Ratio analysis enlarged version-b.v.raghunandan


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Ratio analysis enlarged version-b.v.raghunandan

  1. 1. Ratio Analysis B.V.Raghunandan, SVS College, Bantwal Page 1
  2. 2. DefinitionRatio Analysis is a financial technique ofmeasuring the strength and weakness ofan organisation out of informationavailable from financial reportsspecifically from the Balance Sheet andIncome Statement Page 2
  3. 3. Advantages• Measuring the efficiency of organisations• Measuring the liquidity position of the companies• Measuring the capacity of companies to borrow in the future• Understanding the overall financial position of organisations• Estimating the solvency of the companies• Helping in forecasting Page 3
  4. 4. Disadvantages• Only quantitative tools• Manipulation of accounting figures• Too many analytical tools lead to varied interpretation• Based on past data• Same data may be interpreted in different ways• Vested interests• Measuring the changes in price levels• Accounting policies have the impact• Only symptoms and not cure Page 4
  5. 5. A] Liquidity Ratios B] Solvency Ratios C] Activity Ratios D] Profitability RatiosDifferent Ratios E] Shareholders’Page 5 Ratios
  6. 6. A] Liquidity Ratio CurrentAssets• Current Ratio = CurrentLiabilities CurrentAss ets Clo sin gStock• Acid Test Ratio= CurrentLia bility Sales• Working Capital Turnover Ratio = WorkingCapital Page 6
  7. 7. 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 Page 7
  8. 8. 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 Page 8
  9. 9. Measurement of Current Ratio CurrentAssetsCurrent Ratio = CurrentLiabilities Page 9
  10. 10. Precautions to be Taken for Current Ratio• Proper Valuation of assets and • Advance payments for fixed liabilities assets should be excluded• Provision for Bad Debts • Instalment payments are part• Useless Inventory Deducted of current liabilities• Loose Tools are not current • Bank overdraft and cash credit assets are part of current liabilities• Short Term Investment can be • Bills Receivables are a part of part of current assets current assets• Long Term investment like • Bank Loans should not be capital of subsidiary is not treated as current liabilities current asset • Advances to Employees or Utilities are to be treated as current assets Page 10
  11. 11. 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 Page 11
  12. 12. Measurement of Acid Test Ratio QuickAssetsAcid Test Ratio = QuickLiabilities Page 12
  13. 13. 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 Page 13
  14. 14. Measurement of Working Capital Turnover Ratio NetSales AverageWor kingCapital Page 14
  15. 15. 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 Page 15
  16. 16. Types of Solvency Ratios1) Interest Coverage Ratio2) Debt Ratio3) Debt-Equity Ratio4) Capital Gearing Ratio5) Proprietary Ratio Page 16
  17. 17. 1.Interest Coverage Ratio Pr ofitBefore Interest & Tax InterestonLong TermDebt Page 17
  18. 18. 2. Debt Ratio (Debt to Total Funds ratio) LTDebt LTDebt ShareholdersFunds Page 18
  19. 19. 3) Debt-Equity Ratio LongTermDebtShareholdersFunds Page 19
  20. 20. 4) Capital Gearing RatioFixedIncomeBearingSecurities EquityShareholdersFund Page 20
  21. 21. 5) Proprietary RatioShareholdersFunds TotalAssets Page 21
  22. 22. C] Activity Ratios1) Inventory Turnover Ratio2) Debtors Turnover Ratio3) Average Collection Period4) Fixed Assets Turnover Ratio5) Total Assets Turnover Ratio6) Capital Turnover Ratio Page 22
  23. 23. 1) Inventory Turnover Ratio CostofGood sSold CostofGood sSold AverageStock AverageStock Page 23
  24. 24. 2) Debtor Turnover Ratio CreditSalesAverageDebtors Page 24
  25. 25. 3) Average Collection Period365(day sin aYear) / 12(months) DebtorTurnoverRatio Page 25
  26. 26. 4) Fixed Assets Turnover Ratio NetSales NetFixedAssets Page 26
  27. 27. 5) Total Assets Turnover Ratio NetSales TotalAssets Page 27
  28. 28. 6) Capital Turnover Ratio NetSales Long TermFunds Page 28
  29. 29. D] Profitability Ratios1) Net Profit Ratio2) Gross Profit Ratio3) Return on Total Assets4) Return on Equity Page 29
  30. 30. 1) Net Profit RatioPr ofitAfterTax X 100 NetSales Page 30
  31. 31. 2) Gross Profit Ratio Gross Pr ofit X 100 Sales Page 31
  32. 32. 3) Return on Total Assets Pr ofitAfterTax X 100 TotalAssets Page 32
  33. 33. 4) Return on Equity Pr ofitAfterT ax X 100Shareholders Funds Page 33
  34. 34. E) Shareholders‘ Ratio1) Earning per Share (EPS)2) Price-Earning Ratio (PE Ratio)3) Dividend Yield Ratio4) Dividend Pay-out Ratio Page 34
  35. 35. 1) Earning per Share Pr ofitAfterT axNumberofEq uityShares Page 35
  36. 36. 2) PE RatioMar ker Pr iceperShare EarningperShare Page 36
  37. 37. 3) Dividend Yield Ratio DividendperShare X 100Market Pr iceperShare Page 37
  38. 38. 4) Dividend Pay-out RatioDividendperShare X 100EarningperShare Page 38
  39. 39. THANK YOU Page 39