About finantial ratio:
Financial ratio analysis is the technique of comparing the relationship (or ratio) between two or more items of financial data from a company’s financial statements like income statement, balance sheet and cash flow statement.
Its generally used six main areas:-
- Liquidity
- Coverage
- Solvency
- Profitability
- Market prospects
- Efficiency
1) Liquidity ratio
Its used to analysis a company’s abilities to meet its immediate debt obligations out of its current assets.
Current ratio :
Current assets / current liablities
2) Coverage ratio :
It’s used to analysis a company’s ability to pay interest, fees and charges on its debts but not the underlying capital obligations.
Margin ratio :-
Ebitda margin = ebidta / total revenue
Free cash flow = fcf / total revenue
Cash available to share holder after all out filter are accounted
3) Solvency ratio :
Its related to company debt & liabilities.
Debt to equity ratio :-
Its shows outsider & insider money
Outsider gives loan to company and insider invest in company
Debt is the long term borrowing of company while equity is the share holder’s money invested in the business
What’s difference :
Debt you pay interest – its mandotry
Equity you pay dividend – it’s not mandotry
D/e = 2/1 2nd is invested from debt & 1st is equity share holder
Ideal d/e is 1:1 but you never find it
1st :-
If d/e is trending is rising with corelation of time
This dangerous situation
A rising d/e is negetive indicator
2nd :
Its not high & low d/e ratio is unfavourable
A high d/e is shows too much debt
A low d/e also not good for company
Company is not able to raise moeny from the market to low credit rating
Rather then company able to take loan from outside so comopany’s earning divided into more investor which is decrese earning of share holder
So company will not able to take benifit from its incresing profit
De calculation :-De = total debt / total equity
4) Profitability
Profitability analysis is used to analyse a company’s ability to make money from its goods and divided by or services.
Return on equity :
Return on assets : net income / total assets (previous year + current year / 2)
Its shows the profit earned & delivered by the company to its share holder
Now difference between eps & roe
Eps – its basic calculation is per share while its absolute number
Roe – its based on total share of company while its showing in percentage form
Return on equity : net income / total equity (previous year + current year / 2)
Roce : pbit / total equity
Net profit margin = net income / total revenue
5) Market prospects
Its only undertaken for publicly traded companies. It is generally used to determine the likely prospects of different investment options.
Earning per share(eps) ratio:-
Its showing how much company earn per share & its helpful for equity share holdereps is profitibility ratio
If eps is steady its good qulity company if not steady so you haven’t beat on that comapny share
It’s comparison with company to company
Eps calculation :-
Eps = net income after tax / total number of outstanding shares
Net income you can find out from p&l statement
Total number of outstanding share from balancesheet
Pe ( price to earning ratio) :-
Its showing share price is expensive or cheap
Pe calculation :-
P/e = market share price / eps
If your p/e ratio is high your share price is overvalued – that’s means investor invest in company and company give less income compare to investing example like 3/2
If your p/e ratio is low your share price is undervalued – that’s means investor invest in company and company give big income compare to investing example like 1/2
But one truth p/e ratio is high its speaks of great investor sentiment & the company’s past overall performance
Its tell about company’s past performance and the reputation of company’s good will so public invest rather then share price is costly
It’s shows buyer trust
Payout ratio :
Dps / eps
Price to book value ratio : –
When your read p/b ratio must with roe
Roe & p/b investing same time together is good
But one is low & while a rising it’s like red flag that’s means company is not profitable is roe low
P/b ratio rising and p/b shows your company value
If company sold how much how much value comes in your hand
Pb calculation :
Pb = market capitalization / total equity
6 ) Efficiency
Its analysis is used to analyze how hard a business is working its assets on behalf of its owners.
The four key financial ratios used to analyse efficiency are:
Inventory-turnover ratio = sales divided by inventory
Days-sales outstanding = accounts receivable divided by average sales per day
Fixed-assets-turnover ratio = sales divided by net fixed assets
Total-assets-turnover ratio = sales divided by total assets
