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Ratio Analysis• Ratio-analysis means the process ofcomputing, determining and presenting the relationshipof related items and groups of items of the financialstatements. They provide in a summarized andconcise form of fairly good idea about the financialposition of a unit. They are important tools for financialanalysis.• Widely used tool of financial analysis• Make related information comparable• A ratio can be expressed as percentage, fraction orproportion.
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Three types of comparisons•Trend Analysis•Inter-firm comparisons•Comparisons with standards or industryaverage
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DEBTORS TURNOVER RATIO : This is also called DebtorsVelocity or Average Collection Period or Period of Credit given .(Average Debtors/Sales ) x 365 for days (52 for weeks & 12 for months)CREDITORS TURNOVER RATIO : This is also called CreditorsVelocity Ratio, which determines the creditor payment period.(Average Creditors/Purchases)x365 for days (52 for weeks & 12 for months)
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STOCK/INVENTORY TURNOVER RATIO : (Average Inventory/Sales) x 365 for days (Average Inventory/Sales) x 52 for weeks (Average Inventory/Sales) x 12 for monthsAverage Inventory or Stocks = (Opening Stock + Closing Stock) ----------------------------------------- 2This ratio indicates the number of times the inventory isrotated during the relevant accounting period
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Capital Structure RatioThe capital structure is how a firm finances its overalloperations and growth by using different sources offunds.The important Capital structure Ratios are as under:-1. Debt-to-equity ratio It is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. Shows the extent to which shareholders equity can fulfill a companys obligations to creditors in the event of a liquidation.
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Debt-to-Equity Ratio-: Debt / EquityWhere-:Debt=Long term debt +Debentures +Mortgage Loans +Outstanding Interest On Loans and debenture.Equity=Equity Share Capital(Paid up)+Preference ShareCapital(Paid up)+Reserve And Surplus –AccumulatedLossesNote-Equity is also known as net worth or share holder’sfund or Proprietor’s fund.
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Current Ratio : It is the relationship betweenthe current assets and current liabilities of aconcern.Current Ratio = Current Assets/CurrentLiabilitiesIf the Current Assets and Current Liabilities of aconcern are Rs.4,00,000 and Rs.2,00,000respectively, then the Current Ratio will be :Rs.4,00,000/Rs.2,00,000 = 2 : 1The ideal Current Ratio preferred by Banksis1.33 : 1
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ACID TEST or QUICK RATIO : It is the ratio between QuickCurrent Assets and Current Liabilities. The should be at leastequal to 1.Quick Current Assets : Cash/Bank Balances + Receivables up to 6months + Quickly realizable securities such as Govt. Securities or quicklymarketable/quoted shares and Bank Fixed DepositsAcid Test or Quick Ratio = Quick Current Assets/Current LiabilitiesExample :Cash 50,000Debtors 1,00,000Inventories 1,50,000Total Current Assets 3,00,000Current Liabilities 1,00,000Current Ratio = > 3,00,000/1,00,000 = 3 : 1Quick Ratio = > 1,50,000/1,00,000 = 1.5 : 1
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