Presentation on ratio analysis

What is ratio ?
A ratio:It is the mathematical relationship between two quantities in the form of a fraction or percentage.

A ratio on its own has little or no meaning at all.

What is ratio analysis?

Ratio analysis is one of the techniques of financial analysis to evaluate the financial condition and performance of a business concern. According to Myers, ratio analysis of financial statement is a study of relationship among various financial factors in a business as disclosed by a single set of statements and a study of trend of these factors as shown in a series of statement.

Advantages
To workout the profitability To workout the solvency Helpful in analysis of financial statement Helpful in comparative analysis of the performance To simply the accounting information Helpful for forecasting purposes

Disadvantages
Limited comparability False result Effect of price level changes Qualitative factors are ignored Costly techniques Effect of window-dressing (http://www.universalteacher4u.com/cbse/xii/acct heory/ch11/page1.htm) Expanation of advantages and disadvantages

Classification of ratios
Liquidity ratios Solvency ratios Activity or turnover ratios Profitability or income ratios

Liquidity ratios
This ratios helps us to find out the short-term solvency position of the business. Liquidity ratios include 2 ratios:current ratio or working capital ratio Quick ratio or acid test ratio or liquid ratio

Current ratio
Current assets Current liabilities The ideal ratio is 2:1 If the ideal ratio will decrease it means the liquidity position of the company become weak. If the ideal ratio will increase it means that the company is having ideal current assets

Quick ratio
Current assets (stock + prepaid) Current liabilities

The ideal ratio is 1:1 If the ideal ratio will decrease it means the liquidity position of the company become weak. If the ideal ratio will increase it means that the company is having ideal current assets

Solvency ratio
These ratios are calculated to judge the longterm solvency position of the company. Solvency ratios are of 3 types Debt equity ratio Total assets to debt ratio Proprietary ratio

Debt equity ratio :total long term debt * 100

share holder fund This ratio should remain below 2:1 Total assets to debt ratio Total asset Debt Proprietary ratios share holders fund (equity) total assets

* 100

Turn over ratios

These ratios calculates to judge the operational efficiency of the company Turnover ratios are of 5 types Stock turnover ratio Debtor turnover ratio Creditor turnover ratio Working capital turnover ratio Fixed asset turnover ratio

Stock turnover ratio

Cogs / sales Average stock cogs = opening stock + net purchases+ direct expenses-closing stock Cogs= nets sales gross profit
The stock turn over ratio helps us to find out that in how much time the company take to convert the stock into sales

Debtor turnover ratios

Credit sales Avg. debtors

avg.debtors = opening debtors + opening B/R + closing debtors + closing B/R 2 credit sales = total sales - cash sales - S/R

Avg. collection period = 365 / 12 debtors turn over ratio

This ratio helps us to know that how much time the company will take to convert their credit sales into cash.

Creditor turnover ratios

net credit purchase Avg. creditors Avg. creditors = opening creditors + opening B/P + closing creditors + closing B/P 2 Net credit purchase = purchase cash purchase P/R

Avg. payment period = 365 / 12 creditors turnover ratio

It helps us to know that in how many days / month the company will repay the funds to the creditors.

Fixed assets turnover ratios

Cost of good sold / sales

= in times
fixed assets it helps us to find out that how efficiently the company utilizing their fixed assets

Working capital turnover ratios

Cost of good sold / sales

= in times
working capital W/C = current assets current liabilities

it helps us to find out that how efficiently the company utilizing their working capital.

Profitability ratios
These ratios are calculated to judge the profitability of the company. Profitability ratios are of 10 types gross profit ratio Operating profit ratio Net profit ratio Operating ratio Return on capital employed Return on equity Return on equity shareholders fund Earning per share Dividend per share Price earning ratio

(1) Gross profit ratio:- G. p. / net sales * 100 This ratio helps us to know that how much gross profit the company is getting on sales.

(2) Operating profit ratio :- operating profit / net sales * 100

operating profit = G. P. operating exp This ratio helps us to know that how much operating profit the company is getting on sales.

(3) Net profit ratio = net profit/net sales *100 net profit = operating profit non operating expenses + non operating income (4) Operating ratio= cogs+ op expenses *100 net sales cogs+ operating expenses =operating cost

(5) Return on capital employed

net profit before int,tax& preference dividend *100 capital employed Capital employed= shareholders fund(equity)+debt(borrowed
fund) Capital employed= fixed assets +investments + current assets current liablities

(6) Return on equity= net profit after tax *100 equity (7) Return on equity shareholders fund =net profit after int,tax& preference dividend *100
equity shareholders fund Equity share holders fund= equity share capital + reserves surplus miscellaneous

(8) Earning per share = net profit after int,tax & dividend
no. of equity shares issued (9) Dividend per share =amount of equity dividend proposed no. of equity shares issued (10) Price earning ratio = market price of the share EPS

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