Learning Value Investing

Investment Valuation Ratios

2014-09-03T11:07:00.001+05:30

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Series : Ratio Analysis (24 th Post)

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Is the share price of the company overvalued or is it undervalued ?

Or How to Estimate the potential of an attractive investment ?

This ratio helps us to understand attractiveness of a potential or existing investment and get an idea of its valuation.

The ratios covered under this are:

1. Investment Valuation Ratios: Price/Book Value Ratio

The Price / Book Value Ratio Helps us to compare the share price of a company with its Book Value & helps to analyze whether the share price is Overvalued or undervalued,

Formula: Price/Book Value Ratio = Stock Price Per Share / Book Value

2. Investment Valuation Ratios: Price/Cash Flow Ratio

The Price /Cash Flow Ration Helps us to compare the share price of a company to the Cash flow it generates,This is important for investors to evaluate the investment attarctiveness. Or the amount of cash flow it generates per share

Formula :Price/Cash Flow Ratio= Price per share / (Cash flow / Shares outstanding)

3. Investment Valuation Ratios: Price/Earnings Ratio (P/E)

The Price / Earnings ratio or P/E Ratio helps us to understand how much investors are ready to pay for each rupee of profit .For example if an investor buys a stock with a P/E ratio of 15 he is willing to pay 15 times the Earnings per share. A high P/E ratio tells some investors that the stock is overvalued, and a low P/E ratio shows it’s undervalued.

This is one of the most popular of Ratios ,this ratio is further explained in detail with an easy way to interpret or analyse a company How to Analyse Stocks From PE Ratios

Formula: Stock Price Per Share / Earnings Per Share (EPS)

4. Investment Valuation Ratios: Price/Earnings To Growth Ratio

What does the PEG ratio stand for and how will it help us value stocks? The PEG ratio is simply this: the price to earnings ratio (P/E ratio) divided by estimated future earnings growth. The future growth generally uses the 5-year average figure (but you can also use the 3-year figure, your own forecast, or the “earnings guidance” provided by the company). Using this ratio we can estimate:

1. XYZ has a PE of 72.3 and expected growth of 77% per year. The PEG ratio is 0.94.

2. ABC has a PE of 11.04 and future growth expectations of 35% annually. The PEG ratio is 0.32.

3. FGH has a PE of 166 and future growth expectations of 30% annually. The PEG ratio is 5.53.

if the PEG ratio is 1, it is fairly valued. If it is below 1, it is undervalued, and if the number is above 1, it is overvalued.

Formula: PEG Ratio = (P/E ratio) / (earnings growth)

5. Investment Valuation Ratios: Price/Sales Ratio

The Price / Sales ratio or P/S Ratio is similar to a P/E ratio accept for one difference of Sales per share instead of Earnings per share this helps us to understand how much investors are ready to pay for each rupee of Sale. Or The Price/Sales ratio, also called the "PSR", is a company's stock price divided by its annual sales per share

Generally Price/Sales ratio is by assuming that a PSR of 1.0 is right for all companies, and then hunting for "bargains" selling at a PSR of 0.5 or less.

Formula: P/S Ratio = Stock Price Per share / Net Sales (Revenues) Per share

6. Investment Valuation Ratios: Dividend Yield

Dividend yield is the amount that the company pays to its share holders annually for the investments made; this ratio is expressed in percentage & indicated the attractiveness of investment in a company. A good investment opportunity is found in good companies giving increasing or consistent dividend yield over the years.

Formula: Annual Dividend per share / Stock Price per Share

This Valuation ratio’s can be found online on the website

Example : Go to http://www.moneycontrol.com/financials/hdfcbank/ratios/HDF01 under the Tab “ Investment Valuation Ratios ”

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In my quest for learning value investing I came across Ratio Analysis & the importance of these ratios in analyzing a stock & comparing with its peers , would like to share this with the community

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Top 6 Ratios for analyzing a stock.

Cash Flow Indicator Ratios: Dividend Payout Ratio

2014-08-24T18:38:00.003+05:30

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Series : Ratio Analysis (23 th Post)

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Is the company paying good dividends ?

This ratio helps us to understand the dividend paid by a company to its earnings,this relation between dividends and earnings is important since the remaining will be used for reinvestment and growth of the company.

Ideally Investors look for Divident Pay Out Ratio to be consistent or increasing over the years.

Formula: Dividend Pay Out Ratio:%= Dividends per common Share / Earnings Per share

Example : Go to http://www.moneycontrol.com/financials/hdfcbank/ratios/HDF01

under the Tab “ Cash Flow Indicator Ratios ”

Next Post on Ratio Analysis: Investment Valuation Ratios

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In my quest for learning value investing I came across Ratio Analysis & the importance of these ratios in analyzing a stock these ratios are easy to understand & give very good insights into a companies’ operations and its growth , would like to share this with the community

Comments / Improvements and points worth considering are welcome

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Cash Flow Indicator Ratios: Cash Flow Coverage Ratio

2014-08-24T18:34:00.001+05:30

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Series : Ratio Analysis (22 th Post)
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Is the company generating enough cash to meet its Liabilities & fund operating cost ?

This ratio helps us to understand the ability of the company Operating cash flow(Cash flow generated from main operations ) to meet its obligations which includes Liabilities and to keep the business funded.

Ideally larger the ratio the better.

Formula: Short Term Debt Coverage: Operatinng Cash Flow/Short Term Debt

Capital Expenditure Coverage=Operating Cash Flow/ Capital Expenditure

Divident Coverage=Operating Cash flow/Cash Dividents

Next Post on Ratio Analysis: Cash Flow Indicator Ratios: Dividend Payout Ratio

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In my quest for learning value investing I came across Ratio Analysis & the importance of these ratios in analyzing a stock these ratios are easy to understand & give very good insights into a companys operations and its growth , would like to share this with the community

Comments / Improvements and points worth considering are welcome

Related Articles

· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

· Liquidity Measurement Ratios Quick Ratio

· Liquidity Measurement Ratios Cash Ratio

· Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Cash Flow Indicator Ratios: Free Cash Flow/Operating Cash Flow Ratio

2014-08-21T18:08:00.002+05:30

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Series : Ratio Analysis (22 th Post)
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Is the company generating enough Free cash ?

This ratio helps us to understand how much Free cash (Cash remaining after deducting Expenditure),the company is generating ,The Free Cash Flow/Operating Cash flow measure the relationship between Free cash & Operating Cash.

Free cash flow is defined as Operating Cash Flow minus the capital expenditures,This free cash is what a company use for expansion,acquisition,financial stability or to use this funds when the markets are not doing good.

The Higher the percentage of this Ratio the better the financial strength of the company.

Formula: FCF /OCF Ratio=Free Cash Flow(Operating Cash Flow- Capital Expenditure) / Operating Cash flow

Next Post on Ratio Analysis: Cash Flow Indicator Ratios: Cash Flow Coverage Ratio

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· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

· Liquidity Measurement Ratios Quick Ratio

· Liquidity Measurement Ratios Cash Ratio

· Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Cash Flow Indicator Ratios : Operating Cash Flow/Sales Ratio

2014-08-21T18:03:00.003+05:30

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Series : Ratio Analysis (21 th Post)
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Is the company generating enough cash from its sales ?

This ratio helps us to understand the Cash being generated from sales or its ability to generate cash from its sales, usually expressed as a percentage.

The company’s sales growth should be in parallel with the Cash flow of the company if it’s not then there is change in terms of sale and Inefficient or ineffective management.

A high number means the firm will be able to grow because it has sufficient cash flow to finance additional production, a low number indicates the opposite.

The statement of cash flows has three distinct sections, each of which relates to an aspect of a company's cash flow activities - operations, investing and financing. In this ratio, we use the figure for operating cash flow

Formula: Operating cash flow / Sales Ratio = Operating Cash Flows / Sales Revenue

Next Post on Ratio Analysis: Cash Flow Indicator Ratios: Free Cash Flow/Operating Cash Flow Ratio

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In my quest for learning value investing I came across this interesting article and thought would like to share this with the community

Comments / Improvements and points worth considering are welcome

Related Articles

· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

· Liquidity Measurement Ratios Quick Ratio

· Liquidity Measurement Ratios Cash Ratio

· Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Cash Flow Indicator Ratios

2014-08-12T13:21:00.004+05:30

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Series : Ratio Analysis (20 th Post)

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Q How solvent, liquid, and viable the company is ?

This ratio helps us to understand the Cash being generated how much is generated These ratios can give users another look at the financial health and performance of a company.

Cash inflows usually arise from one of three activities – financing, operations or investing .In accounting using non cash based transactions companies that appear to be profitable are actually at a financial risk if they are generating little cash ,

Example if a company does lots of sales on credit they will look profitable but they are yet to receive the cash from the sale’s. Using this Ratios helps to highlight this Details about a company's performance.

This ratio uses cash flow along with other key metrics to determine how much cash the company is generating from the sales ,the Cash generated is free and clear and ready to meet company's obligations.

The Cash flow Ratios that will be defined in following posts are

1.Operating Cash Flow/ Sales Ratio

2.Free Cash Flow/ Operating Cash Flow Ratio

3 Cash Flow Coverage Ratio

Next Post on Ratio Analysis: Cash Flow Indicator Ratios : Operating Cash Flow/Sales Ratio

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· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

· Liquidity Measurement Ratios Quick Ratio

· Liquidity Measurement Ratios Cash Ratio

Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Operating Performance Ratios : Cash Conversion Cycle ( Operating Cycle )

2014-08-12T13:16:00.000+05:30

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Series : Ratio Analysis (19 th Post)
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Q Is the company generating enough cash on time , from the sales of its inventory ?

This Cash Conversion Cycle or Operating Cycle is an indicator in number of days a company takes to receive its cash from the accounts receivable from the time purchase of its inventory.

Less Number of days means more Cash is available quickly for additional purchases or repayment of its loans.

Formula: Operating Cycle Days or Cash Conversion Cycle (CCC) = DIO + DSO – DPO

DIO=Days Inventory Outstanding

DSO=Days Sales Outstanding

DPO=Days Payable Outstanding

DIO is calculated as :

1. Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure;

2. Calculating the average inventory figure by adding the year's beginning (previous yearend amount) and ending inventory figure (both are in the balance sheet) and dividing by 2 to obtain an average amount of inventory for any given year; and

3. Dividing the average inventory figure by the cost of sales per day figure.

DSO is calculated as :

Dividing net sales (income statement) by 365 to get net sales per day figure;
Calculating the average accounts receivable figure by adding the year's beginning (previous yearend amount) and ending accounts receivable amount (both figures are in the balance sheet) and dividing by 2 to obtain an average amount of accounts receivable for any given year; and
Dividing the average accounts receivable figure by the net sales per day figure.

DPO is calculated as :

Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure;
Calculating the average accounts payable figure by adding the year's beginning (previous yearend amount) and ending accounts payable amount (both figures are in the balance sheet), and dividing by 2 to get an average accounts payable amount for any given year; and

Dividing the average accounts payable figure by the cost of sales per day figure.

Next Post on Ratio Analysis: Cash Flow Indicator Ratios

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· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

· Liquidity Measurement Ratios Quick Ratio

· Liquidity Measurement Ratios Cash Ratio

Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Operating Performance Ratios: Sales/Revenue Per Employee

2014-08-11T12:06:00.001+05:30

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Series : Ratio Analysis (18 th Post)

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This Ratio helps us to understand the Sales generated by single employee,This is the measure of performance of human resource of a company ,It also indicates how effectively a company is utilizing its Human Resource.

Higher the Ratio the higher the revenue per employee.Note the Revenue per employee will vary from Industry to Industry according to number of employees.Revenues will be less in Labour Intensive Companies on the other hand in Hight Tech companies where the labour is less the revenue is more

For analytical purposes this figure should be compared with the historical data to see any improvement or deterioration. It should also be compared with the other similar companies operating in the same industry. This comparison over time and across industry will give usefully insights into the productivity of personnel.

Formula: Sales Revenue Per Employee = Revenue / Number of Employees (Average)

Next Post on Ratio Analysis: Operating Performance Ratios: Operating Cycle

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Liquidity Measurement Ratios Quick Ratio

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Operating Performance Ratios : Fixed-Asset Turnover

2014-08-11T12:01:00.000+05:30

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Series : Ratio Analysis (17 th Post)

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This Ratio helps us to understand the productivity of a Fixed Assets (Property Plant And Equipments ) in Generating Revenue for a Company.This Ratio is designed to reflect Companys efficiency in managing this assets.

A high asset turnover ratio is desirable as compared to a low ratio since the former is indicative of better operating performance. A higher asset turnover ratio symbolizes greater shareholder wealth.

Total assets include current assets, fixed assets and intangible assets such as licenses and goodwill. Fixed assets entail huge initial investments that are undertaken with the hope of maximizing revenue. Hence, the fixed-asset turnover ratio is a better measure of operating performance as compared to the total asset turnover ratio.

The amount of capital investment varies depending on the type of business. For instance, oil production and refining and the telecommunications industry is highly capital intensive while the restaurant business or for that matter, agriculture, is labor intensive. The proportion of labor costs in relation to the capital required, for producing a given volume of goods and services, is used to determine whether the process is labor intensive or capital intensive.

Fixed asset turnover ratio is more relevant for capital intensive industries since the size of the fixed asset base depends on whether the process of production is labor intensive or capital intensive. In general, companies that are labor intensive have a higher fixed asset turnover ratio as compared to companies that are capital intensive. Hence, one should compare firms within the same industry rather than comparing them across industries to get a true picture of a firm's relative operating performance. One should also compare a firm's past performance with the current performance for a better understanding of the company's prospects.

Formula: Fixed Asset TurnOver Ratio % = Revenue / Property,Plant & Equipment
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Next Post on Ratio Analysis: Operating Performance Ratios: Sales/Revenue Per Employee

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· Liquidity Measurement Ratios Cash Ratio

· Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Operating Performance Ratios

2014-08-11T11:55:00.000+05:30

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Series : Ratio Analysis (16 th Post)

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This Ratio helps us to understand the how efficiently a company turns its assets into revenue & how effectively it converts its sales into cash.

These Ratios helps us to understand how efficiently & effectively the company is using its resources to generate more sales and increase share holders value.

The various Operating performance Ratios that we will be elaborating in the subsequent sections are

1. Fixed Asset Turn Over Ratio ,

2.Sales /Revenue Per Employee,

3.Operating Cycle.

Next Post on Ratio Analysis: Operating Performance Ratios: Fixed-Asset Turnover

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· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

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· Liquidity Measurement Ratios Cash Ratio

· Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Debt Ratios: Cash Flow To Debt Ratio

2014-08-06T15:06:00.004+05:30

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Series : Ratio Analysis (15 th Post)
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This Ratio helps us to understand the how easily a company can pay its Debt from the Operating Cash Flow its generates or ratio provides an indication of a companys ability to cover total debt with its yearly cash flow from Operations.

A low Cash Flow to debt ratio means company is not able to available to meet its debt payments. The Higher the percentage Ratio the better the companys ability to carry out its total debt.

Formula: Cash Flow to Debt Ratio % = Operating Cash Flow / Total Debt

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Next Post on Ratio Analysis: Operating Performance Ratios

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· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

· Liquidity Measurement Ratios Quick Ratio

· Liquidity Measurement Ratios Cash Ratio

· Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Debt Ratios: Interest Coverage Ratio

2014-08-05T18:22:00.001+05:30

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Series : Ratio Analysis (14 th Post)
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This Ratio helps us to understand the how easily a company can pay its interest on the Outstanding Debt .
The Lower the Ratio,The higher the company’s debt burden. , A low Interest coverage ratio means less interest are available to meet its interest payments. When a company’s ratio is less then 1.5 the company is questionable for its ability to pay the interest.
A ratio greater then 1.5 indicates company is in better health and more likey to meet its financial obligations.

Formula: Interest Coverage Ratio % = Earnings before interest & Expenses (EBIT) / Interest Expense

Next Post on Ratio Analysis: Debt Ratios : Cash Flow To Debt Ratio

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Debt Ratios: Capitalizing Ratios

2014-08-04T14:12:00.004+05:30

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Series : Ratio Analysis (13 th Post)

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This Ratio helps us to understand the Long term Debt or Liabilities to support companies operations and growth over a time or The capitalization ratio reflects the extent to which a company is operating on its equity.

The companies with high capitalization ratio are considered to be risky because they are at a risk if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.

A high capitalization ratio is not always bad, however, higher financial leverage can increase the return on a shareholder’s investment because usually there are tax advantages associated with the borrowings.

Formula: Capitalization Ratio % = Long Term Debt / ( Long Term Debt + Shareholder Equity )

Next Post on Ratio Analysis: Debt Ratios : Interest Coverage Ratio

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· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

· Liquidity Measurement Ratios Quick Ratio

· Liquidity Measurement Ratios Cash Ratio

· Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Debt Ratios:Debt Equity Ratios

2014-08-02T14:24:00.006+05:30

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Series : Ratio Analysis (12 th Post)
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This Ratio helps us to understand the relationship between the Capital invested by the contributors & the capital contributed by the shareholders

The higher the ratio, the greater the risk associated with the Company’s Obligations to the creditors in the event of Liquidation.

Formula: Debt Equity Ratio % = Total Liabilities or Debt / Total Equity

Next Post on Ratio Analysis: Debt Ratios :Capitalization Ratio

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· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

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· Liquidity Measurement Ratios Cash Ratio

· Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Ratio Analysis : Debt Ratios

2014-08-01T14:07:00.002+05:30

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Series : Ratio Analysis (11 th Post)

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This Ratio helps us to understand a company Debt in relation to the Assets.The Ratio helps to identify the overall level of financial risk the company is in along with the shareholders.It shows how much the company relies on debt to finance assets

The higher the ratio, the greater the risk associated with the Company’s operation. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk.

There are two types of liabilities - operational and debt. Operational liabilities includes balance sheet accounts, such as accounts payable, accrued expenses, taxes payable, pension obligations, etc. The Debt Liabilities includes notes payable and other short-term borrowings, The term "debt" is used synonymous with total liabilities.

The optimal debt ratio is determined by the same proportion of liabilities and equity as a debt-to-equity ratio. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt.

Maximum normal value is 0.6-0.7. But it is necessary to take into account industry specific, explained in the article about debt-to-equity ratio.

Formula: Debt Ratio % = Total Liabilities / Total Assets

Next Post on Ratio Analysis: Debt Ratios :Debt Equity Ratio

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· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

· Liquidity Measurement Ratios Quick Ratio

· Liquidity Measurement Ratios Cash Ratio

· Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Liquidity Measurement Ratios Quick Ratio

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Profitability Indicator Ratios: Return On Capital Employed (ROCE)

2014-07-31T14:29:00.001+05:30

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Series : Ratio Analysis (10 th Post)
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This Ratio helps us to understand how profitable a company with in relation to the capital invested.The Ratio ROCE (Return on Capital Employed) ,A Higher ROCE ratio means more efficient use of the capital else its not managing effectively.

The ROCE is expressed as a percentage

Formula: Return On Capital Employed % = Earnings before Interest and Tax (EBIT) / Capital Employed

Example:

Go to Moneycontrol.com Website here is an Online Link for the same http://www.moneycontrol.com/financials/relianceindustries/ratios/RI#RI

Select the Ratios under the Financials Tab & look for the “Profitability Ratios “

Next Post on Ratio Analysis: Debt Ratios

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· Top 6 Ratios for analyzing a stock.

· Liquidity Measurement Ratios

· Liquidity Measurement Ratios Quick Ratio

· Liquidity Measurement Ratios Cash Ratio

· Profitability Indicator ratios for analysing a stock

· Profitability Indicator Ratios :Profit Margin

· Profitability Indicator Ratios Effective Tax Rate

· Profitability Indicator Ratios Quick Ratio

· Profitability Indicator Ratios Return On Asset

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Profitability Indicator Ratios: Return On Equity ( ROE )

2014-07-30T14:25:00.002+05:30

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Series : Ratio Analysis (9 th Post)
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This Ratio helps us to understand how profitable a company with the money shareholders have invested.The Ratio ROE (Return on Equity) for high growth companies should be more ,Averaging ROE over the past 5 years will give a idea of growth the company has made. The ROE is expressed as a percentage

Formula: Return On Equity % = Net Income / Share Holders Equity

Example:

Go to Moneycontrol.com Website here is an Online Link for the same http://www.moneycontrol.com/financials/relianceindustries/ratios/RI#RI

Select the Ratios under the Financials Tab & look for the “Profitability Ratios “

Next Post on Ratio Analysis: Profitability Indicator Ratios ( Return On Capital Employed)

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· Top 6 Ratios for analyzing a stock.

· How to Fundamental Analysis Step By Step

· financial-measures-to-consider-before Investing

· Important-numbers-to-review-before Investing

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Profitability Indicator Ratios: Return On Assets (ROA)

2014-07-29T14:13:00.001+05:30

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Series : Ratio Analysis (8 th Post)
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This Ratio helps us to understand how profitable a company is compared to its total Assets.The Ratio ROA (Return on Asssets) explains how efficiently a company is managing its assets to make profits.The Higher this Ratio the More efficient the Management is in utilizing its assets,The RAO is expressed as a percentage

Formula: Return On assets % = Net Income / Average Total assets

Example:

Go to Moneycontrol.com Website here is an Online Link for the same http://www.moneycontrol.com/financials/relianceindustries/ratios/RI#RI

Select the Ratios under the Financials Tab & look for the “Profitability Ratios “

Next Post on Ratio Analysis: Profitability Indicator Ratios (Return On Equity)

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· Top 6 Ratios for analyzing a stock.

· How to Fundamental Analysis Step By Step

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Profitability Indicator Ratios: Effective Tax Rate

2014-07-28T13:51:00.002+05:30

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Series : Ratio Analysis (7 th Post)

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This Ratio helps us to understand the Tax Rate of a Corporation/Company.For calculating this Tax we use Income Tax Expense & Pre tax Income.

Formula: Effective Tax Rate % = Income Tax Expense / PreTax Income

Example:

Go to Moneycontrol.com Website here is an Online Link for the same http://www.moneycontrol.com/financials/relianceindustries/ratios/RI#RI Select the Ratios under the Financials Tab & look for the “ Profit Before Interest And Tax Margin(%) “

Next Post on Ratio Analysis: Profitability Indicator Ratios (Return On Assets)

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Profitability Indicator Ratios: ( Profit Margin )

2014-07-26T14:43:00.002+05:30

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Series : Ratio Analysis (6 th Post)
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Q : Is the business profitable ?

Profit in relation to Sales and Profit in relation to Assets

1. Profit in relation to sales – this indicates the margin available on sales;

2. Profit in relation to assets – this indicates the degree of return on the capital employed in business that means the earning efficiency.

For example, we will study the following;

Units A and B are in the same type of business and operate at the same levels of capacities. Unit A employs capital of 250 lacs and unit B employs capital of 200lacs. The sales and profits are as under:

Parameter Unit A Unit B

Sales 1000lacs 1000lacs

Profits 100lacs 90lacs

Profit margin on sales 10% 9%

Return on capital employed 40% 45%

While Unit A has higher profit margins, Unit B has better returns on capital employed

Profit margin on sales:

Gross profit margin on sales and net profit margin ratio –

Gross profit margin = Formula = Gross profit/net sales. Gross profit = Net sales (-) Cost of production before selling, general, administrative expenses and interest charges. Net sales = Gross sales (-) Excise duty. This indicates the efficiency of production and serves well to compare with another unit in the same industry or in the same unit for comparing it with past trend. For example in Unit A and Unit B let us assume that the sales are same at Rs.100lacs.

Parameter Unit A Unit B

Sales 100lacs 100lacs

Cost of production 60lacs 65lacs

Gross profit 40lacs 35lacs

Deduct: Selling general,

Administrative expenses and interest 35lacs 30lacs

Net profit 5lacs 5lacs

While both the units have the same net profit to sales ratio, the significant difference lies in the fact that while Unit A has less cost of production and more office and selling expenses, Unit B has more cost of production and less of office and selling expenses. This ratio helps in controlling either production costs if cost of production is high or selling and administration costs, in case these are high.

Net profit/sales ratio – net profit means profit after tax but before distribution in any form = Formula = Net profit/net sales. Tax rate being the same, this ratio indicates operating efficiency directly in the sense that a unit having higher net profitability percentage means that it has a higher operating efficiency. In case there are tax concessions due to location in a backward area, export activity etc. available to one unit and not available to another unit, then this comparison would not hold well.

Example:

Go to Moneycontrol.com Website here is an Online Link for the same http://www.moneycontrol.com/financials/relianceindustries/ratios/RI#RI Select the Ratios under the Financials Tab & look for the Liquidity And Solvency Ratios

Next Post on Ratio Analysis: Profitability Indicator Ratios (Effective Tax Rate)

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Profitability Indicator Ratios for Analyzing a Stock

2014-07-25T14:13:00.000+05:30

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Series : Ratio Analysis (5 th Post)

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Q : Is the business profitable ?

Measures of company’s profitability and financial performance, Give users a good understanding of how well the company utilized its resources in generating profit. The Ratios that will be calculated are

Profit Margin,

Effective Tax Rate,

Return on Assets,

Return on Equity,

Return on Capital Employed

Next Post on Ratio Analysis: Profitability Indicator Ratios ( Profitability Indicator Ratios :Profit Margin)

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Liquidity Measurement Ratios for Analyzing a Stock ( Cash Ratio )

2014-07-24T14:31:00.002+05:30

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Series: Ratio Analysis ( 4th post )
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Cash Ratio:

The cash ratio is generally a more conservative look at a company's ability to cover its liabilities than many other liquidity ratios. This is due to the fact that inventory and accounts receivable are left out of the equation.

Since these two accounts are a large part of many companies, this ratio should not be used in determining company value, but simply as one factor in determining liquidity.

It also ignores inventory and receivables, as there are no assurances that these two accounts can be converted into cash in a timely matter to meet current liabilities.

Formula : Cash +Cash equivalents + Invested Funds / Current liabilities

Example:

Go to Moneycontrol.com Website here is an Online Link for the same

http://www.moneycontrol.com/financials/relianceindustries/ratios/RI#RI

Select the Ratios under the Financials Tab & look for the Liquidity And Solvency Ratios

Next Post on Ratio Analysis: Liquidity Measurement Ratios ( Profitability Indicator Ratios )

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Comments / Improvements and points worth considering are welcome

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Liquidity Measurement Ratios for Analyzing a Stock ( Quick Ratio )

2014-07-23T14:37:00.002+05:30

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Series: Ratio Analysis (3 post )

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Q. Can the business pay its bills ?

Quick Ratio or Acid Test:

This ratio is used to check if a Company has enough Cash & Cash Equivalents to meet its current obligations or Liabilities’ quick Ration of 0.5 means a company is ready to pay off half of its Liabilities instantaneously.

Qucik Ration differs from Current ratio ,The Current Assets that are not readily convertible into cash are excluded from the Calculation

Formula : Quick ratio = (current assets – inventories) / current liabilities Or (cash and equivalents + marketable securities + accounts receivable) / current liabilities

Example:

Go to Moneycontrol.com Website here is an Online Link for the same

http://www.moneycontrol.com/financials/relianceindustries/ratios/RI#RI select the Ratios under the Financials Tab & look for the Liquidity And Solvency Ratios

Next Post on Beginning Investing: Liquidity Measurement Ratios ( Cash Ratio )

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Liquidity Measurement Ratios for Analyzing a Stock ( Current Ratio )

2014-07-22T14:50:00.002+05:30

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Series: Ratio Analysis (2 post )

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Liquidity Measurement Ratios.

The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities. In theory, the higher the current ratio, the better.

The ratios that we'll look at are the current, quick and cash ratios and we will also go over the cash conversion cycle, which goes into how the company turns its inventory into cash.

Current Ratio:

Current ratio expresses the extent to which the current liabilities of a business (i.e. liabilities due to be settled within 12 months) are covered by its current assets (i.e. assets expected to be realized within 12 months). A current ratio of 2 would mean that current assets are sufficient to cover for twice the amount of a company's short term liabilities. –

Generally, companies would aim to maintain a current ratio of at least 1 to ensure that the value of their current assets cover at least the amount of their short term obligations. However, a current ratio of greater than 1 provides additional cushion against unforeseeable contingencies that may arise in the short term. –

Current ratio must be analyzed over a period of time. Increase in current ratio over a period of time may suggest improved liquidity of the company or a more conservative approach to working capital management. A decreasing trend in the current ratio may suggest a deteriorating liquidity position of the business or a leaner working capital cycle of the company through the adoption of more efficient management practices. Time period analyses of the current ratio must also consider seasonal fluctuations.

Current ratio must be analyzed in the context of the norms of a particular industry. What may be considered normal in one industry may not be considered likewise in another sector.

Formula : Current Assets / Current Liabilities

Example:

Go to Moneycontrol.com Website here is an Online Link for the same

http://www.moneycontrol.com/financials/relianceindustries/ratios/RI#RI

select the Ratios under the Financials Tab & look for the Liquidity And Solvency Ratios

Next Post on Beginning Investing: Liquidity Measurement Ratios (QuickRatio)

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Top 6 Ratios for analyzing a stock.

2014-07-21T14:30:00.005+05:30

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Series: Ratio Analysis (1 post )

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1 Liquidity Measurement Ratios.

Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. This is
done by comparing a company's most liquid assets (or, those that can be easily converted to cash), its short-term liabilities.

2 Profitability Indicator Ratios

Profitability Indicator Ratios, give users a good understanding of how well the company utilized its resources in generating profit and shareholder value.

3 Debt Ratios.

Debt Ratios ratios give users a general idea of the company's overall debt load as well as its mix of equity and debt. Debt ratios can be used to determine the overall level of financial risk a company and its shareholders face. In general, the greater the amount of debt held by a company the greater the financial risk of bankruptcy.

4 Operating Performance Ratios

Operating Performance Ratios is a rough measure of the productivity of a company's fixed assets (property, plant and equipment or PP&E) with respect to generating sales. For most companies, their investment in fixed assets represents the single largest component of their total assets. This annual turnover ratio is designed to reflect acompany's efficiency in managing these significant assets. Simply put, thehigher the yearly turnover rate, the better.

5 Cash Flow Indicator Ratios

The ratios in this section use cash flow compared to other company metrics to determine how much cash they are generating from their sales, the amount of cash they are generating free and clear, and the amount of cash they have to cover obligations.

6 Investment Valuation Ratios

Investment Valuation Ratios compares a stock's per-share price (market value) to its book value (shareholders' equity). The price-to-book value ratio, expressed as a multiple (i.e. how many times a company's stock is trading per share compared to the company's book value per share), is an indication of how much shareholders are paying for the net assets of a company.

Next Post on Beginning Investing: Liquidity Measurement Ratios.(Current Ratio)

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