Financial Ratios Lecture Notes

Overview

• PE Ratio (Price to Earnings): A valuation ratio used in fundamental analysis.
• Agenda: Understanding valuation and operating ratios.

Financial Ratios Recap

• Purpose: Indicators of company performance.
• Categories:
  • Profitability Ratios
  • Leverage Ratios
  • Valuation Ratios
  • Operating Ratios

Valuation Ratios

1. Price to Earnings Ratio (P/E Ratio)

• Definition: Current stock price divided by earnings per share (EPS).
• Formula: P/E Ratio = Current Stock Price / EPS
• Example:
  • D Mart's current stock price: 4415
  • EPS: 23.04
  • P/E Ratio: 191.62
• Interpretation: Higher P/E indicates the stock might be overvalued.
  • Rule of Thumb: Good P/E is usually 15-30.
  • Compare with industry peers.
• Note: Higher P/E can imply future growth potential.

2. Price to Book Ratio (P/B Ratio)

• Definition: Current stock price divided by book value per share.
• Formula: P/B Ratio = Current Stock Price / Book Value Per Share
• Example:
  • D Mart's book value per share: 211.5
  • P/B Ratio: 20.87
• Interpretation: Trading over 20 times its Book value; high P/B indicates potential overvaluation.
  • Rule of Thumb: P/B ratio below 1 indicates undervaluation.

3. Price to Sales Ratio (P/S Ratio)

• Definition: Current stock price divided by sales per share.
• Formula: P/S Ratio = Current Stock Price / Sales per Share
• Example:
  • D Mart's sales per share: 9.19
  • P/S Ratio: 9.19
• Interpretation: For every 1 rupee in sales, the stock is valued at 9.19; lower P/S is better for investment.

Operating Ratios

1. Fixed Asset Turnover Ratio

• Definition: Measures efficiency in using fixed assets to generate revenue.
• Formula: Revenue / Average of Fixed Assets
• Example:
  • Average Fixed Assets: 6854 crores
  • Revenue: (from P&L statement)
  • Ratio: 4.51
• Interpretation: Higher ratios indicate better efficiency.

2. Total Asset Turnover Ratio

• Definition: Measures efficiency in using total assets to generate revenue.
• Formula: Revenue / Total Average Assets
• Example:
  • Ratio: 2.12
• Interpretation: Higher ratios suggest better overall asset efficiency.

3. Working Capital Turnover Ratio

• Definition: Efficiency in using working capital to generate revenue.
• Formula: Revenue / Average Working Capital
• Example:
  • Working Capital: 224 crores
  • Ratio: 12
• Interpretation: Higher ratios mean better management of working capital.

4. Receivables Turnover Ratio

• Definition: How frequently the company collects cash from its debtors.
• Formula: Revenue / Average Receivables
• Example:
• Receivables: (from balance sheet)
• Ratio: 562.92
• Interpretation: Higher ratios indicate efficient cash collection.

Conclusion

• Summary of Financial Ratios: Understanding profitability, leverage, valuation, and operating efficiency.
• Next Steps: Learning to value companies and identify investment opportunities.

Note: Keep watching the series in the correct order for better understanding.