Quick Practice: Ratio Analysis Questions (New Ratio: Puppet Ability Ratio).

Welcome you all to NISM series 15th century waste formula series where we are covering formula related explanations, related to national analysis, which are also discussed on numericals, and some questions that we find relevant are also covered here.

Formula of First Puppet Ability Ratio. 

First of all, we are coming to the Puppet Ability Ratio and here the higher the better indicator is. The more the company will profit, the better it will be for that particular business. And the share price of that particular company will also increase, which the company will keep delivering consistent profits. In this category, the first ratio is the gross profit margin ratio. When we say margin, it is computed on net sales. This means the formula here will be very simple. Gross profit divided by net sales into 100. 

How to calculate gross profit? 

For this, you will need COGS. That is, from net sales, you will get COGSGP. So you will get gross profit. And what does COGS mean? COGS means cost of goods sold. To compute cost of goods sold, a formula is used. And this formula is opening stock plus purchases plus factory level expenses minus closing stock. After doing this, you will get cost of goods sold. When you reduce the cost of goods sold in net sales, you will get gross profit. If you want to know more about this, then the related series of accounting is also made. The link of that playlist is given in the description box. You should definitely watch it. So your concepts will be cleared. Next, you will get EBITDA margin. Again, as I said, the margin will come in net sales denominator. What will come in numerator? EBITDA, that is, earning before interest and tax depreciation and amortization. To get margin, you need a percentage answer here. Profit EBITDA ratio is next to Pat margin calculation. That means profit after tax, which is also called net profit. So net profit divided by again net sales multiplied by 100. I didn't tell you anything about net sales. So net sales means that the figure of sales, that is the figure of total sales, we will minus the amount of GST. And we will minus the returns, that is, the returns of sales in that particular year. After doing that, you will get the value of net sales. So to calculate Pat margin, Pat divided by net sales in 200. After that, people also see operating profit margin. That means they see that at different levels, your profit and loss account or your vertical income statement, you are checking the profitability at different levels. So first you checked at the gross profit level, then you checked EBITDA, then you checked at operating profit, then you checked at Pat. That means you are seeing everywhere that this is the level at which the company is profitable. And here on here, how is the profitability reflecting. So to get operating profit margin, you need operating profit divided by net sales in 200. To get operating profit, you have to reduce the cost of goods from net sales. If you are not reducing the cost of goods, then you can take the gross profit value We will deduct the gross profit from the gross profit, office and administration expenses, selling and distribution expenses. After that, we will reduce some financial charges, such as bank charges, etc. After that, we will reduce the debt, that is, the depreciation and amortization value. And then we will get operating profit. Operating profit divided by net sales, we will get the operating profit margin. 

I hope you understood till this. I will once again insist you to watch the accounting series. Because if your accounting related concepts are unclear, then it will be clear there. After that, if you come here, then you will be able to understand things with more clarity. 

Formula of profitability ratio. 

The next star in profitability ratio is return on assets. Formula is Pat, that is, net profit divided by total assets in 200. Here, return on assets tells us that by deploying total assets in the company, that is, by utilising total assets, the company has earned so much profit. And here, the meaning of total assets is fixed assets and current assets. That is, both will be added, that will be your total assets. And the last formula in profitability ratio is the formula of return on equity. It is very important from the exam point of view. Along with this, there is another ratio of return on capital employed. The formula of return on capital employed was A bit divided by total capital employed in 200. Very good. I hope you remember this. Now, return on equity formula is very important from the exam point of view. This question comes in the exam, but it comes in a lot of turns. We have seen for a very short time that the question is very simple and easy to ask. The question comes in turns, but the formula you have to apply here is Pat divided by equity in 200. Now, equity is nothing but network, nothing but book value. You must have understood this much. As we said, in profitability ratio, gross profit margin, EBITDA margin, Pat margin, operating profit margin, return on assets, return on equity, return on capital employed. These are the things that are included. So, every category of ratio helps you to take a decision about the investing in a particular stock. In this session, the next ratio is the leverage category ratios. First of all, we will talk about the formula of debt-to-equity ratio. It is very simple, debt divided by equity. Debt means borrowed capital. Equity means owner's capital. No matter the long term of debt, the long term means that it is going to stay in your balance sheet for more than a year. 

So, in the market, you will get a set of investors who prefer zero-debt companies. So, there will be no debt-to-equity ratio here. So, there is no leverage company here. But how much should it be? 

For example, if the debt-to-equity ratio is 0.2, that is, when there is an equity of 1 rupee, then there is a debt of 20 paisa. This is how it is read. In the leverage ratio, there is the interest coverage ratio. Now, this ratio tells us that whatever debt you have taken from the market, the burden of interest comes. To manage this, or to bear this, does the company have sufficient amount of profit or not? Now, its formula is EBIT, the burden of interest expenses. Again, higher the better. For example, EBIT is 5,000 crore. And the interest expense is only 1,000 crore. So, it has gone 5 times. When you have an interest expense of 1 rupee, then you have 5 rupees at the level of EBIT. That is, you have 5 rupees at the level of interest and tax. Out of that, 1 rupee will go to the interest expense. So, you will have 4 rupees before the tax. In that, you will pay for the tax, then you will have a pack. Now, you have a sufficient portion of your interest expense or the burden of interest to bear. So, the interest coverage ratio tells you this. The next category of ratio you have is the liquidity ratio. How much liquid you have. You have liquid cash, or how much you have the portion with which you can bear your near-term expenses. This is compared with the peers, i.e. with competitors. Because basically, the liquidity ratio here is the standard industry, or the industry standard that we call it. There is nothing like that. For the current ratio, when we were in BCOM, the current ratio or industry parameter is of 2 to 1. But that is not the case with every industry. For the standard industry, there is no need for the current ratio to 1. So, current assets divided by current liability are the family of the current ratio. If there is one current liability, then the two current assets, i.e. when there is 1 rupee of liability, then the company has 2 rupees. Okay, that is good. But when we talk about current assets, we see that current assets are the assets that are going to be cashed in a year. i.e. cash can be disformed. We call this current assets. 

Who do we call current liabilities? 

Those who will bring the liability in a year. What are the assets in current assets? I will give you a list of them. You can write it down. In current assets, there are cash and cash equivalent, i.e. cash in height, bank balance and short-term deposit. Then comes the account receivable, which we also call debtors, i.e. payment coming from the customer, which is still remaining. If we collect the PR, then they also come into the current assets. Then the inventory, then it can be the inventory of raw material, it can be the stock of finished goods or the stock of work-in progress. Short-term investments also come into the current assets. Why? Because it can be entered in a year. i.e. you can have marketable securities, or you have treasury bills, then all these will come into the current assets. There are some previous expenses that you have paid, like you have paid advance tax, you have paid advance rent, you have paid some insurances in advance, then all these things will come into the prepared expenses, and that is also part of the current assets. After that, some receivables are left, like some GST funds are left, some tax recovery funds are left, some interest receivable is left, i.e. some money is left, then this itself will come into the current assets. What is there in current liabilities? Current liabilities are liabilities which we have to pay in a year. i.e. we have to pay. All these accounts can be payable, i.e. returns, which you have with you, which supplies and supplies, they have to be paid in a year. So you will give them money in a year. There will be short term loans and borrowings, i.e. you have to repay them in a year. For example, overdraft, or working capital loan, all these things come into the current liabilities. Then there will be some outstanding expenses, like the rest of the salary, i.e. the year is over, but the payment will be done in April of March, for the employees. So the outstanding salary will be seen here. We call it an outstanding expense and it comes into the current liabilities. It has to be given immediately in the next year, i.e. in the beginning of the next year, in the next financial year. For this, we put it in the current liabilities. There will be some remaining to pay for the rent, i.e. we have utilized the premises in this month, but in the next month, we are paying for the rent. It will come into the current liabilities. Then there will be some prepared orders, i.e. you must have already taken some advance. All these things come into the current liabilities. GST and income tax, there will be some remaining liabilities. This also comes into the current liabilities. The rest of the remaining shareholders will also come into the current liabilities. There are many such things that come into the current liabilities. So you also have to be aware of this. So the formula of the current ratio is the current liabilities. The industry standard is 2 to 1. But that is not standard for everyone. Because every industry parameter, as I said, can be different. For example, I say that there is a real estate business. So here you have seen that the inventory takes 2-3 years to build up. i.e. if you are making a 15-story building, then it can take 2-3 years. So the current assets will take time. In this period, the income will not be generated. So for this, I am saying that the current ratio is 2 to 1. So you have to compare the peers with the competitors.There is a quick ratio here. Like in liquidity ratio. And here the formula is quick assets divided by quick liabilities. Now let's talk about quick assets. So how will we calculate the quick assets here? So whatever I told you about in this list, you have to do minus inventories. In inventories, you get 3 inventories. You get the raw material inventory. You get the finished goods inventory. And you get the work-in-progress inventory. For this, you have to reduce it. Because inventory, if you want to do cash immediately, or if you want to make money by selling it, then the inventory is so easy that it does not convert in cash. But if you have cash, bank balance, marketable securities, that matter, then you can still convert them in cash in the short period. So quick ratio means if you want money immediately, then can you convert them in cash? You have to compute the quick liabilities here. Here you have the formula of quick liability. Current liabilities minus if there is any bank overdraft or any loan of bank overdraft, then the thing you have to reduce here then you get the quick liability. And the quick ratio, industry is a standard parameter. So what does the ratio and industry believe? So this sound ratio will be considered as the current ratio of 2 is to 1. Meaning if there is a current liability, then you should have 2 rupees in the form of a current asset.By the way, the formula of the quick ratio sorry, the parameter of the quick ratio is 1 is to 1. Meaning if there is a quick liability of 1 rupee, then you should have a quick asset of 1 rupee. So I hope you understood all the formulas and parameters. Thanks for your time and happy learning.