Analysis of different types of ratios

1. RATIO ANALYSIS

2. Ratio analysis is a systematic use of ratios to interpret the
performance and status of the firms. It is used to compare the risk
and return relationship of firms of different sizes. It is also used to
interpret the financial statement so that the strength and weakness
of a firm as well as its historical performance and current conditions
can be determined.
Introduction

3. Liquidity Ratios
Capital Structure Ratios
Profitability Ratios
Efficiency ratios
Integrated Analysis Ratios
Growth Ratios
Types of Ratios

4. Liquidity ratio measures the ability of a firm to meet its short term obligations.
 Net working capital : It represents the excess of current assets over current
liabilities.
 Current ratio : The current ratio of total current assets to total current liabilities.
 Acid test ratio : It is the ratio between quick current assets and current liabilities
calculated by dividing the quick assets by the current liabilities.
 Turnover ratio : The ratio to measure the liquidity of the firm to determine how quickly
current assets are converted into cash.
 Defensive Interval ratio : Is the ratio between quick assets and projected daily cash
requirement.
 Cash flow from operations : Cash-flow from operation ratio measures liquidity of a firm
by comparing actual cash flows from operations (in lieu of current and potential cash
inflows from current assets such as inventory and debtors)
with current liability.
Liquidity Ratio

5. Capital structure or leverage ratios throw light on the long-term solvency of a firm.
 There are two aspects of the long-term solvency of a firm:
(i) Ability to repay the principal when due, and
(ii) Regular payment of the interest
 Accordingly, there are two different types of leverage ratios.
First type: These ratios are computed Second type : These ratios are computed
from the balance sheet the income statement
a) Debt-equity ratio a) Interest coverage ratio
b) Debt-assets ratio b) Dividend coverage ratio
c) Equity-assets ratio
Capital structure ratio

6. Profitability ratios can be computed either from sales or
investment
Profitability Ratio
Profitability ratio related to
investment
Profitability ratio related to
sales
Return on investment Profit Margin
Return on shareholder’s
equity
Expense ratio

7. Profit Margin – The profit margin measures the relationship between profit and sales. There
are two types of profit margin gross profit and net profit margin
Gross profit margin – It is also known as gross margin. It is also calculated by diving gross
profit by sales.
Net profit margin -This ratio measures the relationship between net profit and sales of the
firm
Depending on the concept the net profit employed calculated in 3 ways.
 Operating profit ratio
 Pre-tax profit ratio
 Net Profit ratio
Expense Ratio : Another profitability ratio to sales is the expenses ratio. It is calculated by
dividing expenses by sales.
 Cost of goods sold ratio
 Operating expense ratio
 Administrative ratio
 Operating ratio

8. This ratio measures the speed which various assets are converted into sales or
cash. These are also called as efficiency ratio or asset utilization ratio.
 Inventory turnover – It measures the activity of inventory of a firm, the speed
with which inventory is sold.
Inventory turnover = Cost of goods sold/ Average inventory
 Receivable turnover ratio – This is second major activity ratio and closely
related to average collection period.It shows how quickly receivable or debtors
are converted into cash
debtors turnover = Credit sales/ Average debtors +Average bills
receivable
 Asset Turnover – This ratio indicates the efficiency with which firm uses all its
assets to generate sales.
Asset turnover = Cost of goods sold/Average total assets
Activity Ratio

9. This ratio measures the rate at which the firm should grow.The firm’s growth rate is
higher when external finances are used.It is lower when it uses internally generated
funds.
Accordingly there are two types of growth rated.
 Internal Growth Rate – The IGR is the maximum rate at which a firm can grow
without external financing of any kind. To determine the IGR the following
assumptions are made.
 There is an increase in assets of the firm in proportion to the sales
 The firm has a target dividend payout ratio which it wants to maintain.
 The firm wants to grow at a rate which is warranted by its retention.
 Sustainable growth rate – This measures the maximum rate of growth using both
internal and external sources of financing without increasing its financial leverage.
Growth Ratio

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