9.1 – A note on Financial Ratios

Over the last few chapters, we have understood how to read financial statements. We will now focus our attention on analyzing these financial statements. The best way to analyze the financial statements is by studying the ‘Financial Ratios’. The theory of financial ratios was made popular by Benjamin Graham, who is popularly known as the fundamental analysis father. Financial ratios help interpret the results and compare with previous years and other companies in the same industry.

A typical financial ratio utilizes data from the financial statement to compute its value. Before we start understanding the financial ratios, we need to be aware of certain financial ratios’ attributes.

On its own merit, the financial ratio of a company conveys very little information. For instance, assume Ultratech Cements Limited has a profit margin of 15%, how useful do you think this information is? Well, not much, really. 15% profit margin is good, but how would I know if it is the best?

However, assume you figure out ACC Cement’s profit margin is 12%. Now, as we are comparing two similar companies, comparing the profitability makes sense. Clearly, Ultratech Cements Limited seems to be a more profitable company between the two. I am trying to drive across that more often than not, Financial Ratios on its own is quite mute. The ratio makes sense only when you compare the ratio with another company of a similar size or when you look into the financial ratio trend. This means that once the ratio is computed, the ratio must be analyzed (either by comparison or tracking the ratio’s historical trend) to get the best possible inference.

Also, here is something that you need to be aware off while computing ratios. Accounting policies may vary across companies and different financial years. A fundamental analyst should be cognizant of this fact and adjust the data accordingly before computing the financial ratio.

9.2 – Financial Ratios

Financial ratios can be ‘somewhat loosely’ classified into different categories, namely –

  1. Profitability Ratios
  2. Leverage Ratios
  3. Valuation Ratios
  4. Operating Ratios


The Profitability ratios help the analyst measure the profitability of the company. The ratios convey how well the company can perform in terms of generating profits. The profitability of a company also signals the competitiveness of the management. As the profits are needed for business expansion and to pay dividends to its shareholders, a company’s profitability is an important consideration.


The Leverage ratios also referred to as solvency ratios/ gearing ratios measures the company’s ability (in the long term) to sustain its day to day operations. Leverage ratios measure the extent to which the company uses the debt to finance growth. Remember for the company to sustain its operations, it has to pay its bills and obligations. Solvency ratios help us understand the company’s long term sustainability, keeping its obligation in perspective.


The Valuation ratios compare the company’s stock price with either the profitability of the company or the company’s overall value to get a sense of how cheap, or expensive the stock is trading. Thus, this ratio helps us analyse whether the company’s current share price is perceived as high or low. In simpler words, the valuation ratio compares the cost of security with the perks of owning the stock.


The Operating Ratios also called the ‘Activity Ratios’ measures the efficiency at which a business can convert its assets (both current and noncurrent) into revenues. This ratio helps us understand how efficient the management of the company is. For this reason, Operating Ratios are sometimes called the ‘Management Ratios’.

Strictly speaking, ratios (irrespective of the category it belongs to) convey a certain message, usually related to the company’s financial position. For example, ‘Profitability Ratio’ can convey the company’s efficiency, which is usually measured by computing the ‘Operating Ratio’. Because of such overlaps, it is difficult to classify these ratios. Hence the ratios are ‘somewhat loosely’ classified.

9.3 – The Profitability Ratios

We will look into the following ratios under ‘The Profitability Ratio’:

  1. EBITDA Margin (Operating Profit Margin)
    • EBITDA Growth (CAGR)
  2. PAT Margin
    • PAT Growth (CAGR)
  3. Return on Equity (ROE)
  4. Return on Asset (ROA)
  5. Return on Capital Employed (ROCE)

EBITDA Margin:

The Earnings before Interest Tax Depreciation & Amortization (EBITDA) margin indicates the efficiency of the management. It tells us how efficient the company’s operating model is. EBITDA Margin tells us how profitable (in percentage terms) the company is at an operating level. It always makes sense to compare the company’s EBITDA margin versus its competitor to get a sense of the management’s efficiency in terms of managing their expense.

To calculate the EBITDA Margin, we first need to calculate the EBITDA itself.

EBITDA = [Operating Revenues – Operating Expense]

Operating Revenues = [Total Revenue – Other Income]

Operating Expense = [Total Expense – Finance Cost – Depreciation & Amortization]

EBIDTA Margin = EBITDA / [Total Revenue – Other Income]

Continuing the example of Amara Raja Batteries Limited, the EBITDA Margin calculation for the FY14 is as follows:

We first calculate EBITDA, which is computed as follows:

[Total Revenue – Other Income] – [Total Expense – Finance Cost – Depreciation & Amortization]

Note: Other income is income under investments and other non-operational activity. Including other income in EBITDA calculation would clearly skew the data. For this reason, we have to exclude Other Income from Total Revenues.

[3482 – 46] – [2942 – 0.7 – 65]

= [3436] – [2876]

= 560 Crores

Hence the EBITDA Margin is:

560 / 3436

= 16.3%

I have two questions for you at this stage:

  1. What do an EBITDA of Rs.560 Crs and an EBITDA margin of 16.3% indicate?
  2. How good or bad an EBITDA margin of 16.3% is?

The first question is fairly simple. An EBITDA of Rs.560 Crs means that the company has retained Rs.560 Crs from its operating revenue of Rs.3436 Crs. This also means out of Rs.3436 Crs the company spent Rs.2876 Crs towards its expenses. In percentage terms, the company spent 83.7% of its revenue towards its expenses and retained 16.3% of the revenue at the operating level, for its operations.

Now for the 2nd question, hopefully, you should not have an answer.

Remember, we did discuss this point earlier in this chapter. A financial ratio on its own conveys very little information. To make sense of it, we should either see the trend or compare it with its peers. Going with this, a 16.3% EBITDA margin conveys very little information.

To makes some sense of the EBITDA margin, let us look at Amara Raja’s EBITDA margin trend for the last 4 years, (all numbers in Rs Crs, except EBITDA margin):

Year Operating Revenues Operating Expense EBITDA EBITDA Margin
2011 1761 1504 257 14.6%
2012 2364 2025 340 14.4%
2013 2959 2508 451 15.2%
2014 3437 2876 560 16.3%

It appears that ARBL has maintained its EBITDA at an average of 15%, and in fact, on a closer look it is clear the EBITDA margin is increasing. This is a good sign as it shows consistency and efficiency in the management’s operational capabilities.

In 2011 the EBITDA was Rs.257 Crs, and in 2014 the EBITDA is Rs.560Crs. This translates to a 4 year EBITDA CAGR growth of 21%.

Please note, we have discussed the formula for CAGR in module 1.

Clearly, it appears that both the EBITDA margin and EBITDA growth are quite impressive. However, we still do not know if it is the best. To find out if it is the best one needs to compare these numbers with its competitors. In the case of ARBL, it would be Exide batteries Limited. I would encourage you to do the same for Exide and compare the results.

PAT Margin:

While the EBITDA margin is calculated at the operating level, the Profit After Tax (PAT) margin is calculated at the final profitability level. At the operating level, we consider only the operating expenses; however, other expenses such as depreciation and finance costs are not considered. Along with these expenses, there are tax expenses as well. When we calculate the PAT margin, all expenses are deducted from the company’s Total Revenues to identify the company’s overall profitability.

PAT Margin = [PAT/Total Revenues]

PAT is explicitly stated in the Annual Report. ARBL’s PAT for the FY14 is Rs.367 Crs on the overall revenue of Rs.3482 Crs (including other income). This translates to a PAT margin of:

= 367 / 3482

=10.5 %

Here is the PAT and PAT margin trend for ARBL:

Year PAT (in INR Crs) PAT Margin
2011 148 8.4%
2012 215 8.9%
2013 287 9.6%
2014 367 10.5%

The PAT and PAT margin trend seems impressive as we can clearly see a margin expansion. The 4-year CAGR growth stands at 25.48%, which is again good. Needless to say, it always makes sense to compare ratios with its competitors.

Return on Equity (RoE):

The Return on Equity (RoE) is a critical ratio, as it helps the investor assess the return the shareholder earns for every unit of capital invested. RoE measures the entity’s ability to generate profits from the shareholder’s investments. In other words, RoE shows the efficiency of the company in terms of generating profits to its shareholders. Obviously, the higher the RoE, the better it is for the shareholders. In fact, this is one of the key ratios that help the investor identify investable attributes of the company. The average RoE of top Indian companies varies between 14 – 16% to give you a perspective. I personally prefer to invest in companies that have an RoE of 18% upwards.

This ratio is compared with the other companies in the same industry and is also observed over time.

Also note, if the RoE is high, a good amount of cash is being generated by the company. Hence the need for external funds is less. Thus a higher ROE indicates a higher level of management performance.

RoE can be calculated as: [Net Profit / Shareholders Equity* 100]

There is no doubt that RoE is an important ratio to calculate, but like any other financial ratios, it also has a few drawbacks. To help you understand its drawbacks, consider this hypothetical example.

Assume Vishal runs a Pizza store. To bake pizza’s Vishal needs an oven which costs him Rs.10,000/-. The oven is an asset to Vishal’s business. He procures the oven from his own funds and seeks no external debt. You would agree on his balance sheet that he has shareholder equity of Rs.10,000 and an asset equivalent to Rs.10,000.

Now, assume in his first year of operation, Vishal generates a profit of Rs.2500/-. What is his RoE? This is quite simple to compute:

RoE = 2500/10000*100


Now let us twist the story a bit. Vishal has only Rs.8000/- he borrows Rs.2000 from his father to purchase an oven worth Rs.10000/-. How do you think his balance sheet would look?

On the liability side, he would have:

Shareholder Equity = Rs.8000

Debt = Rs.2000

This makes Vishal’s total liability Rs. 10,000. Balancing this on the asset side, he has an asset worth Rs.10,000. Let us see how his RoE looks now:

RoE = 2500 / 8000*100

= 31.25%

With an additional debt, the RoE shot up quite significantly. Now, what if Vishal had only Rs.5000 and borrowed the additional Rs.5000 from his father to buy the oven. His balance sheet would look like this:

On the liability side, he would have:

Shareholder Equity = Rs.5000

Debt = Rs.5000

Vishal’s total liability is Rs. 10,000. Balancing this on the asset side, he has an asset worth Rs.10,000. Let us see how his RoE looks now:

RoE = 2500 / 5000 *100


Clearly, higher the debt Vishal seeks to finance his asset, (which in turn is required to generate profits) higher is the RoE. A high RoE is great, but certainly not at the cost of high debt. The problem is with a high amount of debt, running the business gets very risky as the finance cost increases drastically. For this reason, inspecting the RoE closely becomes extremely important. One way to do this is by implementing a technique called the ‘DuPont Model’ also called DuPont Identity.

This model was developed in the 1920s by the DuPont Corporation. DuPont Model breaks up the RoE formula into three components, representing a certain aspect of the business. The DuPont analysis uses both the P&L statement and the Balance sheet for the computation.

The RoE as per DuPont model can be calculated as:


If you notice the above formula, the denominator and the numerator cancel out with one another eventually leaving us with the original RoE formula which is:

RoE = Net Profit / Shareholder Equity *100

However, in decomposing the RoE formula, we gained insights into three distinct aspects of the business. Let us look into the three components of the DuPont model that makes up the RoE formula :

  • Net Profit Margin = Net Profits/ Net Sales*100
    This is the first part of the DuPont Model, and it expresses the company’s ability to generate profits. This is nothing but the PAT margin we looked at earlier in this chapter. A low Net profit margin would indicate higher costs and increased competition.
  • Asset Turnover = Net Sales / Average Total asset.
    Asset turnover ratio is an efficiency ratio that indicates how efficiently the company is using its assets to generate revenue. Higher the ratio, it means the company is using its assets more efficiently. Lower the ratio, it could indicate management or production problems. The resulting figure is expressed as several times per year.
  • Financial Leverage = Average Total Assets / Shareholders Equity
    Financial leverage helps us answer this question – ‘For every unit of shareholders equity, how many units of assets does the company have’. For example, if the financial leverage is 4, for every Rs.1 of equity, the company supports Rs.4 worth of assets. Higher the financial leverage, along with increased amounts of debt, will indicate the company is highly leveraged, and hence the investor should exercise caution. The resulting figure is expressed as several times per year.

As you can see, the DuPont model breaks up the RoE formula into three distinct components, with each component giving an insight into the company’s operating and financial capabilities.

Let us now proceed to implement the DuPont Model to calculate Amara Raja’s RoE for FY 14. For this, we need to calculate the values of the individual components.

Net Profit Margin: As I mentioned earlier, this is same as the PAT margin. From our calculation earlier, we know the Net Profit Margin for ARBL is 9.2%

Asset Turnover = Net Sales / Average Total Assets.

We know from the FY14 Annual Report, Net sales of ARBL stands at Rs.3437 Crs.

The denominator has Average Total Assets which we know can be sourced from the Balance Sheet. But what does the word ‘Average’ indicate?

From ARBL’s balance sheet, the total asset for FY14 is Rs.2139Crs. The reported number is for the Financial Year 2014, which starts from 1st of April 2013 and close on 31st March 2014. This implies that at the start of the financial year 2014 (1st April 2013), the company must have commenced its operation with assets carried forward from the previous financial year (FY 2013). During the financial year (FY 2014), the company has acquired some more assets which, when added to the previous year’s (FY2013) assets totalled to Rs.2139 Crs. Clearly, the company started the financial year with a certain rupee value of assets but closed the year with a totally different rupee value of assets.

Keeping this in perspective, if I were to calculate the asset turnover ratio, which asset value should I consider for the denominator? Should I consider the asset value at the beginning of the year or the asset value at the end of the year? To avoid confusion, the practice is to take an average of the two financial years’ asset values.

Do remember this technique of averaging line items, as we will be using this across other ratios.

From ARBL’s annual report, we know:

Net Sales in FY14 is Rs.3437Cr

Total Assets in FY13 is Rs.1770 Cr

Total Assets in FY14 is Rs.2139 Cr

Average Assets = (1770 + 2139) / 2

= 1955

Asset Turnover = 3437 / 1955

= 1.75 times

This means for every Rs.1 of asset deployed; the company is generating Rs.1.75 in revenues.

We will now calculate the last component, that is the Financial Leverage.

Financial Leverage = Average Total Assets / Average Shareholders Equity

We know the average total assets is Rs.1955. We just need to look into the shareholder’s equity. For reasons similar to taking the “Average Assets” instead of just the current year assets, we will consider “Average Shareholder equity” as opposed to just the current year’s shareholder equity.

Shareholders Equity for FY13 = Rs.1059 Crs

Shareholders Equity for FY14 = Rs.1362 Crs

Average shareholder equity = Rs.1211 Crs

Financial Leverage = 1955 / 1211

= 1.61 times

Considering ARBL has little debt, Financial Leverage of 1.61 is indeed an encouraging number. The number above indicates that for every Rs.1 of Equity, ARBL supports Rs.1.61 of assets.

We now have all the inputs to calculate RoE for ARBL; we will now proceed to do the same:

RoE = Net Profit Margin X Asset Turnover X Financial Leverage

= 9.2% * 1.75 * 1.61

~ 25.9%. Quite impressive, I must say!

I understand this is a lengthy way to calculate RoE, but this is perhaps the best way to calculate RoE, we can develop valuable insights into the business. DuPont model not only answers what the return is but also the quality of the return.

However, if you wish to do a quick RoE calculation, you can do so the following way:

RoE = Net Profits / Avg shareholders Equity

From the annual report we know for the FY14 the PAT is Rs.367 Cr.

RoE = 367 / 1211

= 30.31%

Return on Asset (RoA):

Having understood the DuPont Model, understanding the next two ratios should be simple. Return on Assets (RoA) evaluates the effectiveness of the entity’s ability to use the assets to create profits. A well-managed entity limits investments in non-productive assets. Hence RoA indicates the management’s efficiency at deploying its assets. Needless to say, the higher the ROA, the better it is.

RoA = [Net income + interest*(1-tax rate)] / Total Average Assets

From the Annual Report, we know:

Net income for FY 14 = Rs.367.4 Crs

And we know from the Dupont Model the Total average assets (FY13 and FY14) = Rs.1955 Cr.

So what does interest *(1- tax rate) mean? Well, think about it, the loan taken by the company is also used to finance the assets, which in turn is used to generate profits. So in a sense, the debtholders (entities who have given a loan to the company) are also a part of the company. From this perspective, the interest paid out also belongs to a stakeholder of the company. The company also benefits in terms of paying lesser taxes when interest is paid out; this is called a ‘tax shield’. For these reasons, we need to add interest (by accounting for the tax shield) while calculating the ROA.

The Interest amount (finance cost) is Rs.7 Crs, accounting for the tax shield it would be

= 7* (1 – 32%)

= 4.76 Cr. Please note, 32% is the average tax rate.

Hence ROA would be –

RoA = [367.4 + 4.76] / 1955

~ 372.16 / 1955


Return on Capital Employed (ROCE):

The Return on Capital employed indicates the company’s profitability, taking into consideration the overall capital it employs.

Overall capital includes both equity and debt (both long term and short term).

ROCE = [Profit before Interest & Taxes / Overall Capital Employed]

Overall Capital Employed = Short term Debt + Long term Debt + Equity.

From ARBL’s Annual Report, we know:

Profit before Interest & Taxes = Rs.537.7 Crs

Overall Capital Employed:

Short term debt: Rs.8.3 Cr

Long term borrowing: Rs.75.9 Cr

Shareholders equity = Rs.1362 Cr

Overall capital employed: 8.3 + 75.9 + 1362 = 1446.2 Crs

ROCE = 537.7 / 1446.2

= 37.18%

Key takeaways from this chapter:

  1. A Financial ratio is a useful financial metric of a company. On its own merit, the ratio conveys very little information
  2. It is best to study the ratio’s recent trend or compare it with the company’s peers to develop an opinion
  3. Financial ratios can be categorized into ‘Profitability’, ‘Leverage’, ‘Valuation’, and ‘Operating’ ratios. Each of these categories gives the analyst a certain view on the company’s business
  4. EBITDA is the amount of money the company makes after subtracting the operational expenses of the company from its operating revenue
  5. EBITDA margin indicates the percentage profitability of the company at the operating level
  6. PAT margin gives the overall profitability of the firm
  7. Return on Equity (ROE) is a precious ratio. It indicates how much return the shareholders are making over their initial investment in the company
  8. A high ROE and high debt is not a great sign
  9. DuPont Model helps in decomposing the ROE into different parts, with each part throwing light on different aspects of the business
  10. DuPont method is probably the best way to calculate the ROE of a firm
  11. Return on Assets is an indicator of how efficiently the company is utilizing its assets
  12. Return on Capital employed indicates the overall return the company generates considering both the equity and debt.
  13. For the ratios to be useful, it should be analyzed compared to other companies in the same industry.
  14. Also, ratios should be analyzed both at a single point in time and as an indicator of broader trends over time


  1. Amitvikram says:

    In ROA how did you get 496 as Net income before interest & taxes. As per AR isnt it 541-1-65=475, where 541 is Profit before Tax, 1 is finance cost and 65 is depreciation.

    • Karthik Rangappa says:

      Amit, thanks so much for pointing this out. In fact the formula should be ROA = [Net Income + Interest*(1-tax rate)] / Avg Asset. ROA calculates the return with respect to the average assets that the company holds. We add back interest because the interest is paid out to the debt holders who in turn has financed to company. And when we pay out interest, lesser taxes are paid, hence the company gets a tax shield. This is the reason why we have interest*(1-tax rate).

  2. Chetan says:

    The PAT for 2014 was 367 crores while you show it as 322 Crores ( Have you deducted something from PAT?)

    • Chetan says:

      Karthik Ji , COnfused about this PAT, can you clarify?

      • Karthik Rangappa says:

        Profit After Taxes (PAT) is the final amount that the company retains after accounting for its expenses, deprecation, and taxes.

        • Ajit Kumar says:

          Yes, but the ARBL annual report explicitly states PAT = 367.4 crores, as pointed out by Chetan. So, why are we using the number the number 322 instead?

          • Karthik Rangappa says:

            Let me recheck this…while writing this chapter I put down all the numbers on excel…hope I’ve not made silly typos while doing this 🙁

          • NIVETHA says:

            sir, can you please explain me on return on equity , how net profit margin is 9.2% ?

            As you have mentioned, it is same as PAT margin but PAT margin value is 10.5%

          • Karthik Rangappa says:

            RoE = PAT/Shareholder’s equity

            PAT margin can include other income or exclude. Based on what you choose, the margins could differ.

      • GIRI BABU GOLLA says:

        it is the profit left out with the company in order to fulfill its obligations regarding payment of dividend to preference shareholders (if any) and balance is either retained by the co. or paid to equity shareholders as dividend at the rate declared . it is the amount used in ratio return on equity (roe) —[PAT (or) earnings made available to equity share holders]/shareholders funds
        shareholders funds=total paid up equity share capital+free reserves – losses(if any)

  3. Chetan says:

    While calculating the ROA, you said the formula is RoA = [Net income before + interest*(1-tax rate)] / Total Average Assets

    The Total Avg Assets is 1955, But seems like you have picked Avg shareholders equity which is 1211 .

  4. Chetan says:

    Karthik Sir… Was going through the VST trillers AR, They have Öther Long Term Liabilities”under liablities ( Balance Sheet), Referring the Note it was the Rental and dealer deposits which VST has received and offcourse they should repay it at the time of Contract termination/expiration. How do we treat this? I guess VST will use this for investment or as deposits which will fetch them Interest.

    How and where should we account this?

    • Karthik Rangappa says:

      So parts of “Other Long Term Liabilities” will be be balanced out in the cash or investments – which is the asset side of the balance sheet. And the interest income received from such investments (if any) will be included in ‘Other Income” of the P&L statement.

  5. Harshad Salvi says:

    While computing ROCE above, how did you take the fig. of NPBIT as 496 Cr.? Whereas ideally it should be 540 Cr. Isn’t it? Pls clarify.

  6. In Calculation of ROE for Vishal Pizza store you have not deducted interest from Profits and hence its conceptually wrong. please correct the same

    • Karthik Rangappa says:

      Thanks for pointing this Abhishek, the point was to take a bare bone example to illustrate how ROE can get skewed with the presence of debt. Also, when you do this excersie on a real company you would divide PAT by Equity…PAT anyway deducts the finance cost.

  7. Varun says:

    Why can’t we take ROCE as a measure to gauge company’s performance as it includes both debt and equity? If ROCE is good then ROE will definitely be good. Can you please clarify?

    • Karthik Rangappa says:

      Well you can do that, but the beauty of ROE is that it allows you to break up and analyse the company in many different aspects – leverage, sales, assets etc..thereby giving you a better insight into company’s operations.

  8. Raju Shinde says:

    While calculating ROA, from where you got this figure i. e 0.4738.
    [RoA = [367.4 + 0.4738] / 1955]
    Thank you.

  9. Raju Shinde says:

    Instead of 0.4738, I get the answer 0.66% when I enter this formula “= 1* (1 – 34%)” into the excel sheet.
    Please explain in detail.
    Thank you.

    • Karthik Rangappa says:

      Guess you could be right here, let me recheck and correct the typo if required. Thanks for pointing this.

    • Suchetha says:

      Thank you for pointing out the error. Yes it should have been 0.66 crores, we have made the necessary correction.

  10. Pooja says:

    How to calculate tax rate ?

    • Karthik Rangappa says:

      One quick way to do this is by dividing Tax by PBT..you will know approximately the tax rate %.

      • Sujatha says:

        then tax rate for the year 2014 is 32% (170/537) and for the year 2013 it is 32%(135/422) .
        Average of these value is 32% then why have to taken 34% in calculating tax sheild ?

        • Suchetha says:

          Thank you for pointing out the error. We have made the necessary corrections.

        • yogesh says:

          please clarify how can you calculate 170 for Year 2014 and 135 for Year 2013?

          • yogesh says:

            Less: Tax expense FY14 FY13
            Current tax 1,580.00 1,377.97
            Deferred tax (credit) / expense 106.23 (24.51)
            Earlier year’s (excess) / short provision 6.11 (2.34)

            ok.Got it
            Add all these value then get tax value for FY.

  11. Pramod Beri says:

    sir while calculating CAGR you have taken n=4 years… but shouldn’t it be 3 years. as the initial year itself is not included??

    • Karthik Rangappa says:

      You can include the 4th year…for example if the investment was made on 1st Jan then the money has the whole year to compound.

  12. yogesh says:

    From which sheet you taken Profit before Interest & Taxes = Rs.496 Cr
    In ROCE and how?
    why you taking finance cost(EBITDA and ROA) 1 cr else 7 cr is given in AR P&L statement?
    Please guide me.

  13. Michael Mathew says:

    How to calculate the tax rate(%) in ROA???

    • Karthik Rangappa says:

      Tax rate is a % of PBT that goes towards the Income tax obligation of the company. You can calculate the same by dividing Income tax paid by PBT.

  14. Harshwardhan says:

    Thanks for your awesome work!
    Shouldn’t the net profit margin under DuPont model be 10.5% as against 9.2% mentioned? This would also make ROE’s calculated from both the method approximately same, which makes sense mathematically. Please clarify.

  15. Michael Mathew says:

    Do we need to add excise duty tax in the income tax paid for finding the tax rate

  16. Michael Mathew says:

    How did u calculate PBIT?? in ROCE??
    –Shouldn’t it be Profit before tax-finance cost=536.7-0.718= 535.98 Cr, But, you got 537.7 Cr.

    • Suchetha says:

      Micheal – Thank you for pointing out this. The Profit before interest and Taxes are calculated as follows :-

      As per ARBL balance sheet – PBT 536.67 and Finance Charges are 0.718. In order to calculate PBIT the Finance costs should be added back, as it was already deducted, hence the PBIT is 537.7.

  17. Michael Mathew says:

    Can i use the formula for tax rate(%)=PAT/Profit Before Tax,Is tax rate and tax burden the same??.

    • Karthik Rangappa says:

      Michael – Yes you can use the formula. Both are same, although I prefer calling it the tax rate 🙂

  18. Michael Mathew says:

    Is return on capital employed and return on capital invested the same?But Return on capital employed=Equity+Long term+short term debt & Return on capital invested=Equity+Long term+short term debt+capital lease obligation{i read this from a blog named Old value school.com} & what does capital lease obligation mean and how do we find it in the financial statement.

    • Karthik Rangappa says:

      Micheal – Both are same.

      Honestly I’m not sure about ‘Capital lease obligation’. Have not come across this in the Annual Report of Indian companies. Need to figure this out.

  19. Michael Mathew says:

    Thank u for answering my earlier Queries.Can a student with out a finance background be a fundamental analyst and enter in to stock investing,u can see lots of people with the required skills on the loosing side of the stock market.

    • Karthik Rangappa says:

      Oh yes, you certainly can. You don’t really need to have a background in Finance to be a fundamental analyst. However if you intend to make this your profession then you may need to have a PG degree of sorts.

  20. Matrix says:

    Hi Kartik,

    How did you arrived at Shareholder’s Equity figure.
    I think you mention Shareholder’s Equilt = Asset – Liability. And for Balance Sheets, Asset should always equal to Liability.
    Then shouldn’t be Shareholder’s equity always zero ?

  21. Abhilash says:

    Awesome work, I have few doubts,
    1) In ROE DuPONT calculation,
    Is Net Sales 3437 Cr/3482 Cr ( from P&L ). Are we excluding OTHER INCOME (46Cr) from Net Revenue ?
    In either Values (3437 / 3482), the calculation goes like this… 367/3437 = 10.6 % (or) 367/3482 = 10.5 %.
    But it is 9.2% there.

    2) Because of this While calculating ROE by normal way and DuPont way, there is a huge difference 25.9% and 30.31%
    I have got both way of calculation ~ same… ( 10.5*1.75*1.61)= 29.58 and other one is 30.31%.

    3) what is the avg ROA of Top indian companies, is it > 15% ?

    • Karthik Rangappa says:

      1) Excluding other income is a good idea. I’ll double check the numbers.
      2) Another way to put this is, companies which display >15% ROE/ROA are usually top 🙂

  22. Abhilash says:

    Thanks … if possible please update the numbers.

  23. suresh says:

    Hi, sir
    ROE=Net profit Margin*Asset Turnover*Financial Leverage

    ROE=Net Profits/Avg.Shareholders Equity
    can we use both formula to calculate ROE?
    but different values come in both formula……is it ok?

  24. suresh says:

    While calculating ARBL’s Return on Asset(ROA), It is written Interest -7 and tax rate-32%
    how it came this value?….

  25. suresh says:

    I got the answer…….Interest is nothing but finance cost so ARBL’s finance cost was 7 right
    and average tax rate is 32%

  26. rohan says:

    in EBITDA calculation-
    why finance cost and depreciation subtracted from total expense for calculating operating expense?? finance cost is also a part of operating expense

    • Karthik Rangappa says:

      Because the EBITDA is supposed to reflect pure operational efficiency of a company.

      • Kunal says:

        EBITDA is before the effect of deprecation interest and taxes, but you have taken dep and amortisation and finance cost into consideration which means the equation is profit before tax and not EBITDA

        • Karthik Rangappa says:

          Kunal, EBITDA or Operational expense is Revenue (exclude other income) minus expenses (exclude D&A).

  27. rohan says:

    plz point out what will be shareholders equity in calculating ROE?
    where to find this value and what is it in ARBL ?

  28. rohan says:

    how can higher financial leverage means higher debt??
    Financial leverage helps us answer this question – ‘For every unit of shareholders equity, how many units of assets does the company have’.

    higher value should be good for company and investor?

  29. rohan says:

    I calculated financial leverage(asset/shareholders fund) of exide. It came out to me .6
    It means for every rs 1 of shareholders money company has asset of rs .6. ?

    so less than 1 ratio is considered good or bad?

    • Karthik Rangappa says:

      Assets/Shareholders alone does not really convey much about leverage. I’d suggest you look at debt to equity as well. Value of 0.6 conveys a healthy ratio.

  30. surendra says:

    Is there any automated tool to carry out the fundamental analysis like you did in this chapter in Zerodha ?

  31. rohan says:

    RoE = Net Profits / Avg shareholders Equity

    From the annual report we know for the FY14 the PAT is Rs.367 Crs

    RoE = 367 / 1211

    = 30.31%

    From where 1211 value is taken?

    In annual different value is given
    shareholders fund
    share capital-170
    reserves and surplus-13456

    • Suchetha says:

      Hi Rohan,
      You can find the details in the Financial section of the Annual report, under the Balance Sheet.

      The Shareholders funds for FY13 = Rs.1059 Crs

      The Shareholders funds for FY14 = Rs.1362 Crs

      Therefore Average shareholder equity = Rs.1211 Crs

  32. rohan says:

    Financial Leverage = Average Total Assets / Average Shareholders Equity
    average shareholders equity=share capital+ reserves and surplus
    shareholders equity means money from shares. Then why reserves and surplus included in this?

    • Karthik Rangappa says:

      Avg Shareholder Eq = Avg of this year’s and previous year’s Shareholder’s EQ.

      Shareholders equity is the net worth of the company and not money from shares. The net worth includes both share capital and Reserves and Surplus.

  33. Prashant says:

    Hi Karthik, While calculating the interests for calculating RoA for one of the stocks i found that the financial costs include the below point
    -Interest to banks
    -Interest others
    -Amortisation of ancillary borrowing costs
    -Cash discount
    -Bank charges

    Now will the interest for the RoA include all the above points given under the financial costs or will it only consider the Interest to banks and Interest others?

  34. Ankur Agrawal says:

    Hi Karthik

    The EBITDA you calculated in the above table for 4 years 2011, 2012, 2013, 2014 i.e. 257, 340, 451, 560 respectively does not match with the EBITDA numbers given in AR of FY14 for the same years i.e. 258.8, 357,465.8 and 575.8

    Why is that so? Please Explain.

    • Karthik Rangappa says:

      I’ve taken the restated numbers to represent the most accurate value. I guess this is where the difference is coming from.

  35. RAJIV says:

    Hi Sir, thanks for such a tutorial. I am a slow learner. It may take some time for me to digest them. meanwhile I thought of asking you this. Is there a place where I can get all these ratios for each stock rather than I calculate it. I am thinking like driving a car. I know to drive a car but do not know how it works. can that theory be applied here.

  36. srikanth says:

    Hi karthik ,I think the logic of taking average of 2 years equity and 2 years debt be applicable in calculating ROCE vis a vis Average assets while calculating ROE ,because the average of both produce the current returns,kindly correct if I’m wrong

    • Karthik Rangappa says:

      Not sure what you mean by – “because the average of both produce the current returns”, can you please elaborate so that I can understand this better? Thanks.

  37. vimal says:

    For analysis of company which numbers should be taken i.e standalone or consolidated statements. And the dividends are paid on which numbers?

  38. luthra888 says:

    Hi Karthik,

    Hope you are doing well.
    I have doubt in the calculation formula of EBIDTA. I have cross checked multiple websites and all of them have there own formulas of calculation EBIDTA. However the most commonly used formula was:
    Total Revenue – Operating Expenses = EBITDA.
    In the above mentioned formula giaven by you it is: Operating Revenue – Operating Expenses = EBITDA.
    Which one is correct? Also, please check the the given link. I have made two calculations based on these two formulas and result were very different.
    By checking the CAGR of both the formulas what will be the effect of them? AS one CAGR is positive and one is negative.

    • Karthik Rangappa says:

      I’d suggest you consider the Total Revenue – Total operating expense = EBITDA. This would be a bit conservative, better that way.

  39. sammandar khan says:

    Dear Karthik
    Why is there a difference while calculating the ROE by both method
    1st: 25.9%
    2nd: 30.31%

    • Karthik Rangappa says:

      Ideally it should not – I’m guessing its because I’m using the restated numbers. Need to look into this again, will get back as soon as I can. Thanks.

  40. MSP says:

    Hi Karthik,
    Asian Paints ROE for 2015-2016 is coming 1800% , net profit 1726.21 cr. Equity 95.92 cr. can a ROE be this high.

  41. MSP says:

    Hi Karthik,
    AP is mentioning share capital 95.92 cr and consolidated profit 1726 cr


    Am i looking , right numbers?

  42. MSP says:

    Hi Karthik,

    Tata Chemical 2015-2016, Shares outstanding 25.82 cr. Reserve and Surplus 6033.58 cr , PAT 780.16 cr , EPS is coming 0.12, they are reporting 30.62. they are not including reserve and surplus, why so?


  43. MSP says:

    Hi Karthik,

    Thanks, now i am clear on this.


  44. MSP says:

    Hi Karthik,

    Tata motors ROE is coming 16%, Financial leverage 3.70, what does this mean? especially Financial leverage of 3.70.


  45. MSP says:

    Hi Karthik,

    Avg. Asset 253977.795 cr, Average share holders equity 68522.295 cr, figures taken from http://www.tatamotors.com/investor/annual-reports/, for 2015-2016. 2014-2015.


  46. Manish Parab says:

    hello Karthik, when we have asset turnover in Dupoint analysis, do we need ROA ratio?, if yes then whats the difference between them?

  47. KP SRIKANTH says:

    While calculating RoA how did you come up with the interest amount or finance cost 7 crs and avg. tax rate as 32%?
    And while calculating Asset turnover ratio I think you taken net sales wrong figure . It is RS. 34036.12 million YOU TOOK AS 3437 CRS

    • Karthik Rangappa says:

      I’ve converted the numbers to Crores throughout as its more intuitive for most of us to understand.

  48. Akash says:

    In EBITDA, what is the meaning of “Interest Tax Depreciation”?

  49. GAURAV LUTHRA says:

    Hi Team,
    The figure of finance cost taken in the calculation of ROA is wrong…The amount of finance cost given in the annual report is 7.18 in million rupees which equals to .72 CR/ 72 lakhs..

    • Karthik Rangappa says:

      Let me look through this, Gaurav. Thanks.

      • Raja Singh says:

        Under return of asset you have taken finance cost as 7 crs whereas by the balance sheet it is 70 lakhs. Please have a look and correct
        Another small issue, once you download the PDF, a few chapters are repeated(The ones on financial ratios)
        And, really thank you for this work.

  50. Romil says:

    Can you please explain DuPont Model 3 points and 5 points?

    • Karthik Rangappa says:

      Dont think we have discussed the Dupont in detail. I’ll probably do that one of these days as a supplementary note.

  51. Eddy says:

    Small spelling correction:
    EBIDTA Margin = EBITDA / [Total Revenue – Other Income]

    Its actually EBITDA Margin

  52. Ayush says:

    Sir, i have few doubts;
    1.Does Asset Turnover and ROA convey the same thing but in different way?
    2. What does this mean ”if the financial leverage is 4, this means for every Rs.1 of equity, the company supports Rs.4 worth of assets”?

    • Karthik Rangappa says:

      No, Asset T/O indicates how efficiently you are using the assets you’ve invested in. ROA on the other hand, indicates the return on the asset you have.

      It means for every 1 Rupee of your own, you have borrowed Rs.4.

  53. Ayush says:

    Why dont we depriciate Tax form operating expenses in EBITDA?

    • Karthik Rangappa says:

      Tax cannot be depreciated, Ayush. If you are talking about deducting, then yes, you can do that and consider just EBIT.

  54. Shraddha says:

    Hi Karthik,
    For PAT, we use Total Revenues (which includes the ‘Other Income’) in the denominator. Then why do we say that Net Profit Margin in Du Pont is same as PAT when we use Net Sales (which excludes Other income ) in the denominator ?

    • Karthik Rangappa says:

      For estimating pure operational efficiency, you will have to exclude other income.

  55. kiranintouch says:

    Hi Karthik,

    Thank you for the module. Regarding ROE and ROCE ratios, Profit was considered for obtaining ratios. However for ROA, “Net Income” had been considered for calculation. Does this have any significance or it is just the way the ratios have been defined.

  56. deepesh jolde says:

    sir, in EBITDA why do we consider other expenses as operating expenses whereas we are not considering other revenue as operating revenue?

    • Karthik Rangappa says:

      Hmm, ideally speaking EBITDA should reflect operating efficiency. So you can exclude other income. However, if you look the nature of other expense, you will notice a lot of expenses, which are core to the operations. Hence you cannot exclude this.

  57. Gowtham says:


    Nice explanation. I can download any organisation in the excel format from screener, as you suggested, but i did not see financial Ratio analysis in Data Sheet. Can you please include that in that excel or if you have any sample, can you please send me one
    Thanks in advance.

  58. Gowtham says:

    Adding to above, I see ratios in ratestar website, but does not have enough ratio analysis, dont have link to download as excel and value looks different comparing to screeners.

  59. Mehboob Khan says:

    Hi Karthik.
    1. What is the difference betwee ROA and ROCE apart from the tax shield number?
    2. For financial leverage you have mentioned Avg total assets/Shareholders equity. What about Debt/ equity ratio.?
    3.Doesnt ROA gives a better idea than ROE as it takes into consideration the debt as well. ?

    • Karthik Rangappa says:

      1) ROA measures the utilization of assets of the company, measured in terms of returns. ROCE, on the other hand, does the case for capital employed
      2) Yes, D/E also gives you a sense of financial leverage
      3) These are two individual ratios measuring two different aspects of the company

  60. rohan bhandari says:

    I am trying to search EBDITA margin in screener.in but I am not able to find that. Can you please help me with this.

    EVEBITDA is available , is it the same thing?

  61. preetam says:

    sir in case of pnb housing finance PAT has increased by 41% CAGR in the last 5 years while ROCE is only around 1.5% in last 5 years. why is there so much difference?

    • Karthik Rangappa says:

      ROCE on banks can be a little tricky, Preetam….especially since a bank’s balance sheet is highly leveraged.

  62. Girish says:

    ROCE should be EBIT (1-T)/ Total capital, instead of EBIT/TC as we have to pay taxes.Please correct me in case you think other wise.

  63. Rinkesh Ahuja says:

    If we want to calculate EPS for 5 years, so how do you get data apart from last two years? Is Annual Report the only source?

  64. amolsatpute2007 says:

    hi, i am new to share market, I am doing positional trading. but have problem about dividend. i have REC share and dividend is already declared on 0n 15/07/2017 but i have confusion about, how long i have to hold this stock. is it till book closer date,or till complete book closer period. i have no clue please guide.

  65. Jinal says:

    In some annual reports they give Profit for the year value and then add/subtract profit/loss attributable to non-controlling interest and then they arrive at Profit attributable to owners of the parent.

    Profit for the Year = 2,713.51crs
    Profit/(Loss) attributable to Non Controlling Interest = (1.41) crs
    Thus, Profit attributable to Owners of the Parent = 2,714.92 crs

    so, which PAT to take for calculation purposes?


  66. Jinal says:

    In Calculation of Net Pproft margin you have taken Total revenue amt 3482 crs as Net sales, but in calculation of Net sales/Avg Total assets (ROE), you have taken Operating revenue amt i.e. 3437 crs as Net sales.

    So, which to take for Net sales, operating revenue or total revenue?

    • Karthik Rangappa says:

      Ah, this could be a typo. You need to take the operative income (without including other income) into consideration.

      • Srikanth Reddy says:

        So, In Net profit margin calculation it is mentioned that “this is same as PAT margin” in PAT margin it is Total Revenue , but here it is Net Sales, how both are same? please clarify
        Thank you

        • Karthik Rangappa says:

          Net sales are essentially revenue from the operations of the company, however, total revenue includes other incomes as well. Hence its prudent to consider revenue just from the operations for PAT margins.

  67. binay says:

    hi sir, pls tel me how to forecast ebita for next year , say we are in 2017 so hw to forecaste or calculate ebita for 2018, 2019 and 2020. pls reply me here or mail me at [email protected]

    • Karthik Rangappa says:

      This will require a little bit of financial modelling, Binay. Plan to take this up as an entire module sometime soon.

  68. Ramana Kumar CH says:


    How do you got 4 year EBITDA CAGR growth of 21%?


  69. Vedant says:

    based on what you have taught above , i tried calculating EBIDTA for tata motors reffering to the latest Annual report in April 2017. I was unable to get the EBIDTA figure that they have mentioned

    Also can you please throw some light on “Other comprehensive income/(loss):” as this is included in Profit and loss and shows loss of (27,494.57)

    • Karthik Rangappa says:

      The Other comprehensive income – seems like the other income. Have you looked at the associated note? Also, are you looking at consolidated statements?

      • Vedant says:

        Yes sir and i dont seem to be arriving at any answer. Under other comprehensive income they seem to have mentioned a loss. Not sure if it needs to be considered and how important it is .

        Also ROE as per money control is -11.91 .

        I reffered the annual report from Tata motors website but unable to get -11.91 as ROE

  70. Vedant says:

    sorry their consolidated return on equity is -12.83. dont understand how they are getting this figure

  71. Vedant says:

    is there anything available on Financial modelling

  72. Sammandar says:

    Hello sir
    In the ROE first you wrote different formula to calculate and after Du Pont method you again wrote a different formula

    1. RoE can be calculated as: [Net Profit / Shareholders Equity* 100]
    2. However if you wish do a quick RoE calculation you can do so the following way:
    RoE = Net Profits / Avg shareholders Equity

    Please clear which is actual formula to calculate ROE except DU PONT Model

  73. rajesh says:

    No words to say… extraordinary work…
    Please provide link to financial ratio pdf… bcoz module 3 is available upto 85 pages only..

  74. Kumar Brar says:

    Hi Karthik,

    I am a bit confused while calculating CAGR – PAT for NTPC. I have taken 5 yrs PAT data i.e.

    2012 — 12590.78
    2013 — 11403.61
    2014 — 9986.34
    2015 — 10182.81
    2016 — 10713.94

    I have used — (10713.94/12590.78)^(1/5) – 1. (ending value/beginning value)^(1/no. of years) – 1

    Can you plz guide me in calculating CAGR here ?

  75. Ashutosh tilwankar says:


    Can financial leverage be calculated as follows


    If yes how is it different from the given formula

  76. Avinash says:

    Hi Karthik,

    I am looking at a company whose financial leverage ratio is 11 but it has zero long term debts. It has had zero long term debt for the last many years.

    How do I interpret this?

  77. Aakash says:

    in Vishal pizza example ,for second case liability should be equal to 2000 and not 10,000 otherwise equation( shareholder equity=total asset -total liability ) will not hold!!!Please clarify.

    • Liability to a company includes shareholders’ fund, non-current liabilities, and current liabilities.
      In this case, Equity Capital of Rs 8000 contributed by Vishal and Rs 2000 as external debt.
      You can read more on this in Chapter 6 & 7 of this module that covers Balance Sheet

    • Karthik Rangappa says:

      The balance sheet equation is Total Assets = Total Liabilities, which holds in the case of this example.

  78. nandhan A says:

    in this documents ,it is stated that we need to compare the financial ratio with its peers
    I think this may be true if two company size or same .
    But in real scenario ,any companies size are not same as another .
    in this case , how it will be effective if comparing the financial ratios with its peer?
    can you please elaborate this ?

    • Karthik Rangappa says:

      I agree, the comparison will be effective only if the companies you are comparing are of similar market cap size.

  79. Aman kabra says:

    Hi karthik,
    Currently i am reading Annual Report of Amar raja for year 2017. One page no. 9 there is a ratio called RONW%. can you please brief me on the same.

  80. chidambaram says:

    Hi Sir,
    1.Why is not correct to compare the financial ratio of two different market cap companies?
    2.As per balance sheet equation Assest = Liability,then does that mean ROCE (accounts for liability side) and ROA should be same?If so they why two different calculation?If not in what aspect they vary?
    3.If the leverage ratio = Avg Asset /Avg Equity is less than 1, then where does the company kept its remaining equity cash?Because in this case no debt would be there,and if so then how come the balance sheet equation Assest = liability get balanced?
    4.In ROCE why is PBIT considered ? Why can’t PAT+Interest be considered ? or simply PAT?

    • Karthik Rangappa says:

      1) You can compare to get a sense of how the companies are doing. No harm in doing this. But be aware that the size of both the companies are different
      2) No, this is not true. The denominator for both these ratios are different
      3) Please dont mix up the ratios with the balance sheet equation
      4) Becuase we are interested in operating profits.

      • l_earn_err says:

        Sir, Doubt Regarding Q&A No. 4…

        Q&A 4)
        But isn’t operating profit = PAT ?
        So why was PAT or (PAT+interest) not considered in ROCE like any other profitability ratios?
        And, what does taking EBIT in numerator signify instead of PAT?

        • Karthik Rangappa says:

          Operating profits deducts just the operational expenses while finance charges, D&A, and interest is not. This is where the difference lies.

  81. Shishir says:

    In ROA, how did the average tax rate (32% here) calculated?

  82. Gourav says:

    While calculating ROE you are considering Net Profit Margin 9.2% but we have calculated it as 10.5% while calculating PAT margin . I’m confused here.

    • Karthik Rangappa says:

      Ah, I need to check this, Gourav. Anyway, here is how I prefer to calculate the

      Net profit margin = PAT / Operating Income.

      Make sure you remove the other income component.

      • ARUN says:

        denominator should be total revenues i think so…..

        • Karthik Rangappa says:

          You can take total revenue, no problem with that. However, if you want to figure out operating profit margins, then it is better to take operating revenue which is total revenue less other income.

  83. Shivanvita says:

    Sir, When you calculated ROA your numerator was PAT + i(1-t) and I understood your explanation for using i(1-t).
    But the similar logic applicable for ROCE. isn’t it? Why did you use EBIT in this case? TAX shield should be considered here as well…?

  84. Shivanvita says:

    Sir, Why do we have two ratios ROA and ROCE, they are almost measuring the same thing or I am unable to understand the difference between the two because A in ROA is nearly equal to CE in ROCE

  85. Ganesh says:

    How to calculate EBITDA and EBITDA Margin of Karur Vysya Bank or Bank Stock?

  86. ZerodhaUser says:

    As Tax shield is interest*tax rate , company wont have to pay this amount , so this can be considered as a profit .
    So, Should the ROA formula be [Net income + interest*tax rate] / Total Average Assets instead of [Net income + interest*(1-tax rate)] / Total Average Assets

    Can you clarify on this ?

  87. Pratiush Kumar says:

    Shouldn’t the net profit margin be 10.5% rather than 9.2% as mentioned in Dupont Model or am i missing something??

    • Karthik Rangappa says:

      You can simply divide the PAT by Operating revenues (not including other income) for a better estimate.

  88. Amit mavani says:


    Is related party transactions impact on net profit of company ? If yes then how ?

    • Karthik Rangappa says:

      Not necessary. Too many related party transactions are not a very healthy sign of a corporate governance.

  89. Pravin says:

    I think in the calculation of ROA should be 0.7*(1-32%)=0.476
    as we are calculating in crores so finance cost 7 should be converted in cr
    =(367.4+0.476)/1955=18.81 %
    Am i right sir ji …??

    • Karthik Rangappa says:

      Yes, Pravin….all the numbers should be converted to Rupee crores…I’m assuming this is easier and intuitive for many of us.

  90. Dhiraj says:

    Do we have to take “Net sales” as revenue from operations or can we take it from notes provided as “Sale of products” ?

  91. Amit says:

    Hi Karthik,
    “Also note, if the RoE is high, it means a good amount of cash is being generated by the company, hence the need for external funds is less”.
    How can this be said conclusively? What if the company has a lot of receivables thereby increasing the Net Income and the ROE. In such cases, the cash generated can be very less in fact.

  92. Ranajit Pal says:

    RoE in DuPont formula coming to 25.9% and in simple way 30.31% which should I follow? Why the difference. Please explain

    • Karthik Rangappa says:

      Du Point helps you dissect the details. However, I’d suggest you stick to the regular method for quick calculations.

  93. l_earn_err says:

    Sir, I read at many places that ROA (Return on asset) and ROI (Retun on investment) are same.
    However, they seem little bit different considering their denominator parts (as all investment may not necessarily be converted to or be equivalent to asset.)
    How true is that?
    Should I consider them the same?

    • Karthik Rangappa says:

      No, treat them differently. ROA measures the effectiveness of fixed assets while ROI is a measure of how good the management is in terms of utilization of funds.

  94. Kiran raj says:

    Hi Karthik,

    Great work as always. Thanks for making accounting look easier for non accounting guys. Secondly, taking time out of your busy schedule to reply to your comments is commendable. I found it a bit difficult to understand the calculation of RoA. While calculating interest(1-Tax rate) , I believe interest is finance cost. From the annual report it is 7.18 million. As all our calculations are converted into crores, shouldn’t it be 0.7 crores? Secondly, how did you arrive at 32% tax rate ? Is it the corporate tax levied as per the Union budget ? If it is that, does the word “average tax rate” suggest that we should consider the average of corporate tax for the years under consideration? Meaning which, it is the average of corporate tax for the years 2013 and 2014 which is (33.99+33.99)/2 , which comes out to be 33.99%. Please correct me if I’m wrong.

    • Karthik Rangappa says:

      Kiran, thanks for the kind words 🙂
      It should be in Crores.
      Divide the tax paid by PBT and you will get the effective tax rate.

  95. limesh says:

    hi karthik,
    can you please tell me how to calculate EBITDA CAGR growth again please ?
    thank you

  96. Mateena says:

    I have a question regarding PAT margin and Net Profit Margin. You’ve mentioned it’s the same yet we got PAT margin as 10.5% and Net Profit Margin as 9.2%, how is that so?

  97. Vinay says:

    hi sir-Is any method to calculate Return on Equity (ROE) on quarterly basis?if any please explain it.

    • Karthik Rangappa says:

      Hmmm, you can take the quarterly numbers and churn out the ratio, but then you won’t have an accurate information unless you compare this quarter with the previous quarter or this quarter versus the same quarter, the previous year.

  98. Vinay says:

    hi sir-PAT Margin = [PAT/Total Revenues]
    = 367 / 3482
    =10.5 % Net Profit Margin: As I mentioned earlier, this is same as the PAT margin. From our calculation earlier, we know the Net Profit Margin for ARBL is 9.2% So why you took 9.2% but it has 10.5% in calculation earlier please explain? for calculating RoE.

    • Karthik Rangappa says:

      The formula is correct. Few people do not like including other income in this equation, so you can exclude it. Guess I’ve done the same here.

  99. Vinay says:

    Hi Sir-If you exclude other income than total revenues is 3482-45=3437 so PAT Margin = [PAT/Total Revenues]
    = 367 / 3437
    =10.6 % so Profit Margin for ARBL is 9.2% is not come this way so how it come 9.2% please explain in detail. thanks

  100. ramesh says:

    hello Karthik – thanks firstly on sharing all these knowledge.

    my question is on EBITDA calculation which you had mentioned as “operating revenues – operating expenses”

    I was trying this on JBMAuto FY17 report although I managed to get all the inputs and arrived at a number, that number doesn’t seem to match with what was calculated in the annual report.
    are there different ways to compute this?

    please direct and thanks in advance.

    • Karthik Rangappa says:

      Maybe they have included other income on the revenue side and finance cost/depreciation on the expense side?

  101. Ram says:

    Hi Karthik,
    Does operating expenses include other expenses?

  102. Ram says:

    Hey Karthik
    I was going through shoppers stop ar they have reported the ebtda of 22025 million but I am getting a higher ebtda than that.

  103. Ram says:

    Does high ROE calculated by dupont method and high debt too drags a red flag?

  104. Arshaq says:

    The equation for RoE provided by the DuPont is essentially the same equation as the first one given to calculate RoE, so the answer obtained from both of these equations should be the same. So what exactly is the point of the DuPont formula? Is it just so that we calculate the individual entities Net Profit Margin, Asset Turnover and Financial Leverage so that we get a more rigorous view of the company and it’s situation to give us a better perspective to make a decision? Or is there more to the DuPont formula?

  105. Shrey Bhandari says:


    Sir while calculating ROA, what tax rate we have to consider now? the same 32% or there is any change after GST ?

  106. Kumar Udayan Das says:

    Why we got two different values of ROE (one is 25.9 and another one is 30.31) of ARBL for the same fin year 2014 when it was calculated using two different formula?

  107. Hemant Patra says:

    Hi karthik,
    i was calculating the ebitda for amara raja batteries according to the formula mentioned above , but my values are completely different from what the ebitda values are showing on money control . Am i missing something here??

    My Calcualtion:
    [Total Revenue – Other Income] – [Total Expense – Finance Cost – Depreciation & Amortization]
    [6299.35 – 66.37] – [5585.15 – 5.06 – 230.34] ; which comes out to be : 883.23 cr .

    Whereas on moneycontrol the graph states the ebitda for march’18 as : 950.29 cr

  108. Sam says:

    Hello, I’m from Hong Kong. First, thanks for offering such useful insights for free and I love reading your articles that they are quite plain and easy to understand.
    I read several annual reports and I found out that their financial statements are not expressed in HKD but RMB instead.
    So, I’m wondering when I’m working out on the fundamental analysis, shall I consider the exchange rate, and on which rate i should base on?

    • Karthik Rangappa says:

      Hey Sam, glad you liked the content on Varsity!

      It would be difficult to consider exchange rate as you’d be dealing with historical data. Its best if you can work with HKD to get a fair and unbiased view on the business. Good luck!

  109. N Jayakumar says:

    Different websites give different values of ROCE for the same company. For example, for the year 2018, the ROCE for Ambika Cotton Mills are 20.26% in Valueresearch, 13.29% in Moneycontrol, 20.16% in Screener and as per my calculation it is 18.25%. Which one is correct?

    • Karthik Rangappa says:

      Its best if you can calculate this on your own with data from Annual Report. In fact, this is what I prefer to do.

  110. Debmalya says:

    According to a statement in this article – “In 2011 the EBITDA was Rs.257 Crs and in 2014 the EBITDA is Rs.560Crs. This translates to a 4 year EBITDA CAGR growth of 21%.”

    I think it should be 3 year EBITDA growth not 4 years because starting point is taken the year 2011 and the end point is 2014. Hence it is growing over 3 years. As per my calculations CAGR will be 29.30 % (approx.)

    Please let me know if I’m right or wrong.

    • Karthik Rangappa says:

      March’11, March’12, March’13, March’14 – so 4 years right?

      • Debmalya says:

        Sorry. I didn’t understand.

        On 31st March 2011, EBITDA was 257 crs. Now, from March 2011 to March 2014, the time duration is 3 years. So, the 257 crs is growing over 3 years and finally becoming 560 crs in March 2014.

        • Karthik Rangappa says:

          So you have EBITA reported for –

          1) Year ending March’11 (257 Crs)
          2) Year ending March’12
          3) Year ending March’13
          4) Year ending March’14 (560 Crs)

          So that makes it 4 years right?

  111. Ram says:

    Hey Karthik,
    What are ‘statement of changes in equity’ ?

  112. Ram says:

    Hi Karthik,
    I was reading through Maruti Suzuki’s annual report and I noticed that, excise duty was included in expenses and not deducted in the revenue, so while taking Net sales should I deduct the excise duty or not?

    • Karthik Rangappa says:

      Not really, treat it as an expense like the way the company is doing.

      • Ram says:

        But in ARBL’s annual report the excise duty was deducted from the revenue, it wasn’t included in expenses and while making the calculation we didn’t consider it.

        • Karthik Rangappa says:

          Most companies like to deduct the excise duty and show net sales, some prefer to treat it under expense. Anyway, post-GST, I don’t think ED exists.

  113. Divakar says:

    Hi sir,

    I was calculating EBITDA for HDFC bank for year 2018. most commonly used formula was Total income ( 95461.70) – operating Expense(27711.50) = 67750.10 , So how to calculate EBITDA Margin from this. By the given Formula 67750.10/ 95461.70 = 70%.
    But in other websites it was given as 14%. Could you please explain sir.

  114. Ram says:

    Hi Karthik,
    You have stated that in the article above that Operating Expenses= Total Expenses- Finance Costs- D&A.
    I think other expenses should also deducted from the total expenses to get to the operating expenses.
    Please correct me.

    • Karthik Rangappa says:

      Thats right Ram, the total expenses includes other expenses.

      • Ram says:

        But I don’t understand that in operating revenues, other revenue is deducted but in operating expenses, other expenses are included

        • Karthik Rangappa says:

          Although its termed ‘Other Expenses’, these are expenses that the company incurs while running the operations. Like power bills, stationary bills, communication etc. I’d suggest you look up under the notes of the company.

  115. Ram says:

    Hi Karthik,
    You have stated that in the article above that ‘ratios should be analyzed both at a single point in time and as an indicator of broader trends over time’
    What does that mean?

    • Karthik Rangappa says:

      I just meant to say that the ratio has relevance from both the historical and the current state. Meaning, you have to check the ratio on a year on year basis and on a 5 – 8 year basis.

  116. shishir kumar das says:

    Good morning sir…
    “ratios should be analyzed both at a single point in time and as an indicator of broader trends over time”
    Sir this is 14th point from take way from the chapter.
    Sir i am unable to understand this last point.

    • Karthik Rangappa says:

      All this means is to figure out how the company is doing today (single point of view) and how it has done in the past (broader trends over time). A good company shows consistency across both the measures of time.

  117. robin says:

    can we use the same methodology in calculating the ROA of banks since banks are highly leveraged. ROA = (pat+interest(1-taxrate))****, can we deduct the tax rate from the finance cost of banks?

    • Karthik Rangappa says:

      Hmm, that can be a bit tricky, Robin. Let me check like I have mentioned earlier, bank’s books are slightly different.

  118. Ram says:

    Karthik as you stated that ‘Other income is income by virtue of investments and other non operational activity. Including other income in EBITDA calculation would clearly skew the data. For this reason, we have to exclude Other Income from Total Revenues.’ then why do we include other expenses in operating expenses

    • Karthik Rangappa says:

      No, we dont include. Other income is included in the overall income, but not income from operations. Income from operations = Total income – other revenue.

  119. Ram says:

    Karthik as mentioned above the average tax rate was 32% when the article was written , is it still the same?

  120. Ram says:

    Could you please do me a favour, in INOX leisure’s Annual Report of FY17 the total revenue for year ended 31 March 2016 is stated as 8087.81 lakhs and for the same of year ended 31March 2016 in FY 2016 the total income is stated as 7749 lakhs
    I cannot understand why the total revenue for the same year is stated different for the same year?

    • Ram says:

      Oops sorry I mispelled your name
      Very sorry:(

    • Karthik Rangappa says:

      This is quite common for companies to restate the numbers and make few corrections. This can be attributed to late revenue recognition/suspense account etc. However, you need to ensure the numbers are not off by a large degree (less than 5% of the initially stated number). In this case, I see it comes to 4.5%, which is ok.

  121. Rohan says:

    You have used ROCE formula as [Profit before Interest & Taxes / Overall Capital Employed], where Overall Capital Employed = Short term Debt + Long term Debt + Equity. However, on researching all websites puts up Capital Employed= Total assets – current liabilities.

    With this, Capital employed = 2139.44-633.7 = 1505.74
    ROCE = 537.7/ 1505.74 = 35.7%
    Which formula do you suggest and why? Please explain.

  122. Jay says:

    How Did You Get The Figures For Total Asset For FY 13 & 14 I Am Unable to Calculate The Average Total Asset of Amar Raja Due to Deviations In figure Mentioned here and used by Me ( Total Asset For FY 14 is 1987 how did you come to the figure of 2139?)

    • Karthik Rangappa says:

      Jay, where are you checking the values from? Are you looking up on the annual report, if not I’d suggest you take the values from the annual report?

  123. Rohan says:

    Hi Karthik,

    I have 2 queries:
    1. For EBITDA Margin in one of the comments you have suggested to consider
    Total Revenue – Operating Expenses = EBITDA but in module and another few comments you have suggested to consider Operating Revenue – Operating Expenses = EBITDA.
    2. In Varun Beverages AR 2017, they have used EBITDA Margin = EBITDA / Net Sales & PAT Margin = PAT/Net Sales, but instead of net sales you have considered Operating Revenue. Please advise which to consider

    • Karthik Rangappa says:

      1) For a true representation of operating EBITDA, you should consider (in my opinion): Total Operating revenue – Operating expenses
      2)EBITDA/Net Sales is good if you want to consider the EBITDA margin as a percentage of sales. EBITDA/Op Revenue is good if you want to consider the EBITDA margin as a percentage of revenues. So it really depends on what you want to analyze.

      • Rohan says:

        Thanks a lot Karthik. Greatly appreciate your lessons. It has been very helpful. Is there a reference material you suggest to get these formulas from a single source? Every place has different formulas and its very confusing for a starter like me. Also, even though the values from balance sheet & p&l match with various websites, the margin ratios do not match up and i get worried thinking i might be doing something wrong. Kindly suggest.

        • Karthik Rangappa says:

          Rohan, for this reason, I do not trust 3rd party sources. I like to look at the annual report of the company. I’m not sure about the single reference source, but probably I’ll try and put this up in the module on Financial Modeling.

  124. Rejo says:

    Hello Sir,

    I am trying to calculate ROE of ICICI Securities, Could you assist me calculate Asset turnover of this company as am struggling figuring Net Sales. Please help.

  125. Pratibha says:

    Hi Sir,

    What does it mean by positive CAGR Revenue growth, whereas negative values for CAGR EBITDA, CAGR PAT and CAGR EPS… Unable to figure out if the company is worth investing.

    Also, what does negative value of Return on Asset ratio and EBIT imply? Is it a sign not to invest in the company?

    • Karthik Rangappa says:

      Positive CAGR is when the company is growing but negative is when the company is de growing.
      Yes, I’d avoid investing in companies with -ve growth numbers.

  126. Jaydeep says:

    How to find tax rate which show in ROA interest*(1-taxrate)

    • Karthik Rangappa says:

      The company would have stated that in the AR. Else, you can divide the Income-tax paid by PBT to get a sense of the tax paid (tax rate) of the company.

  127. Ram says:

    Hey Karthik,
    As mentioned above in the article that PAT margin is same as Net profit Margin then why is the value of PAT margin given as 10.5% and the value of Net Profit Margin given as 9.2%?

  128. Ram says:

    So Karthik should other income be included in Net sales?
    And one more thing while calculating Net profit Margin in Financial Ratios Part 1 the value of net sales has been taken as 3437 Crs.
    and while calculating the value of Gross Profit Margins the value of net sales is taken as 3404 Crs. I think while calculating Net Sales for Gross Profit Margins the values of ‘Sale of Services’ and ‘Other Operating income’ were excluded.

    • Karthik Rangappa says:

      If you want to be conservative (I’d), then I’d not include other income in net sales. Sales of services are actually core operations, although they do not contribute much to the overall revenues. So this has to be included. You can exclude other operating income after studying the constituents of it.

  129. Sivagurunathan says:

    Hi Sir,

    How to apply Dupont model for Bank stocks, What do i consider sales?

  130. SIVAKUMAR says:

    Sir, profit of a company grows; but not the EPS. Why? please explain

  131. sandeep singh sanger says:

    I don’t know where to post, so posting here only, ordered kids books the rupee tales more than a week, but still didn’t get any info about it,.
    secondly,, called zerodha, they say they won’t help coz its different section, neither they provided a contact number.
    feeling flummoxed, what I am supposed to do

  132. Nithun says:

    Can you please explain how you arrived at 9.2% for the net profit margin? Because if I include other income, I get (367/3482)*100= 10.54% and if I exclude other income, I get (367/3436)*100= 10.68% Why is there a difference in RoE calculation for both the methods?

    • Karthik Rangappa says:

      Hmm, I need to double-check this. However,

      Net Profit margin = PAT/ Operational Income

      I’d prefer to exclude other income from this.

  133. […] Click here to read more about ROCE calculation here […]

  134. Bibin says:

    You have mentioned “Net Profit Margin (Net Profits/ Net Sales*100)” is nothing but the “PAT margin”

    PAT margin is = PAT/Total Revenue

    That means “Net Profits = PAT” and “Net Sales = Total Revenue”

    If this is true, when calculating: “Asset Turnover = Net Sales / Average Total asset”

    You have taken “Net Sales” as 3437Crs which is “Net revenue from operations” not “Total Revenue”

    So doubt is whether “Net Sales” is “Net revenue from operations” or “Total Revenue”?

    • Karthik Rangappa says:

      Bipin, the thing is you want operational efficiency, then you need to remove other income. Which means Operational revenue = Total income – other income. I personally prefer to take operational income and exclude the other income component.

  135. Bibin says:

    ROCE = [Profit before Interest & Taxes / Overall Capital Employed]

    Isn’t Profit before Interest & Taxes is Profit before Taxes + Finance Cost?

  136. Bibin says:

    On calculation of Return on Asset (RoA):
    It is mentioned that The Interest amount (finance cost) is Rs.7 Crs, accounting for the tax shield it would be 7* (1 – 32%)
    But actually the finance cost is 7 mill = 0.7 crs tax shield it would be 0.7* (1 – 32%)

  137. Bibin says:

    RoE calculation
    RoE calculated DuPont analysis 25.9% does not match with (Net Profits / Avg shareholders Equity) 30.31%

    This is because Net Profit Margin 9.2% is not correct – the correct value is 10.68% => (Profi After Tax / Operating Revenue) * 100 = (367/3436) = 10.68

    If is corrected – the RoE in both equation matches to 30.31% as expected

  138. Roshan says:

    Hello sir, I have few queries
    1. How to identify capex heavy businesses
    2. Are the retained earnings and reserve / surplus are same
    3. Where to find replenishing and maintenance costs of capex heavy business in balance sheet

    • Karthik Rangappa says:

      1) Such companies usually have heavy ‘Fixed assets’. Also, look for CAPEX spend on a year on year basis
      2) Retained earnings is a part of reserves, but has other components as well
      3) Under the other expense section in P&L

  139. Roshan says:

    Thanks.. Please correct me
    1. CAPEX Spend – one should find in – cash flow statement – Cash from Investing Activity – fixed asset purchased (Payment for purchase of property, plant and equipment)
    2. Retained earnings – where to find.?

  140. Rohit says:

    Hello Sir,
    I have doubt about ‘EBIT’
    as while calculating EBITDA we don’t add D&A
    but still why we reduce D&A from EBITDA to get EBIT (EBIT=EBITDA-D&A) ?
    Thanks In advance sir

  141. Ishani Rao says:

    Hello Karthik,

    Thanks for the simple, concise and wonderful explanation.

    Just writing to inform you that Chapter 9 has been repeated twice in the PDF; hence can you please amend it.

    Thanks in advance

  142. Akash says:

    I have two questions:
    1. Is EBITDA Margin same as Gross Profit Margin ?
    2. Is “Profit & Loss Statement” same as “Income Statement” ?


  143. Akash says:


    Why in EBITDA Margin, operating revenue is considered but in PAT Margin, total revenue is considered ?


  144. Akash says:

    Kindly explain these terms:
    1. Altman Z score
    2. Pitroski F score
    3. Modified C score
    4. Where these are used and their importance ?


  145. SP SANGAM says:

    Hi Karthik Sir,

    1. After the Dupont Analysis, the ROE as per the Dupont method is 25.9% whereas as per the normal formulae it is 30.31%. Why is there a difference? Which one is to be preferred? Is it that when the company has a lot of debt, the Dupont method should be used?

    2. Why do we use the ” Net profit + Interest post tax ” only for ROA ? Why not for ROE where we only consider net profit part ?

    3. When should we use ROCE and when ROE ? Is it that when the company has a lot of debt, ROCE is preferrable because ROE is overstated due to high debt?

    Kindly clearify.

    Thank you. I am huge admirer of your Varsity content.

    • Karthik Rangappa says:

      1) Ideally, both should result the same value. In case of a difference, stick to the formula
      2) The interest post-tax bit is to factor in the finance cost of the asset. In a sense, we are isolating the efficiency of the asset purchase and figuring out its true value
      3) Yup, in case of debt, ROE can be skewed.

  146. SP SANGAM says:

    Thanks a lot for that fast reply.

    How about a module on Equity research, valuations and modeling ?

    • Karthik Rangappa says:

      Eq research and Financial Modelling with be a separate module. I will do it this year sometime 🙂

  147. venkatesh says:

    Financial leverage:For every 1rs of equity Arbl supports 1.61 of assets ?
    It means for every 1 rs of equity the co.receives 1.61rs of assets (is it correct)

  148. Abhijeet Alurkar says:

    Hello Karthik
    I have seen multiple sources explaining that Capital employed = Equity + Non current liabilities or Total assets – Current liabilities
    In your formula you have included short term debt, isn’t that a part of current liabilities ?

    • Karthik Rangappa says:

      Non current liabilities or Total assets —–> But non current liabilities is not total asset right?

  149. Abhijeet Alurkar says:

    Seems I wasn’t able to frame my question correctly.

    I have seen multiple sources explaining that Capital employed = (Equity + Non current liabilities) or (Total assets – Current liabilities)
    In your formula you have included short term debt, isn’t that a part of current liabilities ?

  150. Sumit says:

    Hi Karthik,
    The Company’s EDITDA is not increased linearly.
    How do we calculate the CAGR %. Could you please elaborate on this.
    Year 5: 15,206.51
    Year 4: 13,226.10
    Year 3: 10,734.83
    Year 2: 14,702.89
    Year 1: 8,793.29.

    Should we check for 10years data and compare. how do we analyze such data?

  151. Sumit Sunil Chavan says:

    Well, if the EBITDA is fluctuating every year like its increasing a year and then it decreases next year so how do we analyze this senario.

    • Karthik Rangappa says:

      Well, that shows the cyclicality of the business Sumit. You have to incorporate that into your analysis.

  152. Sumit Sunil Chavan says:

    I mean if we take the above data the growth is not linear so does this mean the company is not stable?

    • Karthik Rangappa says:

      No, it just means its a cyclical business. You have to understand the reasons for this and figure a way around.

  153. S.Chandhana says:

    Hello! While computing ROCE, profit before interest and taxes has been taken as 537.7 Crs. How was this amount computed as profit before tax amounts to Rs. 536.7. Also, shouldn’t finance costs be deducted from this?

    • Karthik Rangappa says:

      I need to check why the small difference exists. You get a tax shield with Finance costs, right?

  154. Sumit says:

    Hello Sir,
    Why Above Calculated ROE is different , it should have been same from both DU point and Quick Method.?
    As in the DUPoint, the denominator and the numerator cancels out with one another eventually leaving us with the original RoE formula ?

  155. Anup Singh says:

    Thank you sir for this tutorial.
    Just had one query. The financial ratio defined on each website is different.
    For example GPM, OPM, NPM value displayed on ET Markets is different from the values displayed on ICICI Direct. Kindly guide, from where we can fetch this actual data.

    • Karthik Rangappa says:

      Best is to look at the data from the Annual Report and calculate these numbers yourself.

  156. Shashank says:

    Do financial ratios make sense in case of companies like IRCTC where you don’t have any peer to compare?

    I checked for IRCTC’s P/E and while I write this, it’s at 74. But how do I know if this is fair? I don’t have any company to compare with.

    Is it safe to say that one can’t make much sense out of valuation ratios in these cases as there is no peer to compare?

    • Karthik Rangappa says:

      Absolutely, this is a problem when you don’t have peers to compare and get a sense of what is fair. But another way to look at it is the fact that there are no peers is perhaps the reason for such high valuations.

  157. Ganesh Jadhav says:

    Hi Karthik
    While calculating ROE, is it ok if we take the same PAT margin as net profit margin ? Or do we have to calculate separately with including or excluding of other income amount with pat ?

  158. Ganesh Jadhav says:

    Hi Karthik,
    While calculating ROCE is it ok if we use the “CE = Total assets – Current liability” formula ?

  159. Hitesh Chavare says:

    PBIT in ROCE
    Should be
    541.272 approx 541
    How I show you
    PBIT= PBT+Exceptional items special in this case+Finance cost(Interest)
    = 541.272
    In wrong please correct it.

  160. Hitesh says:

    PBIT or EBIT= EBITDA – DA(Depre. n Amo)
    in this case
    If other income is consistent it should be added in EBITDA otherwise it should not. for Amara it should be
    EBITDA= Total Revenue – Operating expenses= 3482-2876= 606 cr
    EBIT = 606 – 65= 541 cr
    Otherwise we don’t consider other income
    then it should be
    EBITDA = Operating revenue – Operating Expenses = 3437-2876=561 cr
    EBIT = 561 – 65= 496 cr
    or mentioned above
    PBIT= PBT+Exceptional items special in this case+Finance cost(Interest)-other income
    =536.670+3.884+0.718-(45.514) =495.758 appox 496 cr
    In P&L other income included for calculation we have to cut it to get true value
    calculations are so simple , you can do at ease
    Please go through it & tell me which is correct either 541 or 496 ?

  161. Hitesh says:

    Debt 91.19 95.04 84.07 87.17 84.28
    EBIT 261 223 321 431 { 541 }
    Debt/EBIT 35% 42.61% 26.19% 20.22% 15.57%
    Please see at bracket , data in equity research part 1
    means EBIT I discussed above is right.

  162. Anad Ahamed Aslam says:

    How to get net income???
    What is the difference between net profit and net income??

  163. Mohit Bengani says:

    Hello sir, I want to know how did you arrive at Shareholder’s Equity figure in Pizza example given under ROE ratio calculation

    As you have mentioned in “Understanding Balance Sheet Statement (Part-1)”, in Section 6.1, you have given formula of Shareholder’s Equilt = Asset – Liability. And for Balance Sheets, Asset should always be equal to Liability.
    Then shouldn’t Shareholder’s equity always be zero?

    Also, you have mentioned that Shareholders Euiqty and Net Worth are the same terms. I was going through the comment section and one person had similar doubt to which you replied that

    Net worth = Assets – Liability

    Shareholders equity = Share Capital + Reserves

  164. Mohit Bengani says:

    Sir, in which part are you referring to share capital?

  165. Chandradeep Kumar says:

    Sir, why do we account for Tax shielding in the formula of ROA only. If the interest paid is also going to a stakeholder of company then shouldn’t we consider Tax shielding for ROE & ROCE ?

    • Karthik Rangappa says:

      I need to figure this as well. But intuition says money is raised to buy assets, so you factor in the tax shield to reflect the true yield on the asset.

  166. Payal says:

    Hello Sir,

    What does it mean if the RoE is consistently decreasing although the net profits are increasing every year. So the rate of growth of share capital is higher than the rate at which profits are growing. so what does this say about company?


  167. Indranil Saha Saha says:

    Dear Karthik

    Thanks for all your immediate reponse.

    I have few doubts.

    1)Regarding measuring ROE= Net Profit/(Equity)….And Equity = Share capital+Total Accumulated profit.In that case the total equity for ABRL should be 17.081+1197.255 =1214(Cr).But for measuring ROE you have taken the Equity to be 1211 Cr. Is that correct.Kindly share your inputs
    2) Can you kindly share some genuine websites where we can compare all these Financial values for companies and competitors.Out of Tickertape, Tijori and Ratestar which is more reliable.Also share some other reliable websites.

    • Karthik Rangappa says:

      1) Equity = Share Capital + Gen Reserves . I need to check why there is a minor error
      2) I prefer screener, tijori, and tickertape.

  168. Indranil Saha Saha says:

    Dear Karthik

    Thanks for the response.

    For calculating the total equity we can add share capital + Total Accumulated profit(in Surplus column also).Please correct me

  169. RITESH PADHI says:

    In ROA part the intrest part(finance cost) is taken as rs. 7cr.
    but according do p/l statement finance cost is rs 0.7cr(7 million)
    kindly check and correct if i am wrong

  170. Mohit Jain says:

    Sir does the value of ROE differs using different formulas? And the Net profit margins and the PAT margins value were different, a little confused here!

  171. Mohit says:

    Sir, While calculating the PAT Margin the formula given is PAT/Total Revenue.

    1) While calculating the ROE using the DuPont Model, the first part of it,’ Net profit Margin’, you have written under it that it is nothing but the PAT margin. But In PAT margin we are using Total revenue as a denominator and in Net profit margin we are using Net sales(Total revenue-Other income) as a denominator, so how is it same? Please correct it.

    • Karthik Rangappa says:

      It is not, it should be consistent. I’d prefer to ignore the other income bit to identify just the operating efficiency.

  172. Mohit Jain says:

    Sir Formulas of some ratios are little bit different from the formula of ratios given on investopedia or other sites-
    For Example- ROA- Net income/ Avg. total assets, But you have added interest*(1- tax rate), so the formula of ratios given on screener.in are correct or not?

  173. Mohit Jain says:

    Sir, fundamental Analysis and the derivates module will make it a little bit easy to clear CFA?

  174. satish says:

    why we used ” Interest *(1- tax rate) ” as tax shield? is there any specific logic backing this formulae?

  175. rajiv says:

    hi sir. Thank you for the article.

    My query: In calculating Asset Turnover – should we use ” Revenue from Operations ” or ” Overall Revenue including Other Income ” ? Because while calculating PAT Margin we are using “Overall Revenue including Other income”.

    Please clarify. Thanks.

  176. Pooja says:

    RoA = [Net income + interest*(1-tax rate)] / Total Average Assets
    In RoA, why is it Net Income and not PAT, where for calculation we took 367 cr for Net Income. Doesn’t Net income literally means Operating revenue? Or did I perceive it wrong?

    • Karthik Rangappa says:

      Net income is post-tax, we are trying to figure the operating efficiency here, so operating income is a better parameter.

  177. Arun Sabat says:

    interest in “interest *(1- tax rate)” while calculating ROA, suppose to be .7 Cr, because in PL statement it was in millions.

  178. Suraj says:

    A few queries:
    1. In RoE calculation part, “Net Profit Margin: As I mentioned earlier, this is same as the PAT margin. From our calculation earlier, we know the Net Profit Margin for ARBL is 9.2%”
    But in PAT margin it is 10.5% instead of 9.2%. Pls, check the error and confirm.

    2.In RoA “Interest amount (finance cost)” is taken as Rs.7 Crs, which Rs. 0.7 in the annual report.
    And how did you calculate average tax rate as 32%? I am having confusion in this.

  179. Sandeep says:

    Thanks Karthik. I have been going through the stuff and its quite interesting and designed in such a fashion which creates interest in Non finance guys like me.

    One point on ROE – Understand the Du Pont method which gives fair picture. To get true ROE – while Calculating ROE can we do this way?
    ROE = (Net Profit * 100)/(Shareholders Equity+debt)
    I believe this will reduce the debt contribution and will not bump up ROE unnecessary.
    Just a thought to use this as a short cut.

  180. Suraj says:

    Sir, I did not get 2) point. Can you pls explain?

  181. Suraj says:

    When I calculate avg taxes in %, it gives a huge number.
    Example: Tax for FY19 – 1337.97
    Tax for FY20 – 1580.00
    So, avg tax =(1337.97+1580.00)/2= 1521.73, in % = 152173.00%
    The example that you have given has 32% avg tax rate.
    pls, let me know what am I missing.

    • Karthik Rangappa says:

      Ah no, to get the avg tax, calculate the tax paid every year in terms of %. So suppose this years tax is 32Crs over an income of 100Cr, its 32%. Likewise, calculate for last 5 yrs and then take the average of the %.

  182. Suraj says:

    Got it. Thanks.

  183. Ganesh Jadhav says:


    How did you arrived at 32% while calculating ROA. ?

  184. VAIBHAV MITTAL says:

    Aren’t PAT margin and return on sales the same thing? Both are essentially Net profit/Sales

  185. Bhaskar says:

    You mentioned PAT margin and Net Profit Margin are same. But PAT margin is calculated based on Total Revenue, which I assume also includes other income. While Net Profit Margin is calculated on Net Sales. Can you please clarify?

    • Karthik Rangappa says:

      Yup, if you want to calculate the profitability based on the operations then you need to ignore the other income.

  186. KARTHICK RAJA says:

    Hi sir,

    While discussing about ROA, you have mentioned about “tax rate” in the formula.

    Is this the corporate tax rate paid by the companies to the government??

  187. KP says:

    Hi Karthik,

    Awesome job with the whole thing. Congratulations!

    Quick question: If there any difference between Operating Margin and EBITDA Margin? I don’t know why but I don’t find EBITDA Margin on any of the major websites. All I see is Operating Margin.

    Just wanted to make sure if they are both the same.

  188. Protyay Banerjee says:

    Where can we download the Financial statement for a stock for last 10-12 years in Excel format with all column ?

  189. Prety says:

    What is the acceptable financial leverage ratio for investing?

  190. Moses says:

    In the ROA how do you get the Tax Rate?

  191. Niharranjan Nayak says:

    valuable lessons

  192. Harsh says:

    How is ROCE different from ROA as total assets will always be equal to total capital employed .
    and why tax shield effect is not given in calculation of ROCE then?

    • Karthik Rangappa says:

      ROCE includes the debt component also, while ROA does not. This is the main difference. Otherwise, they both are similar profitability indicators.

  193. Chandu says:

    Sir profit margin is 10.5%,you have took 9.2%
    Could you explain how 9.2% is calculated
    Thank you🤗

  194. Chandu says:

    Sir what does ROA of 19.03% mean, and is the 32% average tax rate now is unchanged

    • Karthik Rangappa says:

      Tax rates have come down. ROA is the return the company earns for every unit of investment on assets.

  195. Chandu says:

    Sir what tax rate shall I use while calculating ROA
    And for 100rs investment on asset the company has earned 19.03% return on this, am I right sir
    Looking forward for how net profit is 9.2% while actual profit margin is 10.3%

    • Karthik Rangappa says:

      Depends on the company in question. Btw, for ROA, try using the earnings without taking in other income in consideration.

  196. Samarth Sharma says:

    Very good

  197. Rakesh says:

    Hi, Just to add more value to the learners, will it be good to add the source of information like, either Balance sheet or Cash flow or P&L sheet.
    For ex. Overall Capital Employed = Short term Debt + Long term Debt + Equity.
    Not all will have explicit wordings, so, it will be good to add that where to look to get these details from the Company supplied annual reports.

  198. Shivaraj says:

    Second best private bank in India has ROE of ~12. Does this mean, shareholders aren’t making money? This bank commands high valuation for more than a decade

  199. Prateek Mukhija says:

    Hi Karthik thanks a lot, It’s an amazing and well-structured course. Learned a lot of things from these. My question is not related to the content, I want if somewhere I can see the market share of different companies for a product and how big a monopoly is. Let’s say noodles, a very simple example, is there any way I can get a good idea about the market share of different companies and the growth of different companies in this market segment.
    Also, are there any groups or communities where people discuss stocks and related doubts because sometimes I am not able to understand a few things in the analysis and no one to ask?

    • Karthik Rangappa says:

      This depends on the sector, while few sectors like AUTO has industry associations like SIAM which publishes such data, many sectors don’t have this data. However, usually the annual report is a good place to get this data.

  200. VK says:

    Shouldn’t the finance cost be 0.71 crore instead of 7 crore in the ROA calculation ?


    Sir pl post details calculation of 9.2%for PAT margin

  202. Manas Modi says:

    Should ‘Other Comprehensive Income’ be considered for calculating PAT Margin?

  203. Manas Modi says:

    Should ‘Profit/(Loss) and Tax Expenses’ of discontinued operations be considered for calculating PAT?

  204. Manas Modi says:

    In the HUL’s annual report for financial year 2019-20, it’s treated separately.

  205. Manas Modi says:

    How to calculate ‘tax rate’ for calculating ROA?

  206. Arjun says:

    In ROA finance cost should not be 0.7 Crs ?
    where can find tax rate in annual report as it is taken 32% in ROA ?

  207. Sumit Kohli says:

    Sir, I think in EBITDA calculation interest expense, taxes, depreciation and amortization, should not be deducted from operating expense, because as the name suggest EBITDA is earnings BEFORE interest, tax, depreciation and amortization are deducted , not AFTER. I guess that’s the nuance difference between operating profit and EBITDA.
    What you say?

    • Karthik Rangappa says:

      Yeah, if its operating profit you are interested in calculating, then I guess it makes sense to keep it to operating income minus operating expense.

  208. Kiran Kanoj says:

    Hi Karthik,
    In the example of EBITDA CAGR 21%…. I guess we should consider 3 yrs as we started with 257 Cr and ended up with 560 after 3 years…it should give us CAGR of 29.64%…correct me if I am wrong?

  209. Sumit Kohli says:

    Sir, what is the tax rate to be assumed while calculating ROA? Which tax rate needs to be considered?. I need some more clarity upon the same.

  210. Sumit Kohli says:

    Also, in ROCE calculation, the profit before interest and tax (PBIT) amounts to 543.85. So, why you have taken the figure of 537.7 in the calculation above?

  211. Abdulkadir says:

    sir, Can you explain me how you take 7cr for finance cost while calculating ROA…. Waiting for your reply

  212. SONJOE JOSEPH says:

    Dear Sir,
    How to find the Return on Invested Capital. When i searched the were i’m getting a formula ROIC = NOPAT / Invested Capital. Were NOPAT = EBIT * (1-Tax Rate); Invested Capital = Long term Debt + Short term Debt + Equity. In some websites i have seen Invested Capital = Long term Debt + Short term Debt + Equity – Cash – Goodwill. I have tried each and every formula but not getting the correct value for the ROIC. I have tried my result in Dabur India but all my numbers are wrong when i look at the Annual report of Dabur India. Please do help me out to arrive at the correct formula.


    Sonjoe Joseph.

  213. Rahul Vimal says:

    While Calculating ROA, you are using 7 Crs as Finance Cost (Interest Amount). But in the P&L Statement, it is showing as 7.18 million. Can you please check

  214. Badrinath says:

    Company gets tax shield, so why we add interest*(1-tax rate) ? Shouldn’t it be interest*taxrate since that is the amount which is saved from taxes and considered extra income? interest*(1-taxrate) is what would be remaining after taxes, but since we are saved from tax, extra earning will be interest*taxrate.

    What did I understand wrong here?

    • Karthik Rangappa says:

      Hmm, I think you’ve got the math wrong (meanwhile, I will also double check) interest*tax rate reduces the entire amount, right?

  215. Gautam V says:

    Hi, I am confused on how to calculate the EBITDA margin as many sources included other income too. I computed the EBITDA margin for the Amaraja batteries for FY20 based on the above logic, I got the value around 1098.56 whereas the tickertape provides the value around 1,153.59 and in the annual report, it was mentioned as 1125. The only difference in the EBITDA from my calculation and others is (1153.59 – 1098.56) = 55.03 which is equal to other income mentioned in the annual report as 55.05. All the above numbers are in crores

    Tickertape: https://www.tickertape.in/stocks/amara-raja-batteries-AMAR/financials?checklist=basic&period=annual&statement=income&view=normal
    Economic times: https://economictimes.indiatimes.com/amara-raja-batteries-ltd/profitandlose/companyid-12713.cms

    • Karthik Rangappa says:

      Gautam, there is no harm to include other income. I personally don’t like to because I want to get a true sense of operational profitability. Remember, these are all ratios for your own purpose. Use it the way you’d want in terms of information required. You can compare your results with others, but then you need to ask why you’d want to do that. But do ensure you are looking at consolidated financial statements.

  216. Mohit Jain says:

    Just reffering to the ROE formula, the ROE doesn’t reflect the amout of debt in the formula but the the formula is Net Profit/Shareholders equity *100.
    Here the Net profit will come after deducting all the interest, so this will automatically reduce the ROE, so how it becomes a drawback

    • Karthik Rangappa says:

      It has an indirect effect. ROE can be broken down (Dupont) and one of the last components is Asset Turnover, which considered assets, which can be financed by debt. Higher the debt, more the assets, more the leverage.

  217. Soumya says:

    Small Typo at one place :
    EBIDTA Margin = EBITDA / [Total Revenue – Other Income]
    Error – EBIDTA instead of EBITDA

  218. Arpit Surendrakumar Jain says:

    Great effort Team Zerodha.

    Thanks for the content.

  219. divyanshu shekhar says:

    The key difference between EBIT and operating income is that EBIT includes non-operating income, non-operating expenses, and other income.
    all the sites i saw included other income.
    If other income is consistent it should be added in EBITDA otherwise it should not.
    can u elaborate on other income inclusion or exclusion and reasons in general and for company lets say infosys

    • Karthik Rangappa says:

      I’d prefer to exclude it, just to estimate the profitability of operations. However, if the other income part is small, you may as well include it.

  220. divyanshu shekhar says:

    i am unable to find total debt to equity ratio for infosys2019-20 as i could not find short term and long term borrowing line items.how to calculate it. i am learning to calculate financial ratios from annual report. different websites have different values.which should i take as reference to check.

  221. Vishal says:

    Hello Karthik sir, I’ve got some doubts, if the company instead of getting a profit after tax gets a loss after tax how would we calculate the margin, would that be a negative percentage?

  222. Shashwat Agarwal says:

    The finance cost in the P&L statement is INR 7.18 Million so shouldn’t it be 0.7 crores and not 7 crores?

  223. Rohit Jain says:

    karthik sir, while calculating EBITDA Margin finance cost is take as 0.7 (as it is quoted in millions in balance sheet)

    My question is, why is finance cost taken as 7 while calculating ROA!?
    is it an typo error?

    • Karthik Rangappa says:

      Ah, not sure why finance cost is considered. Need to double-check this. Btw, do check the module on Financial modelling will be dealing with this and a lot more.

  224. Robinson says:

    Hello Karthik,
    Going through your hardwork as we all can see here thank you soo much for putting this efforts. Seriously learning through the notes that you have provided really helping me understand the stock market. Well, to be honest I’m not soo keen with the formulas and the calculations involved but that PAT what you have calculated with ‘ROE’ is 9.2 but as i can see the PAT from the previous chapters suggests it 10.5 or i saw your comment to calculate with equity shareholder but still the value is not getting anywhere around 9.2 . I am new to this and started learning just a couple of weeks ago don’t understand enough might be making mistakes while calculations would you please help me understand PAT-9.2 how did you got that.
    And i really appreciate your work thank you once again.

  225. Aravind says:

    Sir return on assets the finance cost is
    7 million but you wrote 7 crore can you check sir?
    Thank you sir

  226. Pratik Tak says:

    What is the difference between Overall capital (As in case ROCE) which includes both equity and debt (both long term and short term) AND Total asset as in case of ROA?

    • Karthik Rangappa says:

      In ROA, you only take the netblock of the company, which mainly includes the plants and machinery.

  227. Sourabh says:

    Do you still reply?

  228. Dinesh Kumar D says:

    Hii Karthik

    in EBITDA Margin, when calculating Operating Expenses why ”Finance Cost, Depreciation and Amortization” is subtracted from total expense.

    EBITDA means it includes both depreciation and amortization and also interest right?

    deducting Depreciation and Amortization would actually give the value of EBIT

    Can you please explain the reason behind this

    Thank You

  229. Roshan says:

    Hello sir,
    1. PAT Margin / Net profit Margin / After tax profit margin are all three are same?
    2. What is the denominator for this?
    3. What is formula for net sales?
    Thanks and regards.

  230. Roshan says:

    Hello sir,
    While going through past comments, I have got below comment regarding bank sector
    February 1, 2018 at 12:47 pm
    Total Expense – Total Revenue = EBITDA
    Total Expense / Total Revenue = EBITDA Margin

    But in varsity following is mentioned
    Operating revenue – operating expenses = EBITDA
    EBITDA / Total revenue – other income = EBITDA Margin


  231. Chetan says:

    Hello Sir,

    How do you have 2 different values of ROE from the Dupoint and normal method. If you cool at the dupoint formula the result is the same as the normal method. How did you end up with two different values?

    • Karthik Rangappa says:

      Ideally both should result the same Chetan, if its not, then I must have missed a small variable somewhere. Btw, in the new module on financial modelling, I’ll try and address this agin.

  232. Samshed says:

    Why did ROCE have Profit before interest + taxes instead of PAT?

    • Karthik Rangappa says:

      To find efficiency at the operating level. Will be discussing more on this in the financial modelling module.

  233. John says:

    How is net sales calculated?

  234. Karish says:

    Hello Sir,

    How does one understand financial leverage. What is a reference point to understand it.

    For example is a financial leverage of under 1 poor? What about 1.5 what about 2??
    How much debt is required to show if a company is under leveraged or over leveraged?

    • Karthik Rangappa says:

      Leverage in simple sense is taking loans, beyond what your net worth permits. Higher the leverage, the risker it is because you maybe in a situation where repayment can be an issue.

  235. Tanish jain says:

    Which should we consider?
    Standalone financial ratios or consolidated??

  236. Guru says:

    Karthick,….If we analysing ROE in any website what method they will using it there

  237. Himesh says:

    Hello Sir,

    I hope you are doing well.

    I am confused about financial leverage.

    How does one interpret it?
    If a company has 0 borrowings, and has a financial leverage of 10. It would mean for every Rs.1 of shareholder equity, the company has 10 assets.
    Is this a good thing or bad thing?

  238. Kuldip says:

    Hello Sir,

    What are ideal financial leverage amounts?

    How does one interpret it and what are some causes of concern?

  239. Tarun says:

    Hello Sir,

    Assuming a company is debt free.

    It’s ROCE would be EBIT/shareholder equity.

    And ROE would be Net PAT/shareholder equity.

    This is an easier evaluation if the company has no debt.

    What if a company has some debt.
    How does one interpret ROCE and compare it to ROE?

  240. Vijay says:

    For capital employed, short term debt should not be considered , right?
    Capital employed =asset – current liabilities

    Short term debt will come under current liabilities right?

  241. Suchi says:

    Hi Karthik,
    I wanted to understand why while calculating ROCE we take operating profit and not PAT and why while calculating ROE we take PAT and not operating profit

  242. Anoop Singh says:

    Sir, you have used 7 crores as Finance costs, but the annual report is showing 7 million rupees or 0.7 crores as the cost. Am I missing out on something here?

  243. Attraya says:

    Hi, the PAT Margin calculated under the PAT Margin section was 10.5%. However, while in the DuPont Model, you said Net Profit margin and PAT margin are same, but you took Net Profit Margin as 9.2% (while calculating DuPont model). Why the difference? Is that typing error or I am missing something?

  244. Attraya says:

    Also, why did you took the average tax rate as 32%. Is that written in the Annual report too? If not where did you get the tax rate?

  245. Attraya says:

    Thanks for replying Karthik. I calculated PAT Margin both including and excluding Other Income. It seems like it contradicts your statement. PAT(including other income)= 10.5%, PAT(excluding other income)=10.7%. And PAT Margin that you took in the Dupont Model is 9.2%. Could you please look into this?

  246. Attraya says:

    Also, I was calculating some profitability ratios of other companies (TCS, INFY) looking at their Annual reports.
    1. When I am comparing some ratios that I have calculated with my own with those in the moneycontrol or screener websites, I can find difference of 2-3%. Can those differences be neglected?
    2. Are lease liabilities and short/long term borrowings are same thing in the Balance sheet?

    • Karthik Rangappa says:

      1) Yes, you can.
      2) No, lease liabilities are usually associated with rentals and long term property occupation. There is a specific purpose for this, whereas short/long term borrowings can be related to the capital needs of a company.

  247. Attraya says:

    Okay. Thank you so much for clarifying my doubt. Also, a Happy Teachers Day, words will fall short to express all the efforts you are putting behind to teach us!

  248. Imran Shaikh says:

    EBIDTA shown in Annual Report (2013-14) is 575.8 Cr while your calculation is 560 Cr, is it possible something is missing?

  249. Simran says:

    Hi Karthik, what great work I must say. I am probably reading through this almost exhaustive material for the third time now.
    Not sure how it skipped every time until now, that the CAGR for EBITDA from 2011 to 2014 should come about 30% as it is 3 years.

    This was just an observation. Please feel free to correct me if I stand wrong. I have dodged all the comments so pardon me if I am being repetitive with my comment.

    • Karthik Rangappa says:

      Simran, thanks for the kind words. I’m glad you liked the content 🙂

      About the CAGR, I need to check again. I wont be surprised if I’ve made a silly mistake 🙂

  250. Rupal says:

    Why did we take profit before interest & taxes and not PAT for working of return on capital employed?

  251. akhil says:

    Mostly i see ROCE is greater than ROA.

  252. Baban says:

    Key takeaways from this chapter
    Point no 8. “High ROE is not great sign” What does it mean? We all know high ROE is good for stock.

  253. three toed sloth says:

    Respected Sir, ROA as calculated by you is approx 19.03%, BUT as per AR2013-2014 ROA is 64.56% (Note: Page 9/116 and Page 46/116 of pdf file, Table titled 10 – Years Financials).

  254. three toed sloth says:

    Sir, any updates?

  255. three toed sloth says:

    on the wide variation of ROA

  256. Tushaar Nandan Pati says:

    In the RoE Section, The Net Profit Margin of ARBL FY-14 is 10.6%. Not 9.2%. Kindly correct. If I am mistake, kindly suggest me the procedure to get the correct answer

    Thank You


    The Interest (Finance Cost) is 7 Million = 0.7 Cr.
    But in RoA, it is showing Interest is 7 Cr. which is wrong
    Take Interest (Finance Cost) = 0.7 Cr.

  258. Jaydeep Padhiyar says:

    Dear Kartik,

    In ROCE, you have taken 537.7 crores as profit before Interest and taxes. while, this figure includes interest too. can you please elaborate?

  259. Mayank Rawat says:

    I am confused with (net sales term), while calculating net profit margin ratio you said its same as PAT margin ratio, but in PAT margin the denominator is Total revenue(operations+other income) but in net profit margin its net sales(only operations)

    2)also in these 2 ratios does net profit equals PAT ?

    3) also are profit, income and earnings same things?

    Kindly clarify?

  260. Shailesh Mhapakar says:

    Sir, in formula of ROE, PAT is in numerator while for ROCE, PBIT is in numerator. Why is this difference? or why is not PAT considered while calculating ROCE?

  261. Harsimran Kaur says:

    Hey Karthik
    I believe Operating profit is EBIT, not EBITDA (from what I have studied in class 12 and my degree). So if we want to analyse the operating profit margin, shouldn’t we take EBIT margin?
    And I am pretty confused why didn’t we take EBIT margin, why EBITDA? Could you please clarify??

    • Karthik Rangappa says:

      Depending on how you consider D&A, many treat it just the way it is i.e accounting expense, hence take EBITDA. But you are right, EBIT has a wider acceptance.

  262. Mayur says:


  263. Sarvesh says:

    Hi sir

    I have doubt as per formula stated for EBITDA it states =Total revenue-Other income-(Total Expense-Depreciation-Amortization)

    I used this formula for Exide Industries Ltd for the Annual Report 2020-21 but when applied answer is coming wrong
    All Amount in Cr
    Revenue from Operations-10,040.84
    Other income -65.44

    Cost of materials consumed – 6,527.61
    Purchase of stock-in-trade -7.46
    Changes in inventories of finished goods, work-in-progress and stock-in-trade- 44.44
    Employee benefit expenses -721.52
    Other expenses -1,384.23
    Total Expenses -8,685.26
    They have given D and A under different heading altogether and D and A wasn’t included in total expense

    Finance costs -23.77
    Depreciation and amortization expenses -379.35
    So Operating income =10040.84, Operating expense-8685.26
    But they have shown EBITDA after adding Other Income to operating income
    Please help in solving my doubt

  264. Sarvesh Pandey says:

    Hi kartik

    Why in overall capital employed, only short term and long term debt has been taken, why other line items like deferred tax liabilities, long term provision,
    short term borrowing, trade payables, and others are not taken into account

    Another doubt From where did you get Profit before interest and taxes because in the annual report there is line item which states Profit before exceptional items and tax which is 540.5 Cr

    • Karthik Rangappa says:

      Hey Sarvesh, someone had the same query and we discussed this in the comments section. Can you please check?

  265. GAURAV RAJ says:

    hii…i like your contents.

    i have a query.

    (1).out of ROE and ROCE, which one should we consider while doing fundamental analysis of the company.
    (2) Which type of the company is best used for ROE and ROCE.
    (3) How much % of ROE and ROCE is considered the best?
    (4) What is difference between ROE and ROIC?

    • Karthik Rangappa says:

      1) Both, but I’d suggest you start with ROE 🙂
      2) All
      3) There is no specific answer to this, generally speaking, higher the better
      4) Have explained in the chapter itself.

  266. Shreyash says:

    Hi Karthik,

    In video series, module 3 video 8 you have taught EBITDA = Total income – Total expense, but on varsity it is mentioned EBITDA = [Operating Revenues – Operating Expense].

    Can you please clearly state the exact formula to calculate EBITDA and EBITDA margin?

  267. akash says:

    karthik sir can u plz explain this?
    e \valuation ratio compares the cost of a security with the perks of
    owning the stock
    what is cost of security and perks includes ??(dividends……)

    • Karthik Rangappa says:

      It just means that the valuation ratios help you understand if the stock is trading cheap or expensive compared to its intrinsic value.

  268. Abhinav says:

    I have a doubt, may be it is already asked. Is it not the case that to calculate ROCE we don’t use short term debt as part Capital Employed. For reference:

    ROCE= EBIT/Capital Employed
    EBIT=Earnings before interest and tax
    Capital Employed=Total assets − Current liabilities

    • Karthik Rangappa says:

      Capital employed is the debt + equity, and we consider short term debt as well, Abhinav since that too contributes in generating the PAT.

  269. Anurag Pareek says:

    Thanks a lot Karthik Rangappa sir for your beautiful insights.

    Tonnes of Love from my side 😀

    Thanks & Regards
    CA Anurag Pareek

  270. Santhosh says:

    I couldn’t encourage Financial Leverage

    if the financial leverage is 4, for every Rs.1 of equity, the company supports Rs.4 worth of assets. Higher the financial leverage, along with increased amounts of debt, will indicate the company is highly leveraged, and hence the investor should exercise caution.

    For every Rs.1 of shareholders money, company has Rs.4 worth of assets. then how come it is negative ?

    • Karthik Rangappa says:

      The question is how did the company finance 3 Rupee worth more of assets? It must be via leverage, right? Leverage is fine as long as the company is in a position to repay back the borrowed funds.

  271. Santhosh says:

    ** I Couldn’t Understand Financial Leverage

  272. Adonis Thomas says:

    While calculating ROE through dupont model the result was 25% and through the simplified method it was 30 %.There was 5% difference. Can you please explain ?

  273. Santhosh says:

    Karthik it would be great if you could clarify the difference between (Return on Asset) vs (Asset turnover)

  274. Vignesharasu says:

    = 7* (1 – 32%)
    = 4.76 Cr. Please note, 32% is the average tax rate.

    Kindly explain me how did to get 32% and how to average tax rate??
    Thank you

    • Karthik Rangappa says:

      Vignesh, I’d suggest you check the Financial modelling module, I have discussed this there.

  275. vignesharasu says:

    Hi this is vignesharasu
    Please explain me that how did you get this 32% and 4.76 cr ( = 7* (1 – 32%)= 4.76 Cr. Please note, 32% is the average tax rate) and how to calculate the average tax rate too Waiting for your reply
    Thank you & regards

    • Karthik Rangappa says:

      Hi Vignesh…if you take the ratio of tax paid divided over PAT for last 5 years and then average it out, you will get the tax rate. Of course, this is an average and not accurate.

  276. Vignesharasu says:

    2009 – 2572
    2010 – 3786
    2011 – 1480
    2012 – 2867
    2013 – 2867
    Total 12855
    Tax paid is 4005

    Mr. Karthik I know that you will be busy on your work and too your are replying for your comments first thank you for that and I really don’t know how to calculate this thing and getting confused so kindly explain me the steps if possible thank you

  277. Vaibhav Gaikwad says:

    Can anyone confirm the below statements
    EBITDA = Revenue – Direct Expense – Indirect expense
    EBIT= EBITDA – Depreciation & Amortisation (non cash)-Non-Operating Expenses (Interest)
    In above post EBIT is given As EBITA
    EBITA is basically Earnings Before Interest, Taxes, Depreciation, and Amortization
    Formula for Operating profit margin should be EBIT/Revenue

  278. Rajpal Singh says:

    Greetings sir,
    If, most of the financial ratios(over a 5yr period) are looking promising but just a single or maybe two of them are are slightly fluctuating or growing negatively (not rapidly) in that case what should be the conclusion about a stock, whether it is worth digging more or not.

    For ex Alkyl Amines chemicals ltd . All the investable grade attributes are promising ✅ but the price to book value is 13.6x
    And the relatively P.E stock PE is 59.9 whereas industry PE is 24.1

    This is one of the examples, there are many only the attributes chages .

    One more question sir,
    Is it okay to invest by seeing the future forecasts reports published on the websites like trendlyne. I’ve seen one for the HAL where it shows the targeted price which is impressive .

    Thank you

    • Karthik Rangappa says:

      Rajpal, it then depends on how important these ratios are for you. I know many investors who don’t mind investing even if the stock is a high PE/PB stock. So evaluate what’s important for you in your checklist and go with that thought process.

  279. Neev says:

    In ROA ,
    Sir you took the interest amount ( finance cost ) as 7 crs.
    I checked the ARBL statement but I did not understand how did you get 7 crs as the number.

  280. Rajpal says:

    Thank you sir, according to me each ratio is essential but I have major concern not getting stuck later on with overvalued stocks and I’m confused whether to select those companies. Although they’re showing good financial numbers and looking at the annual report they’ve shown good futures plannings.
    I’m just stuck with the overvaluation thing
    Hoping you’ll guide me 🙏🏻

    • Karthik Rangappa says:

      Rajpal, its is just that the stock in in-demand and buyers are willing to pay any price for it. Yes, buying at high valuations is a problem, but you need to be in a position to figure if the current valuation wrt to future growth is high or not. If you think its high, then wait for a correction in stock.

  281. Umang says:

    Hello Sir ,
    while calculating tax rate for ROA calculations and using the formula (current tax + deferred tax)/PBT. What if the deferred tax is in negative and making the whole (current tax + deferred tax) term negative . Then how to proceed further for tax rate calculation.

    • Karthik Rangappa says:

      The deferred tax won’t be negative right? It is an allocation of tax that the company intents to pay later.

  282. Umang says:

    Sir , I am analysing financial statements of 20 microns for the fy20-21 , in that they have given deferred tax as negative for fy20-21

    • Karthik Rangappa says:

      Then its a tax refund that they are expecting. On the balance sheet, check if they have deferred tax assets, on the asset side.

  283. Sanjay says:

    I am going to complete the course “Fundamental Analysis” in 2/3 days. I can not thank you more for the simplest yet effective way you have explained it. It is even better than face-to-face classes. Thank you a lot for your hard work. Now, can you please guide me on how can I take the certification exam immediately?

    • Karthik Rangappa says:

      Sanjay, thanks for the kind words. For certification, I’d suggest you download the app and run through the FA module.

  284. Kumari Jahnvi says:

    i have a query, i went to varsity App to see whether the content is same as the website. Though the headings , sub-headings are almost same but In App, there is no module in video form. So is content the same ?

  285. Umang says:

    Sir the deferred tax shown in the P&L statement is -748.66 and the deferred tax asset in the balance sheet is 70.51.
    I have read the note of deferred tax in that they have mentioned that they will pay income tax according to section 115BAA. Then my question is how to calculate tax rate .Since deferred tax is negative and for calculation of tax rate for ROA the formula I am using ((current tax + deferred tax)/PBT.

    https://cleartax.in/s/section-115-baa-tax-rate-domestic-companies. Sir in this link they have mentioned the tax rate for deferred tax under the said section. But if I use this then will the tax rate be same for current tax as well.

  286. Sanjay says:

    Thank you, Karthik for the reply. I’ll do as suggested.

  287. Vishal Vishwas yadav says:

    Why ?
    A high Roe and a high debt is not a great sign

    • Karthik Rangappa says:

      The return should be generated by equity, but if the company is using debt to finance, then its not a great sign.

  288. Umang says:

    Thank you sir will do that once I reach on that module.

  289. Aravind says:

    Can I calculate ROA as (PBIT + Finance Costs)/ Total Average assets ?

  290. jabastin nadar says:

    when I calculated the EBITDA margin of bajaj auto it was 15% 5258 but when I see the EBITDA margin from the third-party website it showed a vastly different value from calculation

    • Karthik Rangappa says:

      As long as you’ve calculated it based on numbers from the Annual report it’s fine. Dont worry about 3rd party sites.

  291. jabastin nadar says:

    why there is so much difference

  292. Nazr says:

    Hello Karthik while calculating ROCE PBIT is 537 not considering interest payment

  293. Nazr says:

    537 is Pbt right ?Finance cost already deducted why is that? i don’t have any financial background plz expain?

  294. Ananth kumar says:

    In ROA.. Why are we deducting tax rate ??because the returns on asset is needed to be found out and not the taxable returns to deduct the tax rate on interest .. The tax is paid to the IT department and thus it may reduce the tax liability but not the interest rate that we are liable to pay to the debtors!! And in such case the returns earned will be as same as the net income from assets with or without deducting tax rate

  295. Raman says:

    In ROA, finance cost would be 70 lakhs instead of 7 cr ?

  296. Ayush says:

    Operating Expense = [Total Expense – Finance Cost – Depreciation & Amortization]

    Hello sir,
    i want to know since we are calculating operating expenses why we are not subtracting the (other expenses) from the above formula
    as fas as i know other expenses is not related to operating expenses!

  297. srikanth says:

    hello sir

    Without dupont model Shall we deduct finance cost ,depriciation and amortisation from PAT sir to find ROE ,as earlier we’ve done for find EBITDA on total revnue?

    1) RoE=net profit/shareholders equity-debt , which was mentioned in as an pizza eg
    2) Alternativly shall we do this sir?
    ROE=net profit-debt- DEP AND AMORT/Share holders equity

  298. Sankalp Singh says:

    can you please explain me on return on equity , how net profit margin is 9.2% ?

    As you have mentioned, it is same as PAT margin but PAT margin value is 10.5% and If you exclude other income it comes 10.69%

  299. Deepesh Garg says:

    In ROA, you have taken finance costs as Rs 7 Crores whereas it is Rs 7 Million (~0.7 Crores) in the Statement of Profit and Loss.
    After taking Finance costs as 0.7 crores, the ROA is 18.8%.

  300. Dhanraj says:

    PAT Margin in ROE calculation still shows as 9.2%. Please correct it.

  301. Prince says:


    In ROE – I couldn’t understand why the PAT margin is 9.2%. It should be 10.5% (per PAT margin calculation, considering Total Revenue) or if we take Operating Revenue instead of Total Revenue – it should be 10.68%. Based on these two percentages, the ROE is 29.58% and 30.09% respectively. Can you explain how it is 9.2%? or am I right with my numbers above? Secondly, the ROE percentage by applying Direct formula and Three section formula is 30.31% and 30.09% (I took 10.68% for PAT margin – 10.68%*1.61*1.75) respectively so the difference seems negligible. In the same manner, I used another company financial statement and computed ROE in both methods. To my surprise each method of computing ROE arrives with same number, does this happen? Thanks

    • Karthik Rangappa says:

      Ideally, whichever method you apply, the end result should be the same. In my opinion, using the direct method is better. About the numbers, I’ll check this again. We have just started to update the content on Varsity, will relook at these numbers as well. Thanks.

  302. B Nair says:

    Hi Karthik,

    For Financial Leverage, is it not = debt / Shareholders Equity?


    • Karthik Rangappa says:

      We are using assets here to determine what portion of assets is financed by debt. Hence assets is used in the numerator. Btw, there are many ways to discuss leverage ratio, which we have discussed in this chapter.

  303. Saurabh Singh says:

    Hello sir
    Though I got the idea that we have to compare these ratios with its previous year data or with its peers company but in general I am asking how much ROCE you consider is good ?

    • Karthik Rangappa says:

      So how much is good, depends on the sector. If the sector average is 15%, but the company under consideration is doing 20%, then 20% is good here. What I’m trying to say is that there is no one fixed number that is good for all companies.

  304. Forum Gandhi says:

    I have a doubt here in this RoE is been calculated based on DuPont Model.
    In which the first thing which is been calculated is Net Profit Margin and there example of ARBL P&L is taken. I had calculated the same but i am not getting 9.2%.
    How i m calculating is = (367/3482)*100 = 10.5%
    Please help me out where i am making mistake.

  305. paras says:

    The main source of confusion is this:-
    PAT Margin=Net Profit/Net Sales(Which considers only operating revenue, excluding other income) ,taken in DU-Point Formulae

    PAT Margin=Net Profit/Total Revenue(Including other income)

    Kindly Put some light on the same.
    Thanks In Advance.

    • Karthik Rangappa says:

      Both are correct. If you want a conservative approach, exclude other income, else consider other income and take the total revenue.

  306. paras says:

    So Can I say that PAT Margin=Net Profit/Operating Revenue
    i.e the net profit the company is able to retain from operating revenue.

  307. Ashish says:

    Hi, while calculating Return on Equity, using Dupont model –
    Especially while calculating Asset Turnover, you have used a Net Sales value of 3437(ie, without the other income of 45.5 crores). While calculating Net Profit margin, we have used Total revenue of 3482. If we correct this error, and accommodate enough decimals, we will get the same value of 30.3%.

    Should the Return on Equity, calculated should be same(with/without Dupont Model), as the data used for calculating it is same ??

  308. Deep says:

    Under financial leverage, you mentioned that for every Rs.1 of equity the company has Rs.4 worth of assets and this ratio should be lower the better.
    But if the company has Rs.4 of assets from only Rs.1 of equity then it should mean that the company has more assets from Rs.1 of equity so this should ideally be treated as good to have more of assets with 1 rupee in equity.
    But you are saying that this should be lower the better which means that for eg, if the ratio is 2, then the company has only 2 rupees of assets with respect to 1 in equity.
    So, I feel this ratio should be higher the better because having more and more assets financed from a single rupee in equity should be good.
    Please correct me.

    • Karthik Rangappa says:

      So where are the additional assets being financed from? If it is not equity, then it must be debt, right? Debt is not bad as long as the company can generate enough profits by utilizing the debt (to finance assets). So always check the financial leverage and interest coverage ratio to get the complete picture.

  309. Paras says:

    A few questions:-
    1)Why is Interest, Depreciation and Amortization not considered operating in nature,i.e why are they non operating in nature?

    2)Is there any difference between EBITDA and Operating Profit? Or are they one and the same?

    Guide on the same
    Thanks in Advance!

    • Karthik Rangappa says:

      1) D&A is more of an accounting entry Paras and does not impact operations.
      2) We calculate the EBITDA to identify the operating profits. So in a sense, both are same.

  310. Paras says:

    1)In cash flow from operations the first line item after net income is Depreciation,so can we say that though D&A are operating in nature but non cash hence they are added back in EBIT?

    2)Also that means EBIT=Operating profit(D&A are considered as operating expenses)
    EBIT+DA(operating but non cash hence we add it)=EBITDA

    Guide for the same.

    • Karthik Rangappa says:

      1) Since D&A is an accounting entry (non-cash expense), its added back to calculate the operating cash flow.
      2) Yes

  311. PUNIT says:

    The 4-year CAGR growth stands at 25.48%, HOW DID U CALCULATE THIS 25.48

  312. Himanshu says:

    Hi Karthik, is it important to remember all the formula’s for long term?

    • Karthik Rangappa says:

      Not at all; you can google them at any point. But what you do need to know is how to interpret these formulas.

  313. Sidharth Sawhney says:

    Hello karthik, i believe the finance cost in the RoA calculation for tax shield should be 0.7 crore, not 7 crore.

    The Interest amount (finance cost) is Rs.7 Crs, accounting for the tax shield it would be

    = 0.7* (1 – 32%)

    Thank you!

  314. Ganesh says:

    The finance cost is 7 million ie 0.7 Crore as P&L figures are in million rupees. Am I right?

  315. Vishal says:

    Hi Karthik,

    Why do we use PAT for calculating ROA but “Profit before interest and tax” for calculating ROCE?

    • Karthik Rangappa says:

      ROE is basically from only EQ perspective and ROCE considers both debt and equity. Perhaps because the interest is paid to debt holders, we measure the ROCE by excluding interest, and hence EBIT.

  316. Gaurav Sharma says:

    Hi Karthik,

    I am confused between EPS & ROE. I understand EPS is amount earned per share and ROE is % of earnings on equity.

    but is there any relation between EPS & ROE ? I am really confused. Are both same ? if not then how to interpret both in terms of return on my investment ? I mean to say that if i want to calculate my expected return based on these 2 values then by which one should I calculate my return ? suppose I have 100 share of a company at Rs.1000 each share, whose EPS is Rs.30 & ROE can be some X % then how my return I can calculate ? (not considering market price)


  317. Kushal Chatim says:

    hello karthik sir,

    is the formula given below for ROCE correct?

    ROCE = operating profit/total capital and liability

    i want to calculate roce for banks also it will be easy to calculate as i will get the data mentioned in formula on moneycontrol.

  318. SANKAR RAMAN B says:

    Hi Karthik,

    The presentation of different ratios done in a lucid manner. Feel good.

    My doubt:
    In the ROE, it is stated that in case of debts , this parameter cannot be depended as it may mislead the position of the entity.
    But, In arriving the Net Profit, all the expenses including the interest repaid on loans, are taken into account. Also if an entity with loans, after accounting for all the expenses including interest payment, shows good ROE isn’t a good sign.
    Taking loan is mostly in the interest of growing the business and that cannot be said as a drawback.

    Kindly clarify

  319. Devendra says:

    In ROA how did you calculate the tax rate 32%? Please clerify.

  320. Anirban Basak says:


    We know ROCE= PBT/Debt+Equity. Then what do the RoI signify? How is it different from ROCE?

    • Karthik Rangappa says:

      ROI = Measures the profit from cost perspective
      ROCE = Measures the profit from capital employed perspective.

  321. Anirban Basak says:


    The below is for the same example as you cited for Amara Raja batteries for FY 14.

    ROCE= Profit before interest and tax/Overall capital employed which implies EBIT/Overall capital employed.

    You have shown for Profit before interest and tax= 537.7 Crs.
    Also, you have shown EBITDA= 560 Crs.
    Now Depreciation for the FY stands to 64.5 Crs. which takes EBIT=495.5 Crs. and not 537.7 Crs.

    Could you please help get into the point?Am I missing somewhere?

    • Karthik Rangappa says:

      Anirban, its possible I could be missing something due to a error. Can you double check with FY14 annual report?

  322. chennakesavareddy says:

    In RoA 32% is the average tax rate, where I can find that, I am confused that every company will have the average 32% or for this particular ARBL or for this particular year.

    • Karthik Rangappa says:

      It is a rough calculation that you can make, or maybe the company will state it explicitly in its Annual Report.

  323. Johnson says:

    When we compare ROCE and ROE if the former is higher than the latter and vice versa what inference can we draw. In the first case is it safe to assume that as interest is paid out ROE is lesser and inf the difference is large, does it mean that cost of debt is high? In the second case does it mean that profitability is low?

    • Karthik Rangappa says:

      Yeah, usually it means the cost of finance is higher. In such cases you may need to evaluate the weighted average cost of debt.

  324. Prathamesh says:

    Sir, Is tax rate is always around 32% for all companies.

  325. Kinjol Basu says:

    Hi sir,

    “Accounting policies may vary across companies and different financial years. A fundamental analyst should be cognizant of this fact and adjust the data accordingly before computing the financial ratio.”

    Could you please explain this a bit? Like should I not look at all financial ratios equally for companies of let’s say a sector? How to differentiate?

    • Karthik Rangappa says:

      You will have to check the changes in the policy. Usually the director’s report in the annual report will have these changes, if any.

  326. Aditya says:

    In RoE, it is mentioned that the net profit margin is taken as 9.2% from the calculation earlier. But actually, it is 10.5% from the calculations shown in the table.

  327. Shrijeet says:

    I checked the ARBL’s annual report of FY14 and found that Finance Cost is 0.07Cr

    while calculating RoA we’ve considered it as 7cr can someone pls demystify

  328. Vikram says:

    In DuPont model, the numerator of asset turnover ratio is 3437, but the denominator of PAT margin is taken as 3482, But both have the same variables in the equation of the model. How?

  329. Ashay says:

    1. RoE = Net Profit Margin X Asset Turnover X Financial Leverage

    = 9.2% * 1.75 * 1.61

    ~ 25.9%. Quite impressive, I must say!

    2. However, if you wish to do a quick RoE calculation, you can do so the following way:

    RoE = Net Profits / Avg shareholders Equity

    From the annual report we know for the FY14 the PAT is Rs.367 Cr.

    RoE = 367 / 1211

    = 30.31%

    which one to choose 25.9% or 30.31% as both are RoE

  330. Yogesh says:

    Hello sir,

    How did we get Profit before Interest & Taxes 537.7?

    In profit and loss statement
    Profit before tax is = 5366.70
    and finance cost is = 7.18

    if we Profit before tax and interest can be : Profit before tax – finance cost
    which will be = 5359.52

    Can you help me to calculate? because I’m bit confused.

    Question 2 ) Why everywhere we are using three figure(E.g : XXX.XX) Instead of four figure (E.g : XXXX.XX)

  331. Priya says:


    While cal return for less than year you just add 6m return why. Why not multiply 2 6m return to get one year return.

  332. Ashok says:

    Hi Karthik,

    I was calculating the ROCE of Nestle India. Should we have to add the lease liability with the long-term borrowing? because the long-term borrowing is just 26.66Crs of the FY2022, but the lease liability is 190.65Crs. What should I do? please advice me on that.

  333. Shashank Patel says:

    Sir, how will we get the information about tax rate to calculate RoA?

  334. Rohan Agarwal says:

    I had booked a test for Varsity certification for Rs.295/- for 10 February at 4 pm but due to some mishap in my family, I couldn’t attend the test. Later when I opened the link test expired.
    Could you please give me one link for next weekend?
    I booked the test on 6 February with invoice number #VC17221
    I am sure let my hard-earned money go to waste

  335. Rohan Agarwal says:

    I am sure Zerodha Varsity wouldn’t let my hard earned money go waste.

  336. Rohan Agarwal says:

    Could you please help, under which category do we need to create a ticket for this issue?

  337. Shehar says:

    Hi Karthik, kindly help me here, we calculated the financial leverage as avg(total assets)/shareholder equity. but the shareholder is the amount left after all expenses+tax which is yet to be distributed.
    a.) shouldnt we take the just asset purchased this year along with shareholder equity.

    b.) we are using all the amount of share holder equity with assests, shouldnt we use the just amount used in purchasing assets.


    • Karthik Rangappa says:

      Not really, share holder equity is the total shareholder values right? Which represents the equity portion of the company.

  338. Shehkar says:

    Hi Karthik, we have used 10.5 pat magin below, and below we have used 9.2 for the same numbers. kindl share which one is correct.

  339. Shekhar says:

    hi kartik, can you please share how is knowing financial levearage helpful, we already caluculated debt to asset ratio(i if understood it correctly, it means how much asset are handeled by debt.) ty

  340. Shehkar says:

    Hi Kartik, its turns to be (367/3482)- .105, but how did .95 came. kindly share if I am mising something in pat margin.

  341. Divesh katariya says:

    What is the proper EBIDTA formula as in the textbook it states as Operating revenue – operating expenses while on the youtube channel of zerodha varsity it says EBIDTA = total income – total expenses

    • Karthik Rangappa says:

      If you want to consider from purely from operations perspective, then you can exclude other income, otherwise its ok to consider total income – total expenses.

      This works especially well if other income is not a significant portion of operating revenue.

  342. Chitaranjan says:

    I have a very fundamental question.

    Assume company X is listed it’s 50,000 shares in stock exchange at a price of INR 1,000 on day 1. The shares are alloted to various investors etc. After that as usual trade happened on each day. Let’s say after 100 days, the trading price of the share is INR 1,500. As per companies books, the value of the share is or book value is INR 1,100. Please reply to below queries.

    1) Who is ultimately having the money on 100 day i.e. effectively market capitalisation (no of listed shares * current share price)= 50,000 * 1,500 = 7,50,00,000. The stock exchange or the listed company ?

    2) Whether the listed company will only take the money from Stock exchange as per their book value everyday i. e. as per above example INR 50,000 * 1,100= 5,50,00,000 and the remaining amount will be with stock exchange i.e. INR 2,00,00,000

    3) What will happen if the share price goes down to INR 900.

    • Karthik Rangappa says:

      1) This is a notional value, it will be realized only when the shares are sold.
      2) If the promoters have to sell, it will be based on the price of the stock prevailing in the market.
      3) Notional value will come donw.



    is It to be Perceived as ARBL’ Report is Calculated in a different way to show inflated Figures as i can see that some reports and ratios are not as per the calculation (For Example you calculated the ROA as 19.03%, i calculated it to 19% as per your Guidance and ARBL’s Calculation is a Whopping 64.56%).

    And Sometimes misplaced. For Example, PBIT (Profit before Interest and TAX) is 5,087 More than PBT (Profit Before Tax) is 5,367.

    what is your Official Email ID so that i can send you the screen shots .

    Actual is 19 % and they report 64.56% Because of this mistake ? is such mis reports to gain benefits is Allowed unchecked by SEBI ?. Is it because of these kind of delibrate mistakes you advised us to calculate the Readings and Ratios by ourselves ?

    Please answer as i have spent so much of time to understand what you have written and did my own calculation to understand it better ,.

    • Karthik Rangappa says:

      It is always good to do these number crunching yourself, as you can add a layer of caution. But that said, companies cant blatantly misrepresent such numbers. Please check if the accounting techniques have changed. Speak to the company if required to get clarity.

  344. Priyal kherde says:

    In ROE how is DuPont Analysis helpful as it is not directly showing/analysing debt involved in the business which was the main reason, even in Financial leverage formula it is Asset/Equity here also Debt is not involved directly in the analysis, so whats the point of doing it.

    • Karthik Rangappa says:

      DuPont analysis is more of a process where in you get more granualar details into the company’s operations and financial. If you were to directly calculate RoE, you will get only RoE (which is fine), but no other insights into other metrics.

      This is the only reason to use DuPont.

  345. shree says:


         is It to be Perceived as ARBL’ Report is Calculated in a different way to show inflated Figures as i can see that some reports and ratios are not matching as per the calculation (For Example you calculated the ROA as 19.03%, i calculated it to 19% as per your Guidance and ARBL’s Calculation is a Whopping 64.56%).

    And Sometimes misplaced. For Example, PBIT (Profit before Interest and TAX) is 5,087 More than PBT (Profit Before Tax) is 5,367.  

    Actual is 19 % and they report 64.56% Because of this mistake ? is such mis reports to gain benefits is Allowed unchecked by SEBI ?. Is it because of these kind of deliberate mistakes you advised us to calculate the Readings and Ratios by ourselves ?. Is this Kind of Misproportions Very Common in Annual Reports submitted by the Companies  ? 

    Please answer as I have spent so much time understanding what you have written and did my own calculation to understand it better.

    • Karthik Rangappa says:

      19% and 19.03% is nearly the same, does not make any difference right? But if ARBL is showing such a number, then you can see why they are doing so by checking the notes in the annual report for details.

      Also, make sure you are not looking at standalone balance sheet numbers but instead consolidated numbers.

  346. Aditya says:

    Sir, while calculating the Return on Capital Employed, isn’t it standard practice to exclude current liabilities as they represent a short term payment obligation and hence aren’t likely to remain invested in the business for very long and hence should not form a part of the capital invested?

  347. Salim Zaidi says:

    Hi Karthik. I dont get that why are we using average assets for asset turnover ratio. Why dont we use the final value of the assets at the end of the FY13 which is Rs.2139Crs. Please explain.

    • Karthik Rangappa says:

      We use avg to include asset values from this year and the previous year, just to factor in change in asset position during this time.

  348. Neil says:

    Sir, as seen in the ROA formula there’s an interest that we multiply to tax rate. Although that interest, also known as finance cost in ARBL’s P/L statement, is not clearly mentioned in many other companies’ financial statements. What to do then?

    • Karthik Rangappa says:

      Have you checked the notes? Its a crucial information, should be present. Please check the MD&A notes as well.

  349. mehul vaidya says:

    Net Profit Margin: As I mentioned earlier, this is same as the PAT margin. From our calculation earlier, we know the Net Profit Margin for ARBL is 9.2%

    You never mentioned about 9.2 earlier. PAT margin was 10.5.
    Can you please tell how did you calculate 9.2

    • Karthik Rangappa says:

      Profit/Revenue is your PAT. You can exclude ‘Other Revenue’, from Revenue if you’d like to give you a sense of what PAT is from an operational perspective.

  350. Kosin says:

    Hey Karthik, loving the work!

    In the ROE section, you said higher ROE means the company is generating a good amount of cash and the need for external funds is less. And then you gave the example of how the higher the debt, the higher the ROE. Arent these two sentences contradictory? If I am wrong, then feel free to correct me.

    • Karthik Rangappa says:

      Not really, ROE can increase for both these reasons, you need to figure why ROE is increasing.

  351. Vishal Mali says:

    Will the tax rate be 32 every time? Or as the corporate tax is 30% or higher we mentioned an average of it?
    A place where we can keep a track of the tax rates for the better calculation of RoA

  352. srinidhi says:

    Hi Karthik,

    The EBITDA & EBITDA Margin for ARBL from your calculation is 560Cr ,16.3 %
    but in annual report document they mentioned 578 Cr,16.75% Why difference ? which shall i use ?

  353. Gavin says:

    Where can I find the total outstanding shares of a company?

  354. Yash Panchal says:

    Sir while calculating EBITDA margin that is EBITDA/operating revenue,
    can we use total sale instead of operating revenue as many of sites are suggesting???

Post a comment