Financial Ratios: Ratio of two selected numerical
values taken from an enterprise's financial statements.
Financial ratios allow for comparisons
• • • • between companies between industries between different time periods for one company between a single company and its industry average
1.
Activity ratios measure how quickly a firm converts non-cash assets to cash assets.
a. Average collection period = Accounts receivable / (Annual credit sales / 365 days) b. Average payment period = Accounts payable / (Annual credit purchases / 365 days)
– Inventory Turnover
A ratio showing how many times a company's inventory is sold and replaced over a period. Inventory Turnover = Sales/Inventory Inventory Turnover = Cost of goods sold/Average inventory
–
Debtor turnover ratio or accounts receivable turnover ratio
It indicates the number of times average debtors (receivable) are turned over during a year. Debtors Turnover Ratio = Total Sales / Debtors
– Asset Turnover
The amount of sales generated for every ruppee's worth of assets. Asset Turnover = Revenue / Assets
3.
Debt ratios measure the firm's ability to repay longterm debt.
Interest Coverage Ratio A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period Debt/Equity Ratio A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. D/E Ratio : Total liabilities/Shareholders Equity
• •
•
•
4.
Liquidity ratios measure the availability of cash to pay debt a. Current ratio = Current assets / Current liabilities
measures a company's ability to pay short-term obligations
3.
Ratio Analysis
Liquidity Ratio DABUR
CURRENT ASSETS CURRENT LIABLITIES CURRENT RATIO
BRITANNIA
HUL
P&G
18525 14576
1.3
7299 6839
1.1
63169 75089 0.8
6797
2742
2.5
6
3.
Ratio Analysis
Debt Ratio DABUR
Interest coverage
BRITANNIA
HUL
P&G
29.7 0.6
5.2 1.4
2737.1 0
52
D/E Ratio
0
6
3.
Ratio Analysis
Turnover Ratio DABUR
Inventory Turnover Inventory period
BRITANNIA
HUL
P&G
63 5.79
28
13.04
53 6.89
24
15.21
Debtors Turnover Collection Period
32 11.41
6 60.83
18 20.28
11 33.18 6
3.
Ratio Analysis
Liquidity Ratio DABUR
Asset Turnover Total assets
BRITANNIA
HUL
P&G
2.96 38217
4.91 16366
75.48 100285
17.65
8777
6
The Working Capital Model
11
5.
The working capital Model
The short term operating activities of the firm & their impact on cash & working capital
15
5.
The working capital Model
THE OPERATING CYCLE & THE CASH CYCLE - Short Term Operating Activities :
1
2
Buying raw-material
Paying cash & purchases
How much inventory to order
To borrow / draw down cash balance
3
Manufacture the product
Choice of production technology
4 5
Selling the product Collecting cash
Offer cash / credit term to the customer How to collect cash
15
Net working capital (NWC) • NWC refers to the difference between current assets and current liabilities. • NWC can be positive or negative.
– Positive NWC = CA > CL – Negative NWC = CA < CL
Concepts of working capital
27
Gross Operating Cycle (GOC)
28
Inventory conversion period
• Inventory conversion period is the total time needed for producing and selling the product. • It is the time required for the conversion of raw materials into finished goods sales. • Typically, it includes:
29
Debtors (receivables) conversion period (DCP)
• Debtors conversion period (DCP) is the average time taken to convert debtors into cash. • It is the time required to convert the credit sales into cash realization. • It is calculated as follows:
30
Creditors (payables) deferral period (CDP)
• Creditors(payables) deferral period (CDP) is the average time taken by the firm in paying its suppliers (creditors). CDP is given as follows:
31
Cash Conversion or Net Operating Cycle
• Net operating cycle (NOC) is the difference between gross operating cycle and payables deferral period. • Deferral period is the period for which the payments to creditors are deferred or delayed
• Net operating cycle is also referred to as cash conversion cycle.
5.
The working Capital Model
DABUR
Inventory Period 7.59
Operating Cycle 25.9
Receivable Period 18.31
A/c Payable period 10.11 HUL
Operating Cycle 25.9 days
Cash Cycle or NOP 15.85 days
Inventory Period 74.87 Operating Cycle 91.09
Receivable Period 16.22 A/c Payable period 217.87
Operating Cycle 91.09 days Cash Cycle -126.78 days 14
5.
The working Capital Model
P&G
Inventory Period 21.55
Operating Cycle 43.94
Receivable Period 22.39
A/c Payable period 72.42 BRITANNIA
Operating Cycle 43.94 days
Cash Cycle -28.48days
Inventory Period 26.07 Operating Cycle 29.94
Receivable Period 3.87 A/c Payable period 31.48
Operating Cycle 29.94 days Cash Cycle -1.54days 14