#Stock-Market  #Fundamental-Analysis  #Finance 

Financial Ratio

General terms used

  • Total Equity = Shareholders Equity
    • Equity Share Capital + Prefered Equity + Reserve
    • –> Book Value(BV)
  • Capital = Total Equity + Debt
  • Book value per share
    • –> Price to Book Ratio(P/B)
  • Net Sales = Topline = Total Revenue
    • Total anount of sales made
  • Capital Raising - 2 Ways
    • Equity Capital
      • Shareholders are the part owners of Company’s Profitability
    • Debt Capital
      • Short-term
      • Long-term
  • Debt = Borrowings + Other financial liablities
  • Earning Per Share(EPS)
    • Net Profit / No. of Equity Shares
    • It changes if Bonus, New Issue, Split

Profitability Ratio

PAT margin

  • Profit After Tax(PAT) or Net Profit
    • Actual Profit
    • Total profit left after paying TAX
  • PAT margin = Profit percentage in terms of Revenue
PAT = PBT - TAX
PAT Margin = PAT/Topline

EBIT Margin

  • Earning Before Interest and Tax(EBIT) or Operating Profit
    • Tax and Interest Not Subtracted
EBIT = PAT + Taxes + Finance Cost  OR
EBIT = PBT + Finance Cost
EBIT Margin = EBIT/Net Sales

EBITDA Margin or OPM

  • Earning Before Interest, Taxes, Depreciation, and Amortization(EBITDA)
  • Also term as Operating Profit Margin(OPM)
  • It is used to see how much operating profit a company is making
  • Tells Operational Efficiency
EBITDA = PAT + Taxes + Finance Cost + Depreciation
EBITDA Margin = EBITDA/Net Sales

Return Ratio

Return on Equity(ROE)

  • ROE is used in Debt free Company
    • Eg: FMCG(HUL, LTC)
    • Because they can advantage of debt to increase ROE
ROE = PAT / Shareholders Equity
ROE = PAT FY20 / Avg Shareholders Equity of FY19 and FY20
ROE = [ 2,496/{ (15,197+12,927)/2 }] * 100 = 17.75%

Return on Capital Employed(ROCE)

  • ROCE is used in Debt Company
    • Eg: Infrastracture, Telecom Sector
Capital Employed =  Shareholders Equity + Debt Capital
ROCE = (EBIT / Avg Capital Employed) * 100
ROCE = (3,455/15,664.5) * 100 = 22.01%

ROA

  • In Banking sector
    • ROA is considerd instead of ROCE
    • Loans —> are Banks Assets

NOTE:

  • For Debt-free Company ROE != ROCE because PAT and EBIT is used in the calculation of ROE and ROCE respectively
  • Issue: Make ROE High
    • IF a Company has High Debt and has less Equity
    • ROE is HIGH –> when Earning form Debt is Good
    • ROE is LOW –> when Earning from debt is low but interest pay is HIGH
  • Issue:Make ROCE, ROE High
    • If a High Dividend is given, So Reserve & Surplus does not increase
    • May misLead to High ROCE, ROE

Leverage Ratio

Debt/Equity(D/E)

# D/E = Total debt/Shareholders Equity

D/E < 1 --> Debt capital < Shareholders Equity
D/E > 1 --> Debt capital > Shareholders Equity
D/E = 1 --> Debt capital = Shareholders Equity
  • Ideally should be D/E < 1 – except Banks and NBFCs
  • Compare Same Sector
  • But D:E = 2:1 is at max acceptable.

Interest Coverage Ratio

  • It will help us to see if the firm can pay interest on the outstanding debt
  • Higher the ratio is better
  • Ideally ratio > 2.4
* Interest Coverage Ratio = EBIT/ Interest Expense
* Interest Coverage Ratio = (PBT + Finance cost) / Finance cost

Valuation Ratio

Price to Earning (P/E or PE) Ratio

  • PE Ratio tells us how much price an investor pays for Rs 1 of earning of the company
PE Ratio = Maket price per Share(MP) / Earning per Share(EPS)
PE Ratio = Market Cap / PAT
PE Ratio = MP/EPS = (say 100) / (say 10) = 10
Any Investor is ready to `pay 10 times of Earning` of the share
Eg: PE of SGB = 100/2.5 = 40
  • Types
    • TTM PE (Traling 12 Month PE)
    • Forward PE
  • Indices PE
    • PE 16 Under Valed Zone
    • PE 21 Over Valued Zone

Price to Book Ratio(P/B or PB)

  • Book Value is the amount that would be left if the company liquidate all of its assets and repaid all of its liability
  • PB tells us how much multiple-time price an investor pays for the asset
Book Value(BV) = Assets - Liabalities = Common Shareholders Equity
BV per Share = BV / Total shares --->  (Say 50) / (say 10) = 5

P/B = Maket price per Share(MP) / BV per Share --->  (say 20) / 5 = 4
# Investors are ready to `pay 4 times of their Net Assets`
  • PB is more stable than PE
    • In difficult times like Covid19 – PB is more Useful
  • PB not useful for less capital intensive industries
    • IT Companies

PEG Ratio

  • Price / Earning to Growth Ratio
  • PEG = PE / Growth in PAT – CAGR growth in last 5yrs
* PEG < 1 --> Company is undervalued
* PEG > 1 --> Company is Overvalued
* PEG = 1 --> Company is Fairly valued
  • Better PEG
    • Avg Growth = Avg CAGR growth of PAT, Revenue & EBITDA in lasy 5yrs
    • PEG = PE/ Avg Growth
    • Consider those 3 paramater instead of only PAT
    • And compare with peers, industry

Reference