This slide is focussed on theoretical aspect of ratio analysis.it discusses meaning, advantage and limitations of ratio analysis tools. It then suggests precautions and guidelines to be considered while using this tool followed by various users of the tool and the source from where the information can be gathered for ratio analysis. purpose. it very briefly also tells about various ratios depending upon their classifications

1. Ratio Analysis
Basic Theory
By Dr. Paritosh Dube

2. Content
• Objectives of Presentation.
• Meaning of Ratio
• Forms of Expression
• Meaning of Ratio Analysis
• Advantages
• Limitations
• Precaution & Guidelines of Ratios
• Users of Ratios
• Source of Information
• Classifications of Ratios.

3. Objective of Presentation
• To create an understanding about the nature of Ratios.
• To create an understanding about the advantages and limitations of Ratio Analysis
tool.
• To inform about the various precautions and guidelines to be followed while using
ratio analysis tool
• To provide information regarding various Users of the ratio analysis tool.
• To learn about the Source from where information for ratios can be gathered.
• To briefly discuss the classification of Ratios.

4. What is a Ratio?
•Relationship in quantitative terms,
between figures which have cause and
effect relationships or which are
connected to one another in one way or
another

5. Forms of Expression
• Absolute Figure
a. Division Form:- when two numbers are divided by each number. For
example 5/10=.50
b. Proportion Form using Colon :- when two numbers are placed in
relation to each other. for example 5:10
• Percentage Form:- when two numbers are divided by each other and the
result is multiplied by 100. For example (3/6)*100=50%

6. What is Ratio Analysis
• RATIOS ANALYSIS IS A COMPARISON OF TWO NUMBERS.
• THE NUMBERS RELATE TO FINANCIAL ASPECT OF THE
BUSINESS.
• THE OBJECTIVE IS TO GAIN INSIGHT INTO PERFORMANCE
OF THE BUSINESS

7. Advantages
• Helps in Decision Making such as Make or Buy decision, Increasing Production
Capacity
• Helps in forecasting and Planning for the future
• Helps in Easy Communication of Performance
• Helps in better coordination among various departments.
• Helps in establishing control by establishing standards and identifying Deviations.
• Helps prospective shareholders to assess business profitability

8. Advantages
• Helps lenders and creditors to assess creditworthiness of the business.
• Helps employees to assess the business from increment and bonus point of
view
• Helps the government to assess the financial viability of various sectors and
frame suitable policies for overall development of the economy.
• Helps the tax authority to assess the true profit of the business concern and
determine the level of tax chargeable from the company

9. Limitations
• Limited use of Single Ratio
• Lack of adequate standards
• Ratios of past may not truly represent future performance.
• Subject to change of accounting procedure.
• Personal Bias of researcher
• Window dressing

10. Limitations
• Comparison becomes difficult as both Industry and Companies differ on
account of number of various variables such as their size ,accounting
procedures etc.
• Subject to price level changes
• It is only a tool and not an End in itself.
• It depends on financial statements for its usefulness.

11. Precautions & Guidelines
• Trained Analyst
• Objective of The Analysis.
• Selection of Proper Ratios
• Use of Suitable Standards
• Accuracy of the Financial Statements.
• Ratios should only serve as a tool and decision should be taken after due
deliberations

12. Users of The Ratio Analysis
• Shareholders/Investors
• Prospective Investors
• Management of the company.
• Employees of the Company.
• Competitors
• Lenders & Creditors
• Government/Policy Makers
• Taxation Authority
• Society
• Researchers

13. Where does the Information for Ratio Analysis
come from ?
•Income
Statement
•Balance
Sheet

14. Classification
Statement Functional

15. Statement Ratios
Income statement
• Net Profit Ratio
• Gross Profit Ratio
• Operating Profit
Ratio
Balance Sheet
• Debt Equity Ratio
• Current Asset
Ratio
• Acid Test Ratio
Mixed Statement
• Return on Capital
Employed Ratio.
• Fixed Asset to
turnover ratio
• Earning per share

16. Functional Ratios
Liquidity Ratio
• Current Asset
Ratio
• Acid Test Ratio
• Debtors
Turnover Ratio
Profitability Ratio
• Gross Profit
Ratio
• Net Profit
Ratio
• Return on
Capital
Employed
Ratio
Solvency Ratios
• Debt Equity
Ratio.
• Debt to capital
employed ratio
• Interest
Coverage ratio
Activity Ratios
• Inventory
Turnover Ratio
• Debtors
turnover ratio
• Working Capital
Turnover Ratio

17. Thank You