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Financial ratio analysis-

Financial ratios are measurements of a business' financial performance. Ratios help


an owner or other interested parties develop an understand the overall financial
health of the company.

Financial ratios are used by businesses and analysts to determine how a company is
financed. Ratios are also used to determine profitability, liquidity, and solvency.
Liquidity is the firm's ability to pay off short term debts, and solvency is the ability
to pay off long term debts.

Commonly used financial ratios can be divided into the following five categories.

 Liquidity and Solvency ratios


 Solvency ratios
 Turnover ratios
 Profitability ratios
 Market Value ratios

Liquidity and Solvency ratios-


Liquidity ratios focus on a firm's ability to pay its short-term debt obligations. The
information you need to calculate these ratios can be found on your balance sheet, which
shows your assets, liabilities, and shareholder's equity.

 Current ratio= Current asset/ Current liabilities


o The current ratio is an indicator of your company's ability to pay its
short-term liabilities.
o If the company’s current ratio is too high it may indicate that the
company is not efficiently using its current assets, if current liabilities
exceed current assets it indicates that the company may have problems
meeting its short-term obligations.
o Infosys current ratio lies between 3-4 which is an ideal ratio.
Years Current ratio
2019 2.93
2018 3.78
2017 4.04
2016 3.97
2015 3.11
Asset Turnover ratio
100
90
80
70
60
50
40
30
20
10
0
2019 2018 2017 2016 2015

 Acid Test ratio (Quick ratio) = Current asset- Inventory/ Current


liabilities
o The quick ratio measures the ability of a company to use its near cash
to retire its current liabilities immediately.
o A company with a quick ratio of less than 1 cannot currently pay back
its current liabilities.

Years Quick Ratio


2019 2.93
2018 3.78
2017 4.04
2016 3.97
2015 3.11
Asset Turnover ratio
100
90
80
70
60
50
40
30
20
10
0
2019 2018 2017 2016 2015

Turnover ratios-
Sometimes called asset efficiency ratios, turnover ratios measure how efficiently a
business is using its assets. This ratio uses the information found on both the
income statement and the balance sheet.

 Inventory Turnover ratio= Sales/Long Term Capital Employed.


o The inventory turnover is a measure of the number of times inventory
is sold or used in a time period such as a year.
o It is calculated to see if a business has an excessive inventory in
comparison to its sales level.
o Since IT sector companies have 0 inventories so their inventory
turnover ratio is also 0.

Year Inventory Turnover Ratio


2019 0.00
2018 0.00
2017 0.00
2016 0.00
2015 0.00
 Asset Turnover ratio= Revenue/ Avg Total Assets
o Asset Turnover measures the efficiency of a company’s use of its
asset in generating sales measure or sales income to the company.
o Company’s with low profit margin tend to have high asset turnover,
while those with high profit margin have low asset turnover.
o Infosys got high asset turnover ratio and its increasing since last five
years.

Year Asset Turnover ratio


2019 92.62
2018 81.63
2017 74.21
2016 74.22
2015 76.52

Asset Turnover ratio


100
90
80
70
60
50
40
30
20
10
0
2019 2018 2017 2016 2015
Solvency ratios-
Solvency ratios focus on a firm's ability to meet its long-term debt obligations.
They use the firm's long-term liabilities on the balance sheet such as payable
bonds, long-term loans, or pension funds.

 Debt to equity ratio= Long Term debt/ Net worth


o It is a financial ratio indicating the relative proportion of shareholder’s
equity and debt used to finance a company’s asset.
o A high ratio may indicate that the company is much resourced with
borrowing as compared to funding from shareholders.
o A ratio of 2 indicates the company derives two-thirds of its capital
financing from debt and one-third from shareholder equity.

Years Debt to Equity ratio


2019 0.00
2018 0.00
2017 0.00
2016 0.00
2015 0.00

Profitability ratio-
These are ratios that measure if a business' activities are profitable. Frequently used
ratios are the net profit ratio and the contribution margin ratio.

 Return on investment= PAT/ LTCE


o Return on investment is the ratio between the net profit and cost of
investment resulting from an investment to some resources.
o ROI is used to evaluate the efficiency of an investment or to compare
the efficiencies of several different investments.
o A high ROI means the investment’s gains compare favorable to its
cost.
Year Return on Investment
2019 0.23
2018 0.25
2017 0.20
2016 0.20
2015 0.25

Net Profit Margin


30

25

20

15

10

0
2019 2018 2017 2016 2015

 Net Profit Margin= PAT/ Net Sales


o It is the ratio of revenue remaining after all operating expenses,
interest, taxes and preferred stock dividends have been deducted from
a company’s total revenue.
o Shareholders look at net profit margin closely because it shows how
good a company is at converting revenue into profit available for
shareholders.
o It can be extremely useful to compare net profit margin pf INFOSYS
with different group of companies to see which are most effective at
converting sales into profit.
Year Net Profit Margin
2019 20.11
2018 26.08
2017 23.31
2016 23.51
2015 25.72

Net Profit Margin


30

25

20

15

10

0
2019 2018 2017 2016 2015