Description
The report about all the financial ratios, key terms in balance sheet, as well as effect of various parameters on balance sheet and profit and loss account.
BASIC FINANCIAL ACCOUNTING
1. Financial Ratios
Leverage Ratios 1) Debt Ratio- Measures the Ratio of long-term debt to long-term capital. It indicates what proportion of the firm’s capital is financed through debt. Debt ratio= Long-term debt+ Value of leases______ Long-term debt+ Equity+ Value of leases 2) Debt equity Ratio- Measures the relative shares of outsider’s funds and owner’s funds in the firms capital structure. Debt Equity Ratio= Long term debt Equity The ideal figure for this ratio for firms in India is considered to be 2:1 to 3:1.
3) Interest Coverage Ratio- shows the capacity of the firm to meet its interest obligations out of its earnings. = EBIT+ Depreciation Interest (EBIT is earnings before interest and tax)
Profitability Ratios 1) Gross Profit Ratio- Proportion of gross profit to sales.
Gross Profit = Sales- Cost of Goods sold GP ratio= (GP/Sales)*100
2)
Net Profit Margin
= (Net profit/Sales)*100 Net profit= EBIT- Tax 3) Operating net profit ratio- shows the proportion of earnings from operation to Sales = (Operating NP/Sales)*100, where Operating Net profit= Net Profit+ Non operating expenses- Non operating incomes 4) Return on Investment (ROI)- Measures the total performance of the firm.
ROI= [EBIT (1-t)]/Average total assets. 5) Payout ratio- Measures the proportion of earnings paid out as dividends.
= Dividends per share/ Earnings per share 6) Earnings per Share- Indicator of how much of the earnings accrue to each individual share. = PAT/ Number of equity shares This ratio is an indicator of profitability from the shareholder’s viewpoint. 7) Price earnings ratio- Measures the ratio of MPS/EPS. A high P/E ratio would mean that the shareholders feel the firm has good growth opportunities, or that their earnings are relatively safe, and thus, more valuable. = Stock Price/EPS 8) Dividend Yield- This is simply the expected dividend as a proportion of the stock price. If a stock has relatively low dividend yield, it would mean that the investors are looking for the compensation of rapid growth in dividends, and consequent capital gain. = Dividend per share/Stock Price. For most profitability ratios, a higher figure is indicative of better performance (the payout ratio and the dividend yield do not necessarily follow this rule)
Tobin’s Q The ratio of the market value of the company’s debt and equity to the current replacement cost of it’s asset is called Tobin’s q, after the economist James Tobin. = Market Value of debt and equity/Estimated replacement cost of assets The numerator includes all the firm’s debt and equity securities. The denominator includes all assets. These assets are considered at what it would cost to replace them. Tobin states that firms have an incentive to invest when q>1, that is, capital investment is worth more than the cost of replacing it. They would stop investing when q becomes
The report about all the financial ratios, key terms in balance sheet, as well as effect of various parameters on balance sheet and profit and loss account.
BASIC FINANCIAL ACCOUNTING
1. Financial Ratios
Leverage Ratios 1) Debt Ratio- Measures the Ratio of long-term debt to long-term capital. It indicates what proportion of the firm’s capital is financed through debt. Debt ratio= Long-term debt+ Value of leases______ Long-term debt+ Equity+ Value of leases 2) Debt equity Ratio- Measures the relative shares of outsider’s funds and owner’s funds in the firms capital structure. Debt Equity Ratio= Long term debt Equity The ideal figure for this ratio for firms in India is considered to be 2:1 to 3:1.
3) Interest Coverage Ratio- shows the capacity of the firm to meet its interest obligations out of its earnings. = EBIT+ Depreciation Interest (EBIT is earnings before interest and tax)
Profitability Ratios 1) Gross Profit Ratio- Proportion of gross profit to sales.
Gross Profit = Sales- Cost of Goods sold GP ratio= (GP/Sales)*100
2)
Net Profit Margin
= (Net profit/Sales)*100 Net profit= EBIT- Tax 3) Operating net profit ratio- shows the proportion of earnings from operation to Sales = (Operating NP/Sales)*100, where Operating Net profit= Net Profit+ Non operating expenses- Non operating incomes 4) Return on Investment (ROI)- Measures the total performance of the firm.
ROI= [EBIT (1-t)]/Average total assets. 5) Payout ratio- Measures the proportion of earnings paid out as dividends.
= Dividends per share/ Earnings per share 6) Earnings per Share- Indicator of how much of the earnings accrue to each individual share. = PAT/ Number of equity shares This ratio is an indicator of profitability from the shareholder’s viewpoint. 7) Price earnings ratio- Measures the ratio of MPS/EPS. A high P/E ratio would mean that the shareholders feel the firm has good growth opportunities, or that their earnings are relatively safe, and thus, more valuable. = Stock Price/EPS 8) Dividend Yield- This is simply the expected dividend as a proportion of the stock price. If a stock has relatively low dividend yield, it would mean that the investors are looking for the compensation of rapid growth in dividends, and consequent capital gain. = Dividend per share/Stock Price. For most profitability ratios, a higher figure is indicative of better performance (the payout ratio and the dividend yield do not necessarily follow this rule)
Tobin’s Q The ratio of the market value of the company’s debt and equity to the current replacement cost of it’s asset is called Tobin’s q, after the economist James Tobin. = Market Value of debt and equity/Estimated replacement cost of assets The numerator includes all the firm’s debt and equity securities. The denominator includes all assets. These assets are considered at what it would cost to replace them. Tobin states that firms have an incentive to invest when q>1, that is, capital investment is worth more than the cost of replacing it. They would stop investing when q becomes