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BY:-SAGAR.V.MORADIYA
What is ratio analysis?
• Tool of financial analysis.
• Compare the risk and return relationships.
• It is a systematic use of ratios to interpret/assess
the performance and status of the firm.
• Interpret financial statements so the strength
and weakness as well as historical performance
and current financial condition can be
determined.
Basis of comparison
ratio make the related information
comparable. a single figure by itself has no
meaning, but when expressed in terms of
related figure, it yields significant inferences.
Thus, ratios are relative figures reflecting the
relationship between related variables.
Three types of comparisons are generally
involved: namely, (1)trend analysis (2)inter
firm comparison (3) comparison with
standards or industry average.
◙ Trend analysis
it involve evaluation of financial performance over a
period of time using financial ratio analysis.
Present ratios are compared with past ratios for the
same firm.
For
example:-
year Gross profit sales Gross profit
ratio
2007 25000/- Rs.300000 8.33%
2008 48000/- Rs.450000 10.67%
Inter firm comparison
• Comparison of the ratios of a firm with those of
others in the same line of business.
• For example:-
Year (2007) ABC STEEL LTD. XYZ STEEL LTD.
Current Ratio (:) Current Asset B.S. Asset portion it indicate the firm’s ability to
Current Liabilities B.S. Liability portion meet its short term
obligation.(2:1)
For example.
A B
=18000/12000 30000/10000
=1.5:1 =3:1
Quick Test (:) Quick Asset (C.A-inventory) B.S. Asset portion it indicate the firm’s instant
Current Liabilities B.S. Liability portion debt paying ability.(1:1)
For example:-
A B
= 4000/8000 =12000/6000
= 0.5:1 = 2:1
Cash Ratio (:) Cash + Cash Equivalents B.S. Cur. Asset To indicate how many
Current Liabilities B.S. Liability portion current obligations
can be met with
For example. cash or cash
equivalents
= 50000+20000/140000
= 0.5:1 (50%)
Profitability ratio
Ratio Formula Location Explanation
Net Profit Margin (%) Net profit After Taxes Income Statement Indicates the net profit after
Net Sales Income Statement tax in compare to net sales.
For example:-
= 500000/3000000
= 16.67%
Gross Profit Margin (%) Sales – Cost of Goods Sold Income Statement Indicates the profit available
Net Sales Income Statement for non-manufacturing
overhead
For example:-
=30000/400000
=7.5%
Return On Investment (%) Net Profit After taxes Income Statement Indicates the efficiency that
Total Assets Balance sheet management uses the
companies assets
For example:-
=25000/300000
= 8.33%
Return On Equity (%) Net Profit After taxes Income Statement Indicates the how
Shareholder’s Equity Balance sheet profitably the owners’
(preference & equity share capital+ordinary+ fund have been
share premium+ reserve and surplus) utilized by the firm.
For example:-
=39000/200000
=19.5%
Earnings per Share ($) Earning available to equity share holders (Income Statement-B.S) Indicates the profit
(equity) Number of equity shares. B.S. (sometimes) available to the equity
shareholders on a per
For example:- share basis.
= 25000/5000
= RS.5
Activity ratio
Ratio Formula Location Explanation
Net Working Capital Turnover (:) Net Sales Income Statement assess effectively the Net
Net Working Capital Balance sheet (CA-CL) Working Capital is used to
generate sales
For example:-
=20000/40000
=0.5:1
Asset Turnover (:) Sales Income Statement the efficiency with which
Total Assets Balance sheet the firm uses all its assets
to generate sales.
For example:-
=27500/19250
=1.43:1
Receivable (debtors) Turnover Annual Credit Sales Work sheet or Sub. The average amount of
(days) Average debtors + average bills Ledgers time needed to collect
receivables Balance Sheet accounts receivables.
For example:-
=1200000/(140000+160000)/2
=8 times
Average debt Collection Period Accounts Receivable Balance Sheet It indicates the gap of
(days) Sales for Year/365 Income Statement days to collect the debt.
Or
12 months / debtors ratio.
For example:-
= 12/8
= 1.5 months
Creditor (payables) turnover ratio Credit purchase Work sheet & sub.Average amount of time
(days) (Creditors + bills payables)2 ledger needed to pay account
Balance Sheet payables.
For example:-
= 50000/(9000+11000)/2
= 5 times
Accounts Payable Period Accounts Payable Balance Sheet It indicates the period gap
Purchases for year/365 Work sheet &/or Sub. to pay money to creditors
Ledgers for credit purchase.
For example:-
=12/5times (2.4months)
Leverage ratio
Ratio Formula Location Explanation
Debt to Asset Ratio (%) Total Debt Balance Sheet it indicate the portion assets
Total assets Balance Sheet which company have to meet the
total debt.
For example:-
=20000/22000
= 0.91:1 (good)
Proprietary ratio Proprietor's fund Balance Sheet it indicates the extent to which
Total assets Balance Sheet assets are financed by owners
funds.
For example:-
= 50000/200000
= 25% (neither high nor low)
Long term debt to CapitalL –T debt Balance Sheet It indicates the what portion
Structure ratio (%) Permanent capital Balance Sheet permanent capital of a firm
consists of long term debt.
For example:-
= 200000/500000
= 40%
Time Interest Earned EBIT Income Statement Indicates the
(interest coverage ratio) Interest Charges Income Statement ability of the
company to
For example:- meet its annual
=270000/27000(.09*300000) interest
= 10 times payment.
Coverage of Fixed Charges EBIT+ Lease payment Income Statement Assess the
Interest + lease payments + Income Statement company’s
( preference dividend +installment of principal) / ability to meet
(1-t) all of its fixed
expenses.
for example:-
= 50000+20000/1000+20000+(25000)/(1-.35)
= 1.18 times
Price/Earnings Ratio Market price per Share Stock Market Reports Assess the amount
Earnings per share Income Statement investors are willing
to pay for each
For example:- rupee of earnings
= 40/3.04
= 13.2 times
Dividend Payout Ratio (%) Annual dividends per Share Income Statement Indicates the
Annual Earnings per Share Income Statement percentage of profit
that is paid out as
For example:- dividends
= 4/11
= 36.37%
Dividend Yield on CommonAnnual dividends per Share Income Statement Indicates the
Stock Current Market price per share Stock Market dividend rate of
(%) return to common
For example:- shareholders at the
= 4/40 current market price
= 10%
Ϋ Importance and limitation of
ratio analysis
₪ advantages ₪ disadvantages
• Liquidity position. • Difficulty in
• Long term solvency. comparison.
• Operating efficiency. • Impact of inflation.
• Overall profitability.
• Inter-firm comparison. • Conceptual
diversity.
• Trend analysis.
Thank : you
For your feedback kindly mail
to onintex2012@gmail.com
Sagar_moradiya@yahoo.com