APPROPRIATENESS

OF

FINANCIAL RATIOS
IN DIFFERENT SECTORS

ALI DANISH
MB2-11-43

FINANCIAL ANALYSIS
The analysis in which you collect, evaluate and interpret the financial data in order to provide purposeful information to investors for making their decisions. The financial analysis is a two way process.

 Why

there is need to Financial Analysis??? can we do financial Analysis???

How

SOURCES OF FINANCIAL DATA

Financial reports Market price Economic data e.g. GDP, inflation etc.

CATEGORIES OF RATIOS:

LIQUIDITY RATIOS:

Current Ratio:

Quick Ratio: Cash + Marketable Securities + Accounts receivable Current Liabilities

Cash Ratio: Cash+M.S / C.L Working Capital Ratio: CA- CL

EFFICIENCY RATIO :

Efficiency in terms of: Collection, cash flow, operations.

CONTINUE:

Account receivable turnover :

Net sale / avg gross receivable

A/c R.T.O.D:

avg gross Receivables / net sales / 365

Inv T.O:

CGS / avg inventory

Inv T.O.D:

Avg inv / CGS / 365

PROFITABILITY RATIOS :

Net profit ratios = net income / net sales Operating profit = op. income/ net sales Gross profit ratios = gross profit / net sales Sales to fixed asset = net sales / net fixed asset

ROA = net income / avg total asset

ROE = net income / Equity

ARSLAN HUSSAIN
MB2-11-34

FINANCIAL LEVERAGE

Company can get finances through two ways

Equity Debt

Debt financing is more risker one because it generates the legal obligation of payments like interest and principle. Financial leverage shows the extent to which the debt is used with respect to equity. Higher this ratio reflect the higher risk and higher returns.

DEBT TO ASSET RATIOS

Debt ratios show the proportion of assets which are financed by the debt. Higher ratio reflect higher leverage which leads toward high risk. Ratios are calculated as:

DEBT TO EQUITY RATIO

It shows the proportionate of debt with respect to equity. Higher this ratio may lead towards company inability to meet its future due payments. It is calculated as:

TIME-INTEREST COVERAGE RATIO

It measures the companies ability to pay its interest payment in future and calculated as:

FIXED CHARGE COVERAGE RATIO

It measures the companies ability to pay its fixed payments in future and calculated as:

SHAREHOLDER RATIOS
These ratios compare the results of operations with respect to the shares. This ratio includes:

Earning per share Book value of equity Price earning ratio Dividend payout ratio Dividend yield Plowback ratio

EARNING PER SHARE

It show how much earning we have generated during a period with respect to one share and computed as:

EPS is further computed as Basic EPS Diluted EPS

PRICE EARNING RATIO

It tells us about how much an investor is willing to pay in order to get 1 rupee earning and calculated as:

PLOW BACK RATIO

Also known as retention ratio and reflects the amount of earnings which a company retains for reinvestment and calculated as:

DIVIDEND YIELD

Dividend yield is the return to the shareholders which are measured in terms of the dividend paid during the period

ARTICLE PRESENTATION
BY
Sheikh Hussnain M B 2 - 11 - 6 3

INTRODUCTION
In financial statement analysis it is common to compare the various financial ratios of a business firm with industry averages. The evaluation of a firm's performance and financial status becomes strongly dependent on the financial ratios of the industry, and particularly dependent on how these ratios are distributed. Comparing the financial ratios between firms may, however, be quite misleading, especially when the structure of the firms is not homogenous.

RESEARCH PROBLEM

The object of this study is to establish whether it is a reasonable practice for a firm to compare its central financial ratios to industry averages in order to acquire information on the performance and the state of the firm. If homogeneity of financial ratios prevails in an industry branch, comparisons with industry averages or other firms within the industry will give valuable information.

In cases of heterogeneity comparisons to the industry average, as well as to the other firms within the industry, mainly reflect the differences of the structures of the firms rather than the differences in their financial performance.

APPROACH

Three Major stages to solve Problem:

Dynamic measure of financial ratio closeness between pairs of firms is developed. 2. The firms under observation are grouped into homogeneous clusters on the basis of this closeness measure. 3. The congruence of this clustering with the standard industry classification is measured.
1.

FINANCIAL RATIOS ARE;

Operating leverage Profitability Financial leverage Liquidity Turnover ratios