RATIO ANALYSIS

A tool used by individuals to conduct a quantitative analysis of information in

a company's financial statements. Ratios are calculated from current year
numbers and are then compared to previous years, other companies, the
industry, or even the economy to judge the performance of the
company. Ratio analysis is predominately used by proponents of
fundamental analysis.

1. ROCE

A ratio that indicates the efficiency and profitability of a company's capital

investments.

Calculated as:

ROCE should always be higher than the rate at which the company borrows,
otherwise any increase in borrowing will reduce shareholders' earnings.

A variation of this ratio is return on average capital employed (ROACE),

which takes the average of opening and closing capital employed for the
time period.

So for broking industry the ideal ratio for ROCE is 25%.

2. Gross Profit margin

A financial metric used to assess a firm's financial health by revealing

the proportion of money left over from revenues after accounting for the cost
of goods sold. Gross profit margin serves as the source for paying additional
expenses and future savings.
Also known as "gross margin".

Calculated as:

Where:
COGS = Cost of Goods Sold

This metric can be used to compare a company with its competitors. More
efficient companies will usually see higher profit margins.

So, a Broking industry the profit margin would be 33%.

3. Net profit margin

A ratio of profitability calculated as net income divided by revenues, or net

profits divided by sales. It measures how much out of every dollar of sales a
company actually keeps in earnings.

Profit margin is very useful when comparing companies in similar industries.

A higher profit margin indicates a more profitable company that has better
control over its costs compared to its competitors. Profit margin is displayed
as a percentage; a 20% profit margin, for example, means the company has
a net income of $0.20 for each dollar of sales.

Also known as Net Profit Margin.

Looking at the earnings of a company often doesn't tell the entire story.
Increased earnings are good, but an increase does not mean that the profit
margin of a company is improving. For instance, if a company has costs that
have increased at a greater rate than sales, it leads to a lower profit margin.
This is an indication that costs need to be under better control.
So, a Broking industry the profit margin would be 33%.

4. Current Ratio

A liquidity ratio that measures a company's ability to pay short-term

obligations.

The Current Ratio formula is:

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

The ratio is mainly used to give an idea of the company's ability to pay
back its short-term liabilities (debt and payables) with its short-term assets
(cash, inventory, receivables). The higher the current ratio, the more capable
the company is of paying its obligations. A ratio under 1 suggests that the
company would be unable to pay off its obligations if they came due at that
point. While this shows the company is not in good financial health, it does
not necessarily mean that it will go bankrupt - as there are many ways to
access financing - but it is definitely not a good sign.

The current ratio can give a sense of the efficiency of a company's operating
cycle or its ability to turn its product into cash. Companies that have trouble
getting paid on their receivables or have long inventory turnover can run into
liquidity problems because they are unable to alleviate their obligations.
Because business operations differ in each industry, it is always more
useful to compare companies within the same industry.

This ratio is similar to the acid-test ratio except that the acid-test ratio does
not include inventory and prepaids as assets that can be liquidated. The
components of current ratio (current assets and current liabilities) can be
used to derive working capital (difference between current assets and
current liabilities). Working capital is frequently used to derive the working
capital ratio, which is working capital as a ratio of sales.

Therefore for a broking industry should have atleast 1.5: 1 current

ratio.

5. Acid-test ratio

An indicator of a company's short-term liquidity. The quick ratio measures a

company's ability to meet its short-term obligations with its most liquid
assets. The higher the quick ratio, the better the position of the company.

The quick ratio is calculated as:

Also known as the "acid-test ratio" or the "quick assets ratio".

The quick ratio is more conservative than the current ratio, a more well-
known liquidity measure, because it excludes inventory from current
assets. Inventory is excluded because some companies have difficulty
turning their inventory into cash. In the event that short-term obligations
need to be paid off immediately, there are situations in which the current
ratio would overestimate a company's short-term financial strength.

Therefore, for a broking industry the minimum of Quick ratio is

considered as 0.66
 6. Debt-Equity ratio

A measure of a company's financial leverage calculated by dividing its total

liabilities by stockholders' equity. It indicates what proportion of equity and
debt the company is using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead of

total liabilities in the calculation.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to
personal financial statements as well as corporate ones.

A high debt/equity ratio generally means that a company has been

aggressive in financing its growth with debt. This can result in volatile
earnings as a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity),

the company could potentially generate more earnings than it would have
without this outside financing. If this were to increase earnings by a greater
amount than the debt cost (interest), then the shareholders benefit
as more earnings are being spread among the same amount of shareholders.
However, the cost of this debt financing may outweigh the return that the
company generates on the debt through investment and business activities
and become too much for the company to handle. This can lead to
bankruptcy, which would leave shareholders with nothing.

The debt/equity ratio also depends on the industry in which the company
operates. For example, capital-intensive industries such as
auto manufacturing tend to have a debt/equity ratio above 2, while personal
computer companies have a debt/equity of under 0.5.

For a Broking Industry the minimum value should be 0.70

7. Interest Coverage ratio

A ratio used to determine how easily a company can pay interest on

outstanding debt. The interest coverage ratio is calculated by dividing a
company's earnings before interest and taxes (EBIT) of one period by the
company's interest expenses of the same period:

The lower the ratio, the more the company is burdened by debt expense.
When a company's interest coverage ratio is 1.5 or lower, its ability to meet
interest expenses may be questionable. An interest coverage ratio below 1
indicates the company is not generating sufficient revenues to satisfy
interest expenses.

For a Broking Industry the ideal value should be above 1.5.