Post by Equity Section on Aug 22, 2011 16:11:20 GMT 5.5
Financial ratios are mathematical ratios that indicates to the health of a company as well as its efficiency. There are loads of such ratios which analysts use in various ways for their purposes. I'll be discussing here only those which I use and which as per me are the most important. I'll be again using Hawkins Report for demonstration purpose. The link for which is given below.
equitysection.proboards.com/index.cgi?action=downloadattachmentpage&board=fundamentalanalysis&thread=5&post=9
1. Debt / Equity : Its simply the the ratio between Total Loan Funds and Shareholders' Fund. It indicates about the ability of the company to pay its debts. The smaller the figure in decimals, the better. If the figure approaches 1 or above, one should be worried about the company and shall investigate further into the reasons. Larger the debt, larger the interest cost and larger the pressure on Working Capital.
For Hawkins Cookers, Debt / Equity is 20.25 / 46.08 = 0.43. Since the Debt / Equity is below 1, it indicates comfortable debt situation. Investors must also keep track of this ratio over years and dig into the reasons over its increase or decrease.
2. Return on Capital Employed (ROCE) : ROCE is a percentage figure involving two components, Operating Earning before Interest, Depreciation, Taxation & Amortisation (OEBIDTA) and Capital Employed. ROCE gives the percentage of return over capital employed for conducting business. It indicates towards the efficiency of business. Higher the percentage, the better the business it is.
ROCE = (OEBIDTA / Capital Employed) X 100
(i) OEBIDTA : Its Profit from business Operations without deducting Interest, Depreciation, Taxation & Amortisation. It doesn't include earning from Other Operations. This figure can be obtained from Profit & Loss Statements.
(ii) Capital Employed : Different sources indicate different meanings of Capital Employed. In fact, most of them're vague. In Applications of Funds section in Balance Sheet, only Fixed Assets and Net Current Assets / Working Capital are involved in business operations. The third component, Investments doesn't aid in running day-to-day business operations. So, here, we'll include Fixed Assets and Working Capital as Capital Employed.
Now, for Hawkins Cookers, if we calculate ROCE, then
OEBIDTA = Sales net of Excise Duty - (Materials + Expenses)
= 331.54 - (136.73 + 150.88)
= 43.93 crores
Capital Employed = (Net Block + Capital Work in Progress) + Net Current Assets
= (17.36 + 1.18) + 48.55
= 67.09 crores
ROCE = (OEBIDTA / Capital Employed) X 100
= (43.93 / 67.09) X 100
= 65.47%
Practically, very few businesses have such high ROCE.
3. Cash Conversion Cycle : It has been discussed earlier equitysection.proboards.com/index.cgi?action=display&board=fundamentalanalysis&thread=6&page=1#16
4. Dividend / Net Profit : Ideally, we invest in a company to have a share in its profits in the form of dividends. The amount to be distributed as dividends to the shareholders is decided by the Board of Management of the company. Dividend as a percentage of Net Profits tells us about the ethics of the management regarding sharing the profits of the company with the shareholders. The higher the dividend pay-outs, the better it is. Higher dividend pay-outs to the shareholders also indicates that the business is quiet efficient and is also able to make quick cash. Often high dividends as percentage of Net Profits indicates towards some inherent strength of the company. Dividend figure is found in the Profit & Loss Statement under Appropriations.
For Hawkins Cookers, Dividend / Net Profit = (21.15 / 31.76) X 100
= 66.59%
Hawkins Cookers is amongst the highest dividend payers to its shareholders.
These are the few ratios to which I pay great attention to. Members or investors can similarly develop their own diiferent indicators or ratios to facilitate their decisions.
equitysection.proboards.com/index.cgi?action=downloadattachmentpage&board=fundamentalanalysis&thread=5&post=9
1. Debt / Equity : Its simply the the ratio between Total Loan Funds and Shareholders' Fund. It indicates about the ability of the company to pay its debts. The smaller the figure in decimals, the better. If the figure approaches 1 or above, one should be worried about the company and shall investigate further into the reasons. Larger the debt, larger the interest cost and larger the pressure on Working Capital.
For Hawkins Cookers, Debt / Equity is 20.25 / 46.08 = 0.43. Since the Debt / Equity is below 1, it indicates comfortable debt situation. Investors must also keep track of this ratio over years and dig into the reasons over its increase or decrease.
2. Return on Capital Employed (ROCE) : ROCE is a percentage figure involving two components, Operating Earning before Interest, Depreciation, Taxation & Amortisation (OEBIDTA) and Capital Employed. ROCE gives the percentage of return over capital employed for conducting business. It indicates towards the efficiency of business. Higher the percentage, the better the business it is.
ROCE = (OEBIDTA / Capital Employed) X 100
(i) OEBIDTA : Its Profit from business Operations without deducting Interest, Depreciation, Taxation & Amortisation. It doesn't include earning from Other Operations. This figure can be obtained from Profit & Loss Statements.
(ii) Capital Employed : Different sources indicate different meanings of Capital Employed. In fact, most of them're vague. In Applications of Funds section in Balance Sheet, only Fixed Assets and Net Current Assets / Working Capital are involved in business operations. The third component, Investments doesn't aid in running day-to-day business operations. So, here, we'll include Fixed Assets and Working Capital as Capital Employed.
Now, for Hawkins Cookers, if we calculate ROCE, then
OEBIDTA = Sales net of Excise Duty - (Materials + Expenses)
= 331.54 - (136.73 + 150.88)
= 43.93 crores
Capital Employed = (Net Block + Capital Work in Progress) + Net Current Assets
= (17.36 + 1.18) + 48.55
= 67.09 crores
ROCE = (OEBIDTA / Capital Employed) X 100
= (43.93 / 67.09) X 100
= 65.47%
Practically, very few businesses have such high ROCE.
3. Cash Conversion Cycle : It has been discussed earlier equitysection.proboards.com/index.cgi?action=display&board=fundamentalanalysis&thread=6&page=1#16
4. Dividend / Net Profit : Ideally, we invest in a company to have a share in its profits in the form of dividends. The amount to be distributed as dividends to the shareholders is decided by the Board of Management of the company. Dividend as a percentage of Net Profits tells us about the ethics of the management regarding sharing the profits of the company with the shareholders. The higher the dividend pay-outs, the better it is. Higher dividend pay-outs to the shareholders also indicates that the business is quiet efficient and is also able to make quick cash. Often high dividends as percentage of Net Profits indicates towards some inherent strength of the company. Dividend figure is found in the Profit & Loss Statement under Appropriations.
For Hawkins Cookers, Dividend / Net Profit = (21.15 / 31.76) X 100
= 66.59%
Hawkins Cookers is amongst the highest dividend payers to its shareholders.
These are the few ratios to which I pay great attention to. Members or investors can similarly develop their own diiferent indicators or ratios to facilitate their decisions.
