Presentation on accounting for management (1)

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Presentation on accounting for management (1)

  1. 1. What is Ratio Analysis?• It is Not just comparing different numbers from the balance sheet, income statement and cash flow statement.• It is about comparing the numbers against previous years, other companies, the industry or even the economy in general.• Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future.
  2. 2. Ratio Analysis LIQUIDITY RATIOS: tests the ability of a firm to meet its current liabilities SOLVENCY RATIOS: tests the long term solvency of a firm TURNOVER RATIOS: indicates the efficiency with which assets are utilized PROFITABILITY RATIOS: measures the efficiency of a business
  3. 3. Liquidity Analysis RATIOS LENOVO LENOVO HP HP (2011) (2010) (2011) (2010) Current Ratio: (Current Assets/Current 0.99 0.97 1.01 1.10 Liabilities)Quick Ratio: (Current Assets- Stock/Current 0.89 0.83 0.58 0.66 Liabilities)InterpretationsCurrent ratio: Normally a current ratio of 2:1 is considered as satisfactoryHP has a higher current ratio that is better able to meet its current liabilitiesQuick ratio: Normally a quick ratio of 1:1 is considered satisfactory. Lenovohas enough short term assets to pay its short term liabilities.
  4. 4. Solvency Analysis RATIOS LENNOVO LENNOVO HP HP (2011) (2010) (2011) (2010) Long Term Debt / Equity 0.00 0.18 0.58 0.38 Total Debt / Equity 0.14 0.22 0.79 0.55 Total Debt / Capital Employed 0.10 0.14 0.44 0.36Proprietary ratio: (share holders funds / 0.17 0.18 0.30 0.32 total assets) Interpretation: Debt Equity Ratio: Here debt equity ratio is less in 2011 for Lenovo, which is good for the company as it shows the debt is paid much faster in that year. As compared to HP, Lenovo has a better financial position.
  5. 5. Interpretation of solvency analysis RATIOS LENNOVO LENNOVO HP HP (2011) (2010) (2011) (2010)Proprietary ratio: (share holders 0.17 0.18 0.30 0.32 funds / total assets)Interpretation:Proprietary ratio: The standard proprietary ratio should be1:3. The higher theProprietary ratio the stronger the financial position of the company is but neither ofthe company has been able to meet the standard ratio.
  6. 6. Activity Ratio RATIOS LENOVO LENOVO HP HP (2011) (2010) (2011) (2010)Inventory Turnover Ratio: (COGS/Avg. 23.92 16.85 16.99 19.49 Stock) Fixed Asset Turnover Ratio: (Net 11.02 8.62 10.35 10.71 Sales/Fixed Assets) Total Asset Turnover Ratio: (Net 8.00 5.34 0.98 1.01 Sales/Total Asset) Capital Turnover Rate: (Sales/Capital 8.08 6.54 2.08 2.26 Employed)
  7. 7. Interpretation of Activity Ratio RATIOS LENOVO LENOVO HP HP (2011) (2010) (2011) (2010)Inventory Turnover Ratio: (COGS/Avg. 23.92 16.85 16.99 19.49 Stock) Fixed Asset Turnover Ratio: (Net 11.02 8.62 10.35 10.71 Sales/Fixed Assets)Interpretation:Inventory Turnover Ratio: if the ratio is higher it is better for the companybecause it show that finished stock is rapidly turnover and low stock turnover isis not desirable because it show obsolete stock or carry too much of stock, so Lenovois doing well than HP. Fixed Asset Turnover Ratio: The higher the ratio is the better is theperformance of the company and low ratio indicate that fixed assets arenot being effectively utilized, so Lenovo is doing well in 2011.
  8. 8. Interpretation of Activity Ratio RATIOS LENOVO LENOVO HP HP (2011) (2010) (2011) (2010) Total Asset Turnover Ratio: (Net 8.00 5.34 0.98 1.01 Sales/Total Asset)Capital Turnover Rate: (Sales/Capital 8.08 6.54 2.08 2.26 Employed)Interpretation:Total Asset Turnover Ratio: The higher the ratio is the higher will be theovertrading of total assets, while low ratio reveal idle capacity, so Lenovo is doinggood in compare to HP.Capital Turnover Rate: The higher the ratio the greater are the profit and alow capital turnover ratio should be taken to mean sufficient sales are notbeing made and profit are low, so here Lenovo is doing good profit in 2011and also in compare to HP.
  9. 9. Profitability Analysis RATIOS LENOVO LENOVO HP HP (2011) (2010) (2011) (2010)Return On Equity: (Profit-Dividend Due To 0.148 0.080 0.183 0.216 Pref. Shareholder/Equity Share Capital) Return On Total Assets: (PBIT/Total 2.55 1.44 5.46 7.04 Asset)*100 Operating Profit Ratio: (Operating 1.77 1.32 7.61 9.11 Profit/Net Sales)*100Net Profit Ratio: (Net Profit After Tax/Net 1.27 0.78 5.56 6.95 Sales)*100 Return on capital employed: 10.22 5.10 16.00 20.00 (PBIT/capital employed)*100Earnings Per Share: (NPAT/No of equity 2.84 1.42 1.68 2.08 shares issued)
  10. 10. Interpretation of Profitability Analysis RATIOS LENOVO LENOVO HP HP (2011) (2010) (2011) (2010)Return On Equity: (Profit-Dividend Due To 0.148 0.080 0.183 0.216 Pref. Shareholder/Equity Share Capital) Return On Total Assets: (PBIT/Total 2.55 1.44 5.46 7.04 Asset)*100 Operating Profit Ratio: (Operating 1.77 1.32 7.61 9.11 Profit/Net Sales)*100Interpretation:Return On Equity: Over here Lenovo is doing good as the more they get returnfrom the equity shareholder the more it is good for the companyReturn On Total Assets: The higher the ratio is the better it is for the companybecause the more the company get return from total asset the more is good for the firm.Operating Profit Ratio: Higher the ratio is the better it is for the company as itindicate the portion remain out of every rupee worth of sale after all operating costexpense have been met.
  11. 11. Interpretation of Profitability Analysis RATIOS LENOVO LENOVO HP HP (2011) (2010) (2011) (2010) Net Profit Ratio: (Net Profit After 1.27 0.78 5.56 6.95 Tax/Net Sales)*100 Return on capital employed: 10.22 5.10 16.00 20.00 (PBIT/capital employed)*100 Earnings Per Share: (NPAT/No of 2.84 1.42 1.68 2.08 equity shares issued)Interpretation: Net Profit Ratio: Higher the ratio is the better it is for the company because itgive idea to improve the efficiency, Lenovo is doing good in 2011 compare to 2010Return on capital employed: The higher the return on capital employed will bethe higher the return on capital the company will get, Lenovo is doing good in 2011Earnings Per Share: measures the profitability of a firm on per share basis
  12. 12. THANK YOU

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