ratio analysis

1. RATIO ANALYSIUS
SUBJECT:-financial management
BY:-MAYURI,KAPIL,SUNAYNA,NIPUN,ANJALI
MBA 1 YEAR

2. INTRODUCTION,TYPES
 Ratio analysius is a tool used by manager for analyusius of financial
statement
 Ratio analysis involves methods of calculating and interpreting financial
ratios to assess a firm’s financial condition and performance
 It is of interest to shareholders, creditors, and the firm’s own
management.
 TYPES OF RATIO
 LIQUIDITY RATIO
 PRFITABILITY RATIO
 SOLVENCY RATIO
 TURNOVER RATIO

3. Using Financial Ratios
Cautions for Doing Ratio Analysis
Ratios must be considered together; a single ratio by itself means
relatively little.
 • Financial statements that are being compared should be dated at
the same point in time.
 • Use audited financial statements when possible.
 • The financial data being compared should have been developed in
the same way. • Be wary of inflation distortions.

4. 1)LIQUIDITY RATIO/SHORT
TERM/SOLVENCY RATIO
 Liquidity: High liquidity means a company has the ability to meet
its short-term obligations.
 Liquidity ratio expresses a company’s ability to repay short-term
creditors out of its total cash. The liquidity ratio is the result of
dividing the total cash by short-term borrowings. It shows the
number of times short-term liabilities are covered by cash. If the
value is greater than 1.00, it means it is fully covered.
 Reserve requirement – a bank regulation that sets the minimum
reserves each bank must hold.

5. Liquidity Ratios – Current Ratio
 Acid Ratio Analysis • Liquidity Ratios – Current
Ratio
 Current ratio = total current assets
total current liabilities
 Current ratio analysius =$1,233,000 = 1.97
$620,000Test
 a ratio used to determine the liquidity of a business entity.
 The formula is the following
 LR = liquid assets / short-term liabilities

6. Liquidity Ratios – Current Ratio – Quick
Ratio
 Quick ratio = Total Current Assets - Inventory
total current liabilities
 Quick ratio = $1,233,000 - $289,000 = 1.51
$620,000

7. Liquidity Ratios • Activity Ratios –
Inventory Turnover
 Inventory Turnover = Cost of Goods Sold
Inventory
• Inventory Turnover = $2,088,000 = 7.2
$289,000

8. Liquidity Ratios • Activity Ratios –
Average Collection Period
ACP = Accounts Receivable
Net Sales/360
ACP = $503,000 = 58.9 days
$3,074,000/360

9. Liquidity Ratios • Activity Ratios –
Average Payment Period
 APP = Accounts Payable
Annual Purchases/360
 APP = $382,000 = 94.1 days
(.70 x $2,088,000)/360

10. Liquidity Ratios • Activity Ratios – Total
Asset Turnover
 Total Asset Turnover = Net Sales
Total Assets
Total Asset Turnover = $3,074,000 = .85
$3,579,000

11. Liquidity Ratios • Activity Ratios
Debt Ratio
•
 Debt Ratio = Total Liabilities
 Total Assets
Debt Ratio = $1,643,000
$3,597,000 = 45.7%

12. • Liquidity Ratios • Activity Ratios • Leverage
Ratios – Times Interest Earned Ratio
 Times Interest Earned = EBIT
Interest
Times Interest Earned = $418,000
$93,000 = 4.5

13. Liquidity Ratios • Activity Ratios • Leverage
Ratios – Fixed-Payment coverage Ratio (FPCR)
 FPCR = EBIT + Lease Pymts
Interest + Lease Pymts + {(Princ Pymts + PSD) x
[1/(1-t)]}
 FPCR = $418,000 + $35,000 = 1.9
$93,000 + $35,000 + {($71,000 + $10,000) x [1/(1-
.29)]}

14. • Liquidity Ratios • Activity Ratios •
Leverage Ratios. Gross Profit Margin
 GPM = Gross Profit
Net Sales
Profitability Ratios – Gross Profit Margin GPM =
$986,000
$3,074,000 = 32.1%

15. • Liquidity Ratios • Activity Ratios • Leverage
Ratios • Profitability Ratios – Operating Profit
Margin
 OPM = EBIt
Net Sales Ratio Analysis
 OPM = $418,000
$3,074,000 = 13.6%

16. Liquidity Ratios • Activity Ratios • Leverage
Ratios • Profitability Ratios – Net Profit
Margin
 NPM = Net Profits After Taxes
Net Sales
 NPM = $231,000
$3,074,000 = 7.5%

17. Liquidity Ratios • Activity Ratios • Leverage
Ratios • Profitability Ratios – Return on Total
Assets (ROA)
 ROA = Net Profits After Taxes
Total Assets
 ROA = $231,000
$3,597,000 = 6.4%

18. • Liquidity Ratios • Activity Ratios • Leverage
Ratios Profitability Ratios – Return on Equity
(ROE
 ROE = Net Profits After Taxes
Stockholders Equity
 ROE = $231,000
$1,954,000 = 11.8%

19. Liquidity Ratios • Activity Ratios • Leverage
Ratios Profitability Ratios – Earnings Per Share
(EPS)
 EPS = Earnings Available to Common Stockholders
Number of Shares Outstanding
 EPS = $221,000
76,262 = $2.90

20. Liquidity Ratios • Activity Ratios • Leverage
Ratios Profitability Ratios – Price Earnings
(P/E) Ratio
 P/E = Market Price Per Share of Common Stock
Earnings Per Share
 P/E = $32.25
$2.90 = 11.1

21. Conclusion:-
 Part of your assignment in this course is to perform a ratio analysis of your
company.
 • Be sure to consider each ratio, each ratio within a category of ratios, and
how the ratios relate to each other collectively across categories.
 • Be sure to consider both the trend over time and the comparison to the
industry.
 • The analysis should be performed on both the historical financial statements
as well as on the pro formas.
 • Also try to obtain industry figures for all historical periods.