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Ratio Analysis
Ratio is the mathematical
relationship of one number to
another number.
Most important benefit
Facilitation of unbiased comparison
5 main categories
of Financial
Statement ratios
Liquidity
ratios
Asset
Manageme
nt Ratio
Debt
utilization
ratio
Profitability
ratio
Market
value ratio
Example
2014
2013
30,000
20,000
A/R
150,000
100,000
Inv.
200,000
150,000
Prepaid expenses
20,000
15,000
A/P
125,000
100,000
Accrued expenses
25,000
20,000
Fixed assets
600,000
400,000
Sales
1500,000
Gross profit
40% of sales
1. Liquidity Ratios
Liquidity ratios give us an idea about
firms ability to pay off debts that are
maturing within an year.
Liquidity ratio measures how capable a
firm is in meeting its short term debt
obligations in full and on time.
Most commonly used liquidity ratios:
Current ratio
Quick ratio or Acid test ratio
Cash ratio or Super Quick or Super Acid test
ratio
i. Current Ratio
Formula (CA/CL)
Ideal
It indicates the extent to which current
liabilities are covered by those assets
expected to be converted to cash in near
As for large
future.
discrepancies
4TH SESSION
i. Debt Ratio
(Total Debt to Total Assets Ratio)
Formula: (Total Debt/Total assets)
It measures portion of firms total assets
that is financed through creditors funds.
Total debt here means: Current liabilities +
long term liabilities
Question
From the following data you are required to
calculate Debt Ratio and Times Interest Earned.
EBIT .. Rs.
300,000
10% bonds payable Rs.
500,000
Ordinary share capital Rs. 10 each Rs. 800,000
Reserves and surplus..Rs.
200,000
Current liabilities.Rs.
250,000
Question
From the following data you are required to
calculate Debt Ratio and Times Interest Earned.
EBIT .. Rs.
300,000
10% bonds payable Rs.
500,000
Ordinary share capital Rs. 10 each Rs. 800,000
Reserves and surplus..Rs.
200,000
Current liabilities.Rs.
250,000
(EBIT+D+A+Lease payment/Interest+Principal
payment+Lease payment)
Practice Question
Willis Publishing has $30 billion in
total assets. The companys TIE ratio
is 8.0. Its EBIT is $6 billion. Willis
depreciation and amortization
expense total $3.2 billion. It has to
make $2 billion in lease payments
and $1 billion must go towards
principal payments on outstanding
loan and long-term debt. What is
Willis EBITDA coverage ratio?