Ratio Analysis

IMT Nagpur
Prof Navneet Kaur

1
Outline
• Financial Statements
- Income Statement
- Balance sheet
- Cash Flow Statement
• Ratio Analysis
- Profitability Ratio
- Turnover Ratio
- Solvency Ratio
- Liquidity Ratio
• Common Size Statement
• Z Score
• Exercise
 Statement of Profit and Loss for the year ended March 31, 2015
2012-2013 2013-2014 2014-2015
` Lacs ` Lacs ` Lacs
Net Sales (A) 434939 487008 543128
Cost of good sold (B) 266844 296045 328505
Raw material cost 231396 256263 282609
Labour Cost 30543 34393 39299
Depreciation 4905 5389 6597

Gross Profit (C = A-B) 168095 190963 214623

Adminstrative, Selling & Dis expenses (D) 100711 113780 127370

Operating Profit (E = C-D) 67384 77183 87253
Other Income (F) 9423 10885 11389
Interest (G) 1840 1935 989

Profit Before Tax (H = E+F-G) 74967 86133 97653

Tax Expense (i) 15869 18923 21395
Profit After Tax (J= H-i) 59098 67210 76258
 Balance Sheet as at March 31, 2015
EQUITY AND LIABILITIES ASSETS
2014 2015 2014 2015

Net Worth (A) 190234 233619 Non-current Assets (D) 115195 211604
Share Capital 17438 17565 Fixed Assets 67038 69474
Reserve & Surplus 172796 216054 Non-current Investments 48157 142130
Non-Current Liabilities (B) 8278 9314
Long Term Debt 8278 9314
Current Liabilities ( C) 113668 125903 Current Assets ( E) 196985 157232
Short -term borrowings 4429 12913 Current Investments 65170 37117
Trade Payables 70467 75664 Inventories 55820 55060
Other Current Liabilities 14730 17022 Trade Receivables 32312 33879
Short-term Provisions 24042 20304 Cash and Bank Balances 29747 12394
Short-term Loans and Advances 8462 11408
Other Current Assets 5474 7374

Total Liabilties (A+B+C) 312180 368836 Total Assets (D+E) 312180 368836

Current Portion of Long Term debt 1655.6 1862.8

Steps in financial statement analysis
• Review of Management Discussion and Analysis (MDA). (not all
business firms provide this)
• Review of balance sheet – examine assets and liabilities
• Review of profit and loss account
• Review of cash flow statement
• Read the fine print (Notes on Accounts)
• Significant changes in accounting procedures
• Pending law suits
• Contingent liabilities
• Reorganise the statements, if needed
• Analyse the numbers
Financial Statement Analysis (FSA)
Profitability - Why FSA?
Ratio
Analysis
- Relevance of FSA
• New firms/projects – not relevant
Turnover Solvency Ratio • Existing firms – relevant and very
Ratios Analysis
important

FSA
Common Activity
Size Ratio
Statement Analysis

Liquidity
Ratio

7
Financial Statement Analysis
Measure a firm’s ability to generate profits
Profitability
Ratio
Analysis Return on Sales: Return on Investment:

Turnover
Solvency • Gross Profit margin • Return on Asset
Ratio
Ratios
Analysis • Operating Profit (ROA)
margin • Return on Equity
• Net Profit margin (ROE)
FSA
Common Activity
Size Ratio
Statement Analysis

Liquidity
Ratio

8
 Statement of Profit and Loss for the year ended
March 31, 2015
Gross Profit Margin
2013-2014 2014-2015
` Lacs ` Lacs Gross Profit
Net Sales (A) 487008 543128 Gross Profit Margin
Revenue
Cost of good sold (B) 296045 328505
Raw material cost 256263 282609
Labour Cost 34393 39299
Depreciation 5389 6597
214623
Gross Profit (C = A-B) 190963 214623 39.5%
Adminstrative, Selling & Dis 543128
expenses (D) 113780 127370
Operating Profit (E = C-D) 77183 87253
Other Income (F) 10885 11389
Interest (G) 1935 989

Profit Before Tax (H = E+F-G) 86133 97653

Tax Expense (i) 18923 21395
Profit After Tax (J= H-i) 67210 76258
 Operating Profit Margin
Operating Profit Operating Profit Margin (EBIT)
Margin Revenue

87253
16 %
543128

Cash Profit Margin

87253 +6597
17 %
543128
Net Profit Margin

Net Profit Net Income

Margin
Revenue

76258
13.6%
543128
Return on Assets

Return on Assets EBIT

Average Total Assets

97653+989

(312180+368836)/2
28.9%
 Balance Sheet

Return on Equity EQUITY AND

LIABILITIES 2014 2015
Net Worth (A) 190234 233619
Non-Current
Liabilities (B) 8278 9314
Current Liabilities ( C) 113668 125903
Total Liabilties
(A+B+C) 312180 368836

ASSETS
Fixed Assets 67038 69474
Non-current
Investments 48157 142130
Current Assets ( E) 196985 157232
Total Assets 312180 368836

Return on Equity Profit After Tax

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑁𝑒𝑡 𝑊𝑜𝑟𝑡ℎ

76258

(190234+233619)/2
35.9%
Margin Vs. ROI
• ROI ratios are more important because:
• Ultimate objective of any stakeholder will be to know how much is the return
one can make from one’s investment.
• ROI ratios are inclusive of margin ratios.
• Amongst the ROI ratios, ROE is the ultimate measure of profitability.
Financial Statement Analysis
Profitability
Turnover Ratios:
Ratio
Analysis • Total Asset Turnover
• Fixed Asset Turnover
Solvency
Turnover Ratios Ratio
• Current Asset Turnover
Analysis

FSA
Common Activity
Size Ratio
Statement Analysis

Liquidity
Ratio

15
Total Asset Turnover

Total Asset Turnover Net Sales

Average Total Assets

543128

(312180+368836)/2
1.59
Fixed Asset Turnover

Fixed Asset Turnover Net Sales

Average Fixed Assets

543128

(67038+69474)/2
7.95
Current Asset Turnover

Current Asset Net Sales

Turnover Average Total Current Assets

543128

(196985+157232)/2
3.06%
Financial Statement Analysis
Measure a firm’s ability to fulfill its long term
Profitability
obligations
Ratio
Analysis Debt Ratio: Coverage Ratio:

Turnover Solvency Ratio • Debt-to-Equity Ratio • Interest coverage

Ratios Analysis • Total outside ratio
liabilities to Equity • Debt Service Coverage
Ratio Ratio
FSA
Common Activity
Size Ratio
Statement Analysis

Liquidity
Ratio

19
Solvency Ratio

Interest Coverage Ratio P𝐴𝑇 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 + 𝐼𝑛𝑡𝑒𝑟𝑒

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑎𝑦𝑚𝑒𝑛𝑡

(76258+ 989+6597) 84 times

989
Solvency Ratio
Current Portion of Long Term
debt 1655.6 1862.8

DSCR P𝐴𝑇 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 + 𝐼𝑛𝑡𝑒𝑒𝑠𝑡

(Debt Service Coverage
Ratio)
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 +
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡

(76258+ 989+6597) 29 times

989 + 1862.8
 Solvency Ratio
Balance Sheet as at March 31, 2015
EQUITY AND LIABILITIES
2014 2015 Long Term Borrowings
Share Capital 17438 17565 Debt to Equity Ratio
Reserve & Surplus 172796 216054 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑁𝑒𝑡 𝑊𝑜𝑟𝑡ℎ
Long Term Debt 8278 9314
Current Liabilities 113668 125903
Year 2015
Total Liabilties 312180 368836

9314
ASSETS
Fixed Assets 67038 69474
3.9%
Non-current Investments 48157 142130
17565+216054
Current Assets 196985 157232

Total Assets 312180 368836

Solvency Ratio
Balance Sheet as at March 31, 2015
EQUITY AND LIABILITIES
2014 2015
Total Outside Liabilities to TOL
Share Capital 17438 17565 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑁𝑒𝑡 𝑊𝑜𝑟𝑡ℎ
Equity Ratio
Reserve & Surplus 172796 216054
Long Term Debt 8278 9314
Current Liabilities 113668 125903
Year 2015
Total Liabilties 312180 368836
(9314+125903)
ASSETS 57.8%
Fixed Assets 67038 69474 ((17565+216054)
Non-current Investments 48157 142130
Current Assets 196985 157232

Total Assets 312180 368836

Financial Statement Analysis
Measure a firm’s ability to meet its short
Profitability
term obligations
Ratio
Analysis Liquidity Ratio:

Turnover Solvency Ratio • Current Ratio

Ratios Analysis • Quick Ratio

FSA
Common Activity
Size Ratio
Statement Analysis

Liquidity
Ratio

24
 Liquidity ratio(Liquidity vs Solvency)
Balance Sheet as at March 31, 2015

Current Liabilities
Short -term borrowings 12913
Trade Payables 75664
Other Current Liabilities 17022
Current Ratio Current Assets
Short-term Provisions 20304
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
125903

Current Assets
Current Investments 37117
Inventories 55060
157232
Trade Receivables 33879 1.24
Cash and Bank Balances 12394 125903
Short-term Loans and Advances 11408
Other Current Assets 7374
 Liquidity ratio(Liquidity vs Solvency)
Balance Sheet as at March 31, 2015

Current Liabilities
Short -term borrowings 12913
Trade Payables 75664
Other Current Liabilities 17022 Quick Assets
Quick Ratio
Short-term Provisions 20304
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
125903

Current Assets
Current Investments 37117
Inventories 55060
157232-55060
Trade Receivables 33879 .81
Cash and Bank Balances 12394 125903
Short-term Loans and Advances 11408
Other Current Assets 7374
Current ratio – a note
• Current ratio indicates:
• Liquidity
• Operational efficiency (Lower the level of current assets higher the efficiency)
• Working capital margin [Margin (%) = (CR – 1)/CR * 100]

• Ratios related to liquidity and operating cycle are not relevant for seasonal
businesses
Financial Statement Analysis
Measure how effectively a firm uses its
Profitability
resources
Ratio
Analysis • Inventory Turnover • Payables turnover
• Days of inventory at • Number of days of
Turnover
Solvency hand (DOH) payables
Ratio
Ratios
Analysis
• Receivable turnover
• Days of sales
outstanding (DSO)
FSA
Common
Activity Ratio
Size
Analysis
Statement

Liquidity
Ratio

28
 Statement of Profit and Loss for the
year ended March 31, 2015
Inventory Turnover Ratio Revenue from operations
2014-2015
543128
Cost of good sold 282609
Gross Profit 260519
Operating Expenses 45896
Income from Operations 214623
Other Income 13785
Finance cost 989
Other Expenses 129766
Profit Before Tax 97653
Tax Expense 21395
Profit After Tax 76258
282609
Cost of good sold 5.09
(55820+55060)/2
Average Inventory

365
365
5.09 71 days
Inventory Turnover
 Statement of Profit and Loss for the year
ended March 31, 2015

Receivable Turnover Ratio Net Sales (A)

2014-2015
` Lacs
543128
Cost of good sold (B) 328505
Raw material cost 282609
Labour Cost 39299
Depreciation 6597

Gross Profit (C = A-B) 214623

Adminstrative, Selling & Dis
expenses (D) 127370
Operating Profit (E = C-D) 87253
Other Income (F) 11389
Interest (G) 989

Profit Before Tax (H = E+F-G) 97653

Tax Expense (i) 21395
Profit After Tax (J= H-i) 76258

Revenue (Credit sales) 543128

16.4
Average Receivables (32312+33879)/2

365
365
16.4 22 days
Receivable Turnover
 Statement of Profit and Loss for the year
ended March 31, 2015

Payable Turnover Ratio Net Sales (A)

2014-2015
` Lacs
543128
Cost of good sold (B) 328505
Raw material cost 282609
Labour Cost 39299
Depreciation 6597

Gross Profit (C = A-B) 214623

Adminstrative, Selling & Dis
expenses (D) 127370
Operating Profit (E = C-D) 87253
Other Income (F) 11389
Interest (G) 989

Profit Before Tax (H = E+F-G) 97653

Tax Expense (i) 21395
Profit After Tax (J= H-i) 76258

Purchases (Credit) 282609

3.86
Average Trade Payable (70467+75664)/2

365
365
Payable Turnover 3.86 94 days

Cash Conversion cycle = 71 days + 22 days – 94 days = -1

days
Operating Cycle and Its Importance
• Operating cycle is the duration of operations starting from purchase of raw material and
ending at collection of cash from customers.
• Other things remaining the same, shorter the cycle more efficient the operations are.
• Shorter cycle will lead to lesser working capital requirement. Consequently, it will help
save interest cost and also other carrying costs.
• Net operating cycle is the period for which funding support is needed.
• Different industrial sectors have varying length of operating cycle and it changes from
time to time.
• Understanding the operating cycle of different sectors is highly relevant for banks/FIs for
drafting credit policy and in working capital financing decisions.
Ratios to be used
Type of facility Ratios to be examined / analysed
Current Ratio - CR
Quick Ratio - QR
Inventory / Stock Turnover Ratio
Debtors Velocity -
Creditors Velocity
Working Capital
Interest Coverage Ratio - ICR
Total indebtedness Ratio TOL/TNW
Gross Profit Ratio
Net Profit Ratio
Debt Equity Ratio & TOL / TNW
Debt Service Coverage Ratio - DSCR
Term Loan Fixed Assets Coverage Ratio - FACR
Interest Coverage Ratio - ICR
Gross Profit Ratio
Net Profit Ratio
Ratios of Dabur India Ltd.
Profitability Ratios 2012-2013 2013-2014 2014-2015

Gross Profit Margin 38.65 39.21 39.52

Operating Profit Margin 15.49 15.85 16.06
Net profit Margin 13.59 13.80 14.04
Return on Asset 27.45 29.75 28.97
Return on Equity 37.75 38.76 35.98

Turnover Ratios
Total Assets Turnover 1.65 1.60
Fixed Assets Turnover 7.47 7.96
Current assets Turnover 2.55 3.07

Solvency Ratio
Interest Coverage ratio 35.78 38.52 84.78
DSCR 20.76 29.40
Debt to Equity ratio 4.75 4.35 3.99
TOL to equity ratio 78.75 64.10 57.88
Ratios of Dabur India Ltd.
Liquidity Ratio 2012-2013 2013-2014 2014-2015
Current Ratio 1.60 1.73 1.25
Quick Ratio 1.17 1.24 0.81

Activity Ratios
Inventory turnover 4.62 4.59 5.13
Days in Inventory 78.92 79.51 71.11
Recivable turnover 17.04 16.84 16.41
Days in Receivable 21.43 21.68 22.24
Payable Turnover 4.03 4.01 3.87
Days in payable 90.48 91.03 94.37
Cash Coversion cycle 9.87 10.15 -1.01
Common Size Statement • Income Statement
- Take total Revenue as
Profitability
Ratio
100
Analysis
• Balance Sheet
Turnover Solvency Ratio
Ratios Analysis
- Take Total Liabilities as
100
FSA
- Take Total Assets as 100
Common Activity
Size Ratio
Statement Analysis

Liquidity
Ratio
Profit & Loss Account 2014-2015
` Lacs Common size
Net Sales (A) 543128 97.9 Total Income (A+F)
Cost of good sold (B) 328505 59.24 554517 100
Raw material cost 282609 50.96
Labour Cost 39299 7.09
Depreciation 6597 1.19

Gross Profit (C = A-B) 214623 38.70

Adminstrative, Selling & Dis expenses (D) 127370 22.97
Operating Profit (E = C-D) 87253 15.73
Other Income (F) 11389 2.05
Interest (G) 989 0.18

Profit Before Tax (H = E+F-G) 97653 17.61

Tax Expense (i) 21395 3.86
Profit After Tax (J= H-i) 76258 13.75
Balance Sheet as at March 31, 2015
EQUITY AND LIABILITIES ASSETS
2015 Common size 2015 Common size
Net Worth (A) 233619 63.34 Non-current Assets (D) 211604 57.37
Share Capital 17565 4.76 Fixed Assets 69474 18.84
Reserve & Surplus 216054 58.58 Non-current Investments142130 38.53
Non-Current Liabilities (B) 9314 2.53

Current Liabilities ( C) 125903 34.14 Current Assets ( E) 157232 42.6

Total Liabilties (A+B+C) 368836 100 Total Assets (D+E) 368836 100
Bankruptcy ratios
Z-score model
Z= 1.2 X1 + 1.4X2+ 3.3X3 + .6X4 + 1.0X5

X1 = Working capital to total assets

X2 = cumulative retained earnings to total assets
X3 = earnings before interest and taxes (EBIT) to total assets
X4 = market value of equity to book value of total assets
X5 = Sales to total assets

Zone : 1.8 – 2.99

Default
Gray zone
No default
Z score
2012-2013 2013-2014 2014-2015 X
Net working Capital 69402 83317 31329
NWC/Total Asset 0.24800157 0.26688769 0.08494019 1.2
Accumulated Retained Earning 109003 133502 159704
ARE/Total Asset 0.38951205 0.42764431 0.43299461 1.4
EBIT 76807 88068 98642
EBIT/Total Asset 0.27446265 0.28210648 0.267441356 3.3
Market value of equity 137.8 179.04 265.6
Shares outstanding 17429 17438 17565
Market Cap 2401716.2 3122099.52 4665264
Total Liabilities 123284 121946 135217
MVE/TL 19.4811671 25.6023118 34.50205226 0.6
Sales /Total Asset 1.55421394 1.56002306 1.472546064 1

14.9915597 18.7713288 23.76445458