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Finance for Business Leaders- Ratio Analysis

Finance for Business Leaders- Ratio Analysis. July 8, 2011. Financial Ratio Analysis. Financial ratios combine different financial parameters. They are based on the financial data drawn from the balance sheet and the P&L account.

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Finance for Business Leaders- Ratio Analysis

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  1. Finance for Business Leaders- Ratio Analysis July 8, 2011

  2. Financial Ratio Analysis • Financial ratios combine different financial parameters. • They are based on the financial data drawn from the balance sheet and the P&L account. • Each ratio is studied both by itself and along with other ratios, in order to gain critical insights. • Different ratios are used to analyse the different dimensions of a business.

  3. TCS Financial Ratios ( 2009-10)

  4. TCS Financial Ratios ( 2009-10)

  5. Wipro Financial Ratios ( 2009-10)

  6. Profitability ratios • These ratios measure how profitable the business is with respect to sales and assets.

  7. Gross Profit Margin • = (Sales – Cost of Goods Sold) ÷ (Sales)

  8. Operating profit margin • (Gross Profit – SG&A - R&D ) ÷ (Sales)

  9. Net Profit Margin • = (Profit After Tax) ÷ (Sales)

  10. Return on Assets • = (Profit After Tax) ÷ (Total Assets)

  11. Return on Investment (ROI) • The return on investment is computed as under: • ROI = [(PBIT) ÷ (Total Capital Employed)] • = [(PBIT) ÷ (Shareholders’ Net Worth + Borrowings)]

  12. Activity ratios • These ratios measure how efficiently the assets of the business are being used.

  13. Inventory Turnover Ratio • = (Cost of Goods Sold) ÷ (Inventory)

  14. Average Collection Period (Debtors Turnover) • = (Debtors) ÷ (Average Daily Sales)

  15. Capital Employed Turnover • = (Sales) ÷ (Capital Employed)

  16. Fixed Assets Turnover • = (Sales) ÷ (Net Fixed Assets)

  17. Liquidity Ratios • These ratios measure to what extent the business has funds available to meet its obligations.

  18. Current Ratio • = (Current Assets) ÷ (Current Liabilities)

  19. Quick Ratio or Acid Test Ratio • = (Quick Assets) ÷ (Current Liabilities) • Quick assets = Current assets - Inventory

  20. Leverage ratios • These ratios measure the extent of financial risk assumed by the business, ie the level of debt in relation to equity.

  21. Debt-Equity Ratio • = (Long Term Debt) ÷ (Shareholders’ Net Worth)

  22. Total Debt to Total Capital Employed Ratio • = (Total Debt) ÷ (Total Capital Employed)

  23. Coverage ratios • These ratios measure the availability of funds to meet various financial obligations.

  24. Interest Coverage • = (Profit Before Interest and Tax) ÷ (Interest Charges)

  25. Dividend Cover • = (Profit after Tax less Preference Dividend) ÷ (Equity Dividend)

  26. Debt Service Coverage Ratio • = (Profit Before Interest and Tax) ÷ (Loan Installments + Interest)

  27. Shareholder Returns • These ratios measure how well the shareholders are being rewarded by the company.

  28. Return on Shareholders’ Net Worth • = (Net Profit After Tax – Pref. Dividend) ÷ (Equity Shareholders’ Net Worth)

  29. Earnings Per Share (EPS) • = (Net Profit After Tax – Pref. Dividend) ÷ (Number of Equity Shares)

  30. Dividend Per Share = (Dividends paid to Equity Shareholders) ÷ (Number of Equity Shares)

  31. Dividend Pay-out Ratio = (Dividend per share) ÷ (Earnings per Share)

  32. Dividend Yield = (Dividend per share) ÷ (Market Value per share)

  33. Earnings Yield = (Earnings per share) ÷ (Market Value per share)

  34. Valuation ratios • These ratios are useful in arriving at a realistic valuation of the business.

  35. Price/Earnings Ratio (P/E ratio) = (Market Value per Share) ÷ (Earnings per share)

  36. Book Value per Share = (Net Worth – Preference Share Capital) ÷ (No of shares)

  37. Market Price to Book Value = (Market Price per Share)÷ (Book Value per share)

  38. Thank You

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