RATIO ANALYSIS

WHY RATIO ANALYSIS ?

TO JUDGE STRENGTH AND WEAKNESS OF THE FIRM.
BUT FOR WHOM ?

Supplier of debts 3.investors .Trade creditors 2.RESULT OF RATIO ANALYSIS (USE BY) OUTSIDERS Management Of The Same Firm 1.

Hindustan Manufacturing Company .Ratio analysis with respect to.

.1.LIQUIDITY RATIO USED TO CHECK THE ABILITY OF THE FIRM TO MEETS ITS CURRENT OBLIGATIONS OR LIABILITIES.....

75 ( March 2011 ) . HMC the current ratio is := = 1.20 : 1 1555.92 For. CURRENT RATIO Total of Current Assets Total of Current Liablities 1870.A.

53 For.B.In en ry v to C rren u t L lities iab 720 .46 : 1 1555 .QUICK RATIO \ ACID TEST RATIO C rren u t A ssests .75 ( March 2011 ) . HMC the Quick Ratio is : = 0.

HMC: Liquidity Ratio Mar.24 1.56 0.46 . 2009 Mar.20 Quick Ratio 0. 2010 Mar.25 1.56 0. 2011 Current Ratio 1.

the more risky a creditor will perceive its exposure in your business.Leverage Ratios Leverage ratios measure the extent to which a firm has been financed by debt. Thus. high leverage ratios make it more difficult to obtain credit (loans). . the higher this ratio. Leverage ratios include: Debt Ratio Debt--Equity Ratio Interest-coverage Ratio Generally.

06 = 0.646 or 64% 1901. the lower the number. the better.87 ( March 2011 ) .Total Debt Ratio – Proportion of interest bearing debt in the Capital structure. – In general. HMC the debt ratio is : = 1229. Total Debt Debt Ratio = Capital Employed (Total Debts + Net Worth) For.

Equity ratio is : = = 1. – This ratio indicates the extent to which the business relies on debt financing (creditor money versus owner’s equity). HMC Debt .06 For.Debt-Equity Ratio – The Debt-Equity Ratio indicates the percentage of total funds provided by creditors versus by owners.83 672.81 ( March 2011 ) .229. Total Debt Debt − Equity Ratio = Net Worth 1.

50 For.Interest Coverage Ratio – interest coverage ratio indicates the extent to which earnings can decline without the firm becoming unable to meet its annual interest costs. HMC the interestcoverageratio is :: = = 105 1.10 ( March 2011 ) . EBIT InterestCoverageRatio = Interest 115.

63 0.56 0. 2010 Mar.26 1. 2011 Total Debt ratio 0. 2009 Mar.65 Debt-equity ratio 1.HMC: Leverage Ratios Mar.83 .72 1.

Activity Ratios • These ratios evaluate the efficiency with which the firm manages and utilizes its assets. • Activity ratios include:  – – – Inventory Turnover Debtors Turnover Assets Turnover Working Capital Turnover . • They indicate the speed with which assets are being converted or turned over into sales.

• Cost of goods sold/average inventory • Cost of goods sold = opening stock + purchases + direct expenses – closing stock • Average inventory = average of opening and closing inventory .Inventory Turnover Ratio • Indicates the efficiency of the firm in producing and selling its product.

81) / 2 360 = 42 days 8.6 Avg Inventory (244.053.6 times in a year. .26 + 7461 .6 ( March 2011 ) Days of Inventory Holding = It means that the firm is turning its inventory of finished goods into sales 8. HMC the Inventory Turnover ratio is : Inventory Turnover Ratio = Cost of Goods Sold 3.66 = = 8.For.

• Debtors are convertible into cash over a short period and therefore they are included in current assets. • Credit is used as a marketing tool by a number of companies. • The liquidity position of the firm depends on the . • When the firm extends credit to its customers .DEBTORS TURNOVER • A firm sells goods for cash and credit. debtors are created in the firm’s account .

18 ( March 2011 ) This means the firm is able to turnover its debtors 7. HMC the Debtors Turnover ratio is : Credit Sales Debtors(AR ) Turnover = Avg Debtors Sales 3.7 times in a year.7 times Avg AR 483.For.23 = = = 7. .717.

• The relationship between sales and assets is called assets turnover.ASSETS TURNOVER • Assets are used to generate sales • A firm should manage its assets efficiently to maximize sales. .

87 ( March 2011 ) This implies that firm is producing Rs. HMC the Assets Turnover ratio is : Sales Net Assets Turnover = Net Assets 3. .717.95 times 1901.23 = = 1.95 of sales for one rupee of capital employed in net assets. 1.For.

WORKING CAPITAL TURNOVER • Sales/Net Current Assets • Net Current Assets = Current Assets – Current Liabilities • Working capital means the day to day requirements of the firm. .

04 ( March 2011 ) .For.2 times 115. HMC the Working Capital Turnover ratio is : Sales Working Capital Turnover ratio = Net Current Assets 3.717.23 = = 3.

Profitability ratios include – Gross profit margin – Net profit margin – Operating Expense ratio – Return on equity (ROE) – Return on investment (ROI) .Profitability Ratios – Profitability ratios measure management’s overall effectiveness as shown by returns generated on sales and investment.

717.57 The ratio for HMC is : = = 0.Gross Profit Margin Gross Profit GP Margin = Sales 663.9% 3.23 .179 or 17.

036 or 3.86 The ratio for HMC is : = = 0.23 .Net Profit Margin Profit after tax NP Margin = Sales 134.6% 3717.

23 ( March 2011 ) .53 The ratio for HMC is : = = 0.8% 3717.918 or 91.Operating Expense Ratio Operating Expense Operating Expense Ratio = Sales 3411.

20 or 20% 672.86 The ratio for HMC is : = = 0.81 ( March 2011 ) .Return on equity (ROE) Profit After Tax(PAT) Return on equity = Net Worth (Equity) 134.

T) Net Assests (NA) 342.2% 1901.122 or 12.9% 2617.61 (1 .32) The ratio for HMC is : = = 0.089 or 8.Return on investment (ROI) 1. RONA RONA = ( March 2011 ) (Return on Net Assets) EBIT (1 .87 ( March 2011 ) ..T) Total Assests (TA) 342.32) The ratio for HMC is : = = 0. ROTA ROTA = (Return on Total Assets) EBIT (1 .61 (1 .75 2.0.

Since. ROTA (Return on Total Assets) EBIT ROTA = Total Assests (TA) 342.61 The ratio for HMC is : = = 0. taxes are not controllable by management and firm’s opportunity for availing tax incentives differ.180 or 18. Thus. RONA (Return on Net Assets) EBIT Net Assests (NA) 342. it may be more prudent to use before-tax measures of ROI.61 The ratio for HMC is : = = 0.87 RONA = ( March 2011 ) .75 ( March 2011 ) 2.0% 1901. the before-tax ROI ratios are: 1.131 or 13.1% 2617.

036 0.175 Mar.191 0.HMC: Profitability Ratios Mar.200 . 2009 Gross profit margin 0.179 Net profit margin 0. 2011 0.178 Mar. 2010 0.092 Return on equity (ROE) 0.094 0.164 0.

Project Interpretation / Summary / Findings  Liquidity ratio analysis indicates that HMC’s liquidity is deteriorating. but the proportion of other liabilities is increasing. From the creditor’s point of view. The level of long term debts is not very excessive. .  HMC seems to depend more on outsiders funds to finance its expending activities. the trend is risky and undesirable.

. but its current assets turnover is declining. The company has marginally improved its utilizations of fixed assets.Project Interpretation / Summary / Findings  Activity ratio analysis shows HMC’s turnover ratios do not show improvement.  Profitability ratio analysis indicates that the company’s EPS and DPS are increasing.

Thank you…. P.K. and Team .

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