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# Ratio analysis

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### Ratio analysis

1. 1. Accounting RatiosAccounting Ratios are the relationship betweentwo amounts or two group of amounts given infinancial statements(Income statement/Profit &Loss A/c & Position Statements/Balance Sheet) . Itis a process of simplify the complex amounts it ishelpful to understand the quantitative andqualitative relations of items shown in financialstatements. It is a significant tool of managerialand financial analysis and decision making .It isalso helpful in forecasting of growth of profits andwealth .
2. 2. In order to compute a meaningful ratios, theremust be a significant relation between the twofigures . A ratio focuses attention on a relationwhich is significant, but a full interpretation of theratio usually requires further investigation of theunderlying data. Ratios are an aid to analysis andinterpretation, they are not a substitute for soundthinking.
3. 3. Liquidity Ratios1.Current Ratio2. Liquid Ratio/Quick Ratio/Acid Test Ratio Profitability Ratio1. Gross profit Ratio2.Net Profit Ratio3.Return on Equity4.Return on Capital Employed/Total Investment5.Return on Total Assets
4. 4. Turnover Ratios1.inventry/Stock turnover ratio2.Fixed Asset turnover ratio3.Current Asset Turnover Ratio4.Working Assets Turnover Ratio Stability Ratios/Capital Ratios1.Debt Equity ratio2.Fixed Asset to Capital ratio
5. 5. On the basis of P/L A/C Or Income Statement1. Gross Profit Ratio Gross Profit × 100 Net sales (credit sale+cash)2. Net Profit Ratio Net profit ×100 Net sales3. Operating ratio Cost of goods sold + Op. exp. × 100 Net sales4. Expenses Ratio Particular expenses × 100 Net sales5. Stock or Inventory turnover Net sales Ratio Or Cost of goods sold Average Inventory Average stock = Opening +closing 2
6. 6. 6. Operating expenses ratio Operating expenses ×100 Net sales 7. Operating profit ratio Operating Profit×100 Net sales Operating profit = Gross Profit –operating expenses8. Interest coverage ratio PBIT (Profit before interest and terms) Interest on long term debts
7. 7. 1. Current Ratio Current Asset (2:1) Current liability2. Quick or Liquid Ratio Quick or Liquid Assets (1:1) Quick Liabilities Quick assets = Current – ( Closing Stock + Prepaid ) Quick liabilities = Current liabilities – Bank overdraft3. Proprietary Ratio (Net worth to Equity or share holder fund total asset ratio ) Total Assets or total equities Share holders fund = Eq. share capital + Reserve fund +reserve for dividend4. Fixed Asset Ratio ( Fixed Asset to Fixed Assets net worth ) Net worth or long term loans
8. 8. 5. Capital gearing Shareholders fund (Total ratio debts capital = Debentures + Total debts capital preference share capital) Share holder fund = Equity share capital+ Reserve fund + Reserve for dividend6. Debt equity Long term debt or ratio External equity Share holder eq. or fund Internal Equity7. Solvency Ratio Total assets (1:1) Total liability