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Module 1: Ratio and Financial Statement Analysis

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Namaste.In the last session we were discussing the financials of Reliance industries, we haveconsidered their P and L, balance sheet, cash flow and have also calculated few of the ratios.So, what we are doing is the company analysis for the company taking 5 year data, let uscontinue with the same.So, we had come up to this net working capital to sales ratio and we had seen that the movementis really very interesting from plus 8 percent to minus 32 percent.So, much is a negative working capital now as a percentage of sales.Next one is sales per share, so, take the sales and divide it by number of shares.So, 14477.98 and if you drag it over a period of time you can see there is a slow fall inthe sale per share because the sale performance has dropped while the number of shares havegone up.So, there is a fall in sale per share the next is very important figure from financialstock market angle that is EPS or Earning Per Share.So, numerator I think you all know we take PAT this is the total profit of the companydivided by number of shares to know the profit available per share.So, 76 the earning per share has increased in March 17 because, the profit have gonethe up, but now it has significantly decreased because number of shares have also increasednow.Dividend per share here we have just taken one hypothetical amount for dividend and wedivide it by number of shares to get dividend per share.So, dividend divided by number of shares, I think there is some confusion we will doit again.So, 34.02 it has more or less remain constant over the period.The next one is dividend yield, now this is important ratio and slightly a different ratiobecause it is trying to leak dividend to market prices, we will try to calculate it on averagebasis because we know the average market price.So, dividend is a return to the shareholder which we have calculated on per share basisdivide it by average market price during the year; 0.04 let us do it as a percentage.So, 4.20 percent over the years it has fallen because market prices have increased dividendhas not increased much fine.Now, book value per share this we know from balance sheet that what is the net worth andcalculate it on per share basis.This is going to be a pretty high amount it represents the total value of the companyif the whole of the company is sold off today on per share basis.So, it is 83133 in terms of millions of rupees and it has now gone up to 105959.The next ratios are price related ratios PE ratio.So, price per earning it can be done at a particular point of time, but right now wewill do on average.So, average price during the yeardivided by earning per share.So, its 10.59 for 1 for the shares sorry it is not for 1 share it is 10.59 times and youcan see it has gone up now it is substantially high it is 23 what does it show higher isgood or lower is good?Normally, from the company’s reputation view point higher is good; that means, marketis giving more importance to this particular company’s earnings, but from investors viewpointmany times lower may be good because that could be a good time to buy the shares.Of course, there are other market related factors also which go into the PE becausethe price of the share also depends on vast market and economic related factors.The next is price to book value ratio we have just calculated book value per share.Now we will try to link it to the prices.Now let us go to dividend payout ratio.So, we have already calculated dividend per share we will divide it by the, we will takethe market price.So, dividend per share upon market price this is the percentage of earning the shareholdersare gettingusually calculated as a percentage.So, I am sorry there is some confusion, earlier we have already calculated dividend yieldwhich is market dividend per share upon market price currently we have been asked to finddividend payout, what dividend payout means is from 100 rupees of earning how much moneyis being paid out as a dividend.So, it is DPS upon EPS.So, DPS divided by EPS.So, 44.46 percent is a dividend payout, you can see it has slightly gone up which showsthat more percentage is being now paid as a dividend out of the available profits tothe equity owners.Now, the three next three ratios are related to performance of employees.So, this is a semi financial ratio you can say because the denominator will be now numberof employees and we will try to link the sales average wages and average net profit to thenumber of employees.So, first one is sales upon number of employees.So, it is 181782 millions per employee and you can see there is a fall because therehas not been much increase in the sales.In fact, there was a decrease in the sales and only in the last year there is a slightrise.Average wages per employee.So, total wage data is available divided by number of employees.So, 2331 millions there is some confusion in this data because number of employees arein per 1000 that is why we are getting very high figure.So, do not worry they are not getting that much of amount we will have to what we aredoing is we are taking the total amount in million and take dividing by number of employeesin terms of 1000.So, further we need to divide by 1000 to get the correct figure, so then we will get just2.Same way even for average sales per employees then it was necessary to divide it by 1000,remember this is in millions of rupees the next is average net profit per employee.So, we are taking profit after tax and dividing it by number of employeesand further dividing by 1000 because number of employees are in 1000’s.So, 9.41 it has gone up now because recent years the profitability is bit improved.Now the last two ratios are net sales to operating cash flow ratios, we have not done many ratioson cash flow.So, we know the cash generated from operations is a operating cash flow and we have got netsales figures.So, we are trying to link our sales to operating cash flow.You can see that there is a slow fall in the ratio.So, the higher figure we will mean that the in relation to sales the operating cash flowshave been low, right now it is a bitter sign that slowly the ratio is going down.And the last one we will try to know the profits as a percentage of operating cash flow.So, since they have asked for net profit we are calculating profit after tax and dividingit by cash flow from operations it will be better understood as a percentage.So, profits are about 52 percent and now they have they have more or less remain constantthey are now 50 percent.It will actually make better sense if we link PBDIT because that is a profit cash profitfrom operations.So, let us link that as well.So, we are linking our cash profit to cash from operating activities.So, let us take profit before tax add interest, add depreciation which is our PBDIT and divideit first by cash from operations.So, you are getting 0.99 1.31 the amount is close to 1 is it correct it is correct becauseboth are showing the cash generated one is a profit generated on cash basis the otheris cash generated from operations, that is why the amounts are fairly close its 0.991.33 etcetera.So, we have tried to calculate variety of ratios there here.As I told you one can calculate 100s of ratios, but each ratio from each stakeholder’s angleis very important.So, here we have tried to calculate number of important ratios and try to understandthe significance of the major ratios and try to work them out for different companies because,that will give you insight about the performance or financial position or cash flow of thatparticular company.So, let us stop here, Namaste.