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  • 1. Ratio-analysis means the process of computing, determining and presenting the relationship of related items and groups of items of the financial statements. They provide in a summarized and concise form of fairly good idea about the financial position of a unit. They are important tools for financial analysis.
  • 2.  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
  • 3.        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
  • 4.     Based on Historical Data No Standard Interpretation Ignoring Qualitative Aspects Difference in Accounting Methods make comparison difficult
  • 5. 1) Liquidity Ratios 2) Profitability Ratios 3) Solvency Ratios 4) Activity Ratios 5) Shareholders' Ratios
  • 6. LIABILITIES ASSETS NET WORTH/EQUITY/OWNED FUNDS Share Capital/Partner’s Capital/Paid up Capital/ Owners Funds Reserves ( General, Capital, Revaluation & Other Reserves) Credit Balance in P&L A/c FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIES Original Value Less Depreciation Net Value or Book Value or Written down value LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions) Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. assets which are not current or fixed in nature CURRENT LIABILTIES Bank Working Capital Limits such as /Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or deposits Expenses payable & provisions against various items CURRENT ASSETS : Cash & Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks & inventory (RM,SIP,FG) Stores & Spares, Advance Payment of Taxes, Prepaid expenses, Loans and Advances recoverable within 12 months INTANGIBLE ASSETS Patent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses
  • 7.  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. 
  • 8.    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
  • 9.     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 indicator of cash management
  • 10. It is the ratio between cash and current liabilities Means Availability of cash for meeting current liabilities.  Cash Ratio= Cash in hand + cash at bank Current Liabilities
  • 11.    These ratio shows short term financial soundness of the company. The Financial position is supposed to very sound, if the current ratio is more than 2:1. Higher ratio shows the better capacity of the business to meet its current obligation.
  • 12.     1) 2) 3) 4) Net Profit Ratio Gross Profit Ratio Return on Total Assets Return on Equity