Finance for Business Leaders- Ratio Analysis

July 8, 2011

Financial Ratio AnalysisFinancial ratios combine different financial

parameters.They are based on the financial data drawn from

the balance sheet and the P&L account.Each ratio is studied both by itself and along with

other ratios, in order to gain critical insights.Different ratios are used to analyse the different

dimensions of a business.

TCS Financial Ratios ( 2009-10)

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TCS Financial Ratios ( 2009-10)

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Wipro Financial Ratios ( 2009-10)

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Profitability ratiosThese ratios measure how

profitable the business is with respect to sales and assets.

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Gross Profit Margin = (Sales – Cost of Goods Sold) ÷ (Sales)

Operating profit margin(Gross Profit – SG&A - R&D ) ÷ (Sales)

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Net Profit Margin = (Profit After Tax) ÷ (Sales)

Return on Assets = (Profit After Tax) ÷ (Total Assets)

Return on Investment (ROI)The return on investment is computed as under: ROI = [(PBIT) ÷ (Total Capital Employed)] = [(PBIT) ÷ (Shareholders’ Net Worth +

Borrowings)]

Activity ratiosThese ratios measure how efficiently

the assets of the business are being used.

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Inventory Turnover Ratio = (Cost of Goods Sold) ÷ (Inventory)

Average Collection Period (Debtors Turnover) = (Debtors) ÷ (Average Daily Sales)

Capital Employed Turnover = (Sales) ÷ (Capital Employed)

Fixed Assets Turnover = (Sales) ÷ (Net Fixed Assets)

Liquidity RatiosThese ratios measure to what extent

the business has funds available to meet its obligations.

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Current Ratio = (Current Assets) ÷ (Current Liabilities)

Quick Ratio or Acid Test Ratio = (Quick Assets) ÷ (Current Liabilities)Quick assets = Current assets - Inventory

Leverage ratiosThese ratios measure the extent of

financial risk assumed by the business, ie the level of debt in relation to equity.

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Debt-Equity Ratio = (Long Term Debt) ÷ (Shareholders’ Net Worth)

Total Debt to Total Capital Employed Ratio = (Total Debt) ÷ (Total Capital Employed)

Coverage ratiosThese ratios measure the availability

of funds to meet various financial obligations.

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Interest Coverage = (Profit Before Interest and Tax) ÷ (Interest

Charges)

Dividend Cover = (Profit after Tax less Preference Dividend) ÷

(Equity Dividend)

Debt Service Coverage Ratio= (Profit Before Interest and Tax) ÷ (Loan Installments + Interest)

Shareholder ReturnsThese ratios measure how well the

shareholders are being rewarded by the company.

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Return on Shareholders’ Net Worth = (Net Profit After Tax – Pref. Dividend) ÷ (Equity Shareholders’ Net Worth)

Earnings Per Share (EPS) = (Net Profit After Tax – Pref. Dividend) ÷

(Number of Equity Shares)

Dividend Per Share= (Dividends paid to Equity Shareholders) ÷

(Number of Equity Shares)

Dividend Pay-out Ratio = (Dividend per share) ÷ (Earnings per Share)

Dividend Yield = (Dividend per share) ÷ (Market Value per

share)

Earnings Yield = (Earnings per share) ÷ (Market Value per

share)

Valuation ratiosThese ratios are useful in arriving at

a realistic valuation of the business.

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Price/Earnings Ratio (P/E ratio) = (Market Value per Share) ÷ (Earnings per

share)

Book Value per Share = (Net Worth – Preference Share Capital) ÷ (No

of shares)

Market Price to Book Value = (Market Price per Share)÷ (Book Value per

share)

Thank You

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