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- 1. Submitted by-Aakriti Rohatgi - 04016659312Roshnita Taneja - 03616659312
- 2. CONTENTS How does Ratio Analysis came into picture? What is Ratio Analysis? Significance of Ratio Analysis Purpose of Ratio Analysis Precautions to be taken while using ratio analysis Types of Ratios Case study
- 3. Learning Outcomes Understand the contextual environment in whichwe apply financial ratios Explain the calculation and application of ratiosin the areas of profitability, efficiencies, liquidity,etc. and apply them to a set of financialstatements Calculate different ratios from supplied companydetails and interpret these ratios Explain the different classifications of financialratios Explore the results of ratio analysis in terms ofwhat it tell us about the organisation
- 4. NEED FOR A CHANGE.. Traditional financial statements( balance sheet,profit and loss accounts) do not give all theinformation related to the firm It ignores the significance of financial operationsthat the firm has undertaken in the entire year. Understanding Financial statements is acomplex task for a lay man(non commerce), thisgave rise to ratio analysis.
- 5. WHAT IS RATIO ANALYSIS ?? Ratio-analysis means the process of computing,determining and presenting the relationship ofrelated items and groups of items of the financialstatements. It is the systematic use of ratios to interpret theperformance and status of the firm. They provide information in a summarized andconcise form.
- 6. SIGNIFICANCE OF RATIOANALYSISThe significance of a ratio can only truly be appreciatedwhen: It is compared with other ratios in the same set offinancial statements of the competitors. It is compared with the same ratio in previousfinancial statements. It is compared with a standard of performance(industry average). Such a standard may be either theratio which represents the typical performance of thetrade or industry, or the ratio which represents thetarget set by management as desirable for thebusiness.
- 7. PURPOSE OF RATIOANALYSIS-It’s a tool which enables the banker or lender toarrive at the following factors i.e : Liquidity position Profitability Solvency Financial Stability Quality of the Management Safety & Security of the loans.
- 8. Before looking at the ratios there are a number ofcautionary points concerning their use that need tobe identified :a. The dates and duration of the financial statements beingcompared should be the same. If not, then wrongconclusions will be drawn.b. The accounts to be compared should have been prepared onthe same bases. Different treatment of stocks ordepreciations or asset valuations will distort the results.c. In order to judge the overall performance of the firm, agroup of ratios, as opposed to just one or two should beused. In order to identify trends at least three years ofratios are normally required.
- 9. HOW A RATIO IS EXPRESSED? As Percentage - such as 25% or 50% . Forexample if net profit is Rs.25,000/- and the salesis Rs.1,00,000/- then the net profit can be said tobe 25% of the sales. As Proportion - The above figures may beexpressed in terms of the relationship betweennet profit to sales as 1 : 4. As Pure Number /Times - The same can alsobe expressed in an alternatively way such as thesale is 4 times of the net profit or profit is 1/4thofthe sales.
- 10. TYPES LIQUIDITY RATIOS ACTIVITY RATIOS PROFITABILITY RATIOS LEVERAGE RATIOS MARKET VALUE RATIOS
- 11. A: LIQUIDITY RATIOS The main concern of liquidity ratio is tomeasures the ability of a firm to meet their short-term obligations. Failure to do this will result in the total failure ofthe business. These ratios are concerned with the examinationof the financial stability of the organization.
- 12. 1: CURRENT RATIOS It expresses the relationship between currentassets and current liabilities The concept behind this ratio is to find outwhether a companys short-term assets arereadily available to pay off its short-termliabilities or not. Current Ratio = Current Assets/CurrentLiabilities The ideal Current Ratio is 2 : 1
- 13. COMPARISON AMONG TWO FIRMSParticulars Firm A Firm BCurrent assetsCurrent liabilities1,80,0001,20,00030,00010,000Current Ratio = 3 : 2 = 3 : 1
- 14. 2:QUICK RATIO OR ACID TEST It is the ratio between Quick Current Assets and CurrentLiabilities. Acid Test or Quick Ratio = Quick CurrentAssets/Current Liabilities Example : Cash 50 Debtors 100 Inventories 200 Current Liabilities 100 Total Current Assets 350 Current Ratio = > 350/100 = 3.5 : 1 Quick Ratio = > 150/100 = 1.5 : 1
- 15. 3:CASH RATIOS The cash ratio is an indicator of a companysliquidity by measuring the amount of cash, cashequivalents or invested funds there in thecurrent assets to cover current liabilities. Cash ratio = cash + cash equivalentscurrent liabilities4: NET WORKING CAPITAL It indicates the amount of money in hand to meetcurrent obligations. Net Working Capital = Current Assets – CurrentLiabilities
- 16. 5: DAYS PAYABLE OUTSTANDINGIt indicates the number of days to settle all payables.Days payable outstanding is an efficiency ratio thatmeasures the average number of days a companytakes to pay its suppliers Days Payable outstanding =Average Accounts Payable * 365COGSAverage Accounts Payable is the average of the openingand closing balances of Accounts Payable.
- 17. B: ACTIVITY RATIOS If a business does not use its assets effectively,investors in the business would rather take theirmoney and place it somewhere else. It is also known as Asset Management process. Activity ratios are used to assess how activevarious assets are in the business.
- 18. 1: AVERAGE COLLECTION PERIOD The average collection period measures the quality ofdebtors since it indicates the speed of their collection. The shorter the average collection period, the betterwill be the quality of debtors, as a short collectionperiod implies the quick payment by the debtors. An excessively long collection period implies a veryliberal and inefficient credit and collectionperformance. Debtor collection period= debtors x 365credit sales
- 19. 2: INVENTORY TURNOVER It determines how often the stock turns over inthe business. It indicates the efficiency of the firm in selling itsproduct. This ratio measures the number of times in oneyear that a business turns over its stock of goodsfor sale. Stock Turnover= average stock x 365 (days)cost of goods soldAverage Inventory = (Opening Stock + Closing Stock)2
- 20. 3: TOTAL ASSETS TURNOVER It indicates the efficiency with which the firmuses all its assets to generate sales. Asset turnover = salesnet assets
- 21. Cash turnover = sales / cash and cash equivalents Accounts Receivable ratio= Annual Sales / averageAccounts Receivable Current Asset Turnover Ratio = Annual Sales /Current Assets Fixed Assets Turnover ratio = Sales / Net FixedAssets Accounts Payable ratio= Annual Sales / AccountsPayable
- 22. Working capital turnover = sales / workingcapital Days in Inventory = Average inventory / cost ofsales per day Days in Accounts Receivable = AccountsReceivable / sales per day Days in Accounts Payable = Accounts Payable /sales per day Operating cycle = Days in Inventory + Days inAccounts Receivables.
- 23. C: LEVERAGE RATIOS A financial leverage ratio is the comparison betweendebts and assets. This means that the values beingcompared here are the size of debts and whatevermeasurement of assets value is available. Technically , these ratios speak volumes about acompany’s reliance on loans and other sources ofborrowed money. The leverage ratio is used to calculate the financialleverage of a company.
- 24. 1:DEBT TO EQUITY RATIO The debt-to-equity ratio is a financial ratio indicatingthe relative proportion of equity and debt used to financethe assets. It is the key of financial ratios and is used as a standardfor judging a companys financial standing. Debt to Equity Ratio = Total debt/ total equity2: TIMES INTEREST EARNED RATIOIt is used to measure the long term viability of a business topay off its debts.Times Interest Earned = Earnings before Interest & TaxNet Interest Expense
- 25. 3: GEARING The most common use of the term gearing is to describethe level of a companys net debts compared with itsequity capital. It is expressed as a percentage. In simpler terms, gearing explains how a companyfinances its operations - either through outside lenders orthrough shareholders. Gearing =Long-term debt + Short-term debt + Bank overdraftsShareholders equity4: DEBT RATIOSDebt Ratio is a financial ratio that indicates thepercentage of a companys assets that are providedvia debt.Debt ratio= Total debts/ total assets
- 26. D:PROFITABILITY RATIOSGross profit MarginNet Profit MarginReturn On InvestmentReturn On EquityEarning Per Share
- 27. 1:GROSS PROFIT MARGINThis ratio examines the relationship between theprofits made on trading activities only (grossprofit) against the level of turnover/sales made.It is given by the formulaGross Profit Margin = gross profit x 100turnover (sales)
- 28. 2:NET PROFIT MARGINAs opposed to gross profit margin this ratiomeasures the relationship between the net profit(profit made after all other expenses have beendeducted) and the level of turnover or sales madeNet Profit Margin = net profit x 100turnover (sales)
- 29. 3:RETURN ON INVESTMENTA performance measure used to evaluate theefficiency of an investment or to compare theefficiency of a number of different investments.To calculate ROI, the benefit (return) of aninvestment is divided by the cost of theinvestment; the result is expressed as apercentage or a ratioROI = After tax earnings/ total assets
- 30. 4:RETURN ON EQUITYThe amount of net income returned as apercentage of shareholders equity. Return onequity measures a corporations profitability byrevealing how much profit a companygenerates with the money shareholders haveinvested. ROE = After tax Earnings/ Stockholder’s equity
- 31. 5:EARNING PER SHAREThe portion of a companys profit allocated to eachoutstanding share of common stock. Earnings pershare serves as an indicator of a companysprofitability.EPS = Net income after tax- pref. dividend / no.of issued equity shares
- 32. E:MARKET VALUE RATIODividend Yield RatioPrice Earning Ratio
- 33. 1:DIVIDEND YIELD RATIOA financial ratio that shows how much a companypays out in dividends each year relative to itsshare price. In the absence of any capital gains,the dividend yield is the return on investment fora stock.Dividend yield = Dividend per share / share priceDividend per share = total dividend / no. ofshares outstanding
- 34. 2:PRICE EARNING RATIO A valuation ratio of a companys current shareprice compared to its per-share earnings.P/E ratio = Market price per share/ currentearnings per shareFor example: a company is currently trading atRs.43 a share and earnings over the last 12months were Rs.1.95 per share, the P/E ratio forthe stock would be 22.05
- 35. ~~CASE STUDY~~RATIO ANALYSIS FOR JETAIRWAYS Jet Airways was incorporated on April 1, 1992 as aprivate company with limited liability under theCompanies Act. In 2005, Jet Airways Limited has filed its draft RedHerring Prospectus with the Securities and ExchangeBoard of India (Sebi) to enter the capital market withits initial public offering. The company will offer17,266,801 (1.72 crore shares) equity shares of Rs 10each for cash at a price to be decided through thebook-building process. It is learnt that the value ofeach share will be Rs 870. The IPO proceeds willessentially be used to fund its international expansionplans. Jet Airways IPO was subscribed 4.25 times on thefirst day of the offer.
- 36. MANAGEMENTDesignation NamesChairman / Chair Person Naresh GoyalDirector Ali GhandourDirector Javed AkhtarDirector Aman MehtaDirector Victoriano P DungcaDirector I M KadriDirector Yash Raj Chopra
- 37. RATIO ANALYSIS

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