Session 1- Financial Statement Analysis(Part-2)

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Types of Ratio…

• Efficiency Ratio
• Profitability Ratio
• Liquidity Ratio
• Leverage Ratio

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Efficiency Ratios…
• Total Asset Turnover
• Fixed Asset Turnover (in times)
• Receivable Turnover Ratio (in times)
• Average Collection period (in days)
• Payable turnover ratio (in times)
• Average payables period (in days)
• Inventory turnover ratio (in times)
• Average inventories period (in days)

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Efficiency ratio formulae…
• Total Asset Turnover Ratio= Net Sales/Total Assets
• Fixed Asset turnover Ratio= Net Sales/Fixed Assets
• Receivable turnover ratio= Net Credit Sales/Average Receivables
• Average Collection Period (days)= (Average Debtor/Total Credit Sales)*365
• Payable Turnover Ratio (times) = Total purchase/ Average Accounts payable
• Average payable Period (days)= (Average Creditors/Total Credit Purchase)*365
• Inventory Turnover Ratio (in times)= Cost of Goods Sold/Average Inventory
• Average Inventory period (days)= 365/Inventory turnover ratio

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Profitability Ratios…
• Gross Profit Margin
• EBITDA Margin
• EBIT Margin
• PBT Margin
• PAT Margin
• ROE
• ROA
• ROCE

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Profitability Ratios formulae…
• Gross Profit Margin=Gross Profit/Revenue
• EBITDA Margin= EBITDA/Net Sales
• EBIT Margin=EBIT/Total Sales
• PBT Margin= PBT/Sales
• PAT Margin= PAT/Sales
• ROE= Net Income/Shareholders’ Equity
• ROCE=EBIT/Capital Employed

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Liquidity Ratios…
• Current Ratio
• Quick/Acid Test Ratio

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Liquidity Ratios formulae…
• Current Ratio= Current Assets/Current Liabilities

• Quick Ratio= (Current Assets – Inventory)/Current Liabilities

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Leverage Ratios…
• Debt/Equity Ratio
• Overall Gearing Ratio
• Interest Coverage Ratio
• Debt Service Coverage Ratio (DSCR)

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Leverage Ratios formulae….
• Debt/Equity Ratio= Total Debt/Shareholders equity

• Capital Gearing Ratio= Common Stockholders’ Equity/Fixed cost bearing fund

• Interest Coverage Ratio= EBIT/Total Interest payable for a period

• Debt Service Coverage Ratio (DSCR)= Net Operating Income/Total Debt Service

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Some important points for analyst….
• Non-operating/Extraordinary/prior period income & expenses
• Change in accounting policy
• Intangible Assets
• Capital Work in progress/Capital Expenditure in initial stage of operation
• Quasi Equity Debt/Convertible Debt
• Off balance sheet items

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Uses of Ratio Analysis…..

• Quick Analysis of historical performance

• Peer to peer analysis
• Used for financial modelling or forecasting future earnings and cash flow
• Used for investment decision making process
• Used for evaluation of management’s performance

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Limitations of Ratio Analysis….
• There must be two sets of data to enhance the usefulness of ratio analysis
• Ratios considers only quantitative figure but can not analyse the qualitative factor
• Inflation cause distortion of data
• Relative comparison of a firms ratio with another firm is difficult due to difference in
accounting policy followed by companies
• Difficult to analyse when companies operate in different products and geographies

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Trailing & Forward Ratios…
Accounting Periods:
1. Last Financial Year (LFY):
A fiscal year is a 12 month accounting cycle. In India it is from April of current
year to March of next year…April-March.
2. Trailing Twelve Months (TTM):
This refers to firm’s most recent twelve months performance…For example if
analysis is done at Oct2015, then we take data for Q1 & Q2 for FY 2015-16 & Q3
& Q4 of FY 2014-15.
3. Leading Twelve Month (LTM):
LTM looks at financials over the next twelve months from a designated point in time. It
is for companies with a new product Line, high growth scenario etc.

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Some Valuation Ratios….
● Price/Earning Ratio(P/E)
Current Price per Share/Expected Earning per share
● Price/Earning to Growth Ratio (PEG)
(Price/Earning)/Earning Growth Rate
Illustration on PEG.xlsx
● Price to Book Ratio (P/B)
Share Price (Y0)/Book value per share
● Price to Sales Ratio (P/S)
Stock price/Expected Sales per share
● EV/EBITDA
Enterprise Value/EBITDA
● Price/Cash Flow Ratio
Current Price per share/Expected Cash Flow per share
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Thank You