Quick Revision - Numerical on Ratio Analysis | Detailed Explanation Available

Formula of Price to sales ratio 

Let's move towards the next formula, Price to Sales Ratio. You must have heard of Price to Sales Ratio many times. This is the Price to Sales Ratio. Usually, Price to Sales Ratio is seen for companies that are not profit making. Because Price to Sales Ratio can be used for all shares or companies. But Price to Sales Ratio will be used for those companies whose company is profit making. So, Price to Sales Ratio is used for all companies and at the same time, Price to Sales Ratio is seen for non profit making companies. So, Price to Sales Ratio is used for two ways. Two ways are in one totality and one is in individuality. Totality means total number. What we are seeing here is individual. Individual means per share. Price to Sales Ratio is equal to current market price, that is, market price per share. Divided by annual net sales per share. Now, how will we take this out? Market capitalization divided by, if you share the number of equity, then you get current market price. And for annual net sales per share, net sales, like all the sales that have been done in that particular year, we will divide it with the number of equity shares. So, you will get annual net sales per share. Remind it a little, then listen to it slowly, write it somewhere and then revise it once again. It is very important. Because if you want to understand formula, then the formulas will be like this. We will see its related question. But first, let's look at the numbers in totality. Price to Sales Ratio is another way, as I said, market capitalization. Again, if you go up on the formula, then you will find out the current market price. Here is the market cap. I did a flat here. The number of equity shares in the current market price multiplied by the outstanding shares. Annual net sales will be obtained from your revenue settlement. 

The company's current market price is 250 per share. And the company reports annual net sales of Rs. 50. What is the price to sales ratio? 

So, it is very simple here, we have to divide it by 250 because the current market price is divided by annual net sales per share. And the answer will be Rs. 5 per share. And the second question is, in totality, we see a company has market capitalization of Rs. 5000 crore and a total annual net sales are Rs. 2000 crore. And here we have to find out the price to sales ratio. And the formula for price to sales ratio is, market capitalization divided by annual net sales. And the answer is Rs. 5,000 divided by 2000. The answer is Rs. 2.5 times because the price to sales ratio is denoted in times. This is explained in the times. The next formula is the enterprise value formula, EV equal to value of the common. The next formula is the enterprise value formula. This is a very, very important example. EV equal to value of common equity, which is called the ordinary equity shares. And if there are any DVRs, they will also be added here. Plus the value of non-controlling interest. Here, non-controlling interest is paid if the company has taken a stake in another company. For example, company A has taken a stake in company B, but this stake is of 80%. Okay, so here 20% is not with the company, 80% is with the company. So the non-controlling interest of 20% is also added here to calculate EV. Plus the value of preferred capital. The value of preferred capital means if the company has taken an issue of preference shares, then you have to add capital for that as well. Because preference share capital is also a part of the net worth. Plus the debt of the company has to be added here to calculate EV. Actually, what we are doing here is, we are adding the long term liabilities of the company, minus cash and cash equivalent and financial investment, which we can en-cash. Why is this happening here? Basically, when we calculate EV, we try to see how much I have to buy this particular company. Okay, so when I buy something, if I get cash with it, then because of cash, the burden of buying it is decreasing. Right? So for this, cash or cash equivalent is reducing. The question is very simple. You have to add the cash value of the company, the value of non-controlling interest, the value of preferred capital, if there is a debt, then you have to add it. And the cash value has to be reduced. But it is very important to look at it carefully. So here we have a numerical question as well. The value of common equity is of 50 lakhs. In this, we will add the non-controlling interest, that is, 5 lakhs. We will also add the value of preferred capital, sorry, of 8 lakhs. We will also add the total debt of 20 lakhs. And we will reduce the cash and cash equivalent and financial investment of 10 lakhs. And we will get our enterprise value, that is 73 lakhs. So if I want to buy this particular company, then to buy this company, net net can be the burden of 73 lakhs. Evaluation point of view is an important formula. 

Formula of return on capital employed.

ROCE equal to EBIT divided by total capital employed. EBIT means earning before interest and tax. You are not taking the interest here. When you calculate the pattern, the profit of the tax, the interest is also reduced here at the time. The tax government is also reducing it. But the first phase of it is the level. But the first level is the level of EBIT, earning before interest and tax. Why are you doing this? Because the total capital employed, at the time of capital employed, or at the time of capital employed here, we are not taking the value of equity. We are taking the value of debt. That means the total capital employed will also mean equity capital plus debt capital. Owners capital plus borrowed capital. So EBIT divided by equity capital plus debt capital will give you total capital employed. And by doing this capital employed, the money that we have earned, we have to check on the EBIT level. That is, we have to check on the level of earning before interest and tax. We will also get our ROCE. The question you have given here is equity capital, 40 lakhs, debt capital, 20 lakhs, and earning before interest and tax is given for 12 lakhs. If you have not given earning before interest and tax, you have given a PAT, and you have given corporate tax, how much tax you have paid, or how much interest you have paid, then you have to add those two things to the PAT and go from the bottom to the top. That means first you will earn before interest and tax, minus we will do interest, after that we will earn before tax, then we will reduce tax, then we will earn after tax. So we had come from the top to the bottom, when we were calculating our PAT. By the way, when you go from the bottom to the top, that is PAT to earning before interest and tax, then you will keep doing minus, you will keep doing plus, you will get EBIT. I am giving you a little trick, so that whenever you do reading of financial statement, then your mind will be fixed. That is why I said, if you do not have to do formula and word, if your reading of financial statement is strong, then you will get number 8, INISM RA, to learn there. So earning before interest and tax is of 12 lakhs, 40 lakhs plus 20 lakhs will be yours, 16 lakhs will be your total capital employed, so we will do 12 lakhs divided by 60 lakhs, we will multiply by 100 lakhs, then you will get 20% of ROCE here. Next is EV to capital employed, that is EV divided by capital employed, it is a very simple formula. Here EV to capital employed, such a formula comes, or debt to capital ratio, then it becomes very easy because debt divided by capital. Equity to asset ratio will be, so equity divided by asset, this formula is very self-explanatory, self-said, so you get its answers very easily. So I don't think you need to question its related, I think we should look at the last formula, of this particular session, because you will be already exhausted, you will be writing a lot, you will understand a lot. So we will do this, then we will meet in the next session, Price to book value ratio, and this is a very, very, very important formula. 

Formula of Price to book value

First we have to see what is the book value, and what is the price? Price to book value ratio is very easy to understand the formula, Price divided by book value. You don't need to remember the formula here, it is not necessary, but what is the book value? Price is here, the current market price. What is the book value? The book value is your equity value, or you can say, the net worth of a company, the share holders, their net worth, this is nothing but the book value per share.It is very easy to find out the book value, again it is very easy, if you have calculated the net worth, you have to divide it, you will get the number of outstanding shares, you will get the book value per share. If you want a little more understanding, then you have to minus your assets, your outsider's library, your long term liability in the form of a borrowed capital, and your short term liability, like your creditors, bills, payables, your outstanding liabilities, your assets minus your outsider's library, then you will get the book value. All your equity, equity plus preference shares, plus reserves and surplus, then you will get the book value, so there are many ways to calculate the book value, I have just given you an explanation, that such a book value is calculated. If you want to calculate per share, then it is very easy, you have to divide the number of equity shares, and if you want to do it in totality, means you have not given the current market price, you have given the market capitalization exam, and you have given the book value, means you have given the equity value, according to the balance sheet, so the price to book value ratio here, you can also compute, market cap divided by book value, not per share, total book value. Let's discuss on a numerical question here, a company has equity of rupees 10 crore, reserves of rupees 6 crore, current year's undistributed profit is rupees 1 crore, undistributed profit means which is not in the form of dividend, which will be added in the form of retained earnings, in reserves and surplus. Current market price is 340, number of outstanding shares is 15 lakhs, you have to calculate the book value, and the book value per share, and the price to book value ratio, you have to calculate the book value, and the price to book value ratio, this is a very extensive question, we are stopping over here after completing this question, because you won't be overdosed a lot. So, here the equity is of 10 crore, reserves and surplus is of 6 crore, and the undistributed profit is of 1 crore, so the total book value will be of 17 crore. Now, let's calculate the book value per share, total book value divided by number of equity shares, the book value per share will beof 17 crore total book value, and the number of equity shares is of 50 lakhs, meaning 0.50 crore. Okay, when you calculate that time, you have to be very careful, 17 divided by 0.50 will give you the correct answer, it is going to be rupees 34 book value, according to your per share.

Calculate the price to book value ratio to price divided by book value. 

Now, there can be two types of work here, one is current market price divided by book value per share, and the other is potential divided by book value, that is, total book value can also be, as I said, you have taken out the answer in totality, or according to individual per share. So, the price to book value ratio divided by 340, which is current market price, will be divided by book value per share, that is 34, and the answer will be 10 times. This is denoted in times, I have already said 10 times, means when the company has a net worth of 34 rupees, when the company has a net worth of more than 10 times, it is also called overvalued shares, that is, how much is the value, of 34 rupees, how much is the market, of 340 rupees. I have also seen the total answer, price to book value ratio equal to market cap divided by book value. First, we have to calculate market capitalization, how much is the market cap, so this is the 1.70 crore and we have already computed the total book value, which is 17 crore. Now, the answer will be 10 times. Both the answers will be the same. First, we computed it according to the per share, and then we computed it with total number of shares, that is, market cap divided by total book value. I hope you understood this entire session. See you in the next session with few more formulas. Thanks for your time and happy learning.