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Ratios of Profitability, Liquidity and other ratios.

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- 1. RATIO ANALYSIS INTRODUCTION The Financial Analyst needs certain yardstick to evaluate the efficiency and performance of business units. The most frequently used yardstick is Ratio Analysis. It is a tool, which studies the numerical or quantitative relationship between two variables or items, which are related. This is because no useful purposes will be served if ratios are calculated between two figures, which are not at all related to each other. It is difficult to compare any data unless simplified. The ratios are simplification of huge mass of data and are easy to compare. Ratios Analysis may be expressed in any of the three ways: Rate. Proportion and Percentage. The different types of ratios are as follows: Solvency or Financial Ratios : It is used to find out the short term and long term financial position of the concern. The norm varies as per the ratio. Turnover Ratios : It measures the effectiveness of the business. Higher is the better. Profitability Ratios : Profitability ratios are prepared to find out the overall efficiency of the business. The higher the ratio better is the company’s position. SOLVENCY OR FINANCIAL RATIOS Solvency or financial ratios include all ratios which express financial position of the concern.
- 2. SHORT TERM SOLVENCY RATIOS OR LIQUIDITY RATIOS Current Ratio :The ratio of current assets to current liabilities is called Current Ratio. It indicates the ability of a concern to meet its current obligations as and when they are due for payment. It may be expressed as: Current Ratio: Current Assets Current Liabilities Years Current Assets (Rs.) 2007-08 4487710 2008-09 4900817 2009-10 4426769 Current Liabilities (Rs.) 1441833 3416993 2747739 2.97:1 1.43:1 1.61:1 Significance: The ideal ratio is 2:1. High current ratio indicates dependence on long term sources of raising fund. Lesser ratio indicates inadequate current assets to meet current liabilities.
- 3. 3.5 3.11 3 2.5 2 1.61 1.43 1.5 1 0.5 0 2007-08 2008-09 2009-2010 Current Ratio Liquid Ratio:This ratio is also called ‘Quick’ or ‘Acid test ratio’. It is calculated by comparing the quick assets with current liabilities. It may be expressed as: Liquid Ratio = Liquid Assets Current Liabilities Year 2007-08 2008-09 2009-10 Liquid Assets (Rs.) 4402845 4814166 4338756 Current Liabilities (Rs.) 1481833 3416993 2747739 1.41 1.58 2.97
- 4. Significance: The ideal ratio is 1:1. Comparison of quick ratio with current ratio indicates the inventory hold ups. 3.50 3.00 2.50 2.00 1.50 2.97 1.00 1.41 1.58 0.50 0.00 2007-08 2008-09 Liquid Ratio 2009-10
- 5. Absolute Ratio : It is modified form of Liquid Ratio. The relationship of absolute liquid assets to liquid liabilities is known as Absolute liquid ratio. This ratio is also called as Super Quick ratio. This is calculated as : Liquid ratio = Absolute Liquid assets Liquid liabilities Years Absolute liquid 2007-08 4487710 2008-09 4900817 2009-10 4426769 3005877 3416993 2747739 Assets (Rs.) Liquid liabilities (Rs.) 1.49 1.43 1.61 Significance : The quick ratio/acid test ratio is very useful in measuring the liquidity position of a firm. It measures the firm's capacity to pay off current obligations immediately and is more rigorous test of liquidity than the current ratio. A standard of 0.5:1 absolute liquidity ratio is considered an acceptable norm. As a convention, generally, a quick ratio of "one to one" (1:1) is considered to be satisfactory.
- 6. R U P E E S I N C R O R ES 1.65 Asolute Liquid Ratio 1.61 1.60 1.55 1.50 1.49 1.43 1.45 1.40 1.35 1.30 2007-08 2008-09 2009-2010 YEARS Asolute Liquid Ratio SOLVENCY RATIOS Debt Equity Ratio:A measure of a company's financial leverage. Debt/equity ratio is equal to long- term debt divided by common shareholders' equity. The data from the prior fiscal year is used in the calculation. It is the relationship between borrower’s fund (Debt) and Owner’s Capital (equity).
- 7. Debt Equity Ratio : Long term debts Shareholders Fund Year 2007-08 2008-09 Long term debts (Rs.) 103835 38255 38255 Shareholders Funds (Rs.) 818412 1038071 1696183 0.13 0.04 2009-10 0.02 Significance: It is important to realize that if the ratio is greater than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily financed through equity. 0.14 R U P E E 0.13 0.12 0.1 S 0.08 I N 0.06 C R O R E S 0.04 0.04 0.02 0.02 0 2007-08 2008-09 2009-2010 YEARS Fixed Assets Ratio
- 8. Proprietary Ratio:This ratio expresses the relationship between the proprietor’s funds and the total tangible assets. It may be expressed as: Proprietary ratio: Shareholder’s funds Total tangible asset Years Shareholder’s funds (Rs.) i 2008-09 1038071 2009-10 1696183 1925865 1854487 1854487 0.42 Total tangible assets (Rs.) S 2007-08 818412 0.56 0.86 significance: This ratio shows the general soundness of the company. A high ratio indicates safety to the creditors and a low ratio shows greater risk to the creditors.
- 9. Proprietary ratio 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2006-07 2007-08 2008-09 TURNOVER RATIOS(Activity Ratios) These ratios are also called ‘performance ratios’ or ‘activity ratios’. These ratios highlight the operational efficiency of the business concern. Operating Profit Ratio:Operating net profit ratio is calculated by dividing the operating net profit by sales. This ratio helps in determining the ability of the management in running the business. Operating Profit Ratio = Operating Profit x 100 Sales
- 10. Years Operating Profit (Rs.) 2008-09 490192 2009-10 1032741 13185718 8746585 13506451 3.98 Sales (Rs.) 2007-08 525331 5.60 7.65 Significance: This ratio indicates whether Investment in Inventories is efficiently used or not. Higher ratio indicates brisk sales. Lower ratio indicates blocking of funds in Inventory. 9 8 7 6 5 4 3 2 1 0 2007-08 2008-09 2009-10 Operating Profit Ratio Fixed assets turnover ratio:This ratio determines efficiency of utilization of fixed assets and profitability of a business concern. Fixed Assets Turnover Ratio: Sales/Cost of Sales
- 11. Net fixed assets Years Sales (Rs.) Net fixed assets (Rs.) 2007-08 13815718 444032 2008-09 8746585 370663 2009-10 13506451 299346 31.11 23.60 45.12 Significance: Higher the ratio more is the efficiency in utilization of fixed assets. A lower ratio is the indication of under utilization of fixed assets. Fixed assets turnover ratio 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2006-07 2007-08 Fixed assets turnover ratio Capital turnover ratio:- 2008-09
- 12. Managerial efficiency is also calculated by establishing the relationship between Cost of Sales/Sales with the amount of Capital invested in the business. It may be expressed as follows: Capital Turnover Ratio: Sales Capital employed Years Sales (Rs.) 2007-08 2008-09 2009-10 8746585 13506451 818412 1038071 1696183 16.88 Capital employed 13815718 8.43 7.96 (Rs.) Significance: Higher ratio indicates higher efficiency and lower ratio indicates ineffective usage of Capital.
- 13. 0.3 0.25 0.2 0.15 0.1 0.05 0 2006-07 2007-08 2008-09 Capital turnover ratio PROFITABILITY RATIOS Ability to make maximum profit from optimum utilization of resources by a business concern is termed as ‘profitability’. Profitability depends on sales, costs and utilization of resources. The following are the various ratios used to analyze profitability. Gross profit ratio:This ratio is also known as Gross margin/Trading Margin ratio. Gross profit ratio indicates the difference between sales and direct costs. Gross profit ratio explains the relationship between gross profit and net sales. Gross Profit Ratio: Gross Profit x 100 Net Sales Years 2007-08 2008-09 2009-10
- 14. Gross profit (Rs.) 3026701 1502741 6265422 Net sales (Rs.) 13818218 8476585 13506451 21.90 17.18 46.39 Significance: Higher ratio indicates higher profitability. Lower ratio indicates lesser profitability. 90 80 70 60 50 40 30 20 10 0 2006-07 2007-08 Gross profit ratio 2008-09
- 15. Net profit ratio:This ratio is also called net profit to sales ratio. It is a measure of management’s efficiency in operating the business successfully from the owner’s point of view. It indicates the return on shareholder’s investments. Net Profit Ratio: Net Profit after tax x 100 Net sales Years 2008-09 2009-10 413157 384373 950450 13815718 8746585 13506451 2.99 Net profit after tax (Rs.) Net sales (Rs.) 2007-08 4.39 7.04 Significance: Higher the ratio better is the operational efficiency of the business concern.
- 16. 8 7 6 5 4 3 2 1 0 2007-08 7.04 4.39 2.99 2008-09 2009-10

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