RATIO ANALYSIS OF

Submitted to:
Mrs.Vaishali Apte
Faculty of International Finance, Muenchen
International Business School, Pune

Presented By:
Vinod Prajapat (63)
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 RATIO ANALYSIS

Its a tool which enables the banker or lender to

arrive at the following factors :
Liquidity position
Profitability
Solvency
Financial Stability
Quality of the Management
Safety & Security of the loans & advances to be
or already been provided
 HOW A RATIO IS EXPRESSED?

As Percentage - such as 25% or 50% . For

example if net profit is Rs.25,000/- and the sales is
Rs.1,00,000/- then the net profit can be said to be
25% of the sales.
As Proportion - The above figures may be
expressed in terms of the relationship between net
profit to sales as 1 : 4.
As Pure Number /Times - The same can also be
expressed in an alternatively way such as the sale is
4 times of the net profit or profit is 1/4th of the
sales.
CLASSIFICATION OF RATIOS
Balance Sheet P&L Ratio or Balance Sheet
Ratio Income/Revenue and Profit &
Statement Ratio Loss Ratio

Financial Ratio Operating Ratio Composite Ratio

Current Ratio Gross Profit Ratio Fixed Asset
Quick Asset Operating Ratio Turnover Ratio,
Ratio Expense Ratio Return on Total
Proprietary Ratio Net profit Ratio Resources Ratio,
Debt Equity Ratio Stock Turnover Return on Own
Ratio Funds Ratio,
Earning per Share
Ratio, Debtors
Turnover Ratio,
 FORMAT OF BALANCE SHEET FOR RATIO ANALYSIS
LIABILITIES
NET WORTH/EQUITY/OWNED FUNDS
Share Capital/Partners Capital/Paid up
Capital/ Owners Funds
Reserves ( General, Capital, Revaluation &
Other Reserves)
Credit Balance in P&L A/c
LONG TERM LIABILITIES/BORROWED
FUNDS : Term Loans (Banks &
Institutions)
Debentures/Bonds, Unsecured Loans, Fixed
Deposits, Other Long Term Liabilities
CURRENT LIABILTIES
Bank Working Capital Limits such as
CC/OD/Bills/Export Credit
Sundry /Trade Creditors/Creditors/Bills
Payable, Short duration loans or deposits
Expenses payable & provisions against
various items
ASSETS
FIXED ASSETS : LAND & BUILDING,
PLANT & MACHINERIES
Original Value Less Depreciation
Net Value or Book Value or Written down
value
NON CURRENT ASSETS
Investments in quoted shares & securities
Old stocks or old/disputed book debts
Long Term Security Deposits
Other Misc. assets which are not current or
fixed in nature
CURRENT ASSETS : Cash & Bank Balance,
Marketable/quoted Govt. or other
securities, Book Debts/Sundry Debtors, Bills
Receivables, Stocks & inventory (RM,SIP,FG)
Stores & Spares, Advance Payment of
Taxes, Prepaid expenses, Loans and
Advances recoverable within 12 months
INTANGIBLE ASSETS
Patent, Goodwill, Debit balance in P&L A/c,
Preliminary or Preoperative expenses
 SOME IMPORTANT NOTES
Liabilities have Credit balance and Assets have Debit
balance
Current Liabilities are those which have either become due
for payment or shall fall due for payment within 12 months
from the date of Balance Sheet
Current Assets are those which undergo change in their
shape/form within 12 months. These are also called
Working Capital or Gross Working Capital
Net Worth & Long Term Liabilities are also called Long
Term Sources of Funds
Current Liabilities are known as Short Term Sources of
Funds
Long Term Liabilities & Short Term Liabilities are also
called Outside Liabilities
 SOME IMPORTANT NOTES

Assets other than Current Assets are Long Term Use of

Funds
Installments of Term Loan Payable in 12 months are to be
taken as Current Liability only for Calculation of Current Ratio
& Quick Ratio.
If there is profit it shall become part of Net Worth under the
head Reserves and if there is loss it will become part of
Intangible Assets
Investments in Govt. Securities to be treated current only if
these are marketable and due. Investments in other
securities are to be treated Current if they are quoted.
Investments in allied/associate/sister units or firms to be
treated as Non-current.
Bonus Shares as issued by capitalization of General
1. Current Ratio : It is the relationship between the current
assets and current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern are
Rs.4,00,000 and Rs.2,00,000 respectively, then the
Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1
The ideal Current Ratio preferred by Banks is 1.33 : 1

2. Net Working Capital : This is worked out as surplus of Long

Term Sources over Long Tern Uses, alternatively it is the
difference of Current Assets and Current Liabilities.
NWC = Current Assets Current Liabilities
3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current
Assets and Current Liabilities.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months +

Quickly realizable securities such as Govt. Securities or quickly marketable/quoted
shares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example :
Cash 50,000
Debtors 1,00,000
Inventories 1,50,000 Current Liabilities 1,00,000
Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000 = 3:1

Quick Ratio => 1,50,000/1,00,000 = 1.5 : 1
4. DEBT EQUITY RATIO : It is the relationship between
borrowers fund (Debt) and Owners Capital (Equity).

Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets

For instance, if the Firm is having the following :

Capital = Rs. 200 Lacs

Free Reserves & Surplus = Rs. 300 Lacs
Long Term Loans/Liabilities = Rs. 800 Lacs

Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1

5. PROPRIETARY RATIO : This ratio indicates the extent to which
Tangible Assets are financed by Owners Fund.
Proprietary Ratio = (Tangible Net Worth/Total Tangible
Assets) x 100
The ratio will be 100% when there is no Borrowing for purchasing
of Assets.

6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to

Net Sales we can arrive at the Gross Profit Ratio which indicates the
manufacturing efficiency as well as the pricing policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

Alternatively , since Gross Profit is equal to Sales minus Cost of

Goods Sold, it can also be interpreted as below :

Gross Profit Ratio = [ (Sales Cost of goods sold)/ Net Sales]

x 100
A higher Gross Profit Ratio indicates efficiency in production of the unit.
7. OPERATING PROFIT RATIO :

It is expressed as => (Operating Profit / Net Sales ) x 100

Higher the ratio indicates operational efficiency

8. NET PROFIT RATIO :

It is expressed as => ( Net Profit / Net Sales ) x 100

It measures overall profitability.

 9. STOCK/INVENTORY TURNOVER RATIO :

(Average Inventory/Sales) x 365 for days

(Average Inventory/Sales) x 52 for weeks
(Average Inventory/Sales) x 12 for months

Average Inventory or Stocks = (Opening Stock + Closing Stock)

-----------------------------------------
2
. This ratio indicates the number of times the inventory is
rotated during the relevant accounting period
 10. DEBTORS TURNOVER RATIO : This is also called Debtors
Velocity or Average Collection Period or Period of Credit given .

(Average Debtors/Sales ) x 365 for days

(52 for weeks & 12 for months)

11. ASSET TRUNOVER RATIO : Net Sales/Tangible Assets

12. FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets

13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets

14. CREDITORS TURNOVER RATIO : This is also called Creditors

Velocity Ratio, which determines the creditor payment period.

(Average Creditors/Purchases)x365 for days

(52 for weeks & 12 for months)
15. RETRUN ON ASSETS : Net Profit after Taxes/Total Assets

16. RETRUN ON CAPITAL EMPLOYED :

( Net Profit before Interest & Tax / Average Capital Employed) x 100

Average Capital Employed is the average of the equity share

capital and long term funds provided by the owners and the
creditors of the firm at the beginning and end of the accounting
period.
 Composite Ratio

17. RETRUN ON EQUITY CAPITAL (ROE) :

Net Profit after Taxes / Tangible Net Worth

18. EARNING PER SHARE : EPS indicates the quantum of net profit
of the year that would be ranking for dividend for each share of
the company being held by the equity share holders.

Net profit after Taxes and Preference Dividend/ No. of Equity

Shares

19. PRICE EARNING RATIO : PE Ratio indicates the number of times

the Earning Per Share is covered by its market price.

Market Price Per Equity Share/Earning Per Share

20. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most
important one which indicates the ability of an enterprise to
meet its liabilities by way of payment of installments of Term
Loans and Interest thereon from out of the cash accruals and
forms the basis for fixation of the repayment schedule in
respect of the Term Loans raised for a project. (The Ideal DSCR
Ratio is considered to be 2 )

PAT + Depr. + Annual Interest on Long Term Loans & Liabilities

---------------------------------------------------------------------------------
Annual interest on Long Term Loans & Liabilities + Annual
Installments payable on Long Term Loans & Liabilities

( Where PAT is Profit after Tax and Depr. is Depreciation)

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NOTES

All amounts worked here are in terms of

Rupees in Crores (1 crore =10000000=10^7).
MS Excel sheet has been used for computing
the ratios.

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I Liquidity Ratios
Year 2007
1 Current ratio: Current assets / Current Liabilities
II.3:Current assets,Loans and advances 6289.72
II.4:Current liabilities and provisions 3857.59
(II.3/II.4) 1.630479133
The current ratio of 1.63 times says that the company is in
relatively good short-term financial standings.

The ratio is an indication of a company's ability to meet short-

term debt obligations; the higher the ratio, the more liquid the
company is.

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I Liquidity Ratios
Year 2007
2 Quick ratio or Acid test ratio: (Current assets-
inventories)/ Current Liabilities
II.3:(Current assets,Loans and advances) 6289.72
Less:II.3a:Inventories 3354.03
2935.69
II.4:Current liabilities and provisions 3857.59
(II.3-II.3a)/(II.4) 0.761016593
The small Quick ratio, i.e. 0.76 times says that the company's
financial strength is not so strong. In general, a quick ratio of 1
or more is accepted by most creditors; however, quick ratios
vary greatly from industry to industry and ITC does not have as
such any worries in getting creditors.
ITC has strong financial positions in many other aspects.
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I Liquidity Ratios

Year 2007
3 Cash ratio or Absolute liquidity ratio: (Cash
+Marketable securities)/Current liabilities
II.3c:Cash and bank Balances 900.16
Add:Marketable securites 0
900.16
II.4:Current liabilities and provisions 3857.59
(II.3c)/(II.4) 0.233347764
The cash ratio of 0.23 times says that the company is
not in the position to very quickly liquidate its assets and
cover short-term liabilities. But there is no such liquidity
need for the company and so the small value of the ratio
has no such important implications. (The ratio is of
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interest to short-term creditors) 23
II Solvency Ratios
Year 2007
1 Debt equity ratio: Long term debt/ equity (net
worth)
I.2:Loan funds 200.88
I.1:Shareholders funds 10437.08
(I.2)/(I.1) 0.019246763

The ratio of 0.02 times, which means that the

company has not been aggressive in financing its
growth with debt. Thus its earnings are stable. The
company has better support from the shareholders.

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II Solvency Ratios
Year 2007
2 Debt ratio: debt (long term)/ (debt (long term) +
equity) or debt/capital employed

I.2:Loan funds 200.88

I.1:Shareholders funds 10437.08
(I.2)+(I.1) 10637.96
(I.2)/(I.2+I.1) 0.01888332
The ratio of 0.02 times signifies that the company
has employed more capitals over its debts. Thus the
company is efficiently utilizing its loan funds.

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II Solvency Ratios
Year 2007
3 Interest Coverage ratio : (earnings before interest
and tax) / Interest
P/L:III:profit before taxation and exceptional items3926.7
II.4a-13:Interest accrued but not due on loans 0.55
(P.III)/(II.4a-13) 7139.454545
The ratio of 7139.4 times is magnificently very high
and hence the company has very sound financial
position. It has no tension of paying interests over its
loans.

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III Turnover Ratios
Year 2007
1 Inventory turnover: Cost of goods sold or net
sales/Average (or closing) inventory.

P/L:IB:Net sales 7135.75

II.3a:Inventories 3354.03
(P/L:IB)/(II.3a:) 2.127515258
The ratio of 2.13 times signifies that the company is
efficient in selling its stocks.

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III Turnover Ratios
Year 2007
2 Days of Inventory holding: Number of days in the
year (say 360)/ Inventory turnover ratio.
Number of days in a year 360
Inventories turnover ratios 2.127
(360)/(ITR) 169.2524683
169 days or about five and half months periods for
the liquidation of stocks is quiet efficient.

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III Turnover Ratios
Year 2007
3 Debtors turnover ratio: Credit sales or net sales/
Average (or closing) debtors (or accounts
receivable (total debtors +bills receivable)

P/L:IB:Net sales 7135.75

II.3b:Sundry debtors 636.69
(P/L:IB)/(II.3b) 11.20757354
The ratio of 11.2 times signifies that the company
is getting good returns and has no visible risk but
benefits out of its debtors.
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III Turnover Ratios
Year 2007
4 Collection period: Number of days in the year
(say 360)/ Debtors turnover
Number of days in the year 360
Debtors turnover 11.207
(360)/(DTR) 32.12278041
The debt collection period of 32 days is quiet good
and the company is efficient in getting back its dues.

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III Turnover Ratios
Year 2007
5 Current assets turnover: Net sales/ Current assets

P/L:IB:Net sales 7135.75

II.3: Current assets,loans and advances 6289.72
(P/L:IB)/(II.3) 1.134509962
The ratio of 1.13 times signifies that , in spite of the
current liabilities, the company is efficient in making
sales revenue.

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III Turnover Ratios
Year 2007
6 Net current assets turnover: Net sales/ Net current
assets
P/L:IB:Net sales 7135.75
Net Current Assets 2432.13
(P/L:IB)/(NCA) 2.933950899

The ratio of 2.93 times signifies that the company is

highly efficient in utilizing its net current assets and
generating sales revenue.

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III Turnover Ratios
Year 2007
7 Fixed assets turnover: Net sales/ Net fixed assets
P/L:IB:Net sales 7135.75
II.1:Net Fixed Assets 5610.91
(P/L:IB)/(II.1) 1.271763404

The ratio of 1.27 times signifies that the company is

very efficiently utilizing its fixed assets for generating
sales revenue.

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III Turnover Ratios
Year 2007
8 Net assets turnover: Net sales/ Net assets or
capital employed : (Net assets = all assets
accumulated depreciation)
P/L:IB:Net sales 7135.75
II.1:Net Fixed Assets 5610.91
II.2: Investments 3067.77
Net Current assets 2432.13
Net assets 11110.81
(P/L:IB)/(NA) 0.642234905
The ratio of 0.64 times signifies that the company has still to
be more efficient in utilizing its net assets in generating sales
revenue.
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IV Profitability Ratios
Year 2007
1 Margin: (Profit before interest and tax (PBIT)/ Net
sales)100

P/L:III:Profit before taxation and Exceptional items 3926.7

P/L:IB:Net Sales 7135.75
(P/L:III)/(P/L:IB)100 55.02855341

The Profit margin of 55.03% is quiet impressive and

the company is making good profits.

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IV Profitability Ratios
Year 2007
2 Net margin: Profit after tax (PAT) 100 / Net sales

P/L:III:Profit after taxation 2699.97

P/L:IB:Net Sales 7135.75
(P/L:III)/(P/L:IB)100 37.83722804
The net margin of 37.83% is quiet impressive, and the
company is performing well.

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IV Profitability Ratios
Year 2007
3 Before tax return on investment: (PBIT/Net
assets) 100
P/L:III:Profit before taxation and Exceptional items 3926.7
II.1:Net Fixed Assets 5610.91
II.2:Investments 3067.77
Net Current assets 2432.13
Net assets 11110.81
(P/L:III)/(NA)100 35.34125775

The Return of 35.34% is quiet good and company is

performing well.
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IV Profitability Ratios
Year 2007
4 Return on equity: (PAT/Equity (net worth)) 100
P/L:III:Profit after taxation 2699.97
I.1:Shareholders funds 10437.08
(P/L:III)/(P/L:IB)100 25.869017

The ratio of 25.86% is quiet good and the company

is utilizing the shareholders funds in a better way.

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V Equity-related Ratios
Year 2007
1 Earning per share (EPS): PAT/Number of ordinary
shares
P/L:III:Profit after taxation 2699.97
P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907
(P/L:III)/(P/L:IV)(10^7: to convert in per rupee) 7.185287102

In comparison to the face value of Re.1/share the EPS

of Rs.7.18 is very good.

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V Equity-related Ratios
Year 2007
2 Dividends per share (DPS): Dividends/ Number of
ordinary shares
P/L:IV:Proposed Dividend 1166.29
P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907
(P/L:III)/(P/L:IV)10^7(to convert into unit ruppes) 3.10378578
Dividend per share (DPS) is a simple and intuitive
number. It is the amount of the dividend that
shareholders have (or will) receive, over an year, for
each share they own.
In compared to the face value of the shares, i.e.
Re.1.00/share. DPS of Rs.3.10 is quiet good.
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V Equity-related Ratios
Year 2007
3 Pay out ratios: DPS/EPS or Dividends/PAT
DPS 3.1
EPS 7.19
(DPS)/(EPS) 0.431154381
a very low payout ratio indicates that a company is
primarily focused on retaining its earnings rather
than paying out dividends.
The payout ratio also indicates how well earnings
support the dividend payments: the lower the ratio, the
more secure the dividend because smaller dividends are
easier to pay out than larger dividends.
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So the value of 0.43 times is quiet good. 41
V Equity-related Ratios
Year 2007
4 Dividend Yield: DPS/Market value per share

We have to get the Market value per share of the relevant

period .

Market Price Per Share

The closing price of the common or preferred stock as
reported on the applicable stock exchange consolidated
tape as of the date indicated

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V Equity-related Ratios
Year 2007
5 Book value per share: Net worth/ Number of
ordinary shares
I.1:Shareholders funds 10437.08
P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907
(I.1)/(P/L:IV)10^7(to convert into unit ruppes) 27.77564799
BV is considered to be the accounting value of each
share, drastically different than what the market is
valuing the stock at. The book value, i.e. Rs.27.77 is far
higher than the face value of each share, i.e. Re.1.00.
Here diluted value in considering numbers of shares is
not considered.
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VI Investment-related Ratios
Year 2007
1 Return on assets or earning power (ROA): (PAT/ Average
total assets (of the given years, here 2006&07)) 100 or
((PAT+ Interest)/Average fixed assets) 100
P/L:III:Profit after taxation 2699.97
Fixed assets 2007 5610.91
Investments 2007 3067.77
Current assets 2007 6289.72
Fixed assets 2006 4405.13
Investments 2006 3517.01
Current assets 2006 5161.9
Average total assets 14026.22
(PAT/ATA)100 19.24944853
Earning power of the company, i.e. 19.25% is quiet good and the
company is doing well.
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VI Investment-related Ratios
Year 2007
2 Return on capital employed (ROCE):
(EBIT(PBIT)/ Capital employed) 100
P/L:III:Profit before taxation and Exceptional items 3926.7
I:Sources of Funds 11110.81
((P/L:III)/I)100 35.34125775
The ROCE of 35.34% signifies that the company is
getting good return out of its investment decisions.

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VII Return on Equity (ROE)
Year 2007
1 ROTSE (return on total shareholders equity):
(PAT/ Total shareholders equity) 100
P/L:III:Profit after taxation 2699.97
I.1:Shareholders funds 10437.08
(P/L:III)/(P/L:IB)100 25.869017
The ratio (25.87 times) is same as that of Return on
equity, since there are no preference shares.

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VII Return on Equity (ROE)
Year 2007
2 ROOSE (return on ordinary shareholders equity) /
RONW (return on net worth): ((PAT-preferential
dividends)/Net worth) 100
P/L:III:Profit after taxation 2699.97
I.1:Shareholders funds 10437.08
(P/L:III)/(P/L:IB)100 25.869017
The ratio (25.87 times) is same as that of Return on
equity, and return on total shareholders equity since
there are no preference shares.

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DU PONT ANALYSIS

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DU PONT ANALYSIS FOR YEAR 2007:

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DU PONT ANALYSIS FOR YEAR 2006

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DU PONT ANALYSIS FOR YEAR 2005:

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DU PONT ANALYSIS FOR YEAR 2004:

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 Du Pont Analysis

30.00 28.55
Return on total assets (%)

25.00 22.44 23.37 22.69

20.00

15.00

10.00

5.00

0.00
1 2 3 4
Years:1~2004:2~2005:3~2006:4~2007

Du Pont chart portrays the earning power of a firm. The ROA ratio is a central
measure of the overall profitability and operational efficiency of a firm it shows the
interaction of Profitability and activity Ratios, It implies that the performance of a firm
can be improved either by generating more sales volume per rupee of investment or
by increasing the profit margin per rupee of sales.
So as per the analysis, the company has to maintain more consistent and increasing
trend in its ROA in the following years. 53
 Employees and
trade unions
(pay raises / job
security)

Local Managers and

community directors
(secure funding (bonuses for
for local
projects/jobs) 1. reaching
targets)

Uses
of
Potential
financiers
(looks at
Ratio Analysis Trade creditors
(makes sure
customer has
profitability and
enough working
funds to repay
capital)
loans)

Shareholder
(capital gain
and dividends)
 Historical
account of a
firms
performance

change in
external
organizational
business
objectives
environment
differ from 2. can change
firm to firm
the ratios
Limitations
of
Ratio Analysis

Qualitative
factors that No universal
affect way to report
performance company
of a firm are accounts
totally ignored
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