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    Ratio Analysis

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    snsahu
    Ratio analysis is a technique used to examine a company's financial statements to evaluate its liquidity, profitability, solvency, financial stability, and management quality. Ratio analysis is crucial for investment decisions as it helps investors understand a company's performance and compare companies in the same industry. Some key financial ratios that should be considered include price-to-earnings ratio, price-to-book value ratio, debt-to-equity ratio, return on equity, dividend yield, operating profit margin, and enterprise value to EBITDA. While ratios provide useful information, they must be interpreted carefully and in combination with other factors as single ratios do not provide a full picture of a company's financial health.

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    Ratio Analysis

    Uploaded by

    snsahu
    98 views14 pages
    Ratio analysis is a technique used to examine a company's financial statements to evaluate its liquidity, profitability, solvency, financial stability, and management quality. Ratio analysis is crucial for investment decisions as it helps investors understand a company's performance and compare companies in the same industry. Some key financial ratios that should be considered include price-to-earnings ratio, price-to-book value ratio, debt-to-equity ratio, return on equity, dividend yield, operating profit margin, and enterprise value to EBITDA. While ratios provide useful information, they must be interpreted carefully and in combination with other factors as single ratios do not provide a full picture of a company's financial health.

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    Ration Analysis

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    Ratio analysis is a technique used to examine a company's financial statements to evaluate its liquidity, profitability, solvency, financial stability, and management quality. Ratio analysis is crucial for investment decisions as it helps investors understand a company's performance and compare companies in the same industry. Some key financial ratios that should be considered include price-to-earnings ratio, price-to-book value ratio, debt-to-equity ratio, return on equity, dividend yield, operating profit margin, and enterprise value to EBITDA. While ratios provide useful information, they must be interpreted carefully and in combination with other factors as single ratios do not provide a full picture of a company's financial health.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    98 views14 pages

    Ratio Analysis

    Uploaded by

    snsahu
    Ratio analysis is a technique used to examine a company's financial statements to evaluate its liquidity, profitability, solvency, financial stability, and management quality. Ratio analysis is crucial for investment decisions as it helps investors understand a company's performance and compare companies in the same industry. Some key financial ratios that should be considered include price-to-earnings ratio, price-to-book value ratio, debt-to-equity ratio, return on equity, dividend yield, operating profit margin, and enterprise value to EBITDA. While ratios provide useful information, they must be interpreted carefully and in combination with other factors as single ratios do not provide a full picture of a company's financial health.

    Copyright:

    © All Rights Reserved
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    of 14

    Ratios Analysis

    24 January 2020
    Ratio Analysis
    A technique used to examine a company’s financial
    statements with regard to
    ▪ Liquidity position
    ▪ Profitability
    ▪ Solvency
    ▪ Financial Stability
    ▪ Quality of the management

    Ratio analysis is crucial for investment decisions. It not only helps in knowing
    how the company has been performing but also makes it easy for investors to
    compare companies in the same industry and zero in on the best investment
    option.

    2
    Use of Ratios

    ▪ as an absolute standard
    ▪ as a comparative indicator
    ▪ as a trend over time
    ▪ in combination with technical analysis

    Financial ratios could help you to pick the best stocks


    for your portfolio.

    3
    7 Financial ratios that one should look at
    before investing in a Stock
    ▪ P/E Ratio
    ▪ Price-To-Book value Ratio
    ▪ Debt-To- Equity Ratio
    ▪ Return on Equity
    ▪ Dividend Yield
    ▪ Operating Profit Margin
    ▪ EV/EBITDA

    4
    Price to Earning (P/E) Ratio
    P/E ratio shows how much stock investors are paying for each rupee of
    earnings. Helps in evaluating whether shares of the company are
    undervalued/overvalued

    = Market price per equity share


    Earning per share

    ▪ One can know the ideal P/E ratio by comparing the current P/E with the
    company's historical P/E, the average industry P/E and the market P/E.
    For instance, a company with a P/E of 15 may seem expensive when
    compared to its historical P/E, but may be a good buy if the industry
    P/E is 20.

    5
    Price to Earning (P/E) Ratio
    ▪ High P/E ratio may indicate that the stock is overpriced.
    ▪ A stock with a low P/E may have greater potential for rising.
    ▪ P/E ratios should be used in combination with other financial ratios
    for informed decision making.

    Trailing P/E: EPS for the most recent 12 month period divided
    by number of shares outstanding

    Forward P/E:Uses estimated net earnings over next 12 months

    6
    Price to Book Value Ratio
    The price-to-book value (P/BV) ratio is used to compare a company's
    market price to its book value. Book value, in simple terms, is the
    amount that will remain if the company liquidates its assets and repays
    all its liabilities.

    = Market price per equity share


    Book Value Per Share
    A P/BV ratio of less than one shows the stock is undervalued (value of
    assets on the company's books is more than the value the market is
    assigning to the company)

    P/BV ratio values shares of companies with large tangible assets on


    their balance sheets

    7
    Debt to Equity Ratio
    This ratio shows how much a company is leveraged, that is, how much
    debt is involved in the business vis-a-vis promoters' capital (equity).
    = Total Debt
    Equity Capital
    ▪ A low figure is usually considered better. This ratio depends upon the
    type of business
    ▪ If the company's returns are higher than its interest cost, the debt will
    enhance value. However, if it is not, shareholders will lose

    Capital intensive industries such as automobiles & power have higher Debt
    Equity ratio

    8
    Return on Equity Ratio
    This ratio measures the return that shareholders get from the business
    and overall earnings
    = PAT – Preference dividend
    Net Worth
    Net Worth = Equity Share capital + Reserves and Surplus
    ⚫ Measures the business success and managerial efficiency
    ⚫ ROE of 15-20% is generally considered good, though high-growth
    companies should have a higher ROE.

    One would expect “a rise in debt will also reflect in a higher ROE”. Because
    additional profits generated by deploying funds from debt should be more
    than cost of debt.

    9
    Dividend Yield
    Amount company pays out in dividends each year relative to its share
    price
    = Annual Dividend Per Share
    Market Price Per Share

    ⚫ Useful by investor interested in dividend income


    ⚫ higher figure signals that the company is doing well
    ⚫ a low dividend yield may not always imply a bad investment as
    companies (particularly at nascent or growth stages) may choose to
    reinvest all their earnings so that shareholders earn good returns in the
    long term.

    10
    Operating Profit Margin Ratio
    The OPM shows operational efficiency and pricing power. Higher the
    margin, the better it is for investors.

    = Operating Profit
    Net Sales

    While analyzing a company, one must see whether its OPM has been
    rising over a period. Investors should also compare OPMs of other
    companies in the same industry.

    11
    EV/EBITDA
    Enterprise value (EV) by EBITDA is often used with the P/E ratio to value
    a company. It gives a much more accurate takeover valuation because
    it includes debt.
    = EV( Market Capitalization Plus Debt minus Cash
    EBITDA (earnings before interest, tax, depreciation and
    amortization)

    ⚫ EV/EBITDA lower ratio indicates that a company is undervalued.


    ⚫ This ratio is high for fast-growing industries and low for industries that
    are growing slowly.
    ⚫ Stock selection based on EV/EBITDA outperforms P/E and price-to-book
    value methodologies on a risk-adjusted basis.

    12
    Word of caution regarding ratio analysis
    ▪ Usefulness is dependent on accuracy of figures. Audited financial
    statements are more reliable than unaudited statements

    ▪ A single ratio rarely tells enough to make a sound judgment

    ▪ Financial statements used in ratio analysis must be from similar


    points in time.

    ▪ Window dressing techniques can make statements and ratios look


    better.

    ▪ Ratios are clues, not bases for immediate conclusion. They merely
    convey certain observations pointing to the probability of matters
    needing investigation.

    13
    Thank You

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