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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
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.)

## . 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.)

 
 .
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.)




&   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.)

 ))
#





 



)))

''





''

\$ !   
     

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??