July 8, 2011. Financial Ratio Analysis Financial ratios combine different financial parameters. They are based on the financial data drawn from the balance.

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Presentation transcript:

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. 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.

TCS Financial Ratios ( ) 3

4

Wipro Financial Ratios ( ) 5

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

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

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

Net Profit Margin = (Profit After Tax) ÷ (Sales)

Return on Assets = (Profit After Tax) ÷ (Total Assets)

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

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

Inventory Turnover Ratio = (Cost of Goods Sold) ÷ (Inventory)

Average Collection Period (Debtors Turnover) = (Debtors) ÷ (Average Daily Sales)

Capital Employed Turnover = (Sales) ÷ (Capital Employed)

Fixed Assets Turnover = (Sales) ÷ (Net Fixed Assets)

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

Current Ratio = (Current Assets) ÷ (Current Liabilities)

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

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

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

Total Debt to Total Capital Employed Ratio = (Total Debt) ÷ (Total Capital Employed)

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

Interest Coverage = (Profit Before Interest and Tax) ÷ (Interest Charges)

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank You 38