RATIO ANALYSIS

&
ITS TYPES

T T N Satya Vani
MBA 1st Year
Regd. Number: 17Q71E0094
 Ratio analysis
Is a method or process by which the
relationship of items or groups of items in the
financial statements are computed, and
presented.

Is an important tool of financial analysis.

 Utility of Ratio Analysis
Is used to interpret the financial
statements so that the strengths and
weaknesses of a firm, its historical
performance and current financial
condition can be determined.

Accounting ratios are very useful in

assessing the financial position and
profitability of an enterprise.
 Five Types of Financial Ratios:
Liquidity Ratios.
Asset Management Ratios (Activity Ratios).
Debt Management Ratios (Leverage Ratios).
Profitability Ratios.
Market Value Ratios.
 Liquidity ratios
Analyse the short-term financial position of a firm and
indicate the ability of the firm to meet its short-term
commitments (current liabilities) out of its short-term
resources (current assets).
Liquidity ratios measure the availability of cash to pay
debt.
Two measures of liquidity:
Current ratio - Measures a firms ability to pay its
current liabilities from its current assets.
Quick Ratio - Measures a firms ability to pay its
current liabilities without relying on the sale of its
inventory.
 Asset Management Ratios
Measures how effectively the firm converts non-
cash assets to cash assets
The Inventory Turnover Ratio - Indicates the number of times that
a firm sells its inventory each year.

The Days Sales Outstanding (DSO) - Indicates the length of time

normally required to collect a receivable resulting from a credit sale.

The Fixed Assets Turnover Ratio- to measure how effectively the

firm uses its plant and equipment to generate sales.

Total Asset Turnover Ratio - Measure efficiency of total assets for

the company as a whole or for a division of the firm.
 Debt Management Ratios
Indicate the long term solvency of a firm and
indicate the ability of the firm to meet its long-
term commitment with respect to
(i) repayment of principal on maturity or in
predetermined instalments at due dates and
(ii) periodic payment of interest during the
period of the loan.
 Profitability Ratios
Measure the firm's use of its assets and control
of its expenses to generate an acceptable rate
of return.
Show the combined effect of liquidity, asset
management, and debt management on
operating results.
Net Profit Margin on Sales.
Basic Earning Power (BEP).
Return on Assets (ROA).
Return on Common Equity (ROE).
 Market Value Ratios
A set of ratios that relates the firms stock price
to its earnings, cash flow, and book value per
share.

Focus on the stock price and compare it to

earnings and book value.

These ratios give management an indication of

what investors think of the companys past
performance and future prospects.