Confidential

Circulation is restricted to Section G & H only

Financial Accounting and Control

Ratios
 Ratios
• Ratios – relationship between two variables
– Operations
– Financial performance
– Profitability
– Balance sheet
– Liquidity
– Leverage
– Market efficiency

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 Ratios
• Operations - Activity/ Turnover Ratios Includes purchases and sales

–Receivables (Debtors) Turnover =Credit Sales/ Average Receivables

–Average Collection Period/ Debtors Velocity = 365/ Debtors
Turnover
• Reduce age of receivables
–Payables (Creditors)Turnover =Credit Purchases/ Average Payables
–Average Payment Period/ Creditors Velocity = 365/ Creditors
Turnover
• Increase age of payables
–Asset Turnover =Sales/ Average Assets
–Inventory/ Stock Turnover =Cost of Goods Sold/Average Inventory
–Days Stock (Stock Velocity)= 365 days (12 months)/ Stock Turnover
–Working Capital Turnover = Cost of Sales/ Average Working Capital
–Capital Employed Turnover= Sales/ Average Capital Employed
 Ratios
• Financial Performance Ratios

– Cost of Goods Sold / Net Sales

– Manpower Costs / Total Income
– Advertising and Selling Cost / Total Income
– Interest / Total Income
– Debt-Service Ratio = Profit before Depreciation, Interest and Tax
(PBDIT)/ Interest

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 Ratios
• Profitability Ratios (In percentage)
– Gross profit margin= Gross Profit *100 / Net Sales Revenue
• Gross Profit= Revenue-Cost of Goods Sold (COGS)
– Operating profit= EBIT*100/ Sales
– Net profit margin = Net profit (PAT) * 100/ Sales
– RONW = PAT *100/ Average Net Worth
– Return on Capital Employed (ROCE) = Earning before Interest and
Tax (EBIT) *100/ Average Capital Employed
– Return on Total Assets= EBIT*100/ Total Assets
– Return on Shareholder’s Equity= PAT*100/ Shareholder’s
equity
EBIT – Earnings Before Interest and Tax
RONW – Return on Net Worth
ROIC- Return on Invested Capital
ROCE – Return on Capital Employed
PAT= Profit After Tax *
 Ratios
• Financial Indicators: Profitability Ratio (Contd.)

ü Earnings Per Share (EPS)= Earnings available to equity SH (PAT)/ No.

of equity shares
ü Dividend Per Share (DPS)= Dividend to equity SH/ No. of equity shares
ü Dividend Payout Ratio= DPS *100 / EPS
ü Price/ Earning Ratio= Market price per share/ EPS
ü Earning Yield= EPS*100/ Market price per share
ü Dividend Yield= DPS*100/ Market Price per share
 Ratios
• Balance sheet ratios

– Debt-Equity Ratio= Long term Debt/ Shareholder’s Funds

– Current Ratio = Current Assets (CA)/ Current Liabilities (CL)
– Quick Ratio = (CA- Closing Inventory)/CL
– Proprietary Ratio= Shareholder’s Funds/ Total Assets

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 Ratios
Liquidity Ratios

-Current (Working Capital) Ratio = Current Assets/Current Liabilities

-Quick Ratio = (Current Assets – Closing Inventory)/Current Liabilities
-Super Quick Ratio = (Current Assets – Closing Inventory – A/Cs
Receivable)/ Current Liabilities
-Cash Ratio = (Cash + Marketable Securities)/Current Liabilities

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 Ratios
• Leverage (Borrowing) ratios

ü Debt Ratio = Total Debt/Total Asset

ü Debt To Equity Ratio = Total Debt/Total Shareholders Funds
ü Interest Coverage Ratio = EBIT/Interest Cost
ü Capital Gearing Ratio= Long term Debt +Preference SH Funds/ Equity
SH Funds

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 Key Classifications

Profitability Valuation Ratios Market Efficiency Key Financial

Ratios Ratios performance
Ratios
• Net Profit ratio • Price to sales • Inventory Turnover • Debt equity ratio
• Gross Profit ratio • Price to book value ratio • Current Ratio
• P/E ratio • Price to Earnings • Receivables turnover • Interest Coverage
• Operating Ratio • Dividend Yield ratio Ratio
• Dividend Yield Ratio • Market • Average Collection • Inventory turnover
• Dividend Payout Capitalization to period • Debtors turnover
Ratio sales • Accounts payable • Fixed assets
• Return on capital turnover ratio turnover
Employed • Average payment • ROCE
• Return on Equity period • RONW
• Return on Common • Asset turnover ratio
Stock • Working capital
• EVA turnover ratio
• Payout Ratio • Fixed assets
turnover ratio

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 Key Classifications ( Contd.)
Solvency Ratios Liquidity Ratios Debt Investor Equity Investor
( Leverage
Ratios)
• Debt to equity • Current ratio • Debt Ratio • Price to sales
• Debt to assets • Quick ratio • Debt To Equity Ratio • Price to book value
• Times interest • Accounts Receivable • Interest Coverage • Price to Earnings
earned turnover Ratio • Dividend Yield
• Capital gearing ratio • Days sales • Capital Gearing • Market
• Interest Coverage outstanding Ratio Capitalization to
Ratio • Inventory turnover sales
• Day’s sales in
Inventory

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 DuPont Analysis
DuPont formula (also known as the DuPont analysis, DuPont Model, DuPont
equation or the DuPont method) is a method for assessing a company's return on
equity (ROE) breaking its into three parts. The name comes from the DuPont
Corporation that started using this formula in the 1920s.

Calculation (formula)

ROE (DuPont formula) = (Net profit / Revenue) * (Revenue / Total assets) * (Total assets
/ Equity) =

ROE (DuPont formula) = Net profit margin * Asset Turnover * Financial Leverage

DuPont model tells that ROE is affected by three things:

Operating efficiency, which is measured by net profit margin;

Asset use efficiency, which is measured by total asset turnover;
Financial leverage, which is measured by the equity multiplier;

If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is
underperforming.