Ratio Analysis - Liquidity ratio

3. Ratio analysis:
Ratio analysis is the starting point in developing the information desired by the analyst. Ratio
analysis provides only a single snapshot, the analysis being for one given point or period in
time. In the ratio analysis it is possible to defined the company ratio with a standard one.
Ratio analysis can be classified as follows:

A) Liquidity ratio
B) Activity ratio
C) Profitability ratio
D) Debt-coverage ratio

A) Liquidity ratio:
Liquidity ratio measures the ability of the firm to meet its obligations. These ratios establish
relation between cash and other current asset and current liabilities. Creditors to evaluate the
creditworthiness of the firm use these ratios. These ratios also provide revels management’s
policy in managing liquidity position of the firm.

The Liquidity ratio we can satisfy on the three ratios, those are:
1. Current ratio
2. Quick ratio or acid test
3. Current cash debt coverage ratio.

1. Current Ratio:

Current Ratio indicates the ability of a company to achieve its short-term obligations, where
short-term obligations indicate those obligations that are due within a year or within the
operating cycle. Current ratios are extent to which the assets that are expected to cash cover
the claims of short-term creditors.

Current Ratio = Current Assets / Current Liabilities

Ratio 2001 2000

Current ratio 1.20 Times 1.14 Times

Analysis:
In the table we see that in 2000 the ratio is only 1.14 times and in the 2001 increases
to 1.20 times. Here we can see that in 2001 the current assets and current liabilities are
decreasing than the 2000. And the decreasing rate of current asset is lower than
current liabilities at. So, the current ratio increases in 2001. This ratio gives us a gross
idea of liquidity position of the company. This ratio includes Inventory, which is
considered two steps from cash. That’s why it doesn’t tell us the actual liquidity
position of the firm to meet its obligations.

2. Quick Ratio:

Quick ratio is most important measure of liquidity than the current ratio. Because
inventories which are the least liquid of the current assets from the ratio. It is essential
for a company to realize its ability to pay the short-term obligation, without knowing
on the sales of inventory because they are the assets on which losses are mostly in the
event of liquidation.

Quick ratio = (Current assets - Inventory) / Current Liabilities

Ratio 2001 2000

Quick ratio .43 Times .42 Times

Analysis:
The quick ratio has increase over the year 2001 than 2000. This has happened because
inventory has decreased about 1.02 times in 2001 and we know that inventory is
deducted from current asset while calculating quick ratio.

3. Current cash debt coverage ratio:

Current cash debt coverage ratio is the most unadventurous of analyzing liquidity
position. The use of the current or quick ratio absolutely understand that the current
asset will be changed into cash, but in reality it does not happened in the current asset
to pay the current liabilities. For that reasons Current cash debt it’s really vital to look
how much cash has in hand or in Bank to get together its financial obligations.

Current cash debt coverage ratio = Cash / Current Liabilities

Ratio 2001 2000

Current cash debt .34 Times .24 Times

Analysis:
The ratio has decreased over 2001. This way company is holding its cash, which is not
good from investor points of view. Current cash has increase about 1.35 times. The
company must invest that money to get a good return.

Ratio Analysis - Activity ratio

B) Activity ratio:
Activity ratios are used to evaluate the competence, which the company manages and
utilizes on its asset. This ratio also calls the turnover ratios because they indicate the
speed with which the assets are transformed or turnover into sales. A proper balance
between assets and sales generally reflects on that the assets.

The Activity ratio we can satisfy on the three ratios, those are:
1. Receivable turnover.
2. Inventory turnover.
3. Assets turnover.

1. Receivable turnover:
Receivable turnover ratio indicates the rate of receivable to turn into cash. It indicates
the level of outlay in receivables wanted to continue the company's sale stage. This
also events of the helpfulness of the company's credit strategy.

Receivable turnover = Sales / Accounts Receivable

 Ratio 2001 2000
Receivable turnover 7.19 Times 7.94 Times

Analysis:
The company has faced a great problem in collecting its receivable. Here we see that
the sales have decreased from previous years, on the other hand receivable by
increased in quite high rate. Sometimes it indicates that the company has failed to
collect its debts efficiently.

2. Inventory turnover:
The liquidity of the company’s register can be considered by this ratio. Its ratio
indicates how many periods it is needed to twist inventory of sales on a standard. This
event on the efficiency of the company's inventory organization.

Inventory turnover = Cost of goods sold / inventory average

Ratio 2001 2000

Inventory turnover 1.28 Times 1.33 Times

Analysis:
Because of decreasing sales, cost of good sold have decreased at 1.07 times to other
hand inventory has also decreased at 1.02 times. So that the ratio by decrease because
of the decreasing rate of cost of good sold is higher than the decreasing rate of
inventory. It mean company is holding excessive amount if inventory.

3. Assets turnover:
Assets turnover ratio indicates to the capability of the company’s to create sales using
the asset appropriately. The underutilized assets raise the companies require for the
expensive finance. By the achieving a sky-scraping turnover a companies cut cost and
increase final profit of the proprietorship.

Assets turnover = Sales / Total Assets

Ratio 2001 2000

Asset turnover .05 Times .07 Times

Analysis:
Here we that total assets turnover has decreased because of decreasing total sales and
increase of total assets. So analyzing this ratio we can justify that increment has failed
to used its assets efficiently.

Ratio Analysis - Profitability ratio

C) Profitability ratio:
There are many measures of profitability, which relate the returns of the firm to its
sales, assets, or equity. As a group, these measures allow the analyst to evaluate the
firm’s earnings with respect to a given level of sales, a certain level of assets, or the
owners’ investment. This ratio specify the capacity of the company to survive
difficult circumstances, which might occur from a number of basis, such as declining
price, increasing cost and declining sale.

The Profitability ratio we can justify on the six ratios, those are as follows:
1. Profit margin on sales.
2. Return on asset.
3. Return on common stock.
4. Earning per share.
5. Price earning ratio.
6. Pay out ratio.

1. Profit margin on sales:

Profit margin on sales ratio offered information as regards a company’s success from
the action of core trade. Ratio gives you an idea about the success relation to sales on
after the cost of goods sold is remove. It’s could be used as a pointer of the good
organization of the manufacture action and relationship between cost of
manufacturing goods and selling price.

Profit margin on sales = Gross Profit / Sales

Ratio 2001 2000

Profit margin on sales 16.73% 16.24%

Analysis:
In this case the ratio has increased, which is very good sign from on investor’s point
of view. It means that management has able to handle the operating cost and other
cost. As a result company has generated more profit during 2001from the year 2000.

2. Return on asset:
Return on asset compute the success of a company by using the advantage to create to
get self-governing of the financing of those assets. Its compute consequently divides
financing action from working and invests tricks.

Return on asset = Net Income / Total Asset

Ratio 2001 2000

Return on asset 9% 11%

Analysis:
In this case we see that there is a slight decreased of this ratio because the increasing
rate of total asset is higher than the increasing rate of net income. Now investors will
be unhappy with many current job decreasing this ratio.

3. Return on common stock equity:

Return on common stock ratio indicates the amount of, which the company is capable
to exchange in service income into an after tax income that finally can be maintain by
the investor. It is a helpful ratio for investigate the capability of the company’s
administration to understand a sufficient come back on the capital invest by the
proprietors of the company.

Return on common stock equity = Net income / Common stockholders equity

 Ratio 2001 2000
Return on common stock 10% 11%

Analysis:
For the same revenue in this case also the ratio has decreased because the increasing
rate of total equity 1.11 is higher than the increasing rate of return of net income 1.01.

D) Debt-coverage ratio:
Debt ratios are calculated to judgement the long-term financial position of the
company. This ratio indicate, mix of funds provided by owners and lenders, the
manner in which the assets are finance, the extent of earning that is magnified or
leveraged by use of debt and finally the extent of limited stakeholders control over the
company.

The Debt-coverage ratio we can satisfy on the three ratios, those are:
1. Debt to total assets.
2. Time interest earned.
3. Book value per share.

1. Debt to total assets:

Debt ratio maintain how much of the company’s total assets have been financed by
the lending.

Debt to total asset = Total debt / Total Asset

Ratio 2001 2000

Debt to total asset 30% 30%

Analysis:
In debt ratio is no change between 2000and 2001. The ratio is only 30%. And the only
30% of total assets is financed by the creditor. It’s good sign at creditor points of
view.

2. Time interest earned:

This ratio provides an indication of the margin of safety between financial obligations
and the net income thus it provides an indication of the available protection to
creditors. Failure to meet this obligation can bring legal action by the company’s
creditors, possibly resulting in bankruptcy.

Time interest earned (TIE) = EBIT / Interest charged

Ratio 2001 2000

Times interest earned 3.60 Times 3.84 Times

Analysis:
Here we see that earning before interest tax has increased as well as interest has also
increased. But the increasing vote as interest is higher than that of EBIT. The
company must this situation.