expenses

COGS

Admin Exp

Selling Exp

DistributionExp

Net Sales

CapitalTurnover

Ratio

Net sales

FixedAssets

Working

CapitalCA CL

Capital

Employed

X

-

+

-

+

+

+

unit i.3-ratio analysis

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