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Iapm - Ratios & Dupont Explanation

The document discusses various financial ratios that can be used to analyze a company's financial health and performance. It defines ratios such as the current ratio, debt-to-equity ratio, debtors' turnover ratio, interest coverage ratio, and inventory turnover ratio. It also discusses DuPont analysis, which breaks down return on equity into its components - asset turnover, financial leverage, net margin, and return on equity. The document notes that some ratios like the interest coverage ratio and inventory turnover ratio indicate the company is performing well compared to previous years.

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Parvathi M L
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37 views2 pages

Iapm - Ratios & Dupont Explanation

The document discusses various financial ratios that can be used to analyze a company's financial health and performance. It defines ratios such as the current ratio, debt-to-equity ratio, debtors' turnover ratio, interest coverage ratio, and inventory turnover ratio. It also discusses DuPont analysis, which breaks down return on equity into its components - asset turnover, financial leverage, net margin, and return on equity. The document notes that some ratios like the interest coverage ratio and inventory turnover ratio indicate the company is performing well compared to previous years.

Uploaded by

Parvathi M L
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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RATIOS

1) CURRENT RATIO: IT TALKS ABOUT, how will we are able to address our short term liabilities. the
ideal ratio is 2:1. Here, we can see that current ratio is not so good. It is calculated as (current
assets/ current liabilities)

2) Debt – Equity ratio: The debt-to-equity (D/E) ratio compares a company’s total liabilities to its
shareholder equity and can be used to evaluate how much leverage a company is using. Here we can see
that the assets are more funded by debt . It is calculated as (Total debts/ Shareholders equity)

3) Debtors’ turnover ratio: it is also known as accounts receivables turnover ratio. it indicates the
number of times average debtors have been converted into cash during a year. It is a efficiency ratio. we
can see that there is a good number of times of increase in 2021 compared to 2020. It is calculated as
(SALES/ RECEIVABLES)

4) Interest coverage ratio: it is a long-term solvency ratio. It tells how easily a company can pay
interest on its outstanding debt. the ideal ratio is 2 to 3. if we can see here, the interest coverage ratio in
2021 is 4.42 which is good compared to other years. It is calculated as (EBIT / FINANCE COST).

5) INVENTORY TURNOVER RATIO: It indicates the rate at which a company sells and replaces its
stock of goods during a particular period. Ideal ratio ranges between 5 to 10. So, the company is doing
good with respect to this. It is calculated as (Cost of goods sold / Avg inventory for same period)

DUPONT ANALYSIS
It is used to evaluate the component parts of a company's return on equity. it allows investors to
determine what financial activities are contributing the most to changes in RoE.

1) Asset turnover ratio: It measures the efficiency of company’s assets in generating revenue or
sales. Calculated --- SALES/ ASSETS

2) FINANCIAL LEVERAGE: Basically, it assess the ability of a company to meet its financial
obligations.

3) Net Margin: It measures how much net income is generated as a percentage of revenue received.

Calculated ----- PAT/ SALES


4) Dupont is calculated as Asset turnover * financial leverage* Net margin

5) ROE = PAT/ SHARE HOLDERS EQUITY

There was increase in the net margin and asset turnover in 2021 compared to previous years. Resulting
in the increase in RoE. So, it is good sign for the company.

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