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Profitability Ratios

Gross, Operating, Net Profit Margin

The most important ratio is Net Profit Margin percentage or Net margin. It tells us how much out of every sale GRASIM gets to keep after everything else has been paid for. It is highly variable from one industry sector to another. An ideal company has consistent profit margins.

Return on Equity - Grasim Industries Ltd.

From an investor's perspective, ROE is a key ratio. The ROE (after subtracting preferred shares) tells common shareholders how effectively their money is being employed. Ideal long term average ROE should be above 15%.

Average 2 year ROE of Grasim Industries Ltd. : 5%

Free Cash Flow - Grasim Industries Ltd.

Free Cash Flow is a measure which is ignored by most investors. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its Property, Plant and Equipment (PPE) also called as Capital Expenditure (Capex). FCF can be used by the company to invest in other projects, thus enhancing shareholder value.

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Leverage Ratios

Current Ratio

Current Ratio measures the company's current assets against its current liabilities. Ideally the current ratio should be greater than 1.5. Avoid investing in companies whose current ratio is less than 1. There are exceptions to this rule, some good companies can have less than 1 or even a negative current ratio when they recieve money faster from their customers than they have to pay to their vendors.

Interest Coverage Ratio

An interest coverage ratio less than 1.5 is a red flag. The higher the ratio the less a company is burdened by debt. If a company has no debt or the loan interest is being paid by interest income from investments or other activities the ratio is zero which of course is excellent. A negative ratio tells us that the company cannot even pay its interest on loans from its operating income, stay far away from such companies.

Debt to Equity Ratio (D/E)

Debt-to-Equity ratio varies across industries but many companies have a ratio larger than 1, that is they have more debt than equity. If the ratio is very high, raising more cash through borrowing could be difficult. Capital intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while IT companies have a debt/equity of under 0.5.

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Overall Performance

Company Performance

Watch the overall performance of revenue and profit, needless to say you should invest in a company whose numbers are going up.

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Net Income & Cash from Operations

Operating cash flow is a better metric of a company's financial health for two main reasons. Cash flow is harder to manipulate than net income (although it can be done to a certain degree). Second, "cash is king", a company that does not generate cash over the long term is on its deathbed. Investors can avoid a lot of bad investments if they analyze a company's operating cash flow.

Net Income (Income Statement) and Cash from operations (Cash Flow Statement) should ideally be parallel. A consistently falling or negative operating Cash Flow(OCF) despite a rising net profit is a cause for concern because of aggressive accounting techniques or high working capital requirements. An ideal company has a higher operating cash flow than its net profit (income).

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Stock Dilution & Debt - Grasim Industries Ltd.