Financial Ratios a tool

for Financial Analysis

 Financial Statements
Contains summarized information about the
financial health of the organisation.
The financial statements are:
 Balance Sheets – financial position at a specific
moment. Assets and Liabilities
 Profit and Loss A/C – Shows the earning capacity
of the firm. Revenues and Expenses

R K Mishra, IMIS, BBSR

Financial Statement Analysis
Helps in understanding the information
provided in the statements in a better
manner.
Measures the strength and weakness of
the firm, thereby helps in effective decision
making

R K Mishra, IMIS, BBSR

 Tools for Financial Analysis
Ratio Analysis- Numbers that represents a
relationship between to items.
Common Size Statements- Compares
statements of different companies in the
same industry
Comparative Statements- Shows the financial
performance for different accounting period
Trend Analysis- Analysed by computing
trends of series of information.

R K Mishra, IMIS, BBSR

 Ratio Analysis
Relationship between two accounting figures
expressed mathematically.
Defined, “A ratio is an expression the
quantitative relationship between two
numbers.”
- By Wixon, Kell & Bedford
“A ratio is the relation of the amount ‘a’ to
another ‘b’ expressed as a ratio of ‘a to b’ or
‘a : b’(i.e. a is to b); or as a simple fraction,
integer, decimal, fraction or percentage.”
- Kohler
R K Mishra, IMIS, BBSR
 Uses of Ratio
In decision-making – diversify, raising new
funds etc.
Financial forecasting and planning – works
as a guide for the future
Communicating – clearly communicates the
financial health
Co-ordination – better communication results
in better coordination
Control – Actual ratios can be compared with
standards
R K Mishra, IMIS, BBSR
 Financial Ratios

Short Term Profitability Long Term

Gross Profit Debt Equity

Liquidity Ratios Current Asset Funded debt

Operating
Movement to Total Cap.
Operating
Current Equity
Inventory Profit
Quick Solvency
Debtors Expenses
Absolute Fixed Asset
Creditors/ Net Profit
Liquid to Net worth
Payables
Interest
Working
Coverage
capital Current
asset to Cash to Debt
R K Mishra, IMIS, BBSR
Prop. Fund Service
 Liquidity Ratio

Current Ratio Quick or Acid Test Absolute Liquid or

or Liquid Ratio Cash Position
Ratio

Current Assts Quick or Liquid Assts Absolute Liquid Assts

Current Liabilities Current Liabilities Current Liabilities

R K Mishra, IMIS, BBSR

 Current Asset
Movement/
Turnover Ratio

Inventory/Stock Debtors Creditors/ Working capital

Turnover Turnover Payables Turnover
Turnover

Cost of goods sold

Average Inventory Net Credit Purchase
Avg. Creditors
Net Credit Sale
Cost of Sales
Avg. Debtors
Avg. Net working capital

R K Mishra, IMIS, BBSR

 Profitability
Ratios

Gross Profit Operating Operating Expenses Net Profit

Profit

Gross Profit x 100 Net Profit x 100

Sales Operating Profit Sales
x 100
Sales

Operating Exp.
x 100
Sales Expenses x 100
Sales
R K Mishra, IMIS, BBSR
Long Term Ratios

Outsiders’ Fund
Debt Equity
Shareholders’ Fund
Funded Debt
Funded debt
to Total Cap. Total Capitalisation
Shareholders’ Fund
Proprietory or Equity
Total Assets
Outsiders Fund
Solvency
Total Assets
Fixed Assets
Fixed Asset
to Net worth Shareholders’ Fund

Interest EBIT
Coverage Fixed Interest Charges
Current Assets
Current asset to
Prop. Fund Shareholders’ Fund
R K Mishra, IMIS, BBSR
THANK YOU

R K Mishra, IMIS, BBSR