Financial Ratios & Analysis - Explained in Hindi | #26 Master Investor - YouTube

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Namashkar, my name is Mukul and welcome to Asset Yogi

Where we unlock the knowledge of finance

In this video, I am going to discuss a very important topic

Mainly, I'll give an introduction of financial ratios and analysis

Now the question arises that what do we calculate these financial ratios and analyse them

Now let me explain this through an analogy

Let's say if we want to check our body's health

We use different matrix

For example, we measure the temperature of our body

We check cholesterol levels, triglycerides, sugar, etc.

Similarly, if we want to find out about a company's health,

We can do that by calculating financial ratios

So now the question arises that why should we check a company's financial health

Firstly, if you want to check the financial health of your own company,

Then you can calculate the financial ratios for that

To check what is the financial health of your company and where it stands in comparison with the other company's

Secondly, if you invest in the share market and when you buy shares of a company,

It is very important to do a fundamental analysis

And in fundamental analysis, the major part is financial ratios

That's why financial ratios are very important

Financial ratios are mainly divided into 5 categories

1. Profitability ratios

2. Liquidity ratios

3. Solvency ratios

4. Activity ratios

And 5th is Valuation ratios

From all these ratios, we get to know about the profit margins

Debt position in short and long term i.e whether the company took too many loans or not

Or didn't it has too many liabilities that are unable to fulfil

Or how is the operational efficiency of the company

How to decide whether the share price of the company is expensive or cheap

So we can get all these aspects from financial ratios

We will cover all the ratios in detail

But in this video, I will give you an introduction

That what is the meaning of which ratio

And how to calculate them

So watch this video till the end so that you don't miss any important point

Let's switch to the blackboard

Under financial ratios, the first is Profitability ratios

From this, we get to know how good is the company in making money

Profitability means, obviously it is related to profit

So how much profit does a company earns and what are its margins

And how fast it makes profit, we get to know about all these from profitability ratios

And we also get to know about the competitive position of the company in the market

And if we compare it with the other companies of that same sector

Then how good are its profit margins, how fast it turns around, we get to know all these things

And from where do we calculate these profitability ratios?

So you get all the incomes from the income statement, what type of income it is

With that, we get to know about the expenses, hence, we can calculate different types of profitability ratios

For example, the profit margin is the most common

So if you divide 'Net profit' by 'Sales revenue', you get the profit margin

Everyone calculates this

So if a company earns a margin of 30%

Then naturally it is better than the company earns 20% profit margin

So obviously you want to invest in a company whose profit margins are high

That means the higher the profit margins, the better is the company

And if you own a company, you want the profit margins to improve in the future

The second type of ratios are Liquidity ratios

Liquidity ratios tell us how comfortably a company can pay its liabilities, loans in the short term

How much comfortable it is to pay, liquidity ratios tells us

Liquidity means can there be a situation for the company that it can go bankrupt and have to auction its assets

So this situation should never come and we get this from liquidity ratios

That what is the situation of the company in the short term and how is its debt position

The most popular ratio under this is the Current ratio

You get this on dividing Current assets by current liabilities

So basically, current assets should be more than current liabilities

So let's say the Current assets are more than the current Liabilities, that means

The position of that company is comfortable to pay its short term debts

So basically, the higher the current ratio, the lesser is the risk, better it is

I'll talk about the benchmark ratios in the upcoming videos

Now let's move ahead and discuss the 3rd type of ratios

3rd are the Solvency ratios

Solvency ratios are similar to the liquidity ratios,

we talked about the short term there, here we'll talk about long term

How comfortably can a company pay its long term debt

Under long term debt, term loans come

So let's say you borrowed loans for fixed assets

So you can check the position of the company by the solvency ratio

We also call it leverage or debt ratios

If I give an example of a popular ratio, it is the Debt ratio

We get this on dividing the 'total liabilities of the company by the 'total assets'

From this, we get to know about the portion of debt in the assets of the company

So if the debt ratio is 0.8, that means 80% of assets have debt financing

This is not a positive thing because if the debt portion will be more

There may be some problems in the long term.

Hence, the lesser the debt ratio, the better it is

Because debt is something that kills a company, be it short term or long term

Now let's move ahead and the 4th are Activity ratios.

Activity ratios tell us about the operational efficiency of the company

What is operational efficiency?

It means how a company manages its working capital i.e current assets and liabilities or long term assets

To increase its production

For example, there is an Inventory turnaround ratio

Activity ratios are also called efficiency or asset utilisation ratios

So efficiency came from operational efficiency and asset utilisation ratios means

How you use long and short term assets efficiently to produce more and more

So if we talk about Inventory Turn over ratios

We calculate it as 'Cost of goods sold' divided by 'Average inventory'

Let's say this is a shoe manufacturing unit

Let's say the cost of goods sold means the total shoe manufacturing cost in one year is Rs. 120 lakhs

Means 1 crore and 20 lakhs is the cost of goods sold in a year

And the level of average inventory, if we calculate the average of finished goods, raw material, and work in progress

Let's say the one time inventory in that factory is of Rs. 10 lakhs

So inventory turnover ratio is calculated like this and it came 12

That means it turns around 12 times or 12 times a shoe is been sold

So basically you want to produce quickly and then sell quickly

The more times this turnaround will happen, the better it will be

So higher inventory turnover ratio means a fast turnaround and it is better

So you want your inventory turnover ratio high

In a similar way, there are other activity ratios that tell about the operational efficiency

5th are the Valuation ratios

Valuation ratios help you in making an investment decision

Through this, you can find out the right value of the company in which you want to invest

There are different ratios to find this right value

There's a very popular ratio which is called P/E ratio

In this, you find earnings per share

Divide the 'net profit' of the company in one year with the 'number of outstanding shares'

So EPS (earnings per share) is calculated.

Then you calculate the P/E ratio which is a very popular term and let me star mark it

P/E ratio is so popular that you will hear about it every time you talk about the share market

So in this, the price per share, the current market value of the share

Let me write here, the current market value of a share of any company be it Reliance, Infosys

is divided by earnings per share which we calculated

So the lesser the P/E ratio is, the better it is that means the more fair price of that stock is

Hence, if the P/E is lower in comparison with the other stocks of that same sector

That means it is better for investment

Similarly, there are more valuation ratios by which you can compare different companies of the same sector

So broadly, you calculate different ratios like this

And you make a decision after checking that a company is performing good, how is its profitability, liquidity

There shouldn't be any problem of solvency in the long term

And if its operational efficiency, valuation is good and P/E is low

Then definitely you want to invest in such a company

So this was about investment

Similarly, you can calculate ratios for your company

and you can check how your company is performing in comparison with other companies

So in this video, I introduced the basics of financial ratios

And I only share 1 example each but there are many more ratios

We will study all the ratios in detail and will cover in separate videos

So kindly watch the complete series

So that's it in this video

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