All About Combined Ratios
- Grasp the fundamentals of financial ratios
- Explore how combined ratios enhance company analysis
- Learn to correlate financial ratios with real-world financial statements
- Discover how market analysts apply combined ratios in fundamental analysis
Introduction to Financial Ratio Analysis
Financial ratios are indispensable tools in the field of fundamental analysis. When raw financial numbers fall short in providing insight, combined ratios offer clarity. These ratios create meaningful relationships between various components of financial statements—turning data into actionable intelligence.
They serve as a diagnostic lens to evaluate a company's:
Growth trajectory
Consistency and sustainability of profits
Operational efficiency and asset utilization
Liquidity status in short and long-term scenarios
Capacity to repay debts and interest obligations
To derive meaningful interpretations, ratios must be viewed across time (trend analysis) and in comparison with peer companies (benchmarking). Financial ratios can be broadly classified into the following:
Growth Ratios
Profitability Ratios
Liquidity Ratios
Efficiency Ratios
Solvency Ratios
Growth Ratios
Purpose:
Track how specific elements of financial performance evolve year over year.
Example:
To assess sales growth:
Formula = (Current Year Sales – Previous Year Sales) / Previous Year Sales
Illustration:
Growth = ((17397 – 16350.2) / 16350.2) = 6.4%
Consolidated Profit and Loss Account | 0 | 1 | 2 | 3 | 4 |
RS Cr | Mar-21 | Mar-20 | Mar-19 | Mar-18 | Mar-17 |
Net Sales | 17397 | 16350.2 | 17548.84 | 14840.52 | 13180.04 |
Growth (%) | 6.40% | -6.83% | 18.25% | 12.60% | 11.24% |
Gross Profit | 5489.12 | 4792.41 | 4981 | 4288.37 | 4363.01 |
Growth (%) | 14.54% | -3.79% | 16.15% | -1.71% | 0.93% |
Operating profit (EBITDA) | 2797.46 | 1938.72 | 1958.63 | 1651.26 | 1848.73 |
Growth (%) | 44.29% | -1.02% | 18.61% | -10.68% | -7.45% |
EBIT | 1482.51 | 800.6 | 1145.96 | 1058.71 | 1386.92 |
Growth (%) | 85.17% | -30.14% | 8.24% | -23.66% | -11.70% |
PBT before extraordinary items | 1168.93 | 543.45 | 1088.01 | 1012.33 | 1435.85 |
Growth (%) | 115.09% | -50.05% | 7.48% | -29.50% | -7.13% |
PAT before extraordinary items | 957.93 | 476.41 | 879.72 | 723.88 | 1099.3 |
Growth (%) | 101.07% | -45.85% | 21.53% | -34.15% | 1.94% |
Analysis:
From March 2017 to March 2019, the company consistently delivered double-digit sales growth. The pandemic disrupted this trend in March 2020, resulting in a -6.83% contraction. However, March 2021 saw a promising rebound, with a 6.4% increase in revenue. A similar recovery pattern is evident in the profit figures post-pandemic.
Profitability or Margin Ratios
These ratios measure how much profit a company generates at different operational stages, relative to its revenue. The common denominator across most of these is sales or revenue, and the calculations are based on the profit and loss statement.
1. Gross Margin Ratio
What it means:
Reflects the efficiency with which a company converts raw inputs into final goods, after subtracting the cost of goods sold (COGS).
Formula: Gross Profit / Sales
Consolidated Profit and Loss Account | 0 | 1 | 2 | 3 | 4 |
RS Cr | Mar-21 | Mar-20 | Mar-19 | Mar-18 | Mar-17 |
REVENUE |
|
|
|
|
|
Net Sales | 17397 | 16350.2 | 17548.84 | 14840.52 | 13180.04 |
EXPENSES: |
|
|
|
|
|
Cost of Materials Consumed | 7065.3 | 7049.83 | 8626.09 | 7390.65 | 6044.96 |
Purchases of Stock-in-Trade | 2009.34 | 1834.11 | 1982.56 | 1152.3 | 1080.74 |
Changes in Inventories | 319.87 | 191.65 | -470.39 | -147.45 | -235.64 |
Employee Benefits Expenses | 2513.37 | 2482.2 | 2429.58 | 2156.65 | 1926.97 |
Cost of goods sold | 11907.88 | 11557.79 | 12567.84 | 10552.15 | 8817.03 |
Gross Profit | 5489.12 | 4792.41 | 4981 | 4288.37 | 4363.01 |
Gross margin (%) | 31.55% | 29.31% | 28.38% | 28.90% | 33.10% |
Analysis:
The gross margin has generally ranged from 28% to 33%. A notable improvement to 31.55% was observed in March 2021, after a period of stagnation.
2. Operating Margin (OPM)
What it means:
Shows profitability before deducting interest, taxes, depreciation, and amortization—often referred to as EBITDA margin.
Formula: Operating Profit / Sales
Consolidated Profit and Loss Account | 0 | 1 | 2 | 3 | 4 | 5 |
RS Cr | Mar-21 | Mar-20 | Mar-19 | Mar-18 | Mar-17 | Mar-16 |
REVENUE |
|
|
|
|
|
|
Net Sales | 17397 | 16350.2 | 17548.84 | 14840.52 | 13180.04 | 11848.56 |
Cost of goods sold | 11907.88 | 11557.79 | 12567.84 | 10552.15 | 8817.03 | 7525.58 |
Gross Profit | 5489.12 | 4792.41 | 4981 | 4288.37 | 4363.01 | 4322.98 |
Gross margin (%) | 31.55% | 29.31% | 28.38% | 28.90% | 33.10% | 36.49% |
Other Expenses | 2691.66 | 2853.69 | 3022.37 | 2637.11 | 2514.28 | 2325.52 |
Operating profit (EBIDTA) | 2797.46 | 1938.72 | 1958.63 | 1651.26 | 1848.73 | 1997.46 |
Operating margin (%) | 16.08% | 11.86% | 11.16% | 11.13% | 14.03% | 16.86% |
Analysis:
After hovering around 11% from March 2018 to March 2020, the operating margin rebounded to over 16% in March 2021, highlighting an uptick in operational efficiency.
3. EBIT Margin
What it means:
Measures earnings before interest and taxes, factoring in depreciation and amortization.
Formula: EBIT / Sales
Consolidated Profit and Loss Account | 0 | 1 | 2 | 3 | 4 |
RS Cr | Mar-21 | Mar-20 | Mar-19 | Mar-18 | Mar-17 |
REVENUE |
|
|
|
|
|
Net Sales | 17397 | 16350.2 | 17548.84 | 14840.52 | 13180.04 |
Cost of goods sold | 11907.88 | 11557.79 | 12567.84 | 10552.15 | 8817.03 |
Gross Profit | 5489.12 | 4792.41 | 4981 | 4288.37 | 4363.01 |
Gross margin (%) | 31.55% | 29.31% | 28.38% | 28.90% | 33.10% |
Other Expenses | 2691.66 | 2853.69 | 3022.37 | 2637.11 | 2514.28 |
Operating profit (EBITDA) | 2797.46 | 1938.72 | 1958.63 | 1651.26 | 1848.73 |
Operating margin (%) | 16.08% | 11.86% | 11.16% | 11.13% | 14.03% |
Depreciation and Amortization Expenses | 1314.95 | 1138.12 | 812.67 | 592.55 | 461.81 |
EBIT | 1482.51 | 800.6 | 1145.96 | 1058.71 | 1386.92 |
EBIT margin (%) | 8.52% | 4.90% | 6.53% | 7.13% | 10.52% |
Analysis:
Improved from 4.9% in March 2020 to 8.52% in March 2021, showing a steady recovery in core earnings.
4. Net Margin
What it means:
Represents the actual bottom line after all expenses and taxes are accounted for.
Formula: Profit After Tax (PAT) / Sales
Consolidated Profit and Loss Account | 0 | 1 | 2 | 3 | 4 |
RS Cr | Mar-21 | Mar-20 | Mar-19 | Mar-18 | Mar-17 |
REVENUE |
|
|
|
|
|
Net Sales | 17397 | 16350.2 | 17548.84 | 14840.52 | 13180.04 |
Cost of goods sold | 11907.88 | 11557.79 | 12567.84 | 10552.15 | 8817.03 |
Gross Profit | 5489.12 | 4792.41 | 4981 | 4288.37 | 4363.01 |
Gross margin (%) | 31.55% | 29.31% | 28.38% | 28.90% | 33.10% |
Other Expenses | 2691.66 | 2853.69 | 3022.37 | 2637.11 | 2514.28 |
Operating profit (EBITDA) | 2797.46 | 1938.72 | 1958.63 | 1651.26 | 1848.73 |
Operating margin (%) | 16.08% | 11.86% | 11.16% | 11.13% | 14.03% |
PBDIT | 2797.46 | 1938.72 | 1958.63 | 1651.26 | 1848.73 |
PBDIT margin (%) | 16.08% | 11.86% | 11.16% | 11.13% | 14.03% |
Depreciation and Amortization Expenses | 1314.95 | 1138.12 | 812.67 | 592.55 | 461.81 |
EBIT | 1482.51 | 800.6 | 1145.96 | 1058.71 | 1386.92 |
EBIT margin (%) | 8.52% | 4.90% | 6.53% | 7.13% | 10.52% |
Finance Costs | 442.96 | 280.83 | 181.07 | 162.92 | 102.88 |
Add: Other Income | 129.38 | 23.68 | 123.12 | 116.54 | 151.81 |
PBT before extraordinary items | 1168.93 | 543.45 | 1088.01 | 1012.33 | 1435.85 |
PBT margin (%) | 6.72% | 3.32% | 6.20% | 6.82% | 10.89% |
Tax Expenses | 211 | 67.04 | 208.29 | 288.45 | 336.55 |
PAT before extraordinary items | 957.93 | 476.41 | 879.72 | 723.88 | 1099.3 |
PAT margin (%) | 5.51% | 2.91% | 5.01% | 4.88% | 8.34% |
Analysis:
The PAT margin in March 2021 not only improved but also surpassed pre-pandemic levels, showcasing strong operational comeback.
Shareholder’s Return Ratios
These ratios reflect the returns generated for investors—particularly equity shareholders.
1. Return on Net Worth (RoE)
Formula: Net PAT – Preference Dividends / Average Net Worth
| 0 | 1 | 2 | 3 | 4 |
RS Cr | Mar-21 | Mar-20 | Mar-19 | Mar-18 | Mar-17 |
PAT before extraordinary items | 957.93 | 476.41 | 879.72 | 723.88 | 1099.3 |
Shareholder's Funds |
|
|
|
|
|
Share Capital | 63.51 | 57.21 | 57.21 | 57.21 | 50.9 |
Ordinary Capital | 63.51 | 57.2 | 57.2 | 57.2 | 50.9 |
Reserves and Surplus | 9409.05 | 7634.94 | 7583.96 | 7203.41 | 5280.29 |
Money received against Share Warrants | 0 | 0 | 0 | 0 | 0 |
Total Shareholder's Fund | 9472.56 | 7692.15 | 7641.16 | 7260.61 | 5331.19 |
Average of Shareholder's Fund | 8582.36 | 7666.66 | 7450.89 | 6295.90 | 4994.51 |
Return on net worth (%) | 11.16% | 6.21% | 11.81% | 11.50% | 22.01% |
Analysis:
The company’s RoE has returned to pre-pandemic levels. However, the increase in equity capital and reserves has slightly diluted overall returns, making it fall short of the 22% mark achieved in March 2017.
2. Return on Capital Employed (RoCE)
Formula: EBIT / (Total Assets – Current Liabilities)
RS Cr | Mar-21 | Mar-20 | Mar-19 | Mar-18 | Mar-17 |
EBIT | 1482.51 | 800.6 | 1145.96 | 1058.71 | 1386.92 |
TOTAL ASSETS | 19163.45 | 16481.99 | 13648.94 | 13142.58 | 9876.01 |
Total Current Liabilities | 4328.9 | 4092.48 | 2649.1 | 3071.67 | 2876.2 |
Capital employed | 14834.55 | 12389.51 | 10999.84 | 10070.91 | 6999.81 |
Average capital employed | 13612.03 | 11694.68 | 10535.38 | 8535.36 | 6220.27 |
Return on capital employed (RoCE) | 10.89% | 6.85% | 10.88% | 12.40% | 22.30% |
Analysis:
While RoCE has shown improvement in March 2021, rising asset levels have contributed to a lower percentage compared to the 22.3% benchmark in March 2017.
DuPont Analysis
DuPont analysis breaks down Return on Equity (RoE) into three components, offering a layered understanding of financial performance:
Profitability: Net Profit / Sales
Efficiency: Sales / Total Assets
Leverage: Total Assets / Shareholder’s Fund
DuPont RoE =
(Net Profit / Sales) × (Sales / Total Assets) × (Total Assets / Shareholder’s Funds)
Dupont RoE analysis |
|
|
|
|
|
Net Sales | 17397 | 16350.2 | 17548.84 | 14840.52 | 13180.04 |
PAT before extraordinary items | 957.93 | 476.41 | 879.72 | 723.88 | 1099.3 |
Average total assets | 17822.72 | 15065.47 | 13395.76 | 11509.3 | 8697.78 |
Average of Shareholder's Fund | 8582.36 | 7666.66 | 7450.89 | 6295.90 | 4994.51 |
Net margin % | 5.51% | 2.91% | 5.01% | 4.88% | 8.34% |
Asset turnover | 97.61% | 108.53% | 131.00% | 128.94% | 151.53% |
Leverage (Average total assets/Average shareholder’s fund) | 208% | 197% | 180% | 183% | 174% |
Dupont RoE | 11.16% | 6.21% | 11.81% | 11.50% | 22.01% |
Why it matters:
This method reveals whether a company’s RoE is driven by strong margins, efficient asset utilization, or financial leverage.
Points to Remember
Growth ratios allow year-over-year performance tracking and trend analysis.
Profitability ratios are vital for understanding how well a company converts revenue into profits.
DuPont Analysis dissects the core drivers behind RoE, giving investors deeper insight.
Consistent evaluation over time and across industry peers amplifies the utility of combined ratios.
All these ratios together create a holistic view of financial health for better investment decisions.