RATIO ANALYSIS

PRESENTED BY:-
ROHIT KUMAR SINGH
HR/IR 1ST SEM
 WHAT IS RATIO ?
A Ratio is a mathematical number calculated as a
relationship of two or more number. When the
number is calculated by referring to two accounting
numbers derived from the financial statement. It is
termed as accounting ratio.

Eg:- if the Gross Profit of the business is rs

10000 and the Revenue From Operations are
100000. it can be said that the Gross Profit is 10% ;
10000/100000*100.
 ADVANTAGES
Helpful in comparative analysis:- The ratios are not
be calculated for one year only. When many years figures
are kept side by side, they help a great deal in exploring a
trend visible in the business.
Identification of problems areas:- Ratio helps
business in identifying the problem areas as well as the
bright areas of the business.
Helps to understand efficacy of Decisions:- The
ratio analysis helps you to understand whether the
business firm has taken the right kind of operating,
investing, and financial decisions.
 DISADVANTAGES
Limitations of accounting data:- Accounting data gives
an unwarranted impression of precision and finality. It
reflect a combination of recorded fact accounting
conventions and personal judgement which affect them
materiality.
Ignores price level changes:- The financial accounting is
based on money measurement concepts. It implicity assumes
that price level changes are either non-existence or minimal.
Ignore Qualitative or non-monetary aspects:-
Accounting provides information about quantitative aspects
of business not the qualitative.
 OBJECTIVES
To know the areas of the business which need
more attention.
To provide a deeper analysis of the profitability,
liquidity, solvency and efficiency levels in the
business.
To provide information derived from financial
statements useful for making projections and
estimates for the future.
 TYPES OF RATIO
There are 2 types of Ratio:-
On the basis of financial statement
Functional Classification of Ratio
 ON THE BASIS OF FINANCIAL
STATEMENT
Balance sheet Profit and loss Composite Ratio
Ratio a/c Ratio
Current Ratio Gross profit Ratio Trade receivable
turnover Ratio
Quick Ratio Net-profit Ratio Trade payable
turnover Ratio
Debt-equity Ratio Operating-profit Working capital
ratio turnover Ratio
Proprietary Ratio Operating Ratio Inventory turnover
Ratio
Earning per share
BALANCE SHEET RATIO FORMULAE
Objective Ratios to be
computed
Current Ratio Current Assets/Current
Liability
Quick Ratio Liquid Asset/Liquid Liability
Debt-Equity Ratio Outsiders funds/
Shareholders Fund
Proprietary Ratio Shareholders funds/Total
assets
 PROFIT&LOSS A/C RATIO
FORMULAE
Objectives Ratio to be
calculated
Gross Profit Ratio Gross Profit/Net sales*100
Net Profit Ratio Net profit/Net Sales*100
Operating Profit Ratio Operating Profit/Net
Sales*100
Operating Ratio Operating Cost/Net
Sales*100
Earning Per share
 COMPOSITE RATIOS FORMULAE
Objectives Ratio to be
computed
Trade receivable Turnover Net Credit Sale/Avg Trade
Ratio Debtors
Trade Payable Turnover Net Credit Purchase/Avg
Ratio Trade creditors
Working Capital Turnover Cost of Goods Sold/Net
Ratio working Capital
Inventory Turnover Ratio Cost of Goods Sold/Net
inventory
 FUNCTIONAL CLASSIFICATION OF
RATIO
Liquidity Solvency Activity Profitability
ratio ratio ratio Ratio
Current ratio Debt-equity ratio Inventory Gross profit ratio
turnover ratio

Quick ratio Proprietary ratio Trade receivable Operating ratio

turnover ratio

Total assets to Trade payable Operating profit

debt ratio turnover ratio ratio

Interest coverage Net asset ratio Net profit ratio

ratio