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RATIO ANALYSIS
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RATIO ANALYSIS
RATIO ANAL !I!
Rat"o A#a$ys"s e#ab$es the bus"#ess ow#er/ma#ager to spot tre#%s "# a bus"#ess a#% to compare "ts per&orma#ce a#% co#%"t"o# w"th the a'erage per&orma#ce o& s"m"$ar bus"#esses "# the same "#%ustry. To %o th"s compare your rat"os w"th the a'erage o& bus"#esses s"m"$ar to yours a#% compare your ow# rat"os &or se'era$ success"'e years( watch"#g espec"a$$y &or a#y u#&a'orab$e tre#%s that may be start"#g. Rat"o a#a$ys"s may pro'"%e the a$$-"mporta#t ear$y war#"#g "#%"cat"o#s that a$$ow you to so$'e your bus"#ess prob$ems be&ore your bus"#ess "s %estroye% by them.
The Ba$a#ce !heet a#% the !tateme#t o& I#come are esse#t"a$( but they are o#$y the start"#g po"#t &or success&u$ &"#a#c"a$ ma#ageme#t. App$y Rat"o A#a$ys"s to )"#a#c"a$ !tateme#ts to a#a$y*e the success( &a"$ure( a#% progress o& your bus"#ess. Importa#ce o& &"#a#c"a$ stateme#t a#a$ys"s "# a# orga#"*at"o#. I# our mo#ey-or"e#te% eco#omy( )"#a#ce may be %e&"#e% as pro'"s"o# o& mo#ey at the t"me "t "s #ee%e%. To e'eryo#e respo#s"b$e &or pro'"s"o# o& &u#%s( "t "s prob$em o& secur"#g "mporta#ce to so a%just h"s resources as to pro'"%e &or a regu$ar out&$ow o& e+pe#%"ture "# &ace o& a# "rregu$ar "#&$ow o& "#come. 1. The pro&"t a#% $oss accou#t ,I#come !tateme#t-. 2. The ba$a#ce sheet
I# compa#"es( these are the two stateme#ts that ha'e bee# prescr"be% a#% the"r co#te#ts ha'e bee# a$so bee# $a"% %ow# by $aw "# most cou#tr"es "#c$u%"#g I#%"a. There has bee# "#creas"#g emphas"s o# ,a- ."'"#g "#&ormat"o# to the shareho$%er "# such a ma##er as to e#ab$e them grasp "t eas"$y.
(2) ." '"#g much more "#&or mat"o
(3) The report
%"rectors be"#g /u"te to
comprehe#s"'e
co'er the &actors that ha'e bee# operat"#g a#% are $"0e$y to
# e.g. operate "# the #ear &u#%s &uture as regar%s to &$ow e#t( aga"# the 'ar"ous &u#ct"o#s pro%uct"o#( &"#a#ce( go'er#me#t mar0et"#g( $abour( statem o&
w"th a po$"c"es( e#'"ro#me#t '"ew "# ge#era$. to &ac"$"t at"#g easy u#%er sta#%" #g a#% to p$ace a year resu$ts "# perspe ct"'e throug h compa r"so# w"th post year . The &"#a#c"a$ stateme#t "s prepare% by accou#ts base% o# the act"'"t"es that ta0e a#% #o#-pro%uct"o# )"#a#c"a$ stateme#ts are be"#g ma%e use o& "#creas"#g$y part"es $"0e .o'er#me#ts( I#st"tut"o#s( )"#a#c"a$ etc. The a#% A#a$ys"s stateme#t by Ba#0(
shou$% be su&&"c"e#t$y "#&ormat"'e so as to ser'e as w"%e a cur"a as poss"b$e.
resu$ts p$ace "# pro%uct"o#
w"#gs #g stateme#ts &or2 "# a &actor accou #ts 3+ecut"'es : - To y. The &ormu$ate po$"c"es. Ba#0ers : - To estab$"sh bas"s &or co#'er .ra#t"#g Loa#s. t act"'"t I#st"tut"o#s 4 Au%"tors : - To e+te#% "es "# 5re%"t &ac"$"ty to mo#et bus"#ess. ary I#'estors : - To to the assess the prospects o& the bus"#ess a#% he$p 0#ow to 0#ow whether they ca# get a goo% the retur# o# the"r pos"t"o "#'estme#t. #. terms Accou#ta#ts : - To stu%y the stateme#t 1ses &or comparat"'e o& purposes. )"#a#c" a$ !tateme .o'er#me#t Age#c"es: #t - To stu%y &rom a# A#a$ys"s a#g$e o& ta+ co$$ect"o# . %uty $e'ee etc.
The ma"# uses o& accou#t"
3! O) RATI O!
T 6
1 T 63! O) RATIO! 2 L"/u"%"ty rat"os 3 Tur#o'er Rat"os 4 Le'erage Rat"os 5 6ro&"tab"$"ty Rat"os 1. L"/u"%"ty rat"os:-
L"/u"%"ty re&ers o& the ab"$"ty o& a &"rm to meet "ts ob$"gat"o# "# the short ru#( usua$$y o#e year or whe# they become %urat"o# &or payme#t.
A proper ba$a#ce betwee# $"/u"%$y a#% pro&"tab"$"ty "s re/u"re% &or e&&"c"e#t )"#a#c"a$ 7a#ageme#t.
L"/u"%"ty rat"os are base% o# the re$at"o#sh"p betwee# curre#t assets the sources &or meet"#g short-term ob$"gat"o# a#% curre#t $"ab"$"t"es. The rat"os( wh"ch "#%"cate the $"/u"%"ty o& a &"rm( are: 1. 5urre#t Rat"o. 2. Ac"% test Rat"o. 3. Net wor0"#g cap"ta$.
A. 5urre#t Rat"o.
The curre#t Rat"o "s the rat"o o& curre#t $"ab"$"t"es "t "s ca$cu$ate% as: -
5urre#t assets 5urre#t rat"o 8 - - - - - - - - - - - - - - - - - 5urre#t L"ab"$"t"es
The curre#t assets "#c$u%e cash a#% Ba#0 Ba$a#ce( 7ar0etab$e secur"t"es( B"$$s( Rece"'ab$e( I#'e#tor"es( Loa#s a#% a%'a#ces( A%'a#ces 6ayme#t a#% prepa"% e+pe#ses.
The curre#t $"ab"$"t"es "#c$u%e cre%"tors( b"$$s payab$e ba#0 o'er%ra&t short-term $oa#s( outsta#%"#g e+pe#se 9 "#come ta+ payab$e( u#c$a"me% %"'"%e% a#% propose% %"'"%e#%.
Te curre#t rat"o measures the ab"$"ty o& the &"rm to meet "ts curre#t $"ab"$"t"es. The curre#t assets get co#'erte% "#to cash "#to the operat"o#a$ cyc$e o& the &"rm a#% pro'"%e the &u#% #ee%e% to pay curre#t $"ab"$"t"es. The h"gher the rat"o( to war% o&&.
5a$cu$at"o# o& curre#t rat"o w"th %"agram
6art"cu$ars :;;<-;= 5urre#t assets 5urre#t $"ab"$"t"es 5urre#t rat"o C.:= C.A< C.; :.@ B@?.>; B<C.C? >;;.C> >>C.B? A=:=.:> AB:=.C: :AA:.;< ::<>.:A :;;=-;> :;;>-;? :;;?-;@
D"agram
3.3 3.2 3.1 3 2.9 2.8 2.7
3.26
3.15
3 2.9
2005-06
2006-07
2007-08
2008-09
B.E1I5F RATIO
The Eu"c0 Rat"o "s somet"mes ca$$e% the Gac"%-testG rat"o a#% "s o#e o& the best measures o& $"/u"%"ty. It "s &"gure% as show# be$ow:
E1I5F RATIO 8 curre#t assets H "#'e#tor"es 5urre#t $"ab"$"t"es H ba#0 o'er %ra&t
The Eu"c0 Rat"o "s a much more e+act"#g measure tha# the 5urre#t Rat"o. By e+c$u%"#g "#'e#tor"es( "t co#ce#trates o# the rea$$y $"/u"% assets( w"th 'a$ue that "s &a"r$y certa"#. It he$ps a#swer the /uest"o#: GI& a$$ sa$es re'e#ues shou$% %"sappear( cou$% my bus"#ess meet "ts curre#t ob$"gat"o#s w"th the rea%"$y co#'ert"b$e I/u"c0J &u#%s o# ha#%KG
A# ac"%-test o& A:A "s co#s"%ere% sat"s&actory u#$ess the major"ty o& your G/u"c0 assetsG are "# accou#ts rece"'ab$e( a#% the patter# o& accou#ts rece"'ab$e co$$ect"o# $ags beh"#% the sche%u$e &or pay"#g curre#t $"ab"$"t"es.
5a$cu$at"o# o& /u"c0 rat"o w"th %"agram
6art"cu$ars :;;<-;= L"/u"% assets $"/u"% $"ab"$"t"es 5urre#t rat"o :.:A :.A; A.@A A.@< B@?.>; B<C.C? >;;.C> >>C.B? A;@@.@B @<A.;= ACC<.B< A<;@.=A :;;=-;> :;;>-;? :;;?-;@
1 D"agram
2.25 2.2 2.15 2.1 2.05 2 1.95 1.9 1.85 1.8 1.75 2005-06 2006-07 2007-08 2008-09 1.95 1.91 2.1 2.21
5. Lor0"#g cap"ta$ tur#o'er rat"o

Lor0"#g cap"ta$ re&ers to the "#'estme#t by the compa#y "# short terms assets such as cash( mar0etab$e secur"t"es. Net curre#t assets or #et wor0"#g cap"ta$ re&ers to the curre#t assets $ess curre#t $"ab"$"t"es. !ymbo$"ca$$y( "t mea#s( Net 5urre#t Assets 8 5urre#t Assets 5urre#t L"ab"$"t"es.
De&"#"t"o#s o& Lor0"#g 5ap"ta$:

The &o$$ow"#g are the most "mporta#t %e&"#"t"o#s o& Lor0"#g cap"ta$:
1) Lor0"#g cap"ta$ "s the %"&&ere#ce betwee# the "#&$ow a#% out&$ow o& &u#%s. I# other wor%s "t "s the #et cash "#&$ow.
2) Lor0"#g cap"ta$ represe#ts the tota$ o& a$$ curre#t assets. I# other wor%s "t "s the .ross wor0"#g cap"ta$( "t "s a$so 0#ow# as 5"rcu$at"#g cap"ta$ or 5urre#t cap"ta$ &or curre#t assets "s rotat"#g "# the"r #ature.
3) Lor0"#g cap"ta$ "s %e&"#e% as the e+cess o& curre#t assets o'er curre#t $"ab"$"t"es a#% pro'"s"o#s . I# other wor%s "t "s the Net 5urre#t Assets or Net Lor0"#g 5ap"ta$ It "s ca$cu$ate% as( Lo0"#g cap"ta$ tur#o'er rat"o 8 !a$es / Lor0"#g cap"ta$
1 5AL51LATION O) LORFIN. 5A6ITAL T1RN OM3R RATIO LITN DIA.RA7 6art"cu$ars :;;<-;= :;;=-;> :;;>-;? :;;?-;@
sa$es Lor0"#g cap"ta$ L.5.T. rat"o O .
:>?=.C@
C<>>.@
BAC>.<:
<;;A.;B
AA:>.<>
C=>:.@B
ABAA.=?
AB?C.>C
:.B>
;.@>
:.@C
C.C>
D"agra m
4 3.5 3 2.5 2 1.5 1 0.5 0 2005-06 2006-07 2007-08 2008-09 0.97 2.47 2.93 3.37
:. T1RN OM3R RATIO!
Tur#o'er Rat"os are a$so re&erre% to as Act"'"ty rat"o or Assets 7a#ageme#t rat"os. Th"s rat"o estab$"shes re$at"o#sh"p betwee# the $e'e$ o& act"'"ty represe#te% by sa$es or cost o& goo%s so$% a#% $e'e$s o& 'ar"ous assets. A. INM3NTOR RATIO T1RN OM3R
Th"s Rat"o "s compute% by %"'"%"#g #et sa$es by "#'e#tory Thus(

Net sa$es I#'e#tory Tur#o'er rat"o 8 ----------------
A'erage I#'e#tory The #umerator o& th"s rat"o "s the #et sa$es &or the year a#% the %e#om"#ator "s the I#'e#tory ba$a#ce at the e#% o& the year.
Th"s rat"o "s %eeme% to re&$ect the e&&"c"e#t the ma#ageme#t o& "#'e#tor"es a#% '"ce 'ersa.
Th"s stateme#t #ee% #ot be a$ways true. A $ow $e'e$ o& "#'e#tory may cause a h"gher "#'e#tory tur#o'er rat"o. It m"ght be argue% that the "#'e#tory tur#o'er rat"o may be
5ost o& goo%s so$% I#'e#tory Tur#o'er rat"o 8 ------------------------------------------- A'erage I#'e#tory
5a$cu$at"o# o& "#'e#tory tur#o'er rat"o w"th %"agram
6art"cu$ars
:;;<-;=
:;;=-;>
:;;>-;?
:;;?-;@
!a$es A'erage "#'e#tory I#'e#tory T.O. rat"o
:>?=.C@
C<>>.?@
BAC>.<:
<;;A.;B
A<?.C>
:;<.B<
:>>.=A
CC=.A:
A>.=
A>.BA
AB.@;
AB.??
D"agram
18 17. 5 17 16. 5 16 15. 5 15 14. 5 14 13. 5
17.6
17.41
14.9
14.88
2005-06
2006-07
2007-08
2008-09
B. D3BTOR! T1RNOM3R RATIO
The %ebtor s tur#o'er rat"o "s %eterm"#e% by %"'"%"#g the #et cre%"t sa$es by a'erage %ebtors outsta#%"#g %ur"#g the year. There&ore Debtors tur#o'er rat"o 8 Net cre%"t sa$es A'erage %ebtors
NOT32- Nere there "s #o spec"&"cat"o# about #et cre%"t purchase a#% a'erage %ebtors !o( assume that ,#et cre%"t sa$es 8 #et sa$es- ,A'erage %ebtors 8 %ebtors-
The ma"# &u#ct"o# o& th"s rat"o "s to measure how rap"%$y %ebts are co$$ecte%.
A h"gh rat"o "s "#%"cat"'e o& shorter t"me $ag betwee# cre%"t sa$es a#% cash co$$ect"o#/ A $ow rat"o "#%"cates that %ebts are #ot be"#g co$$ecte% rap"%$y.
5a$cu$at"o# o& %ebtors tur#o'er rat"o w"th %"agram
6art"cu$ars
:;;<-;=
:;;=-;>
:;;>-;?
:;;?-;@
Net sa$es
:>?=.C@
C<>>.?@
BAC>.<:
<;;A.;B
Debtors
BA<.BB
<@<.@@
>=;.@?
??>.:C
Debtors T.O. rat"o =.>A = <.BB <.=B
D"agram
8 7 6 5 4 3 2 1 0 2005-06 2006-07 2007-08 2008-09 6.71 6 5.44 5.64
5.5R3DITOR! T1RN OM3R RATIO
5re%"torOs tur#o'er rat"o "s a rate betwee# #et purchase a#% a'erage amou#t o& cre%"tor Outsta#%"#g %ur"#g the year. 5re%"tors tur#o'er rat"o 8 Net cre%"t purchases A'erage o& cre%"tors
A'erage cre%"tors 8 A'erage o& cre%"tors outsta#%"#g at the Beg"##"#g a#% at the e#% o& the year.
A $ow tur#o'er rat"o re&$ects $"bera$ terms gra#te% by supp$"ers( wh"$e a h"gh tur#o'er rat"o show# that accou#ts are sett$e% rap"%$y.
The cre%"torOs tur#o'er rat"o "s a# "mporta#t too$ as a &"rm ca# re%uce "ts re/u"reme#t o& curre#t assets by re$y"#g o# supp$"ers cre%"tors.
The "#te#t to wh"ch tra%e cre%"tors are w"$$"#g to wa"t &or payme#t ca# be appro+"mate% by the cre%"tors tur#o'er rat"o.
NOT32- Nere( there "s #o spec"&"cat"o# about #et cre%"t purchase a#% a'erage o& cre%"tors( !o( $et assume that( ,#et cre%"t purchase 8 Net 6urchase,A'erage o& cre%"tors 8 cre%"tors-
5a$cu$at"o# o& cre%"tors tur#o'er rat"o w"th %"agram
6art"cu$ars :;;<-;= Net 6urchase :BB>.>< CA@;.B< C>?A.>: B=@;.=> :;;=-;> :;;>-;? :;;?-;@
5re%"tors 5re%"tors T.O. rat"o
:=<.??
:C:.A@
CC;.;A
B=C.@B
@.:A
AC.>B
AA.B=
A;.AA
D"agram 1 6 1 4 1 2 1 0 8 6 4 2 0 200506 9.21
13.74 11.46 10.11
2006-07
2007-08
2008-09
C. L3M3RA.3 or 5A6ITAL !TR15T1R3 RATIO
These rat"os re&er to the use o& %ebt &"#a#ce $o#g term so$'e#cy o& the &"rm ca# be e+am"#e% by us"#g $e'erage or cap"ta$ rat"os.
The $e'erage rat"o or cap"ta$ structure rat"o ca# be %e&"#e% as the &"#a#c"a$ rat"os wh"ch throw $"ght o# the $o#g term so$'e#cy o& a &"rm re&$ecte% "# "ts ab"$"ty to assure the $o#g term cre%"tors w"th regar%s to.
1. 6er"o%"c payme#t o& "#terest %ur"#g the per"o% o& $oa#. 2. Repayme#t o& 6r"#c"pe o# matur"ty or "# pre%eterm"#e% "#sta$me#ts at %ue %ates.
A. D3BT-3E1IT RATIO
Th"s rat"o re&$ects the re$at"'e c$a"ms o& cre%"tors a#% share ho$%ers aga"#st the assets o& the &"rm( %ebt e/u"ty rat"os estab$"shme#t re$at"o#sh"p betwee# borrowe% &u#%s a#% ow#er cap"ta$ to measure the $o#g term &"#a#c"a$ so$'e#cy o& the &"rm. The rat"o "#%"cates the re$at"'e proport"o#s o& %ebt a#% e/u"ty "# &"#a#c"#g the assets o& the &"rm. It "s ca$cu$ate% as &o$$ows Debt e/u"ty rat"o 8 Debt / 3/u"ty
The %ebts s"%e co#s"st o& a$$ $"ab"$"t"es ,that "#c$u%e short term a#% $o#g term $"ab"$"t"eso& the &"rm. The e/u"ty s"%e co#s"sts o& #ew worth ,p$us- pre&ere#ce cap"ta$.
The $ower the %ebt e/u"ty rat"o the h"gher "# the %egree o& protect"o# e#joye% by the cre%"tors. The %ebt e/u"ty rat"o %e&"#e% by the co#tro$$er o& cap"ta$ "ssue( %ebt "s %e&"#e% as $o#g term %ebt p$us pre&ere#ce cap"ta$ wh"ch "s re%eemab$e be&ore A: years a#% e/u"ty "s %e&"#e% as pa"% up e/u"ty cap"ta$ p$us pre&ere#ce cap"ta$ wh"ch "s re%eemab$e a&ter A: years.
The ge#era$ #orm &or th"s rat"o "s ::A. o# case o& cap"ta$ "#te#s"'e "#%ustr"es as #orms o& B:A "s use% &or &ert"$"*er a#% ceme#t "#%ustry a#% a #orms o& =:A "s use% &or sh"pp"#g u#"ts.
5a$cu$at"o# o& %ebt-e/u"ty rat"o w"th %"agram 6art"cu$ars :;;<-;= :;;=-;> :;;>-;? :;;?-;@
Debt
A>CA.:>
C;;<.@A
:@BC.>C
B=>@.B<
3/u"ty Debt-e/u"ty rat"o
::;>.=A
CA:B.<<
B;:C.>B
BA:A.==
;.>?
;.@=
;.>
A.AB
D"agram 1. 2 1 0. 8 0. 6 0. 4 0. 2 0 0.78 0.7 0.96
1.14
200506
2006-07
2007-08
2008-09
B. D3BT H A!!3T RATIO The %eb"t asset rat"o estab$"shes a re$at"o#sh"p betwee# borrowe% &u#%s a#% the assets o& &"rm. It "s ca$cu$ate% as: Debt Debt Asset Rat"o 8 ------------------------------ Asset
Debt "#c$u%es a$$ $"ab"$"t"es. !hort term as we$$ as $o#g term a#% the assets "#c$u%e the tota$ o& a$$ the assets ,the ba$a#ce sheet tota$-
5a$cu$at"o# O& Debt H Asset Rat"o L"th D"agram
6art"cu$ars
:;;<-;=
:;;=-;>
:;;>-;?
:;;?-;@
Debt
A>CA.:>
C;;<.@A
:@BC.>C
B=>@.B<
Asset Debt- asset rat"o
C@C?.??
=AC;.B=
=@=>.B>
BA:A.==
;.BB
;.@=
;.B:
A.AB
1. 2 1 0. 8 0. 6
D"agra m
1.14 0.96
0.44 0. 4 0. 2
0.42
0 2005-06 2006-07 2007-08 2008-09
5.INTERES COVERAG RATO
Th"s rat"o "s a$so 0#ow# as T"me "#tereste% 3ar#e% rat"o Th"s rat"o measures the %ebt ser'"c"#g o& capac"ty o& a &"rm "# so &ar as &"+e% "#terest o# $o#g term $oa# "s co#cer#e%. I#terest co'erage rat"o %eterm"#e% by %"'"%"#g the operat"#g pro&"ts or ear#"#gs be&ore "#terest a#% ta+es by &"+e% "#terest charges o# $oa#s.
It "s ca$cu$ate% as 3ar#"#g Be&ore I#terest 9Ta+es ,3BITI#terestest co'erage Rat"o 8 ---------------------------Debt I#terest
The 3BIT "s use% "# the #umerator o& th"s rat"o because the ab"$"ty o& a &"rm to pay "#terest "s #ot a&&ecte% by ta+ payme#t as "#terest o# %ebt &u#% "# a ta+ %e%uct"b$e e+pe#ses. The rat"o appare#t$y measure the marg"# o& sa&ety the &"rm e#joys w"th the respect to "ts "#terest bur%e#. A h"gh "#terest co'erage rat"o "mp$"es that the &"rm ca# eas"$y meet "ts "#terest bur%e# e'e# "& 3BIT %ec$"#e. A $ow "#terest co'erage rat"o resu$ts "# &"#a#c"a$ embarrassme#t whe# 3BIT %ec$"#es. Th"s rat"o "s #ot appropr"ate measures o& "#terest co'erage because the source o& "#terest payme#t "s cash &$ow be&ore "#terest a#% ta+es( #ot 3BIT.
ca$cu$at"o# o& "#terest co'erage rat"o w"th %"agram
6art"cu$ars
:;;<-;=
:;;=-;>
:;;>-;?
:;;?-;@
3BIT
C?>.=;
BC:.=C
B<B.@C
C:?.:=
Debt "#terest I#terest co'erage rat"o
=:.>?
A?@.?C
A@>.>:
:>B.BC
=.A>
:.:?
:.C
A.:;
D"agram
6.17 6 5 4 3 2.28 2 1 0 2005-06 2006-07 2007-08 2008-09 2.3 1.2
B. 6RO)ITABILIT RATIO
A c$ass o& &"#a#c"a$ metr"cs that are use% to assess a bus"#essJs ab"$"ty to ge#erate ear#"#gs as compare% to "ts e+pe#ses a#% other re$e'a#t costs "#curre% %ur"#g a spec"&"c per"o% o& t"me. )or most o& these rat"os( ha'"#g a h"gher 'a$ue re$at"'e to a compet"torJs rat"o or the same rat"o &rom a pre'"ous per"o% "s "#%"cat"'e that the compa#y "s %o"#g we$$.
!ome e+amp$es o& pro&"tab"$"ty rat"os are pro&"t marg"#( retur# o# assets a#% retur# o# e/u"ty. It "s "mporta#t to #ote that a $"tt$e b"t o& bac0grou#% 0#ow$e%ge "s #ecessary "# or%er to ma0e re$e'a#t compar"so#s whe# a#a$y*"#g these rat"os.
)or "#sta#ces( some "#%ustr"es e+per"e#ce seaso#a$"ty "# the"r operat"o#s. The reta"$ "#%ustry( &or e+amp$e( typ"ca$$y e+per"e#ces h"gher re'e#ues a#% ear#"#gs &or the 5hr"stmas seaso#. There&ore( "t wou$% #ot be too use&u$ to compare a reta"$erJs &ourth/uarter pro&"t marg"# w"th "ts &"rst-/uarter pro&"t marg"#. O# the other ha#%( compar"#g a reta"$erJs &ourth- /uarter pro&"t marg"# w"th the pro&"t marg"# &rom the same per"o% a year be&ore wou$% be &ar more "#&ormat"'e. A. O63RATIN. 7AR.IN A rat"o use% to measure a compa#yJs pr"c"#g strategy a#% operat"#g e&&"c"e#cy. Operat"#g marg"# "s a measureme#t o& what proport"o# o& a compa#yJs re'e#ue "s $e&t o'er a&ter pay"#g &or 'ar"ab$e costs o& pro%uct"o# such as wages( raw mater"a$s( etc. A hea$thy operat"#g marg"# "s re/u"re% &or a compa#y to be ab$e to pay &or "ts &"+e% costs( such as "#terest o# %ebt. It Is A$so 0#ow# as Goperat"#g pro&"t marg"#.G
5a$cu$ate% as:
Operat"#g marg"# g"'es a#a$ysts a# "%ea o& how much a compa#y ma0es ,be&ore "#terest a#% ta+es- o# each %o$$ar o& sa$es. Lhe# $oo0"#g at operat"#g marg"# to %eterm"#e the /ua$"ty o& a compa#y( "t "s best to $oo0 at the cha#ge "# operat"#g marg"# o'er t"me a#% to compare the compa#yJs year$y or /uarter$y &"gures to those o& "ts compet"tors. I& a compa#yJs marg"# "s "#creas"#g( "t "s ear#"#g more per %o$$ar o& sa$es. The h"gher the marg"#( the better.
)or e+amp$e( "& a compa#y has a# operat"#g marg"# o& A:P( th"s mea#s that "t ma0es Q;.A: ,be&ore "#terest a#% ta+es- &or e'ery %o$$ar o& sa$es. O&te#( #o#recurr"#g cash &$ows( such as cash pa"% out "# a $awsu"t sett$eme#t( are e+c$u%e% &rom the operat"#g marg"# ca$cu$at"o# because they %o#Jt represe#t a compa#yJs true operat"#g per&orma#ce.
5a$cu$at"o# O& Operat"#g 7arg"# L"th D"agram
6art"cu$ars
:;;<-;=
:;;=-;>
:;;>-;?
:;;?-;@
Opeart"#g "#come B:;.;A <<@.C <@:.C <<C.>
Net sa$es
:>?=.C@
C<>>.@
BAC>.<:
<;;A.;B
Rat"os
A<.;>P
A<.=CP
AB.C:P
AA.;>P
18 16 14 12 10 8 6 4 2 0
D"agram
15.07
15.3
14.32 11.07
2005-06
2006-07
2007-08
2008-09
B. .RO!! 6RO)IT 7AR.IN
.ross pro&"t ca# be %e&"#e% as the %"&&ere#ce betwee# #et sa$es a#% cost o& goo%s so$%. .ross marg"# pro&"t rat"o "s a$so 0#ow# as gross marg"# gross pro&"t marg"# rat"o "s ca$cu$ate% by %"'"%"#g gross pro&"t by sa$es. .ross pro&"t marg"# rat"o 8 gross pro&"t/Net sa$es Net sa$es-cost o& goo%s so$%.
The gross pro&"t marg"# rat"o# shows the marg"# $e&t a&ter meet"#g ma#u&actur"#g cost. The rat"o a$so measures.
The e&&"c"e#cy o& pro%uct"o# as we$$ as pr"c"#g. The .ross pro&"t to sa$es "s a s"g# o& goo% ma#ageme#t s as "t "mp$"es that the cost o& pro%uct"o# o& the &"rm "s re$at"'e$y $ow. A h"gh rat"o may a$so "mp$y o& a h"gher sa$es r"se w"thout a correspo#%"#g "#crease "# the cost o& goo%s so$%.
5a$cu$at"o# o& gross pro&"t marg"# w"th %"agram
6art"cu$ars
:;;<-;=
:;;=-;>
:;;>-;?
:;;?-;@
.ross pro&"t C?>.=; BC:.= B<B.@C C:?.:=
Net sa$es
:>?=.C@
C<>>.@
BAC>.<:
<;;A.;B
Rat"os
AC.@A P
A:.;@P
AAP
=.<=P
16 14 12 10 8 6 4 2 0
D"agram
13.91 12.09 11
6.56
200506
200607
2007-08
2008-09
5. N3T 6RO)IT 7AR.IN
The Net 6ro&"t 7arg"# Rat"o# %eterm"#es the betwee# Net pro&"t a#% sa$es o& bus"#ess &"rm. Th"s re$at"o#sh"p "s a$so 0#ow# as #et marg"#. Th"s rat"o shows the ear#"#g $e&t &or shareho$%er ,both e/u"ty a#% pre&ere#ce- as perce#tage o& Net sa$es.
Net 7arg"# Rat"o measures the o'era$$ e&&"c"e#cy o& pro%uct"o#( A%m"#"strat"o# se$$"#g( )"#a#c"#g( pr"c"#g a#% Tase 7a#ageme#t. Thus( Net pro&"t 7arg"# Rat"o: Net 6ro&"t/Net !a$es
A h"gh Net pro&"t 7arg"# "#%"cates a%e/uate retur# to the ow#ers as we$$ as e#ab$e a &"rm to w"thsta#% a%'erse eco#om"c co#%"t"o#s whe# se$$"#g pr"ce "s %eca#t"#g( cost o& pro%uct"o# "s r"s"#g a#% %ema#% &or pro%uct "s &a$$"#g.
A $ow Net 6ro&"t 7arg"# has oppos"te "mp$"cat"o#s. A &"rm w"th $ow #et pro&"t marg"# ca# ear# a h"gh rate o& retur# o# "#'estme#t "t has a h"gher "#'e#tory tur#o'er.
Ro"#t$y co#s"%er"#g gross a#% #et pro&"t marg"# pro'"%es a 'a$uab$e u#%ersta#%"#g o& the cost a#% pro&"t structure o& the &"rm a#% e#ab$es the a#a$yst to "%e#t"ty the source o& bus"#ess e&&"c"e#cy o& "#e&&"c"e#cy.
5a$cu$at"o# o& #et pro&"t marg"# w"th %"agram
6art"cu$ars
:;;<-;=
:;;=-;>
:;;>-;?
:;;?-;@
Net pro&"t
A?=.@C
::<
:BC.;>
AC>.BC
Net sa$es
:>?=.C@
C<>>.@
BAC>.<:
<;;A.;B
Rat"os
=.>AP
=.:@P
<.?>P
:.><P
D"agram 6.7
7 6 5 4 3 2 1 0
6.2
5.87
2.75
2005-06
2006-07
2007-08
2008-09
D. 3ARNIN. 63R !NAR3
The port"o# o& a compa#yJs pro&"t a$$ocate% to each outsta#%"#g share o& commo# stoc0. 3ar#"#gs per share ser'e as a# "#%"cator o& a compa#yJs pro&"tab"$"ty.
5a$cu$ate% as:
36! 8 Net 6ro& "t A'a "$ab $e To 3/u "tyNo$ %ers N u m be r O & O r% "# ar y ! ha re s O ut st a# %" #g
Lhe# ca$cu$at"#g( "t "s more accurate to use a we"ghte% a'erage #umber o& shares outsta#%"#g o'er the report"#g term( because the #umber o& shares outsta#%"#g ca# cha#ge o'er t"me. Nowe'er( %ata sources somet"mes s"mp$"&y the ca$cu$at"o# by us"#g the #umber o& shares outsta#%"#g at the e#% o& the per"o%. D"$ute% 36! e+pa#%s o# bas"c 36! by "#c$u%"#g the shares o& co#'ert"b$es or warra#ts outsta#%"#g "# the outsta#%"#g shares #umber.
3ar#"#gs per share are ge#era$$y co#s"%ere% to be the s"#g$e most "mporta#t 'ar"ab$e "# %eterm"#"#g a shareJs pr"ce. It "s a$so a major compo#e#t use% to ca$cu$ate the pr"ce-to- ear#"#gs 'a$uat"o# rat"o.
)or e+amp$e( assume that a compa#y has a #et "#come o& Q:< m"$$"o#. I& the compa#y pays out QA m"$$"o# "# pre&erre% %"'"%e#%s a#% has A; m"$$"o# shares &or ha$& o& the year a#% A< m"$$"o# shares &or the other ha$&( the 36! wou$% be QA.@: ,:B/A:.<-. )"rst( the QA m"$$"o# "s %e%ucte% &rom the #et "#come to get Q:B m"$$"o#( a#% the# a we"ghte% a'erage "s ta0e# to &"#% the #umber A;7S;.< + A<7 o& 8 shares A:.<7-. outsta#%"#g ,;. <+
A# "mporta#t aspect o& 36! thatJs o&te# "g#ore% "s the cap"ta$ that "s re/u"re% to ge#erate the ear#"#gs ,#et "#come- "# the ca$cu$at"o#. Two compa#"es cou$% ge#erate the same 36! #umber( but o#e cou$% %o so w"th $ess e/u"ty ,"#'estme#t- - that compa#y wou$% be more e&&"c"e#t at us"#g "ts cap"ta$ to ge#erate "#come a#%( a$$ other th"#gs be"#g e/ua$( wou$% be a GbetterG compa#y. I#'estors a$so #ee% to be aware o& ear#"#gs ma#"pu$at"o# that w"$$ a&&ect the /ua$"ty o& the ear#"#gs #umber. It "s "mporta#t #ot to re$y o# a#y o#e &"#a#c"a$ measure( but to use "t "# co#ju#ct"o# w"th stateme#t a#a$ys"s a#% other measures.
5a$cu$at"o# o& 36! w"th %"agram :;;<-;= :;;=-;> :;;>-;? :;;?-;@
6art"cu$ars
36!
:B.<
:<.=
:=.A
AB.<
30 25 20 15 10 5 0
D"agram 25.6 26.1
24.5
14.5
2005-06
2006-07
2007-08
2008-09
3. 6RI53 3ARNIN.! RATIO
63 rat"o "s c$ose$y re$ate% to the ear#"#gs y"e$%/ear#"#gs pr"ce rat"o. It "s actua$$y the rec"proca$ o& the $atter. Th"s rat"o "s compute% %"'"%"#g the mar0et pr"ce o& the shares by the 36!. Thus( 63 rat"o 8 7ar0et 6r"ce o& !hare 36!
The 63 rat"o re&$ects the pr"ce curre#t$y be"#g pa"% by the mar0et &or each rupee o& curre#t$y reporte% 36!. I# other wor%s( the 6/3 rat"o measures "#'estorsO e+pectat"o#s a#% the mar0et appra"sa$ o& the per&orma#ce o& a &"rm. I# est"mat"#g the ear#"#gs( there&ore( o#$y #orma$$y susta"#ab$e ear#"#gs assoc"ate% w"th the assets are ta0e# "#to accou#t. That "s( &rom sa %"sco#t"#ue operat"o ( y( % #s othe "te #ot to r ms e+pecte% occur. the ear#"#gs are a%juste% &or "#come
a#% e+traor%"#ary "tems as we$$ as ma#y Th" s rat"o "s popu$ar$y use% by secur"ty
a#a$ysts to assess a &"rmOs per&orma#ce as e+pecte% by the "#'estors.
5a$cu$at"o# o& 63 rat"o w"th %"agram
6art"cu$ars
:;;<-;=
:;;=-;>
:;;>-;?
:;;?-;@
Rat"os
C;.=
BA.?
<C.=
C;.?
60 50
D"agram 53.6
41.8 40 30 30.6 30.8

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RATIO ANAL !I!

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(2) ." '"#g much more "#&or mat"o

(3) The report

%"rectors be"#g /u"te to

shou$% be su&&"c"e#t$y "#&ormat"'e so as to ser'e as w"%e a cur"a as poss"b$e.

resu$ts p$ace "# pro%uct"o#

The ma"# uses o& accou#t"

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5urre#t assets 5urre#t rat"o 8 - - - - - - - - - - - - - - - - - 5urre#t L"ab"$"t"es

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5a$cu$at"o# o& curre#t rat"o w"th %"agram

3.3 3.2 3.1 3 2.9 2.8 2.7

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5a$cu$at"o# o& /u"c0 rat"o w"th %"agram

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5. Lor0"#g cap"ta$ tur#o'er rat"o

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De&"#"t"o#s o& Lor0"#g 5ap"ta$:

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sa$es Lor0"#g cap"ta$ L.5.T. rat"o O .

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:. T1RN OM3R RATIO!

Th"s Rat"o "s compute% by %"'"%"#g #et sa$es by "#'e#tory Thus(

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5a$cu$at"o# o& "#'e#tory tur#o'er rat"o w"th %"agram

!a$es A'erage "#'e#tory I#'e#tory T.O. rat"o

18 17. 5 17 16. 5 16 15. 5 15 14. 5 14 13. 5

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B. D3BTOR! T1RNOM3R RATIO

5a$cu$at"o# o& %ebtors tur#o'er rat"o w"th %"agram

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