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It is process of identifying strength and weakness in various area of an organization with the help of ratios of relevant accounting figures. Ratio is the mathematical expression of relationship between two figures and the expression may b either in the form of pure ratio or percentage
According to different aspects of firms operation Liquidity Long-term solvency Efficiency or turnover ratio Profitability ratio
Current ratio Quick ratio Cash ratio Cash to current liability Debt-equity ratio Proprietary ratio
Operating ratio Operating profit ratio Net profit ratio Interest coverage ratio
Type of business Type of products Reputation of the concern Seasonal influence Type of asset available
Quick asset=current asset-(inventory+prepaid exp) Quick liability=current liabilities- bank O/D Ideally quick ratio should be 1:1.
Cash ratio
Turnover ratio
a.
Profitability Ratio
Gross profit ratio= gross profit/sales =(sales-cost of good sold)/sales. Operating ratio= (operating cost+ cogs)/sales Operating profit ratio=operating profit/sales = (sales-operating cost-cogs)/sales Net profit ratio=Net profit after tax/sales ROCE=EBIT/capital employed Return on equity capital=( net profit after tax-preference dividend)/(equity capital+ reserve & surplus)
Profitability ratio
Earning per share= (net profit after tax- preference dividend)/ no. of equity shares Dividend Yield ratio=dividend per share/market value per share Price Earning ratio=market price per share/EPS Dividend pay-out ratio=dividend per share/earning per share.
Debt-equity ratio Proprietary ratio=shareholders wealth/total asset Interest coverage ratio(debt service)=EBIT/fixed interest charges
Debt service coverage ratio= (NPAT+ depreciation+ interest on long-term loan)/(interest on Long Term Loan+instalments of long term loan)
Valuation Ratio
EV/EBIDTA
EV=Enterprise Value= Market capitalization+Debt- Cash Market capitalization= CMP* no. of share EV/sales Book value= Net worth /no. Of share PEG=PE/earning growth
DuPont Analysis
DuPont Analysis integrates the important ratios to analyse a firm's profitability. PBIT Sales PBIT RONA= Net Assets Net Assets Sales PAT Sales PBIT PAT Net Assets ROE Net Worth Net Assets Sales PBIT Net Worth ROE Assets turnover Margin Leverage
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Du Pont Analysis