Liquidity Ratios (ability of a business to meet its short-t

Liquidity Ratios

Working Capital (INR)

1
Current Ratio or working capital ratio (Ratio)
2
Quick Ratio (Ratio)
3
bility of a business to meet its short-term obligations)
Formula

Current assets - Current liabilities

Current Assets, CA
Current liabilities, CL

Quick Assets or (CA - Inventories)

Current liabilities
t its short-term obligations)
Use/Interpretation

Indicates whether a company has enough short-term

assets to cover its short-term debt

To evaluate the amount of current assets a company

has per rupee of current liabilities

To evaluate the amount of more liquid assets a

company has per rupee of current liabilities
 Income Statements of X Ltd Liquidity Ratios
Year 2015 2016 2017 2018
Sales 1000 1200 1440 1800 Working Capital
COGS 500 600 710 880
Gross Profit 500 600 730 920 Current Ratio or working
Expenses 300 400 500 650 capital ratio
Interest 10 10 20 30

Quick Ratio
Profit before Taxes 190 190 210 240
Taxes 76 76 84 96
Net Income (PAT) 114 114 126 144

Blance Sheet of X Ltd

Year 2015 2016 2017 2018
Cash 20 30 40 50
Account Recievable 100 110 130 160
Inventory 100 120 130 140
Plant, Property & Equipment 800 900 1018 1180
Total Assets 1020 1160 1318 1530

Accounts Payable 40 50 60 70
Short term loan 10 20 30 40
Long term Loan 300 400 500 610
Equity 670 690 728 810
Total Liabilities 1020 1160 1318 1530
 2015 2016 2017 2018

Current assets - Current liabilities 170 190 210 240

Current Assets 220 4.4 260 3.7 300 3.3 350 3.2
Current liabilities 50 70 90 110

Quickt Assets or (CA - Inventories) 2.4 2 1.9 1.9

120 140 170 210
Current liabilities 50 70 90 110
higher the WC the more efficiently it functions.

higher….the more efficiently it functions.

A higher quick ratio signals that a company can be

more liquid and generate cash quickly in case of
emergency.
 Solvency Ratios (ability of a business to meet its long-term obliga
Solvency Ratios Formula
Long term debt
Debt to equity ratio (ratio)
1 Shareholders Equity

Total debt
Debt to assets ratio (ratio)
2 Total Assets

PBIT or EBIT i.e. PBT+Interest

Interest Coverage Ratio (times)
2 Interest

Example of LTL
Bank loan
Bond
Debenture
Preference share
s to meet its long-term obligations)
Use

To Measures the relative proportion of shareholders' equity and debt used

to finance a firm

To measure how much debt is used to carry firms total assets

To evaluate Whether company has sufficient income to cover its interest on

debt

Example of Shareholders equity

Common stock
Retained earnings
Other equity
 Income Statements of X Ltd Solvency Ratios
Year 2015 2016 2017 2018

Debt to equity ratio (Ratio)

Sales 1000 1200 1440 1800
COGS 500 600 710 880
Gross Profit 500 600 730 920

Expenses 300 400 500 650 Debt to assets ratio (Ratio)

Interest 10 10 20 30
Profit before Taxes 190 190 210 240

Interest Coverage Ratio (times)

Taxes 76 76 84 96
Net Income (PAT) 114 114 126 144

Blance Sheet of X Ltd

Year 2015 2016 2017 2018
Cash 20 30 40 50
Account Recievable 100 110 130 160
Inventory 100 120 130 140
Plant, Property & Equipment 800 900 1018 1180
Total Assets 1020 1160 1318 1530

Accounts Payable 40 50 60 70
Short term loan 10 20 30 40
Long term Loan 300 400 500 610
Equity 670 690 728 810
Total Liabilities 1020 1160 1318 1530
 2015 2016 2017 2018

0.45 0.58 0.69 0.75

Long term debt 300 400 500 610
Shareholders Equity 670 690 728 810

0.30 0.36 0.40 0.42

Total debt 310 420 530 650
Total assets 1020 1160 1318 1530

20 20 11.5 9
PBIT 200 200 230 270
Interest Expense 10 10 20 30
A high debt-to-equity ratio indicates that a
company is borrowing more capital from the
market to fund its operations

If the ratio is less than one, the business has more

assets than debt….so lower is better..

A higher interest coverage ratio means a company

is more poised it is to pay its debts…so higher is
good
 Efficiency Ratios (efficiency of a firm based on the use of its assets a
Activity/Efficiency Ratios Formula
Cost of Goods Sold
Inventory Turnover (in times)
1 Average Inventory

360
Days sales in inventory (in days)
Inventory Turnover
2
Credit Sales or Sales

Receivable Turnover (in times)

Average Receivable

3
360
Days Sales outstanding (in days)
Recievable Turnover
4
Credit Purchase or COGS
Payable Turnover (in times)
Average Payable
5
360
Days Payable outstanding (in days)
6 Payable Turnover

Operating Cycle (days) DSI + DSO

7
Cash Conversion Cycle (days) DSI + DSO - DPO
8

Av. Inventory= (Op inventory + Closing inventory)/2

Av. A/R= (Op A/R + Closing A/R)/2
Av. A/P= (Op A/P + Closing A/P)/2
ed on the use of its assets and other B/S items)
Use/Interpretation

To evaluate the number of times in a year company has replace its average inventory into
sales (Company's efficiency to convert its inventory into sales, Inventory Management)

To evaluate the number of days on average that a business takes to sell inventory

To evaluate the number of times in a year company's average recievables are turned into
cash (Company's effectiveness in collecting its receivables, Collection success)

To evaluate the average number of days a business take to collect money from account
recievables

To evaluate how many times in a year the company's average A/P are turned into
payments (Company's effectiveness to pay its payables, Creditworthiness )

To evaluate the average number of days a business take to pay money to account
payables

To evaluate the time taken by a company to receive inventory, sell the inventory, and
collect cash from the sale of the inventory

To evaluate the time taken by a company from putting cash into its operations and then
return to the company's cash account.
A high inventory turnover generally means that
goods are sold faster

A high DSI can indicate that a firm is not

properly managing its inventory or that it has
inventory that is difficult to sell.

high receivables turnover ratio can indicate

that a company's collection of accounts
receivable is efficient and that it has a high
proportion of quality customers who pay their
debts quickly

A high DSO number shows that a company is

selling its product to customers on credit and
waiting a long time to collect the money
 Income Statements of X Ltd
Year 2015 2016 2017 2018
Sales 1000 1200 1440 1800
COGS 500 600 710 880
Gross Profit 500 600 730 920
Expenses 300 400 500 650
Interest 10 10 20 30
Profit before Taxes 190 190 210 240
Taxes 76 76 84 96
Net Income (PAT) 114 114 126 144

Blance Sheet of X Ltd

Year 2015 2016 2017 2018
Cash 20 30 40 50
Account Recievable 100 110 130 160
Inventory 100 120 130 140
Plant, Property & Equipment 800 900 1018 1180
Total Assets 1020 1160 1318 1530

Accounts Payable 40 50 60 70
Short term loan 10 20 30 40
Long term Loan 300 400 500 610
Equity 670 690 728 810
Total Liabilities 1020 1160 1318 1530
Activity Ratio / Efficiency Ratio 2015 2016
Inventory Turnover (times) Cost of Goods Sold 500 5 600
Av. Inventory 100 110

DSI - Days sales in inventory (days) 360 360 72 360

Inventory Turnover 5 5.45

Accounts Receivable Turnover (times) Sales 1000 10 1200

Av. Accounts Receivable 100 105

DSO - Days Sales Outstanding (days) 360 360 36 360

Accts. Rec. Turnover 10 11.43

Accounts Payable Turnover (times) Cost of Goods Sold 500 12.5 600
Av. Accounts Payable 40 45

DPO - Days Payable Outstanding (days) 360 360 28.8 360

Accts. Pay. Turnover 12.5 13.33

Operating Cycle (days) DSI+DSO 108 97.5

Cash Conversion Cycle (days) DSI+DSO-DPO 79.2 70.5

2016 2017 2018
5.45 710 5.68 880 6.52
125 135

66 360 63.38 360 55.23

5.68 6.52

11.43 1440 12 1800 12.41

120 145

31.5 360 30 360 29

12 12.41

13.33 710 12.91 880 13.54

55 65

27 360 27.89 360 26.59

12.91 13.54

93.3803 84.2273

65.493 57.6364
 Profitability Ratios (To measure the degree of operating and Invest
Profitability Ratios

Gross profit Ratio, GPR (percentage)

1
Net Profit Ratio, NPR (percentage)
2
3 Return on Assets, ROA (percentage)

4 Return on Capital Employed, ROCE (Percentahge)

Return on Equity, ROE (percentage)

5
Basic Earning Per Share, BEPS (INR)
6

Diluted Earning Per Share, DEPS (INR)

7
P/E (Times): It should based on the ESP of
consolidated financial statements
8
measure the degree of operating and Investment success of the firm)
Formula
Sales - COGS or (GP)
Sales

Net Income or (PAT)

Sales

Net income or (PAT)

Total assets
Net income or (PAT) + Interest * (1-tax rate)
Capital Employed or (LTL + Total Equity)

Net Income (PAT)

Total Equity

Net Income (PAT) - Preferred stock dividend (if any)

Weighted Average No of Share Outstanding

Net Income + Interest Income (1-tax) - Preferred stock Dividend on non-

convertible preference shares (in any)

Weighted Average of (Number of Shares Outstanding + expected no of

diluted shares)

Market Price per share

Earnings per share
tment success of the firm)
Use/Interpretation

To evaluate the percentage of gross profit earned on sale.

To evaluate percentage of net profit earned on sales

To evaluate profitability from a given level of Assets or Investment

To evaluate profitability from a given level of capital employed

To evaluate profitability from the shareholders point of view

To evaluate earnings on each share (currency denomination)

To evaluate earnings per share assuming that all the convertible

secuirities (Convertible bonds and preferrence share) are converted

To Measures how many times an equity share is priced in the market

 Income Statements of X Ltd Profitability Ratio
Year 2015 2016 2017 2018 Gross profit Ratio (percentage)
Sales 1000 1200 1440 1800
COGS 500 600 710 880
Gross Profit 500 600 730 920 Net Profit Ratio (percentage)
Expenses 300 400 500 650
Interest 10 10 20 30
Profit before Taxes 190 190 210 240 Return on Assets (ROA) (percentage)
Taxes 76 76 84 96
Net Income (PAT) 114 114 126 144
Return on Capital Employed (percentage)

Blance Sheet of X Ltd

Year 2015 2016 2017 2018
Cash 20 30 40 50 Return on Equity (percentage)
Account Recievable 100 110 130 160
Inventory 100 120 130 140
Plant, Property & Equipment 800 900 1018 1180 Basic Earning Per Share (INR)
Total Assets 1020 1160 1318 1530

Accounts Payable 40 50 60 70 P/E (Times)

Short term loan 10 20 30 40
Long term Loan 300 400 500 610
Equity (No of share O/S = 100) 670 690 728 810
Total Liabilities 1020 1160 1318 1530

Market price per share 8 9 15 14

 2015 2016 2017
Sales - COGS (GP) 500 50.00% 600 50.00% 730
Sales 1000 1200 1440

Net Income (PAT) 114 11.40% 114 9.50% 126

Sales 1000 1200 1440

Net income (PAT) 114 11.18% 114 9.83% 126

Total assets 1020 1160 1318

12.37% 11.01%
Net income (PAT) + Interest (1-tax rate) 120 120 138
Capital Employed (LTL + Total Equity) 970 1090 1228

Net Income (PAT) 114 17.01% 114 16.52% 126

Total Equity 670 690 728

Net Income (PAT) - Preferred stock dividend (if any) 114 1.14 114 1.14 126
Weighted Average No of Share Outstanding 100 100 100

Market Price per share 8 7.02 9 7.89 15

Earnings per share 1.14 1.14 1.26
2017 2018
50.69% 920 51.11%
1800

8.75% 144 8.00%

1800

9.56% 144 9.41%

1530

11.24% 11.41%
162
1420

17.31% 144 17.78%

810

1.26 144 1.44

100

11.90 14 9.72
1.44
 Income Statements of X Ltd
Year 2015 2016 2017 2018
Sales 1000 1200 1440 1800
COGS 500 600 710 880
Gross Profit 500 600 730 920 There are three ways in which equity
Expenses 300 400 500 650 Either by keeping high profit margin or
Interest 10 10 20 30 efficiency (increase in sales volume o
Profit before Taxes 190 190 210 240 using appropriate Debt -
Taxes 76 76 84 96 Net Profit Margin
Net Income (PAT) 114 114 126 144 2015 0.114
2016 0.095
2017 0.0875
2018 0.08
Blance Sheet of X Ltd
Year 2015 2016 2017 2018
Cash 20 30 40 50 Here you can see that from 2015 to 2018 ROE dec
profit margin otherwise in terms of operational
Account Recievable 100 110 130 160 they are doing good. So they need to work on pro
Inventory 100 120 130 140 high price competition or
Plant, Property & Equipment 800 900 1018 1180
Total Assets 1020 1160 1318 1530

Accounts Payable 40 50 60 70
Short term loan 10 20 30 40
Long term Loan 300 400 500 610
Equity 670 690 728 810
Total Liabilities 1020 1160 1318 1530

Market price per share 8 9 15 14

e are three ways in which equity return can be enhanced.
by keeping high profit margin or by increasing operational
ency (increase in sales volume or reduction in cost) or by
using appropriate Debt - Equity mix.
Asset turnover ratio Financial Leverage ROE
0.980392156862745 1.52238805970149 0.1701493
1.03448275862069 1.68115942028986 0.1652174
1.09256449165402 1.81043956043956 0.1730769
1.09256449165402 1.88888888888889 0.1650986

u can see that from 2015 to 2018 ROE decareses but that is because of low
margin otherwise in terms of operational efficiency and debt equity mix
doing good. So they need to work on profit margin that could be cause of
high price competition or high cost

Financial Leverage and ROE