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Finance for Business Leaders- Ratio Analysis
July 8, 2011
Financial Ratio AnalysisFinancial 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 ratiosThese 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 ratiosThese 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 RatiosThese 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 ratiosThese 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 ratiosThese 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 ReturnsThese 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 ratiosThese 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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