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R C F,Prashant V V


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R C F,Prashant V V

  1. 1. Presentation on Ratio, Fund Flow Statement, Cash Flow Statement <ul><li>Subject:- Financial account </li></ul><ul><li>Subject cod:- 104 </li></ul><ul><li>Submitted to:- Prof. Keshave Kulkarni </li></ul><ul><li>Submitted By:- </li></ul><ul><li>Prashant. v .v </li></ul>
  2. 2. Financial Ratio Analysis
  3. 3. Meaning of Ratio <ul><li>‘ A ratio is defined as the indicated quotient of two mathematical expressions and also as the expression of relationship between two or more things’ </li></ul>
  4. 4. Users of Financial Analysis <ul><li>Trade creditors </li></ul><ul><li>Suppliers of long term debt </li></ul><ul><li>Investors </li></ul><ul><li>Management </li></ul>
  5. 5. Types of Ratios <ul><li>Liquidity ratios </li></ul><ul><li>Leverage ratios </li></ul><ul><li>Activity ratios </li></ul><ul><li>Profitability ratios </li></ul>
  6. 6. Liquidity Ratio <ul><li>It is not an exaggeration but a fact that liquidity is very essential for very survival of organization . Hence there is a need for evaluating the liquidity position to find out whether the company is capable of paying all its current obligations </li></ul>
  7. 7. 1. Liquidity ratios <ul><li>The ratios which are commonly used for this purpose are _ </li></ul><ul><li>Current ratio </li></ul><ul><li>Quick ratio </li></ul><ul><li>Cash ratio </li></ul><ul><li>Interval measure </li></ul>
  8. 8. Current Ratio <ul><li>As the working capital is equivalent to the difference between current asset and current liabilities, or as the working capital is the excess of current asset over current liabilities this ratio is also called working capital ratio. </li></ul>
  9. 9. Current Ratio <ul><li>Current ratio = Total current assets </li></ul><ul><li>Total current liabilities </li></ul><ul><li>Current assets include- cash, cash at bank, debtors,B.R. inventories,marketable securities,prepaid expenses etc … </li></ul>
  10. 10. Current ratio(contd) <ul><li>Current liabilities include- S’ creditors, bills payables, outstanding expenses,short term bank loan,income tax liabilities,long term loan repayable during the current year. </li></ul>
  11. 11. Current ratio <ul><li>Interpretation of the current ratio(2:1) </li></ul><ul><li>It represents margin of safety </li></ul><ul><li>It is a test of quantity and not quality </li></ul><ul><li>Should not be too low or high </li></ul><ul><li>Should be evaluated in in the light of other factors (cash budget, cash and fund flow statements, turnover ratio etc) </li></ul><ul><li>It is a crude and quick method </li></ul>
  12. 12. Quick Ratio <ul><li>It is also called Liquid Ratio, Acid-test Ratio, Nearer money Ratio </li></ul>
  13. 13. Quick Ratio <ul><li>Quick ratio = Current assets – Inventories </li></ul><ul><li>Current liabilities </li></ul>
  14. 14. Quick ratio <ul><li>Interpretation of quick ratio(1:1) </li></ul><ul><li>Establishes the relationship between more liquid current assets and the total current liabilities </li></ul><ul><li>Quality of debtors should be considered </li></ul>
  15. 15. Cash Ratio <ul><li>It is also called Absolute Liquidity Ratio or </li></ul><ul><li>Super-Quick Ratio </li></ul><ul><li>Cash Ratio = Cash + Marketable securities </li></ul><ul><li>Current liabilities </li></ul>
  16. 16. Interval Measure <ul><li>Interval Measure = Current assets- Inventory </li></ul><ul><li> Average daily operating expenses </li></ul>
  17. 17. 2 .Leverage Ratio (Capital Structure Ratio) <ul><li>They help to judge the long term financial position of the firm. </li></ul><ul><li>These ratio indicate the mix of funds provided by owner and lender. </li></ul><ul><li>In order to assess the long term financial soundness </li></ul><ul><li>It is necessary to find out whether the organization is able to meet its long term financial commitments whenever they become due and whether the organization is able to maintain or increase the market value of its shares. </li></ul>
  18. 18. Leverage Ratio <ul><li>In simple it is very much essential to fiind out whether the company is capable of : </li></ul><ul><ul><ul><li>Paying back the principal amt soon after the stipulated period as per the agreement. </li></ul></ul></ul><ul><ul><ul><li>Paying the int on principal amt promptly and periodically as per the tem and conditions to which the company has agreed at the time of raising capital. </li></ul></ul></ul>
  19. 19. Implication of Debt / Equity <ul><li>Debt is more risky as compared to equity. </li></ul><ul><li>However use of debt is advantageous to share holders, in two ways </li></ul><ul><li>(a) Control with limited stake. </li></ul><ul><li>(b) Trading on equity. </li></ul><ul><li>High debt burden will make firm difficult to further lone. </li></ul><ul><li>Owner funds is treated as margin of safety. </li></ul>
  20. 20. Debt ratio <ul><li>It is used to analyse the long term solvency of a firm. </li></ul><ul><li>It indicates the proportion of interest bearing debt in the Capital Structure. </li></ul>
  21. 21. Debt Equity Ratio <ul><li>Debt Equity Ratio = Total Debt </li></ul><ul><li>net worth </li></ul>
  22. 22. Capital Employed to Net Worth Ratio <ul><li>CE to NW Ratio = Capital Employed </li></ul><ul><li> Net Worth </li></ul>
  23. 23. Other Debt Ratio <ul><li>Total Debt Ratio = Total Liability </li></ul><ul><li> Total Assets </li></ul>
  24. 24. Implication of Debt Ratio <ul><li>High Debt Ratio indicates the following </li></ul><ul><li>Claim of creditors is greater than owners </li></ul><ul><li>It leads to inflexibility in firms operation due to interference </li></ul><ul><li>Further borrowing of funds becomes difficult </li></ul><ul><li>The company will suffer during the period of low profit </li></ul>
  25. 25. Implication of Debt Ratio (Contd.) <ul><li>A low Debt Ratio indicates the following. </li></ul><ul><li>Greater claim of owners than creditors. </li></ul><ul><li>Creditors find it a safe situation. </li></ul><ul><li>From shareholders’ view there is still scope for trading on equity. </li></ul>
  26. 26. Treatment of Preference share capital ? <ul><li>Interest Coverage Ratio </li></ul><ul><li>When the organization asks for loan, the lender wishes to know whether the organization is capable of earning adequate amount of profit to pay the int periodically </li></ul><ul><li>The int coverage ratio also known as Debt service Ratio or Fixed charges Coverage Ratio </li></ul>
  27. 27. Interest Coverage Ratio <ul><li>Interest coverage ratio=Net profit before int & income tax *100 </li></ul><ul><li>Fixed Interest charges </li></ul>
  28. 28. Implication of interest coverage ratio <ul><li>It shows the number of times interest charges are covered by the funds available for their payment </li></ul><ul><li>In other words it indicates the extent to which a fall in the EBIT is tolerable </li></ul><ul><li>A high ratio is a safe indication to the creditors however reflects unused debt capacity. </li></ul><ul><li>A low ratio is a danger signal indicating excessive debt and interest burden </li></ul>
  29. 29. Dividend Coverage Ratio <ul><li>Dividend coverage ratio = Net profit after int& tax but before Dividend Preference dividend </li></ul><ul><li>Implication of dividend coverage ratio </li></ul><ul><li>It reveals the margin of safety to the preference shareholders. </li></ul><ul><li>The higher the ratio, the better it is to the preference shareholders </li></ul>
  30. 30. 3.Activity Ratio <ul><li>Funds of creditors and owners are invested in various assets to generate sales. </li></ul><ul><li>The efficient management of these assets leads to larger sale. </li></ul><ul><li>Activity ratio will indicate the efficiency with which the assets are being used. </li></ul><ul><li>It indicates the speed with which the assets are converted into sales </li></ul>
  31. 31. Activity or Turnover Ratio <ul><li>The important ratios used for this purpose are_ </li></ul><ul><li>Stock Turnover or Inventory Ratio. </li></ul><ul><li>Debtor’s Turnover Ratio. </li></ul><ul><li>Creditors Turnover Ratio. </li></ul><ul><li>Fixed Asset turnover Ratio. </li></ul>
  32. 32. Inventory Turnover ratio <ul><li>Inventory turnover = Cost of goods sold </li></ul><ul><li> Average inventory </li></ul><ul><li>or </li></ul><ul><li>= Sales </li></ul><ul><li> Inventory </li></ul>
  33. 33. Average Collection period <ul><li>Average collection = 365 or 12 . </li></ul><ul><li>Period Debtor TO </li></ul>
  34. 34. Implication of Debtors TO ratio <ul><li>It shows how quickly the receivables and debtors are converted into cash </li></ul><ul><li>It is thus a test of liquidity of the debtors of the firm </li></ul><ul><li>The average collection period shows the number of days for which the debt is outstanding. </li></ul>
  35. 35. Implication of Debtors TO Ratio(contd) <ul><li>A long collection period implies a very liberal and inefficient credit and collection performance. </li></ul><ul><li>Which in turn means delay in cash collection and there by effects the liquidity position of the firm. </li></ul><ul><li>A long collection period also increases the chances of bad debts </li></ul>
  36. 36. Implication of Debtors TO ratio(contd) <ul><li>A low a collection period is also not favorable. </li></ul><ul><li>It indicates very restrictive credit and collection policy </li></ul><ul><li>Due to the fear of bad debt the firm sells only to customers who are financially sound and there by looses the potentials of higher credit sales. </li></ul>
  37. 37. Implication of Debtors TO ratio(contd) <ul><li>The average collection period should be compared against the firm’s credit terms, to judge the credit and collection efficiency. </li></ul><ul><li>In addition to the above comparison the average collection period should also be compared with that of the industry average. </li></ul><ul><li>The above comparison helps to find out as to whether the firm is too liberal or too restrictive in its credit policy. </li></ul>
  38. 38. Assets Turnover Ratio <ul><li>It establishes the relationship between the assets and the sales of the firm. It includes the following </li></ul><ul><li>Net assets turnover ratio </li></ul><ul><li>Total assets turnover ratio </li></ul><ul><li>Fixed assets turnover ratio </li></ul><ul><li>Current assets turnover ratio </li></ul><ul><li>Working capital turnover ratio </li></ul>
  39. 39. Formula for the assets turnover ratio <ul><li>Assets turnover ratio = Net Sales Revenue . </li></ul><ul><li> concerned asset (Fixed Asset) </li></ul>
  40. 40. Fund Flow Statement <ul><li>The most widely accepted view of ‘fund’ is one relating to ‘working capital’ where in ‘fund is used to denote the working capital which is the difference between current asset and current liabilities. As the current asset comprise of cash also , cash is part of the ‘fund’ in this background </li></ul>
  41. 41. Definition of Fund Flow Statement <ul><li>By Almand Coleman as:- </li></ul><ul><li>A statement summarizing the significant financial changes which have occurred between the beginning and end of company’s accounting period . </li></ul><ul><li>By Smith and Brown :- </li></ul><ul><li>A fund flow statement is prepared in summary form to indicate changes accruing in terms of financial condition between different balance sheet dates. </li></ul>
  42. 42. <ul><li>By Robert Anthony:- </li></ul><ul><li>Describes the sources from which additional funds were derived and the use to which these fund put </li></ul>
  43. 43. Limitations of Fund Flow Statement <ul><li>Fund Flow Statement is being criticized as one which re-arranges the financial data extracted from the financial Statement. </li></ul><ul><li>The Fund Flow Statement is also being criticized as not furnishing anything new and /or original over and above the conventional Financial Statement. </li></ul><ul><li>The Fund Flow Statement is also based on the historical data as it bases its preparation on the conventional Financial statements. </li></ul><ul><li>Some of the transactions affecting only the Non-current items are sometimes, not considered while preparing the Fund Flow Statement. </li></ul>
  44. 44. Cash Flow Statement <ul><li>Cash flow statement should show the movement of cash during the period under 3 different heads. </li></ul><ul><li>Operating Activity </li></ul><ul><li>Investing Activity </li></ul><ul><li>Financing Activity </li></ul><ul><li>Cash flow statement may be presented using either Direct of Indirect method. </li></ul><ul><li>Listed companies have to present under indirect method only. </li></ul>
  45. 45. <ul><li>“ Cash is king” </li></ul><ul><li>Statement of cash flows for listed companies is mendotory. </li></ul>
  46. 46. Purpose and uses of the statment of cash flow <ul><li>Purpose :- </li></ul><ul><li>To provide relevant information about the cash receipts and payments of an enterprise </li></ul><ul><li>Uses :- </li></ul><ul><li>Asses an enterprises </li></ul><ul><li>Liquidity </li></ul><ul><li>Financial flexibility </li></ul><ul><li>Profitability </li></ul><ul><li>Risk </li></ul><ul><li>Provide feedback about previous assesment. </li></ul>
  47. 48. Cash flows from operating activities
  48. 50. Cash flow from Investing Activities
  49. 51. Cash flow from Financing Activities
  50. 56. Thank you