Financial Management (Integrated Ratio analysis)

INTEGRATED RATIO ANALYSIS:
Integrated ratios provide better insight about financial and economic analysis of a firm.

1.Rate of return of asstes (ROA) can be divided into two parts:

   1.1 Net profit margin = Earning after tax(EAT)/Sales
  
    1.2 Assets turnover = Sales /Total assets

2.Return of equity ( ROE) can becalculated  into two ways:
 
    2.1 ( EAT/Sales) x (Sales/ Assets) x (Assets/Equity)

    2.2 (EAT/EBT) x (EBT/EBIT) x (EBIT/Sales) x (Sales/Assets) x (Assets/Equity)

3.Earning power:Earning power is the overall profitability of a firm  is computed by multiplying net profit margin and assets turnover.

     3.1 Earning power = Net  profit margin x Assets turnover

       whereas, Net profit margin = Earning after taxes/ Sales
                     Assets turnover = Sales/Total Assets


    3.2 Earning power = (Earning after taxes/ Sales) x (Sales/Total Assets) x (EAT/Total Asstes)



DUO PONT SYSTEMS:

A breakdown of ROE and ROA into component ratios:

     1.ROA(Return of assets) = (EBIT-Taxes)/Assets
    
      1.2 ROA = (Sales/Assets) x (EBIT-Taxes)/Sales)

   

      2. ROE(Return of equity) = (EBIT-Taxes-interest)/equity
    
       2.1 ROE = (Assets/Equity) x (Sales/Assets) x (EBIT-Taxes/Sales) x (EBIT-Taxes-interest)/EBIT-Taxes

   

GROWTH RATIOS:

1.Internal Growth rate(IGR) : It a internal growth rate which  the company can achieve without external financing.
       IGR = RE/Net assets

2.Sustainable growth rate : It is the growth rate which keeps the financing leverage constant by increasing debt proportionatly  to increase in equity due to increase in RE.
        (SGR) = Retention ratio x ROE
        where, ROE = PAT/ EQUITY