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# Ratio Analysis-B.V.Raghunandan

## by 1954bvr on May 07, 2010

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deals academically with the ratio analysis, their benefits, demerits and the formulae for computation of various ratios

deals academically with the ratio analysis, their benefits, demerits and the formulae for computation of various ratios

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## Ratio Analysis-B.V.RaghunandanPresentation Transcript

• Ratio Analysis
B.V.Raghunandan,
SVS College,
Bantwal-Karnataka
India
• Meaning of Ratio Analysis
It is an analysis of strength and weakness of an organisation by establishing the quantitative relation among the items of Balance Sheet or Income Statement of such an organisation
Analysis of financial Position
Simplification of Accounting Figures
Assessment of Operational Efficiency
Determining Trends in the long-run
Identification of Strength & Weakness
Taking Remedial Measures
Comparison of Performance
• Limitations of Ratio Analysis
Based on Historical Data
Change in Real Value of Monetary Unit
No Standard Interpretation
Ignoring Qualitative Aspects
Difference in Accounting Methods make comparison difficult
Ambiguity in Terms Used
• Classification of Ratios
A. Liquidity Ratios
B. Solvency Ratios
C. Activity Ratios
D. Profitability Ratios
E. Shareholders' Ratios
• A. Liquidity Ratios
Used to study the ability of the organisation in meeting short-term payments or obligations
Includes:
1) Current Ratio,
2) Acid Test Ratio and
3) Working Capital Turnover Ratio
• 1) Current Ratio
Relation between current assets and current liabilities
Long Term Sources Financing the Current assets give a stable base for the liquidity of the organisation
Normally , the ratio should not be less than 2 i.e., the current assets should be double the size of current liabilities
• Measurement of Current Ratio
Current Ratio =
• 2) Acid Test Ratio/Quick Ratio
It is the ratio between quick assets and quick liabilities
Quick assets include current assets except inventory and pre-paid expenses
Quick liabilities include current liabilities other than bank overdraft
A 1:1 ratio is healthy
Healthy indicator of cash management
• Measurement of Acid Test Ratio
Acid Test Ratio =
• 3) Working Capital Turn-over Ratio
Shows the efficiency of usage of working capital
Relation between Sales and Working Capital
Determination of number of times the working capital is turned over to achieve the maximum profit
• Measurement of Working Capital Turnover Ratio
• B. Solvency Ratios
Measure long-term liquidity ratio
Reflect the ability of the firm to pay interest and repayment of loans at due dates on the long-term loans taken
Avoidance of over-borrowing (over-leverage)
Avoidance of bankruptcy by maintaining healthy solvency ratios
• Types of Solvency Ratios
Interest Coverage Ratio
Debt Ratio
Debt-Equity Ratio
Capital Gearing Ratio
Proprietary Ratio
• 1.Interest Coverage Ratio
• 2. Debt Ratio (Debt to Total Funds ratio)
• 3) Debt-Equity Ratio
• 4) Capital Gearing Ratio
• 5) Proprietary Ratio
• C] Activity Ratios
Inventory Turnover Ratio
Debtors Turnover Ratio
Average Collection Period
Fixed Assets Turnover Ratio
Total Assets Turnover Ratio
Capital Turnover Ratio
• 1) Inventory Turnover Ratio
• 2) Debtor Turnover Ratio
• 3) Average Collection Period
• 4) Fixed Assets Turnover Ratio
• 5) Total Assets Turnover Ratio
• 6) Capital Turnover Ratio
• D] Profitability Ratios
1) Net Profit Ratio
2) Gross Profit Ratio
3) Return on Total Assets
4) Return on Equity
• 1) Net Profit Ratio
• 2) Gross Profit Ratio
• 3) Return on Total Assets
• 4) Return on Equity
• E) Shareholdersâ€˜ Ratio
1) Earning per Share (EPS)
2) Price-Earning Ratio (PE Ratio)
3) Dividend Yield Ratio
4) Dividend Pay-out Ratio
• 1) Earning per Share
• 2) PE Ratio
• 3) Dividend Yield Ratio
• 4) Dividend Pay-out Ratio
• THANK YOU