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The company needs loan of Rs.150crs. to infuse additional
working capital, for which it has approached a bank. The bank
has to decide whether to give the loan or not. The bank before
providing loan has to look for some key financial ratios so as
to find out the creditably of the company. In this presentation
we will derive and analyse the key financial ratios which will
help in deciding whether to sanction the loan or not.
Debt ʹ Equity Ratio
It indicates what proportion of equity and debt the company is using to finance its assets. It is
a measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity
Debt ʹ Equity Ratio = Total debt/ Shareholders Capital




 


  

 
     
 
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!ong - term Debt Equity Ratio
The ratio is calculated by taking the company's long- term debt and dividing it by the total
value of its shareholder capital.
!ong Term Debt ʹ Equity Ratio = !ong Term Debt /Shareholders Capital


  
 


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Current Ratio
The ratio is mainly used to give an idea of the company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The
higher the current ratio, the more capable the company is of paying its obligations.
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Interest Cover Ratio
This ratio used to determine how easily a company can pay interest on outstanding debt. The
interest coverage ratio is calculated by dividing a company's earnings before interest and taxes
(EBIT) of one period by the company's interest expenses of the same period.
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Turnover Ratios
Debtors Ratio
It indicates the velocity of debt collection of a firm. In simple words it indicates the number
of times average debtors are turned over during a year.
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Inventory Ratio
This ratio is compared against industry averages. A low turnover implies poor sales
and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.
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Dixed Assets Turnover Ratio
The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-
asset investments. A higher fixed-asset turnover ratio shows that the company has been
more effective in using the investment in fixed assets to generate revenues.
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Creditors velocity and Cash flows

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ROCE
A ratio that indicates the efficiency and profitability of a company's capital investments.
ROCE should always be higher than the rate at which the company borrows, otherwise any
increase in borrowing will reduce shareholders' earnings.
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RONW
ratio of net income after taxes to total end of the year net worth . This ratio
indicates the return on stockholder's total equity.
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EPS = PRODIT ADTER TAX / NUMBER OD EQUITY SHARES
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Rate of Growth
It is year-over-year change, expressed as a percentage.
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