THE RATIO

The basic objective of analysis is to present to the potential user a brief statement which describe the health of the company. It involves establishing a financial relationship between components of financial statement.

Liquidity Ratio

Solvency Ratio

Profitability Ratio

Turnover Ratio

Capital Market Ratio

Liquidity and Solvency Ratio

Current Ratio(CR) Current Assets Current Liabilities A short-term indicator of the companys ability to the pay its short-term liabilities from short-term assets; how much of current assets are available to cover each dollar of current liabilities. There are nothing as optiomal current ratio of the industry should be considered as the ideal ratio.

Acid-Test Quick Ratio (QR)

Monetary Current Assets Current Liabilities

Measure the companys ability to the pay of its off its short term obligation from currents assets, excluding inventories.

Cash Per Day

Total cash Expenses 360

This ratio simply gives us the amount of cash the company needs to hold every day.

Debt-Equity Ratio or Long Term Solvency Ratio (D/E Ratio)

Long-Term Liabilities Shareholders Equity Or Total Liabilities Shareholders Equity

Measure the relationship between borrowed capital to own capital. Again, there is no optimal capital capital ratio and its depends on the requirement of the firm and aggressiveness of the management The ideal ratio can be the ratio of the industry.

Times Interest Earned or Interest Coverage Ratio (ICR) Pre-tax Operating Profit + Interest Interest

Indicates the ability of the company to meets its annual Interest costs.

Cash coverage Ratio: Pre-tax Operating profit + Interest Interest, Expenses

Indicates the times by which interest cost is covered. Normally used in deciding the credit raining of the company. Higher the ratio, the better it is.

Profitability Ratio
Profit Margin Ratio Profit After Tax X 100 Net Sales

The amount of net profit earned by each rupee of net sales.

Return on Fixed Assets

Profit After Tax x 100 Fixed Assets

Or

Net Income + Interest (1 Tax Rate) Fixed Assets

Measure the profitability of the firm with regards to employment of fixed resources.

Return on Equity (ROE)

Profit After Tax X 100 Shareholders equity

Measure the rate of return on the book value of shareholders total investment in the company

Return on Capital Employed or Return on Invested Capital (ROCE) Net Income + Interest ( 1- tax Rate) Long term Liabilities + Shareholders Equity Or Net Profit before Interest and Tax x 100 Capital Employed

A very useful tool to indicate the efficiency of capital employed.

Turnover Ratio
Assets Turnover Ratio Sales Revenues Total fixed Assets

Measure the utilization of the companys fixed assets (i.e. plant and equipment) measure how many sales are generated by each dollar of fixed assets.

Invested Capital Turnover or Total Assets Turnover Sales Revenues Long-term Liabilities + Shareholders Equity

Measure the efficiency of assets in generating sales. Although the higher it is, the better, but it may not hold true in every case because of the specific nature of the industry, like steel industry normally has a turnover ratio of less than I because of high investment in assets.

Equity Turnover

Sales Revenue Shareholders Equity

Measure the efficiency of equity of generating sales.

Debtors Turnover

Net Credits Sales Account Receivable

Indicates the number of times that account receivable are cycled during the period (usually a year).

Days Receivable

Account Receivable Sales / 365

Indicates the average length of time (in days) that a company must wait to collect a sales after making it; may be compared to the credit terms offered by the company to its customers.

Days Payable Period

Indicates the average length time (in days) that the company takes to pay its credit purchases.

Inventory Turnover

Cost of Sales Inventory

Measure of time taken to turn inventory into sales.

Days Inventory

Inventory Cost of Sales / 365

Indicates the number of the days for which inventory is held by the company. Lower the number of days, the better it is,

Working Capital Turnover

Sales Revenues Working Capital

Indicates the involvements of working capital in comparison to sales. A higher turnover ratio is always good.

Capital Market Ratio

Dividend Payout Dividend Per Share Earning Per Share

Indicates the percentage of Profit that is paid out as dividends.

Dividend Yield

Dividend Per Share Average Market price Per Share

Indicates the dividend rate of return to common shareholders at the current market price.

Book Value of Share

Shareholders Fund No. of Share

The ratio represent the equity of the firm (common equity less preferred shares at liquidation value) on a per-share basis (number of share outstanding at balance sheet date) and its sometimes used as a benchmark for comparisons with the market price per share.

Market value or Book value Ratio Market Price of the Share Diluted Earning Per Share

A higher ratio indicates that the shares is overpriced in comparison to its fundamental value or book value. Lower ratio is an indicator that the share is undervalued and it should be purchased by the inventor. There is no ideal ratio because the market focus drive market value. Fundamental analysis assumes that all companies will have an M/B ratio of 1.

Price-Earning Ratio
Shows the current markets evaluation of a stock based on its earnings ; shows how much the investor is willing to pay for each dollar of earning.