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Assessment of the effectiveness with which funds (investment and debt) are
employed in a firm, efficiency and profitability of its operations, and value and
safety of debtors' claims against the firm's assets. It employs techniques such as
'funds flow analysis' and financial ratios to understand the problems and
opportunities inherent in an investment or financing decision.
RATIO ANALYSIS
Single most important technique of financial analysis in which quantities are
converted into ratios for meaningful comparisons, with past ratios and ratios of
other firms in the same or different industries. Ratio analysis determines trends
and exposes strengths or weaknesses of a firm.
Financial ratio analysis for Pioneer Cement Co. for year 2005:
Liquidity Analysis
CURRENT RATIO
A liquidity ratio that measures a company's ability to pay short-term obligations.
Pioneer Cement Company has Re. 0.92 of Current Assets to meet Re1.00 of its Current
Liability.
QUCIK RATIO
The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best
measures of liquidity. It is figured as shown below:
Activity Analysis
This ratio indicates how well accounts receivable are being collected.
365 Days
__________________ = 121.66
Receivable turnover
Pioneer Cement Co. Convert it receivable into cash after 121.66 days.
INVENTORY TURNOVER
This ratio reveals how well inventory is being managed. It is important because the
more times inventory can be turned in a given operating cycle, the greater the profit.
CGS
Inventory Turnover Ratio = ___________________________ = 24.33
Inventory
Pioneer Cement Co. convert its inventory 24.33 times into sales in a year.
365 days
__________________ = 15
Inventory turnover
Pioneer Cement Co. convert its inventory into sales after 15 days.
Asset turnover measures a firm's efficiency at using its assets in generating sales or
revenue - the higher the number the better.
Leverage Analysis
Indicates what proportion of equity and debt that the company is using to finance its assets.
Sometimes investors only use long term debt instead of total liabilities for a more stringent test.
Pioneer Cement Company has Rs 1.08 of Debt and only Re. 1 in Equity to meet this
obligation.
A metric used to measure a company's financial risk by determining how much of the
company's assets have been financed by debt. Calculated by adding short-term and long-
term debt and then dividing by the company's total assets.
Company has Rs. 0.67 of Debt and Re. 1.00 in total assets to meet this obligation.
A variation of the traditional debt-to-equity ratio, this value computes the proportion of a
company's long-term debt compared to its available capital. A ratio showing the financial
leverage of a firm, calculated by dividing long-term debt by the amount of capital
available
Interest coverage ratio is also known as debt service ratio or debt service coverage ratio.
This ratio relates the fixed interest charges to the income earned by the business. It
indicates whether the business has earned sufficient profits to pay periodically the interest
charges.
Formula: EBIT
_____ _____________ = 4.26
Interest Exp
Pioneer Cement Co. has ability to pay its interest 4.26 times in a year.
Profitability Analysis
Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a
percentage. It expresses the relationship between gross profit and sales.
Net profit divided by net revenues, often expressed as a percentage. This number is an
indication of how effective a company is at cost control. The higher the net profit margin
is, the more effective the company is at converting revenue into actual profit. The net
profit margin is a good way of comparing companies in the same industry, since such
companies are generally subject to similar business conditions. However, the net profit
margins are also a good way to to compare companies in different industries in order to
gauge which industries are relatively more profitable also called net margin.
Net Profit After taxes
_____ _____________ = 25.16%
Net Sales
If Net Sales increase by 1% the Net Profit After Taxes will be increased by 25.16%
RETURN ON INVESTMENT
Where asset turnover tells an investor the total sales for each $1 of assets, return on assets
tells an investor how much profit a company generated for each $1 in assets. The return
on assets figure is also a sure-fire way to gauge the asset intensity of a business.
If total Assets increase by 1% Net Profit After Taxes will be increased by 4.8%.
RETURN ON EQUITY
Return on equity capital , it is the relationship between profits of a company and its
equity.
If Share holder Equity increase by 1% Net Profit After Taxes will be increased by
20.48%.
Financial ratios of Pioneer Co. for
following years