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RATIO ANALYSIS

TOOLS AND TECHNIQUES


ACD Technique

ANALYZE
YOMPARE
DIG DEEP
Learning Objectives

 Meaning of Ratio Analysis


 Tools and Techniques of Ratio Analysis
 Intra Firm and Inter Firm Analysis
 Ratios Predicting Financial Failure
 Different Frameworks of Ratio Analysis
Why Financial Analysis

Lenders¶ need it for carrying out the


following
 Technical Appraisal
 Commercial Appraisal
 Financial Appraisal
 Economic Appraisal
 Management Appraisal
Ratio Analysis
It¶s a tool which enables the banker or lender to
arrive at the following factors :
 Liquidity position
 Profitability
 Solvency
 Financial Stability
 Quality of the Management
 Safety & Security of the loans & advances to
be or already been provided
Types of Ratios

 Liquidity Ratio
 Solvency Ratio
 Activity Ratio
 Profitability Ratio
 Shareholder¶s Ratio
Liquidity Ratio
1. Current Ratio : It is the relationship between the current assets
and current liabilities of a concern.

Y   Y 


 Y  

 ë   

£. Net Working Capital Ratio


Relation between sales and Net
Working Capital.

Õ Y  Õ Y

 Õ Y Y 
  Y  
Ôcontd.)

Œ. Quick Ratio : It is the ratio between Quick


Current Assets and Quick Current Liabilities.

?  ? 
 ? 

 

 Ideal Ratio = 1
 Normally it is less than 1.
Ôcontd.)

Ñ 


 It is the ratio of the cash
flow from operations to current liabilities.

w
 
 w  

 
Solvency Ratios
  
 

  This is the ratio
between earnings before interest and taxes
ÔEBIT) and interest expense.
ë
 ë ë   

£

 This is the ratio of total liabilities to
total assets.
     
Ôcontd.)

Π
 .
This ratio measures
the proportion of
long term debt to
equity.

   
 
Activity Ratios

 

 It is the
ratio of cost of goods sold to inventory.
ë 
 !  
ë !  
£ !

 This is the
ratio of net sales to average debtors.
 "   !    
Ôcontd.)

3. ixed Assets Turnover Ratio :


 #  
The higher the fixed asset turnover ratio, the
more sales the firm is generating with a Rupee
of fixed assets.
4. Asset turnover Ratio : M      
     
"       
6   

Profitability Ratio

 "
#
$ 
 It is the ratio
of net profit to sales.
"$ " $   

%
#
$ 
 It is the
ratio of gross profit to net sales.
$  $ "   
Ôcontd.)
Œ



&   This is the measure of
return of assets invested in business.
w " ë      

Ñ 





 






''

w " $   
  
 

 

 6 

6
6

Shareholder¶s Ratio
 

(  This ratio reflects
the earnings per share for the equity share
holders.
$ %"  &$   ! '"(
      

£ #






'

)

))
 
'*


 



 



ñ ñ
  
 ñ
Ôcontd.)

Π))
#





 



)))

''





''

$ !   
     

Ñ 
)

     " ë 
Ratios Predicting Financial
Failure
Altman Multivariate Model

 1.2 x1+ 1.4x2 + 3.3 x3 + .60 x4 + 1 x5


 Combination of 5 ratios
 Predict financial failure
 Score less than 2.7, the company has the
probability of going BANKRUPT
 Score from 1.81 to 2.7 are in the GREY
area
Different Frameworks for
Ratio Analysis
 Du Pont Model
‡ Return of Assets x Net Profit Margin

± Secure Increasing Profit Margin


± Increase Productivity of Assets
± Liabilities not Included-Limitation
Ôcontd.)

 Fruhan Model
‡ ROE=Net Profit x Capital Intensity x Financial
Leverage
Model is consistent with wealth maximization
Considers financial decision along with operating
decision
Considers the Liabilities along with the Return on
Assets
??? Any
Questions??