2. INTRODUCTION,TYPES
Ratio analysius is a tool used by manager for analyusius of financial
statement
TYPES OF RATIO
LIQUIDITY RATIO
PRFITABILITY RATIO
SOLVENCY RATIO
TURNOVER RATIO
3. 1)LIQUIDITY RATIO/SHORT
TERM/SOLVENCY RATIO
:-to verify organization position to meet its short term debts
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.
Liquidity: High liquidity means a company has the ability to meet its short-term
obligations.
Reserve requirement – a bank regulation that sets the minimum reserves each bank
must hold.
Acid Test – a ratio used to determine the liquidity of a business entity.
The formula is the following
LR = liquid assets / short-term liabilities
4. Total Debt to Total Assets
The debt ratio is expressed as Total debt / Total assets.
The debt ratio measures the firm’s ability to repay long-term debt by indicating the
percentage of a company’s assets that are provided via debt.
Debt ratio = Total debt / Total assets.
The higher the ratio, the greater risk will be associated with the firm’s operation
Financial Ratios
Financial ratios quantify many aspects of a business and are an integral part of the financial
statement analysis. Financial ratios are categorized according to the financial aspect of the
business which the ratio measures.
Financial ratios allow for comparisons:
Between companies
Between industries
Between different time periods for one company
Between a single company and its industry average
5. Debt ratios
Debt: Debt ratio is an index of a business operation.
Debt ratios measure the firm’s ability to repay long-term debt. It is a financial ratio that indicates the
percentage of a company’s assets that are provided via debt. It is the ratio of total debt (the sum of
current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and
other assets such as ‘goodwill’).
Debt ratio = Total debt / Total assets
Or alternatively:
Debt ratio = Total liability / Total assets
imes-Interest-Earned Ratio
Times Interest Earned ratio (EBIT or EBITDA divided by total interest payable) measures a company’s
ability to honor its debt payments.
6. PROFITABILITY RATIOS
• (i) Gross Profit Ratio:
• This ratio tells gross margin on trading and is calculated as under:
•
• Higher the ratio, the better it is. A low ratio indicates unfavorable
trends in the form of reduction in selling prices not accompanied
by proportionate decrease in cost of goods or increase in cost of
production.
7. Operating Ratio:
This ratio indicates the proportion that the cost of sales bears to sales. Cost of
sales includes direct cost of goods sold as well as other operating expenses,
administration, selling and distribution expenses which have matching
relationship with sales.
It is calculated as follows:
Lower the ratio, the better it is
(iii) Expenses Ratios:-
These are calculated to ascertain the relationship that exists
between operating expenses and volume of sales.
