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Outline 3 different comparisons an analyst may include when evaluating the performance of a company. (Not...

Outline 3 different comparisons an analyst may include when evaluating the performance of a company. (Not asking for specific ratios)

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Answer #1

Financial Ratios:

1.Help assess the risk and return of companies

2. Help in comparison within a industry at a particular point of time.

3.provide a profile of the firm, economic characteristics, competitive strategies

4.depict unique operating, financial and investing characteristics.

1. Profitability analysis

It is an ability to generate and maintain profitability. There are two dimensions with in profitability analysis

a. with respect to Sales

1. Gross Profit margin = (Gross Profit / Sales) * 100

2. Net profit margin= (PAT/Sales) * 100

3. EBIT Margin = (EBIT/Sales)*100

a. with respect to Investments

(i) Return on Capital Employed (ROCE) = EBIT(1-t) / Total Capital Employed

(ii) Return on equity (ROE ) = (PAT - Preference divident)/Net Worth

(iii)   Return on Total Assets (ROA) = EBIT(1-t)/Average Total Assets

These ratios measure the profit in relation to capital investments. It is the ultimate measure of the company’s overall performance and productivity of capital employed.

2. Long Term Solvency Analysis

This analysis shows the ability of a company to meet its long term obligations, primarily debt.

It evaluates the risk borne by the firm.   

1.Debt ratio

2.Debt to Equity

3.Total Debt to Tangible Net worth

4.Cash flow from Operations to total debt

5.Interest coverage

6.Debt service coverage

3. Du Pont Analysis

Du Pont Analysis helps an analyst to understand the relation between two ratios and its impact on the return ratios.

It helps to identify the factors which affects the return to the equity shareholders

ROA = Net Profit Margin * Total Asset Turnover

= (PAT/Sales ) * (Sales/Total Assets)

=  Profitability * Efficiency

ROE = Net Profit margin * Total Assets TurnOver * Equity Multiplier

ROE =   (NPAT /Sales ) * (Sales /Total Assets )   *   (Total Assets  /  Equity)

ROE= ROA* Financial Leverage

= Profitability* Efficiency* Leverage

           

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