Ratio Analysis

Dr. Ajit Joshi

Chartered Accountant
Associate professor – Finance
Prin.L.N.Welingkar Institute of
Management Development and Research

Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool

An Example…

Anushka Ltd Deepika Ltd

Who do you like? Profits (In Crs.) 50 60

Anushka Ltd Deepika Ltd

Profits (In Crs.) 50 60
Now…?
Sales (In Crs.) 400 750
Net Margin 13% 8%

Anushka Ltd Deepika Ltd

Yet
NEVER GO BY
Profits (In FACE
Crs.)
Sales (In Crs.)
VALUE…50
400
60
750
Again…? i.e. A Capital
Single (In Crs.)Amount
ROCE
500
10%
300
20%
Financial Statements – ANALYTICAL PRESENTATION
Sales
Less: Cost of Goods Sold
Gross Margin
Less: Administrative, Financial & Selling Expenses
Earnings before Interest Taxes, Depreciation and Amortizations
Less: Depreciation and Amortizations
Earnings before Interest and taxes
Less: Interest
Earnings before Taxes
Less: taxes
Profit after Tax/Net Income
Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool
Understanding Ratio components
• Profitability Ratios
• Liquidity Indicator Ratios
• Capital Structuring Ratios
• Return on Investment Ratios
• Turnover Ratios
• Stock Market Ratios
• DU PONT ANALYSIS

THERE IS NO STANDARD BENCHMARK FOR EACH RATIO.

IT ALL DEPENDS UPON INDUSTRY AND PEERS
Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool
Profitability Ratios
What is the Core efficiency of the business? What
proportion of sales covers basic expenditure to
provide Goods and Services

What is the overall profitability of the business? What

proportion of sales end up as addition to Equity?

For each share held, what is the shareholder

earning? Useful for futuristic projections

What is the proportion of each expense in overall

sales? Useful for comparative and trend analysis.
Measurement of independent functional efficiency.

Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool

Liquidity Ratios
Basic barometer of Liquidity

How can the entity handle Critical situation?

Entity’s response to crisis situation

Entity’s regular ability to service the

outside obligations

How much of the entity’s profits are

realized in cash?
Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool
Short –Term Investment Utilization Ratios
•

Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool

Capital Structuring: Ratios and Importance

• Owned funds do not have fixed rate of return, but get residual return
• Return on the borrowed funds is contractually fixed.
• Thus, if the borrowed funds can be utilized more efficiently than the rate payable to
them, it is beneficial to the shareholders.
• Conversely, if the rate at which they are invested falls short of rate payable to them, then
it erodes shareholders’ benefits and eventually, their equity.
Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool
Return on Investment Ratios

In Indian Context, ROIC is also called as Return on Capital Employed, i.e. ROCE.
Return on Shareholders’ Equity is also termed as Return on Net Worth, i.e.
RONW. Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool
Utilization Ratios

How best is entity able to utilize the potential created by its Long-Term planning?
Are the Fixed Assets utilized efficiently? Are the total assets able to create sales?
Is the equity used to generate more turnover?
Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool
Stock market Ratios
•

Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool

 DUPONT ANALYSIS…

Net
Return on Total Profit Profit Margin
Assets

Total
Sales
Assets

Asset Turnover
Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool
ILLUSTRATION…

FY 16-17 Peer FY 15-16

Net Profit 14 38 13.5
Total Sales 115 315 108
Total Assets 105 325 102

Net Profit Margin 12.17% 12.06% 12.50%

Asset Turnover Ratio 109.52% 96.92% 105.88%
Return on Total Funds 13.33% 11.69% 13.24%

Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool

Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool
Thank You!

Prepared by: Dr. Ajit Joshi, Chartered Accountant, WeSchool