Ratio Analysis– Part 5 – Profitability Ratios · DuPont Model – Asset Turnover Asset turnover...
Transcript of Ratio Analysis– Part 5 – Profitability Ratios · DuPont Model – Asset Turnover Asset turnover...
Ratio Analysis– Part 5 – Profitability Ratios Paper 3B: Financial Management Chapter 3 Unit I
CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT
Learning Objectives
1. Gain Knowledge on Profitability Ratios
2. Usage of various Profitability Ratios
3. Preparation of various Profitability Ratios
2
Introduction to Profitability Ratios
• Background • Types of Profitability Ratios
3
Profitability Ratios - Background
Profitability Ratios
Meaning
Categories
4
From Owner’s Point of view
5
Profitability ratios required for analysis from Owner’s point of view
6
Required for analysis from Owner’s point of view
Return on Equity (DuPont Model)
Earnings Per Share
Dividend Per Share
Price Earning Ratio
Return on Equity
ROE is one of the most important indicators of a firm’s profitability and potential growth
Formulae: Profit After Taxes/ Net Worth
Measures the profitability of equity funds invested in the firm
7
Return on Equity – DuPont Model
8
Components of DuPont Model
Net Profit Margin
Asset Turnover
Equity Multiplier
DuPont Model – Net Profit Margin
Net profit margin is a safety cushion: Lower the margin, less room for error
Formulae: Net Income / Revenue
Net profit margin is simply the after tax profit a company generates for each rupee of revenue
9
DuPont Model – Asset Turnover
Asset turnover ratio tends to be inversely related to the net profit margin.
Formulae: Revenue / Assets
A Measure of how effectively a company converts its assets in to sales
10
DuPont Model – Equity Multiplier
Formulae: Assets / Net Worth
Equity Multiplier is a measure Financial leverage, allows investor to see what portion of the return is
the result of debt
It is possible for a company with good sales and margins to take excessive debt and artificially
increase its return on equity
11
Earning Per Share
Formulae: Net Profit available to Equity Shareholders/
Number of Equity Shares outstanding
Measures the profitability of a firm in terms of earning per Equity share
12
Dividend Per Share
Formulae: Net Profit distributed to Equity Shareholders/
Number of Equity Shares outstanding
Indicates the amount of profit distributed to each equity share
13
Price Earning Ratio
Formulae: Market Price per Share / Earnings per Share
Indicates the expectations of the equity investors about the earnings of the firm
14
Based on Assets / Investments
15
Based on Assets / Investments
Return on Capital Employed (ROCE) / Return on Investment (ROI)
Return on Assets (ROA)
16
Return on Capital Employed (ROCE)
Capital Employed = Total Assets – Current Liabilities (or) Fixed Assets + Working Capital
NOPAT = EBIT (1-t) – Non-operating Income
Formulae: NOPAT x 100 / Capital Employed
It is the percentage of return on funds invested in the business by its owners
17
Return on Capital Employed (ROCE)
ROI can be improved either by improving operating profit or capital turnover or both
Capital Turnover Ratio = Sales / Capital Employed
Profitability Ratio = Return / Sales x 100
ROCE = Profitability Ratio x Capital Turnover Ratio
18
Return on Assets
Return on Assets = Net Profit After Taxes / Average Tangible Assets
Return on Assets = Net Profit After Taxes / Average Total Assets (or)
This ratio measures the profitability of the firm in terms of assets employed in it.
19
Based on Sales
20
Profitability Ratio based on Sales
Classified in to following ratios
Gross Profit ratio – Gross Profit x 100 / Sales
Operating Profit ratio – Operating Profit x 100 / Sales
Net Profit ratio – Net Profit x 100 / Sales
21
Based on Capital Market Info
22
Based on Capital Market Information
Classified in to following ratios
Price – Earning Ratio = Average Share Price / EPS
Yield = Dividend / Average Share Price
Market Value / Book Value per share = Average Share Price / Book Value per share
23
Lesson Summary
24
2. We had discussed various categories of Profitability ratios in detail (including DuPont
Model) and their usage.
1. We have learnt the meaning and categories of Profitability ratios
Testing time
25
Profitability Ratios - Multiple Choice Questions
26
MCQ – 1
Return on Equity measures the _________ of Equity funds invested in the firm
C. Liquidity D. Profitability
Answer: D. Profitability
A. Activity B. Capital Structure
27
MCQ – 2
The profitability of a firm from the point of view of ordinary shareholders can be measured in terms of __________
A. Earnings per share
C. Return on Investment
B. Dividend per share
D. Gross Profit Ratio
Answer : A. Earnings per share
28
MCQ – 3
Following is excluded for calculation of Return on Capital Employed
A. Intangible Assets
C. Fictitious Assets
B. Fixed Assets
D. Current Assets
Answer : C. Fictitious Assets
29
MCQ – 4 _______ ratio is used to compare the product profitability
A. Net Profit
C. Operating Profit
B. Gross Profit
D. Earnings per share
Answer : B. Gross Profit
30
MCQ – 5
_____ indicates true return in which share capital is taken at its market value
A. Earnings per share
C. Price – Earning Ratio
B. Yield
D. Net Profit Ratio
Answer : B. Yield
What Next ……
31
Follow the below Presentations
Ratio Analysis Part 1 – Overview
Ratio Analysis Part 2 - Liquidity Ratios
Ratio Analysis Part 3 - Leverage Ratios
Ratio Analysis Part 4 – Activity Ratios
32
Thank You
33