You are on page 1of 13

Financial Ratio

Analysis
A financial ratio is a relationship between
two accounting numbers. Ratios help to
make a qualitative judgement about the
firms financial performance.

2 Rajendra Lamsal
Liquidity ratios
Solvency ratios
Turnover ratios
Profitability ratios
Equity-related ratios
3 Rajendra Lamsal
Liquidity ratios measure a firms ability to
meet its current obligations.
4
Current assets
Current ratio =
Current liabilities
Current assets Inventories
Quick ratio =
Current liabilities
Cash + Marketable securities
Cash ratio =
Current liabilities
Rajendra Lamsal
Solvency ratios measure the dependence of
a firm on borrowed funds.
5
Debt
Debt-equity ratio
Equity (Net Worth)
Debt
ratio
Debt Equity employed
Earnings before interest and tax
coverage
Interest
Debt
Debt
Capital
Interest
=
= =
+
=
Rajendra Lamsal
Assets Management orTurnover or activity
ratios measure the firms efficiency in
utilising its assets.
Rajendra Lamsal 6
Cost of goods sold or net sales
Inventory turnober
Average (or closing) inventory
Number of days in the year (say, 360)
of inventory holding
Inventory turnover
Credit sales or net sa
Debtors turnover
Days
=
=
=
les
Average (or closing) debtors
Number of days in the year (say, 360)
period
Debtors turnover
Collection =
Rajendra Lamsal 7
Net sales
Current assets turnover
Current assets
Net sales
current assets turnover
Net current assets
Net sales
assets turnover
Net fixed assets
Net sales
assets turnover
Net assets or capital
Net
Fixed
Net
=
=
=
=
employed
Profitability ratios measure a firms overall
efficiency and effectiveness in generating
profit.
Rajendra Lamsal 8
before interest and tax (PBIT)
Margin
Net sales
after tax (PAT)
margin
Net sales
PBIT
return on investment
Net assets
Profit after tax
on equity
Equity (net worth)
Profit
Profit
Net
Before tax
Return
=
=
=
=
Equity-related ratios measure the
shareholders return and value.
Rajendra Lamsal 9
Profit after tax
EPS
Number of ordinary shares
DPS
Number of ordinary shares
DPS
ratio
EPS Pr after tax
DPS
yield
Market value per share
Dividends
Dividends
Payout
ofit
Dividend
=
=
= =
=
Rajendra Lamsal 10
EPS
Earnings yield
value per share
value per share
P / E ratio =
EPS
Net worth
value per share
Number of ordinary shares
value per share
M Bvalue
Book value per share
Mar
'
Market
Market
Book
Market
Tobin s q
=
=
=
=
ket value of assets
Economic value of assets
Rajendra Lamsal 11
DuPont Analysis
integrates the important ratios to analyse a firm's profitability.
PBIT Sales PBIT
RONA=
Net Assets Net Assets Sales
PAT Sales PBIT PAT Net Assets
ROE
Net Worth Net Assets Sales PBIT Net Worth
=

= =

ROE Assets turnover Margin everage L


(
(

=
Assessment of the firms financial conditions
and capabilities.
Diagnosis of the firms problems,
weaknesses and strengths.
Credit analysis
Security analysis
Comparative analysis
Time series analysis
Rajendra Lamsal 12
Standards of comparisons
Company differences
Price level
Different definition
Changing situations
Past data
Rajendra Lamsal 13