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Ratio analysis is the calculation and comparison of ratios which are derived from the information in a companys financial statements. Financial ratios are usually expressed in percentages or times or rupees.
Ratio analysis is a very important part of your internship report and should be presented properly. Five Steps for Presenting Ratio Analysis For the presentation of ratio analysis students are required to follow these five steps described below for each ratio. Step 1-Ratio Title and Formula Write the ratio title (definition and description is not required) and formula. For example: Current ratio = Current assets/current liabilities Step 2-Calculation (with numerator and denominator) Show the table as given below: Year 20XX Year 20YY Year 20ZZ
Show the amounts in numerator and denominator and then the final result. i.e. =XXX\YYY = ZZ times Mention the unit of the respective ratio with its result such as current ratio is calculated in Times so write Times with current ratios result. Also round off the result up to two decimal places. E.g. if answer is 2.4659 times then it should be written as 2.46.
Step 3-Working After the calculation table show how you have calculated the amounts given in numerator and denominator (for those items that require calculations). NOTE: If any amount is clearly provided in the financial statements then there is no need to show the working for those amounts. For example if total assets amount is provided in the financial statements no working for calculating total assets is required. Step 4-Graphical representation Plot the calculated ratio results on graph. Use only Column chart for graphical representation. Show graphical representation like this:
Current Ratio
2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 20XX 20YY 20ZZ Current Ratio
NOTE: You are not required to show Trend Analysis separately. Instead plot the graphs of each ratio according to the given specimen. In this way while showing the graphs and interpreting the ratios, you will also be performing Trend Analysis. Step 5-Interpretation In this section interpret the graph shown above.
indicates? You have to critically analyze the result of calculated ratio by explaining the relationship of numerator with that of a denominator. I.e. if the result of current ratio for a year is 2.1 times then what is meant by this 2.1 times. For supporting your interpretation results you will not use the values provided in the Balance Sheet of the current assets and current liabilities. Step 2) Trend Analysis: i.e. what are the variations in a companys ratio results i.e. the trend for the same company and the reasons for that change in trend? Step 3) Comparisons: i.e. the company's performance (better/ poor/ same) for the three consecutive years along with reasons. Step 4) Bench mark (if applicable): i.e. the comparison of ratio with the benchmark/rule of thumb/standard of that ratio in that particular industry (as these standards vary according to the type of industry selected for analysis e.g. Manufacturing, Banking, FMCG companies, etc). Also give reasoning of deviation from that standard. NOTE You will have to interpret the calculated ratios in the way described above step wise.