WHY RATIO ANALYSIS?
Ratio analysis is a mechanism of gaining
insight.
1. Company's capital allocation
2. Liquidity
3. Operational efficiency
4. Profitability
By studying financial statements
WHY RATIO ANALYSIS?
It shows how a company is performing
over time.
Ratio Analysis can be used to do a peer-
to-peer comparison within the same
industry or sector.
Allow investors to evaluate the historical
track record using various metrics
USE OF RATIOS & METRICS
IN FOOTBALL
SHOTS TO GOAL RATIO
GOALS TO APPEARANCES RATIO
SHOTS ON TARGET TO GOALS
MINS PER GOAL RATIO
MINS PER ASSIST
PASSES COMPLETION RATE
TACKLES WON
SHOT ACCURACY
DRIBBLES COMPLETION RATE
POSSESSION
DISTANCE COVERED PER GAME
NUMBER OF INTERCEPTIONS PER GAME
USE OF RATIOS & METRICS
IN CRICKET
STRIKE RATE
RUN RATE
BATTING AVERAGE
ECONOMY RATE
BOWLING AVERAGE
MAIDEN OVERS
NET RUN RATE
INNINGS PER CENTURY
RUNS PER WICKET RATIO AVERAGE
BOWLING SPEED
WICKETS TAKE PER INNINGS
CATCHES CONVERSION RATE
USE OF RATIOS & METRICS
IN TENNIS
FIRST SERVE IN %
FIRST SERVE POINTS WON %
SECOND SERVE POINTS WON %
NET POINTS WON
WIN RATE %
SERVICE GAMES WON
AVERAGE SERVE SPEED
UPSETS SCORED %
GAMES DOMINANCE RATIO
SETS TO MATCHES OVER-PERFORMING RATIO
RETURN TO SERVICE POINTS RATIO
SERVE RATING
CLASSES OF RATIOS
ACTIVITY RATIOS LIQUIDITY RATIOS
INVENTORY TURNOVER INVENTORY DAYS CURRENT RATIO
RECEIVABLE TURNOVER RECEIVABLE DAYS QUICK RATIO/ACID TEST
PAYABLE TURNOVER CASH CONVERSION
PAYABLES DAYS CYCLE CASH RATIO
WORKING CAPITAL TURNOVER ASSET
TURNOVER
SOLVENCY RATIOS PROFITABILITY & CAPITAL
ALLOCATION RATIOS
DEBT TO EQUITY RATIO
DEBT TO CAPITAL GROSS PROFIT MARGIN OPERATING PROFIT
INTEREST COVERAGE RATIO MARGIN
FINANCIAL LEVERAGE RATIO NET PROFIT MARGIN
DEBT TO EBITDA RETURN ON ASSETS
RETURN ON EQUITY
RETURN ON CAPITAL EMPLOYED
CFO/EBITDA
CFO to EBITDA reflects whether cash operating profit
is converting into real cash or not
CFO/EBITDA
~70-75% incase of B2C Business
~60-70% incase of B2B Business
cash flows.
-
↓ -
Tax capex
-
-
Reinvestment.
-
(capenwa]
- free cash flow
&
free cash flow.
L -
Farm
--
Eq vity -
(F(f) (F(FE)
*
DebtEq+ pref
+
Ea
Net
--
profit -
XX
(1) Depreciation
Prown
1
(4) x in we
() Auterest
CO
-capex
-
x
--
free cash flow
to firm
-
FCFE
--
Fcft XXX
(xxx)
-3 Interest
raised. XXX
[+) Debt
Repaid]
-Neb-
fafe **
-
FREE CASH FLOW
Free cash flow means the cash that is left over
after a company pays for its operating expenses
FREE CASH and capital expenditures (Capex) like purchasing
new machinery, equipment, land & building, etc.
FLOW and satisfying all its working capital needs.
Whatever cash that is left with you after you spend
your salary or income is known as Free cash flow
that you can use for different purposes
The more FCF a company has, the better it
is. Businesses which generate higher FCF
can:
Give higher dividends Me
FREE CASH
re
FLOW Build Funds for acquisitions or Capex.
Do Share Buybacks re
⑧
Reinvest in the business when opportunity
C for future
arises with lesser dependence on debt.
growe
Mrazencen ROD a
capex?
-
As
MA
-
-
Research Development.
A
POL --
500
2023350x80%
-
280 - -
-
2022 300 x60% -
180
-
-
2021 280 x 40%-112
-
2020250 x 20% - 50-
->
2019 ⑱x0%- 0
⑳
TCS and other Indian companies use this to
FREE CASH calculate free cash flow
FLOW TO
FIRM -
Cash flow from operations - Capex
FREE CASH
FLOW TO
FIRM
Free Cash Flow to Firm
FCFF means the ability of the business to
produce cash after deducting all its capital
TWO TYPES expenditures which is calculated as CFO -
Capex.
OF FREE
CASH FLOW
E Free Cash Flow to Equity
Free cash flow to equity (FCFE) is the amount of
cash a business generates that is available to be
distributed to the company’s equity shareholders
as dividends or stock buybacks after all expenses,
TWO TYPES reinvestments, and debt repayments.
OF FREE It is also known as Levered Free Cash Flow.
CASH FLOW
It is calculated as follows:
FCFE = Cash from Operating Activities – Capital
-e
Expenditures + Net Debt Issued (Proceeds from
- -
borrowings-Repayment of borrowings)
- -
Companies generating high ROCE.
WHICH FIRMS
HAVE HIGH
Asset Light Businesses
-
As
FREE CASH Eg:- FMCG, Platforms and IT Services
FLOW?
-
-
Companies with less capex needs
- -
Companies doing high capex.
WHICH
-
Manufacturing businesses.
COMPANIES -
WILL HAVE Companies with very high working capital
LOW FREE -> B2G-
needs.
CASH FLOW? B2G Businesses or infra companies.
-
Google
-
zrobe
Herald
Gor
re
·
I
Got
goobe
Get
ACTIVITY RATIOS
An activity ratio is a financial metric that shows
how efficiently a company is leveraging the assets
on its balance sheet, to generate revenues and
cash.
Activity ratios are also known as efficiency ratios
which allow the analysts to get an overview of how
well the company handles inventory
management.
Activity ratios can be used to do a comparison
between two different businesses within the
same sector/industry, or they may be used to
monitor a single company's fiscal health over time.
Types of Activity Ratios:
1) Inventory Turnover 5) Payable Turnover
2) Inventory Days 6) Payable Days
3) Receivable Turnover 7) Working Capital Turnover
4) Receivable Days 8) Asset Turnover
ACTIVITY RATIOS
INVENTORY TURNOVER RATIO
Inventory turnover indicates the rate at
which a company sells and replaces its
stock of goods during a particular period.
Inventory turnover helps businesses make
better pricing, manufacturing, marketing, 300
-
-
and purchasing decisions.
Inventory turnover indicates how efficiently
S
the company is utilising its inventory to
generate sales.
- 6.5
I
INVENTORY COGS
=
3
TURNOVER RATIO AVERAGE INVENTORY
OR 365 -
INVENTORY
=
SALES -
TURNOVER RATIO AVERAGE INVENTORY 10
INVENTORY DAYS
Inventory days indicates the duration of
time a company’s cash is tied up in its
inventory
INVENTORY DAYS =
Turner.
NO. OF DAYS IN A PERIOD
INVENTORY
OR
AVERAGE = BEGINNING INVENTORY + ENDING INVENTORY
INVENTORY 2
II
⑧
⑧
0
-
a
RECEIVABLE TURNOVER
The receivables turnover ratio is used to
quantify a company's effectiveness in
collecting its accounts receivable or the
money owed by customers or clients.
Receivable turnover ratio measures how
well a company uses and manages the
credit it extends to customers and how
quickly it is collected or is paid.
RECEIVABLE =
⑧
SALES
TURNOVER AVERAGE RECEIVABLES
BEGINNING RECEIVABLES + ENDING RECEIVABLES
AVERAGE =
+
RECEIVABLES 2
X
X X
X
X
RECEIVABLE DAYS
Receivables days is a measure of the
average number of days that it takes a
company to collect payment for a sale.
By quickly turning sales into cash, a
company has a chance to put the cash to
use again more quickly.
I extor days
-
RECEIVABLE NO OF DAYS IN A PERIOD
=
DAYS RECEIVABLE TURNOVER
- O
-AraberI I
O
--
~
-
-
-
-
PAYABLE TURNOVER
The payable turnover ratio is a measure
used to quantify the rate at which a
company pays off its suppliers.
The payable turnover ratio shows how
efficient a company is at paying its
suppliers and short-term debts.
-> credit
PAYABLE =
0
COGS purch-
TURNOVER AVERAGE PAYABLES
Ge Payable Payable
BEGINNING RECEIVABLES + ENDING RECEIVABLES
-- -
AVERAGE = - 2 -
PAYABLES
PAYABLE DAYS
40 days -
Payable day is a measure of the average
number of days that it takes a company to
pay for a Credit Purchase.
PAYABLE NO OF DAYS IN A PERIOD
=
DAYS PAYABLE TURNOVER
⑦ ⑲ 30
CRR
-- -
- ⑧
0 days
⑳
(3 13
WORKING CAPITAL TURNOVER
Measures how efficiently a company is using its
-
working capital to support sales and growth.
Relationship between the funds used to finance
a company's operations and the revenues a
company generates to continue operations and
turn a profit.
WORKING
SALES
CAPITAL =
TURNOVER AVERAGE WORKING
CAPITAL
WORKING
= CURRENT ASSETS - CURRENT LIABILITIES
CAPITAL
CASH CONVERSION CYCLE
The cash conversion cycle is a metric that
expresses the time (measured in days) it takes
for a company to convert its investments in
Opay
inventory and other resources into cash flows
from sales.
The cash conversion cycle is a metric that
expresses the length of time (in days) that it
takes for a company to convert its investments
in inventory and other resources into cash flows
from sales.
Inv+Debtor-Payable
CASH
INVENTORY DAYS + RECEIVABLE
CONVERSION =
DAYS - PAYABLES DAYS
CYCLE
ronet at sit-dot at gaya
Radico Khattan.
--
⑳ 0
-
Valuation Be Analysis.
+
TOTAL ASSETS TURNOVER
4; ->
=
Y
Measures the value of a company's sales or
=
Reinvestment
-
revenues relative to the value of its assets.
Indicator of the efficiency with which a
company is using its total assets to generate
⑭
revenue.
TOTAL 0
SALES
0
ASSETS =
AVERAGE TOTAL ASSETS
TURNOVER
-
⑪ -
*
*
*
#
* I * *
fixed -
- u -
en - -
Dept
-
Net -
--
-
witt-
50.
Reinest 20%
rate
24%25%
25%
EBH(1 - 1000
(->Reinvest (250)
(25) -
f
728
--
750
-
FIXED ASSETS TURNOVER
Measure operating performance. It compares
net sales (income statement) to fixed assets
(balance sheet) and measures a company's
ability to generate net sales from its fixed-asset
investments, namely property, plant, and
equipment (PP&E).
The fixed asset turnover ratio reveals how
efficient a company is at generating sales from
its existing fixed assets.
FIXED
SALES
ASSET =
AVERAGE FIXED ASSETS
TURNOVER
--
groblock 0I
-
10000
-> Accumulated 16000)
Depreciation -
fixedand
--
-
wet
- 9000
-
1000
GROSS BLOCK TURNOVER
How much sales per unit of gross fixed assets is
the business generating?
The gross block is the value of an asset at cost.
The depreciation accrued on the asset is not
accounted for in the Gross Block.
The asset value on reducing the Gross Block
with the accrued depreciation is called the Net
Block.
GROSS
SALES
BLOCK =
GROSS BLOCK
TURNOVER
--
laurns labs
-
As 0
-
Se 0
->
-Brownfield -
0 geenfield
Growth
-
Maintainence
--
continuity
-
Capex
-Backward
Intergration - Forward
Intergration
