S No

Ratios

As

Comments

Interpretation

A. Profitability Ratios : To ascertain the ability of the firm to cover its expenses and generate a surplus
1 2 Gross Margin Ratio Gross Profit / Sales Operating Margin EBIT / Total Income % % Gross Profit = Sale minus Cost of Goods Sold Called operating margin as Interest and Taxes are non operating expenses. EBDIT/ Total Income can be used as Cash Operating Margin Ratio. 3 4 Net Margin PAT/ Total Income Earning Per Share PAT / Number of Shares % Rs./$ Higher the margin better it is. Compare with the industry average and trend over a period of time Higher the margin better it is. Compare with the industry average and trend over a period of time Higher the margin better it is. Compare with the industry average and trend over a period of time Higher the margin better it is. Compare with the industry average and trend over a period of time

Vinod Gandhi

S Ratios As Comments Interpretation No B. Short Tem Solvency : To ascertain the ability of the firm to meet its short term obligations; adequacy of short term assets to cover short term liabilities
5 Current Ratio Current Assets / Current Liabilities & Provisions 6 Quick Ratio (Current Ratio Inventories) / Current Liabilities & Provisions Times Times Short term investments should also be included in the current assets Inventories are less liquid ; also called Liquid Ratio or Acid Test Ratio 2:1 considered adequate; higher ratio indicates blockage of funds in unproductive assets whereas low ratio indicated inability of companys current assets to cover its current liabilities 1 : 1 considered adequate; higher ratio indicates blockage of funds in unproductive assets.

Vinod Gandhi

S Ratios As Comments Interpretation No C. Long Term Solvency : Indicator of the ability of the firm to meet its fixed obligations attached to the long term debt
7 Debt Equity Ratio Borrowed Funds / Shareholders Funds Financial Leverage Ratio Total Assets / Shareholders Funds Interest Coverage Ratio EBIT / Interest & Finance Charges Cash Flow Coverage Ratio (EBIT + Depreciation) / {Interest + Loan Repayment/ (1-Tax Rate) } Times Only long term debt to be considered 2: 1 considered adequate; Higher ratio implies higher financial leverage; inability of the firm to meet its long term commitments attached with debt. Lower ratio means that the company is not taking advantage of financial leverage. Higher ratio implies higher financial leverage Ability of the firms operating profits to cover its interest obligation. Higher the ratio better it is. Compare with the industry average and trend over a period of time Gross up principal component as the same is not tax deductible Often used by the Banks and Financial Institution to ascertain the adequacy of the firms cash flows to cover its debt obligation interest as well as principal.

8 9

Times Times

Supplementary to Debt Equity Ratio

10

Times

Vinod Gandhi

S Ratios As Comments Interpretation No D. Turnover Ratios : Indicator of efficiency in utilization of assets by the company
11 Assets Turnover Ratio Total Income / Total Assets 12 Fixed Assets Turnover Ratio Total Income / Fixed Assets Working Capital Turnover Ratio Total Income / Working Capital 14 15 Debtors Turnover Ratio Credit Sales / Debtors Inventory Turnover Ratio Cost of Goods Sold / Inventories Times Times If credit sales figure is not separately available use the total sales figure If cost of goods sold is not available use the total sales figure Indicator of efficiency in debt collection, higher turnover means better debt collection Indicator of efficiency in managing inventories, higher turnover means better inventory management Times Times May use average assets in the denominators i.e. (Opening + Closing)/2 May use average assets in the denominators i.e. (Opening + Closing)/2 Working Capital means Current Assets less Current Liabilities Indicator of efficiency in utilization of assets, higher turnover means higher ability to generate revenue for the same set of assets Indicator of efficiency in utilization of fixed assets, higher turnover means higher ability to generate revenue for the same set of fixed assets Indicator of efficiency in utilization of working capital , higher turnover means higher ability to generate revenue for the same set of working capital

13

Times

Vinod Gandhi

S No
16

Ratios
Average Collection Period 365 / Debtors Turnover Ratio

As
No. of days No. of days

Comments
Also called Days Sales Outstanding, Can be calculated as Debtors / Average Daily Sales Can also be calculated as Inventories / Average Daily Consumption or Average Daily Sales

Interpretation
Depends upon Debtors Turnover Ratio

17

Average Holding Period 365 / Inventory Turnover Ratio

Depends upon Inventory Turnover Ratio

Vinod Gandhi

S Ratios As Comments Interpretation No E. Dividend Policy How the profits are being appropriated between dividends and retention
18 Dividend Payout Ratio (Dividend + Dividend Tax) / PAT 19 20 Retention Ratio 1 D/P Ratio Dividend Yield Dividend Per Share/ Current Market Price % % % As dividend attracts dividend distribution tax the same is also considered a part of the pay out What % of profits after tax is being distributed; Growing companies have a lower payout

What % of profits after tax is being retained; Growing companies have a higher retention Return to the shareholder by way of dividend on the current market price

Vinod Gandhi

S No
21

Ratios

As

Comments

Interpretation

F. Return Ratios Ability of the firm to generate return on its assets/ capital employed
Return on Assets EBIT (1-Tax Rate) / Total Assets 22 Return on Capital Employed (ROCE) EBIT (1-Tax Rate) / ( Borrowed Funds + Shareholders Funds) 23 Return on Equity PAT / Shareholders Funds 24 Return on Equity Dupont Analysis Net Margin x Assets Turnover x Financial Leverage % % Shareholders Funds include reserve and surplus. Any accumulated losses and fictitious assets should be deducted Ability of the firm to generate return on the shareholders funds. Higher the better. Compare with industry average and past trends. Helps in breaking down the ROE into profitability, assets utilization and financial leverage % % EBIT (1-Tax Rate) is also called the Net Operating Profit After Tax (NOPAT), Can also be calculated as PAT/ Total Assets Can also be calculated as PAT/ Capital Employed Ability of the firm to generate return on the total assets. Higher the better. Compare with industry average and past trends. Ability of the firm to generate return on the capital employed. Higher the better. Compare with industry average and past trends.

Vinod Gandhi

S Ratios As Comments No G. Valuation Ratio : Understanding the valuation of equity shares

25 26 Price Earning Multiple (Times) Current Market Price / EPS Book Value Per Share Shareholders Funds / Number of Shares 27 Market Capitalization No. of shares x Current Market Price Rs. Times Rs. Inverse of earning yields (EPS/CMP) Shareholders Funds include reserve and surplus. Any accumulated losses and fictitious assets should be deducted Total market value of all the shares issued by the firm

Interpretation

High growth firms/ industries normally have a higher P/E multiple Not much meaningful as based upon historical cost of the assets and does not consider the earning capacity of the assets Higher market capitalization acts as a safeguard against hostile takeover

Vinod Gandhi

S Ratios As Comments Interpretation No H. Predictor of Insolvency Using ratios to predict insolvency. Using multiple discriminant analysis to predict corporate failure
28 Altmans Z Score Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5 X1 = Working Capital/ Total Assets X2 = Retained Earnings / Total Assets X3 = EBIT / Total Assets X4 = Market Value of Equity / Book Value of Total Liabilities X5 = Sales / Total Assets Liquidity Firms age and past profitability Profitability Leverage No. 3 or more No problem 1.81 to 2.99 Grey area Less than 1.8 Higher chances of financial embarrassment

Assets Utilization

Vinod Gandhi

Vinod Gandhi

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