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  1. 1. Ratio-analysis means the process of computing, determining and presenting the relationship of related items and groups of items of the financial statements. They provide in a summarized and concise form of fairly good idea about the financial position of a unit. They are important tools for financial analysis.
  2. 2.  It is an analysis of strength and weakness of an organisation by establishing the quantitative relation among the items of Balance Sheet or Income Statement of such an organisation
  3. 3.        Analysis of financial Position Simplification of Accounting Figures Assessment of Operational Efficiency Determining Trends in the long-run Identification of Strength & Weakness Taking Remedial Measures Comparison of Performance
  4. 4.     Based on Historical Data No Standard Interpretation Ignoring Qualitative Aspects Difference in Accounting Methods make comparison difficult
  5. 5. 1) Liquidity Ratios 2) Profitability Ratios 3) Solvency Ratios 4) Activity Ratios 5) Shareholders' Ratios
  6. 6. LIABILITIES ASSETS NET WORTH/EQUITY/OWNED FUNDS Share Capital/Partner’s Capital/Paid up Capital/ Owners Funds Reserves ( General, Capital, Revaluation & Other Reserves) Credit Balance in P&L A/c FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIES Original Value Less Depreciation Net Value or Book Value or Written down value LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions) Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. assets which are not current or fixed in nature CURRENT LIABILTIES Bank Working Capital Limits such as /Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or deposits Expenses payable & provisions against various items CURRENT ASSETS : Cash & Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks & inventory (RM,SIP,FG) Stores & Spares, Advance Payment of Taxes, Prepaid expenses, Loans and Advances recoverable within 12 months INTANGIBLE ASSETS Patent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses
  7. 7.  Liquidity Ratios Used to study the ability of the organisation in meeting short-term payments or obligations Includes:  1) Current Ratio,  2) Acid Test Ratio. 
  8. 8.    Relation between current assets and current liabilities Long Term Sources Financing the Current assets give a stable base for the liquidity of the organisation Normally , the ratio should not be less than 2 i.e., the current assets should be double the size of current liabilities
  9. 9.     It is the ratio between quick assets and quick liabilities Quick assets include current assets except inventory and pre-paid expenses Quick liabilities include current liabilities other than bank overdraft A 1:1 ratio is healthy indicator of cash management
  10. 10. It is the ratio between cash and current liabilities Means Availability of cash for meeting current liabilities.  Cash Ratio= Cash in hand + cash at bank Current Liabilities
  11. 11.    These ratio shows short term financial soundness of the company. The Financial position is supposed to very sound, if the current ratio is more than 2:1. Higher ratio shows the better capacity of the business to meet its current obligation.
  12. 12.     1) 2) 3) 4) Net Profit Ratio Gross Profit Ratio Return on Total Assets Return on Equity