Security Analysis & Portfolio

Management (SAPM)

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 Security Analysis & Portfolio Management
(SAPM)

Ratio Analysis

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 Security Analysis & Portfolio Management
(SAPM)

• Ratio Analysis
– Financial statements
• Income statement
• Balance sheet
• Cash Flow Statement
• Change in equity

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 Security Analysis & Portfolio Management
(SAPM)

• Ratio analysis
– Ratio analysis consists of calculating financial
performance using five basic types of ratios:
• Liquidity
• Activity
• Debt
• Profitability
• Market

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 Security Analysis & Portfolio Management
(SAPM)
• Liquidity
– Cash ratio. Compares the amount of cash and
investments to short-term liabilities. This ratio
excludes any assets that might not be immediately
convertible into cash, especially inventory.
– Quick ratio. Same as the cash ratio, but includes
accounts receivable as an asset. This ratio explicitly
avoids inventory, which may be difficult to convert
into cash.
– Current ratio. Compares all current assets to all
current liabilities. This ratio includes inventory, which
is not especially liquid, and which can therefore mis-
represent the liquidity of a business.
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 Security Analysis & Portfolio Management
(SAPM)
• Activity
– An activity ratio is a type of financial metric that
indicates how efficiently a company is leveraging
the assets on its balance sheet, to generate
revenues and cash.

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 Security Analysis & Portfolio Management
(SAPM)

• ACCOUNTS RECEIVABLE TURNOVER RATIO

– Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

• While a high ratio may indicate the company operates

on a cash basis or has quality customers that pay off
their debts quickly, a low ratio can suggest a bad credit
policy and poor collecting process. It helps in assessing
if its credit policies are helping or hurting the business.

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 Security Analysis & Portfolio Management
(SAPM)

• WORKING CAPITAL RATIO

– Working Capital Ratio = Net Sales / Working Capital
– A high working capital ratio shows that the
business is efficiently using its short-term
liabilities and assets for supporting sales. A low
ratio could indicate bad debts or obsolete
inventory.

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 Security Analysis & Portfolio Management
(SAPM)

• ASSET TURNOVER RATIO

– Asset Turnover Ratio = Sales / Average Total Assets
– This ratio is calculated at the end of a financial
year and can vary widely from one industry to
another. The higher the asset turnover ratio, the
better the company is performing.

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 Security Analysis & Portfolio Management
(SAPM)

• FIXED ASSET TURNOVER RATIO

– Fixed Asset Turnover Ratio = Net Sales / (Fixed Assets – Accumulated Depreciation)

• A high turnover ratio indicates the assets are

being utilized efficiently for generating sales.

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 Security Analysis & Portfolio Management
(SAPM)

• INVENTORY TURNOVER RATIO

– Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
– A low inventory turnover ratio may indicate
overstocking, poor marketing or a declining
demand for the product. A high ratio is an
indicator of good inventory management and a
higher demand for the product.

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 Security Analysis & Portfolio Management
(SAPM)

• DAYS PAYABLE OUTSTANDING

– Days Payable Outstanding = Accounts Payable / (Cost of Sales/ Number of Days)

– The number of days is taken as 90 days for a

quarter or 365 days for a year. The ratio indicates
how well the cash flow is being managed.
– A low ratio indicates that the business is either not
utilizing its credit period efficiently or has short-
term arrangements with creditors.

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 Security Analysis & Portfolio Management
(SAPM)
• Debt Ratio
– The debt ratio is a financial ratio that measures the extent
of a company’s leverage. The debt ratio is defined as the
ratio of total debt to total assets, expressed as a decimal
or percentage. It can be interpreted as the proportion of a
company’s assets that are financed by debt.
– A ratio greater than 1 shows that a considerable portion of
debt is funded by assets. In other words, the company has
more liabilities than assets. A high ratio also indicates that
a company may be putting itself at risk of default on its
loans if interest rates were to rise suddenly. A ratio below
1 translates to the fact that a greater portion of a
company's assets is funded by equity.

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 Security Analysis & Portfolio Management
(SAPM)
• Profitability Ratio
– Profitability ratios assess a company's ability to earn profits from its sales
or operations, balance sheet assets, or shareholders' equity. Profitability
ratios indicate how efficiently a company generates profit and value for
shareholders.
– Net Profit Margin
• Net profit /Net Sales
– Gross Profit Margin
• Gross profit /Net Sales
– Return on Assets
• Net profit /Total Assets
– Return on Equity
• Net profit /Total shareholder Equity

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 Security Analysis & Portfolio Management
(SAPM)
• Earnings Per Share
• EPS = net profit / no. of outstanding Share
• Book Value
• Book value = Total Equity / no. of outstanding Share
• Market/Book (M/B) Ratio
• Market/Book (M/B) Ratio = Market price / Book value
– A ratio of less than 1 can mean a stock might be undervalued, while a ratio greater
than 1 might mean it's overvalued.
• Price-Earnings (P/E) Ratio
• Price-Earnings (P/E) Ratio = Market price / EPS
• Price-Earnings (P/E) Growth Ratio
• PEG = PE/ EPS(Growth)
• Dividend Yield Ratio
• Per Share dividend / Current Market price

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 Security Analysis & Portfolio Management
(SAPM)

Thank you

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