Ratio Analysis

Once the Financial Statement is prepared for an organization, they need to be analyzed. One such tool to analyze and assess the financial situation of a firm is Ratio Analysis. It allows the stakeholder to make better sense of the accounts and better understand the current financial scenario of an entity

Here we have covered some very useful ratios which convey a large part of how the company is working, how it is performing, how much profits it is making, and how its asset allocation is working

Ratios which we have covered:

1. ROE – Return on Equity

Return on Equity is nothing but returns generated by the company on shareholder’s equity. The formula of Return on Equity is:

Du Pont ROE

Du Pont ROE is the breakup of Return on Equity,

Return on Equity is increase by an increase in profit margin, asset turnover, and leverage ratio. If Increase in ROE is due to an increase in leverage ratio while other 2 ratio such as Profit margin and asset turnover remains constant then market acts negatively. But if a 20% to 30% return is generated due to solely Profit margin or asset turnover then the market act positively. The do Pont ROE is very essential to uncover the reason behind the increase in ROE

ROCE – Return On Capital Employed

ROCE is the ratio that shows the returns generated by the company on its capital employed or capital invested i.e. (equity+ debt). Here we are assuming debt as equity. the formula of ROCE is:

Here the reason for taking EBIT in the numerator is that capital employed includes the capital of both debt and equity holder. So from this formula, we are calculating ROCE which included the return of debt holder as well as equity holder and interest is the return of debt holder that the return of taking EBIT

The Reason behind taking EBIT * (1-t) is Profit is available to equity shareholders after deduction of Tax expenses and interest is also tax-deductible.

ROIC – Return On Invested Capital

ROIC calculates the returns earned by the company from its core business asset. The formula of ROIC is

Here the reason for taking Core business assets is that there is a non-operating asset like Investment line item in the manufacturing business which is not the core asset of the business. Including non-operating business assets in calculating returns on capital shows a false picture of the business. ROIC neglect such non-operating asset and income other than operation and shows pure return on capital of business

ROIIC – Return On Incremental Invested Capital

ROIIC shows how much return the company has generated on its incremental investment in the business (Core assets)

In the formula, we take (EBIT – Other Income)*(1-T) of (year 2 minus year 1), which is incremental Profit of this year

And we take Core assets of (Year 1 – Year 0), instead of (Year 2 – Year 1), because if the company do CAPEX, it takes time for the asset to be ready to generate revenue, hence if the company input Plant today, that will be ready to operate in the next year

Hence, ROIIC tells how effective a company’s CAPEX is, which is a very useful metric

If management is telling that they are entering into a value-added product, the company’s ROIIC should be high

Hence it becomes easy to track management’s talks

We have provided all the data from the company’s Annual report itself

Ratio Analysis on companies of Asset Management Sector

ratio-analysis of Asset management IndustryDownload

Ratio Analysis of:

Jagran Prakashan

Thomus Cook

DB corp


Published by Aakash and Meet

I am Aakash Raotole I am currently doing Bcom from Dr. Patel and Rb Patel commerce college I am currently studying at finnacle investment academy Recently done distance internship with windrose capital, Pune - for a period of 14 weeks I am Meet Bhatt Completed HSC in commerce Now studying finbridge program at finnacle investment academy and Bcom externals I had completed CFA institute's investment foundation course and distance internship with Windrose capital, Pune - for a period of 14 weeks

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