insights of ratio analysis
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Insights of Ratio Analysis
AISHVARYA DADHEECH
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RELATIONSHIP BETWEEN PROFIT AND LOSS ACCOUNT AND BALANCE SHEET. PROFIT AND LOSS
ACCOUNT
PBIT
PBT
PAT
BALANCE SHEET
TOTAL ASSETS
CAPITAL EMPLOYED
NET WORTH
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PROFIT AND LOSS ACCOUNT. Sales 1120 Operating cost 1008 ___________________________________ PBIT 112 LESS INTEREST 20 PBT 92 LESS TAX 32 PAT 60 LESS DIVIDENDS 24 RETAINED EARNING 36
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LIABILITIES
AMOUNT ASSETS
AMOUNT
OWNER FUNDS 360 FIXED ASSESTS 400
LONG TERM LIABILTIES 200 INVESTMENTS 80
CURRENT LIABILITIES 240 CURRENT ASSESTS 320
800 800
BALANCE SHEET
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Corporate valuation
Market capitalization Share values , nominal, book, market Earning per share Dividend per share Dividend cover and the pay out ratio Earning yield Dividend yield PE ratio Market to book ratio Cash earning per share CEPS = PAT – Preferred dividend + non-cash charges / no. of equity shares o/s
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P E ratio ( Earning Multiple) Red flag to measure how expensive or cheap
The lower the P/E, the less you have to pay for the stock, relative to what you can expect to earn from it. The higher the P/E the more over-valued the stock is.
Example.
Changes in the market price and EPS.
Trailing and projected P E Ratio
N/A 0-13 14-20 21-28 28 + disparate interpretation.
Averages and Market P E Ratio.
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RETURN ON INVESTMENTS
TWO MEASURES TO COMPUTE
1. RETURN ON TOTAL ASSETS
2. RETURN ON EQUITY
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RETURN ON TOTAL ASSETS PROFIT BEFORE INTEREST AND TAX
_________________________________
TOTAL ASSETS
HERE , 112 / 800 = 14 %
RETURN ON NET ASSETS
=PAT/ FIXED ASSETS + WORKING CAPITAL
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COMPUTATION OF RETURN ON TOTAL ASSETS PBIT/ TA = PBIT/ SALES * SALES/ TA
ROTA = PROFIT * ASSETS MARGIN TURNOVER
ROTA = 112/ 112O * 1120/ 800 = 10 * 1.4 = 14 %DUAL ROLE
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MARGIN ON SALES DRIVERS SALES 1120
OPERATING COSTSMATERIALS 426LABOR 291FACTORY OVERHEADS 168ADMIN/ SELLING ,ETC 123TOTAL OPERATING COST 1008__________________________________MATERIALS COST % 426/1120 = 38%LABOUR COST % 291/1120 = 26%FACTORY OVERHEADS COST % 168/1120 = 15%ADMIN SELLING COST % 123/1120 = 11%Total 90%
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SALES / TOTAL ASSETS DRIVERS SALES / FIXED ASSETS 1120/ 440 = 2.5 TIMES
SALES( cogs) / INVENTORIES 1120 / 128 = 8.7 TIMES
SALES / ACCOUNT RECEIVABLES
1120 / 160= 7.0 TIMES
Purchases/ account payables
OTHER WAY AROUND…………….!
INVENTORY DAYS. DEBTOR DAYS.
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RETURN ON EQUITY
PAT / OWNER FUNDS
60 / 360
16.6 %
Preference dividend
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RETURN ON CAPITAL EMPLOYED ROCE= PBIT / CAPITAL EMPLOYED.
Return on Capital Employed ratio measures the efficiency of the business in using the capital invested in it to make a profit. Therefore, the higher the percentage the more efficient the company is
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Du pont trend
ROE = NI / TE Multiply by 1 and then rearrange
ROE = (NI / TE) (TA / TA) ROE = (NI / TA) (TA / TE) = ROA * EM
Multiply by 1 again and then rearrange ROE = (NI / TA) (TA / TE) (Sales / Sales) ROE = (NI / Sales) (Sales / TA) (TA / TE) ROE = PM * TAT * EM
ROE = PM * TAT * EM Profit margin is a measure of the firm’s operating efficiency – how
well does it control costs Total asset turnover is a measure of the firm’s asset use
efficiency – how well does it manage its assets Equity multiplier is a measure of the firm’s financial leverage
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LIQUIDITY MEASURES
CURRENT RATIOCURENT ASSETS / CURRENT LIABILITIES320 / 240 =1.33
QUICK RATIOCURRENT ASSETS – INVENTORY200/ 240 = .833
WORKING CAPITAL / SALES RATIOCA-CL/ SALES80/1120 = .071
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FINANCIAL MEASURES
DEBT TO EQUITY RATIO
Debt over equity and debt over total funds.
Interest cover PBIT/ INTEREST
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