Ratio Analysis

Identify the Better Performing

Company
Details

Revenue
Profit After Tax
Total Assets
Details

Revenue
Profit After Tax
Total Assets

ACC Ltd.
(Rs. in
Crore)

Ambuja
Cements Ltd.
(Rs. in Crore)

11,392

9,553

1,095

1,294

12,093

12,964

BPCL
(Rs. in
Crore)

Cairn India Ltd

(Rs. in Crore)

2,60,060

11,927

4,060

2,454

72,427

44,205

What are the limitations of F/Ss?

FSs tell us the financial position as on a

particular date for the period covered by the

accounts.
To know the future profitability, business
prospects, further analysis is needed
Comparison with similar business firms is
necessary for future strategy.
Further analysis of the accounting results are
needed to know the reasons for variations, to
make future forecasts.
Judging the profitability, operational efficiency,
financial soundness etc.

Let us look at an example:

Shop keeper A earns Rs 50000/-, B

earns Rs 40000/-.
Whose business is more efficient?
Can we pass a judgment with these
absolute figures? No
We need to know the capital employed.
Suppose A has employed Rs 4.00lacs
and B Rs. 3.00lacs?
Then: 500004.00L 100 = 12.5%,
400003.00L100=13.33%

Meaning of Ratio Analysis:

Ratio Analysis is the process of

determining and interpreting numerical

relationship between figures of the FSs.
A ratio may be expressed in terms of a
number or in terms of a percentage.

How ratios are 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.

Classifications of Financial
Ratios
Liquidity ratios
Leverage ratios
Activity ratios
Profitability ratios
Market Related Ratio

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
Current Assets are Short Term Use of Funds

Liquidity Ratios
Current Ratio:

current assets /current

liabilities
Current assets include cash, cash at bank,
bills receivables, current investments,
debtors (less provision for bad debts,)
inventories (stock), loans and advances and
pre-paid expenses.
The criterion to determine if an asset is current
asset or not is that the assets are meant to
be converted into cash during the operating
cycle 12 months- of the business.

Acid test or Quick ratio

It is the ratio between Quick Current

Assets and Current Liabilities.

Quick Current Assets

: Cash/Bank Balances
+ Receivables up to 6 months + Quickly
realizable securities such as Govt. Securities
or quickly marketable/quoted shares and
Bank Fixed Deposits
Quick current assets = CA-Inventory
Acid Test or Quick Ratio = Quick Current
Assets/Current Liabilities

Details

Inventories

ACC Ltd.
(Rs. in Crore)

Ambuja Cements
Ltd.
(Rs. in Crore)

1,121

933

Trade Receivables

397

231

Short Term Loans and

Advances

359

289

Current Investments

2,017

1,683

Other Current Assets

19

57

Cash and Bank Balances

503

2,341

Trade Payables

639

974

Other Current Liabilities

1,545

792

Short-term Provisions

1,080

1,076

Debtors Turnover Ratio (debtors

velocity)
DTR = Sales/Avg. Debtors
Ideally numerator should include only

credit sales
Implication : Higher debtor turnover
indicates better management of
receivables.
Average Collection Period = Avg.

Debtors/Avg. Daily Sales

Avg. Daily Sales = Sales/360

Details

Trade Receivables
Credit Sales

ACC Ltd.
(Rs. in Crore)

Ambuja Cements
Ltd.
(Rs. in Crore)

397

231

4,322

4,112

Inventory Turnover Ratio

ITR = Cost of Goods Sold/Avg. Inventories
COGS = all operating expenses plus

depreciation
Implications : Higher inventory turnover
indicates better management of inventories.
Working Capital Turnover ratio
WCTR = Net Sales/Working Capital

Details

Inventories
Cost of Goods Sold

ACC Ltd.
(Rs. in Crore)

Ambuja Cements
Ltd.
(Rs. in Crore)

1,121 & 1,133

933 & 983

1,621

646

Profitability Ratio
Profit Margin = PAT/Sales*100
Implication: net profit earned by each rupee of revenue.
Fixed Asset Turnover Ratio = Sales/Avg. Fixed Assets
Implication: Measures firms efficiency in utilizing its assets
Return on Assets = PAT/Avg. . Total Assets*100
Implication: measures profitability from given assets.
Return on Capital Employed = EBIT/(Total Assets CL)
Implication: A ratio that indicates the efficiency and profitability of

a company's capital investments.

ROCE should always be higher than the rateat whichthe company
borrows, otherwise any increase in borrowing will reduce
shareholders' earnings.

Details

ACC Ltd.
(Rs. in Crore)

Ambuja Cements
Ltd.
(Rs. in Crore)

EBITDA

1,275

2,064

Profit After Tax

1,095

1,294

Revenue

11,168

9,553

Total Assets

12,093

12,964

Fixed Assets

7,675

6,757

Return on Equity = (PAT - Preference

Dividend)/Average shareholders equity

Implication: measures profitability from
standpoint of shareholders.

Details

ACC Ltd.
(Rs. in Crore)

Ambuja Cements
Ltd.
(Rs. in Crore)

Profit After Tax

1,095

1,294

Equity

7,824

9,553

Market Ratios
Earnings Per Share: (PAT - Preference

Dividend)/No. of equity shares

Implication: Profit earned per share
Basic EPS
Diluted EPS = Adjusted NP/Adjusted no. of

shares
Price Earnings Ratio: Market Price/EPS
Implication: indicates the number of times

the earning per share is covered by its

market price.

Details
Profit After Tax (Rs. in
Crore)
Number of Equity Shares
Market Price on
21/11/2014

ACC Ltd.

Ambuja Cements
Ltd.

1,095

1,294

18.77 crore

15.45 crore

Rs. 1,446

Rs. 221

Dividend Per Share

Payout Ratio: DPS/EPS
Implication: Proportion of earnings paid as

dividend.
Dividend Yield Ratio = DPS/MPS
Implication: % returns that Investor gets at

that market price.

Book Value per Share = Net worth/No. of

Shares

Details
Total Shareholders
Funds
Number of Equity
Shares
Dividend

ACC Ltd.

Ambuja Cements
Ltd.

7,824

9,485

18.77 crore of Rs.

10 each

15.45 crore of Rs. 2

each

50 percent

120 percent

Solvency Ratios
Debt Equity Ratio = Debt/Equity
Implication: Proportion of debt for every unit of

equity.
Proprietary Ratio = Shareholders funds/Total

Tangible Assets
Implication: Relationship between owners funds
invested in assets.
Fixed Asset Ratio = Fixed Assets/Long term funds
Implication: Utilization of long term funds

Details

Total Shareholders Funds

Long term Borrowings

ACC Ltd.
(Rs. in Crore)

Ambuja Cements
Ltd.
(Rs. in Crore)

7,824

9,485

635

Interest Coverage Ratio: EBIT/Interest

Charges
Implication: very important in lenders point
of view, it indicates whether the business
would earn sufficient profits to pay
periodical interest charges.
Debt Service Coverage Ratio:

EBIT/Interest+Principal payment
Implication: it indicates whether the
business would earn sufficient profits to pay
periodical interest charges along with