ratio analysis ppt

2. Course Title: FINANCIAL MANAGEMENT
Course Code: FIM-501
Program: EMBA
Semester : Summer-2018
Submitted To:
Mohammad Monir Hossain

3. 1 ID 173-0137-009 Md. Abdus Sattar Molla
2 ID 173 0056 029 Md. Shahadat Majumder
3 ID 173 0077 009 Md. Belgium Hossain
4 ID 173 0219 009 Md. Masudur Rahman
5 ID 181 0155 009 Shoriful Islam
Group Member & ID

5. WHAT IS RATIO?
 Ratio can be define as between relationship
between two figures expressed in arithmetical
terms called ratio.
 ACCORDING TO R.N ANTHONY:
“A Ratio is simply one number expressed in
terms of another .It is found by dividing one
number into another”.

6. ADVANTAGES OF RATIO
 Helpful in analysis of financial statements.
 Simplification of accounting data.
 Helpful in comparative study.
 Helpful in forecasting.
 Effective control
 Study of financial soundness

7. LIMITATIONS OF RATIO
 False accounting data gives false ratio.
 Comparison not possible if different firms
adopt different accounting policies.
 Limited use of single ratio.
 Lack of proper standards.
 Ratio alone are not adequate for proper
conclusions.

8. The following income statement and balance sheets relate to PANASONIC
and WALTON. (Hypothetical Data)
Incomestatement
PANASONIC WALTON
SALES 40,00,000 48,00,000
Less: Cost of Sales 32,00,000 37,44,000
GROSS PROFIT 8,00,000 10,56,000
Less: Operating exp.(administrative and selling exp.) 2,50,000 3,00,000
OPERATING INCOME (A) 5,50,000 7,56,000
Less: other exp.:
depreciation on plant and machinery
interest on debentures
preliminary Exp. Written off
2,20,000
75,600
4,000
2,76,000
90,000
4,000
TOTAL OTHER EXP. (B) 2,99,600 3,70,000
Net income before tax (A-B) 2,50,400 3,86,000
Less: provision for tax 36,000 56,000
NET INCOME AFTER TAX 2,14,400 3,30,000

9. BALANCESHEETS
Liabilities Panasonic WALTON ASSTES Panasonic WALTON
Equity share capital
shares of rs.10 each 15,00,000 19,20,000
Fixed assets:
land
Plant & machinery
5,00,000
19,16,000
6,00,000
18,50,000
Reserves & surplus 8,00,000 10,00,000
Secured loans:
9% debentures 8,40,000 10,00,000
investments 1,00,000 3,00,000
Current assets, loans
& advances:
(A)Current assets
Stock
Debentures
Cash and bank
(B) Loans & advances
7,20,000
8,00,000
80,000
-
11,00,000
12,00,000
1,00,000
-
Unsecured loans - -
Current liabilities &
provisions:
(a)Current liabilities
creditors
(b)provisions
Income tax provision
9,64,000
36,000
10,64,000
56,000
Miscell. expenditure
Preliminary exp.
24,000 20,000
41,40,000 51,70,000 41,40,000 51,70,000

10. Liquidityratios
 Current ratio : current ratio / current liabilities
Panasonic: 16,00,000/ 10,00,000 = 1.6 : 1
WALTON: 24,00,000/ 11,20,000 = 2.14 : 1
 Quick ratio: liquid assets / current liabilities
Panasonic: 8,80,000/ 10,00,000 = 0.88 : 1
WALTON: 13,00,000/ 11,20,000= 1.16 : 1
 COMMENT: short term financial position of the company is quite
satisfactory because the current ratio of the company is 2.14 : 1,
which is more then the ideal ratio of 2: 1. the fact is also
supported by quick ratio, which more then the ideal ratio of 1: 1.

11. Solvency ratios:
 Debt equity ratio : long term debts/ shareholder's fund
Panasonic: 8,40,000/ 15,00,000 + 8,00,000 – 24,000 = 0.37 : 1
WALTON : 10,00,000 / 19,20,000 + 11,30,000 – 20,000 = 0.33 : 1
 Total assets to debt ratio : total assets/ long term debts
Panasonic : 41,40,000 – 24,000 / 8,40,000 = 4.9 times
WALTON : 51,70,000 – 20,000 = 5.15 times

12.  COMMENT: debt equity ratio indicates that proportion of
funds provided by long – term lenders in comparison to the
owners is only .37 in the Panasonic company . This proportion
has further come down to .33 in WALTON company. It shows that
the long term solvency position of the companies is very sound.
 The fact is also supported by total assets to debt ratio. It
indicates that long term debts are covered 4.9 times by assets in
the Panasonic and this margin of safety has increased to 5.15
times in the WALTON.

13. Activityratio
 Fixed assets turnover ratio : net sales / fixed assets
Panasonic :40,00,000 / 24,16,000 = 1.66 times
WALTON : 48,00,00 / 224,50,000 = 1.96 times
COMMENTS : fixed assets turnover ratio has improved. It
indicates better utilization of fixed assets generating
sales.

14. Profitabilityratios
 Gross profit ratio : gross profit / sales * 100
Panasonic : 8,00,000/ 40,00,000 * 100 = 20 %
WALTON : 10,56,000 / 48,00,000 * 100 = 22%
 Operating ratio: cost of sales + operating exp. / sales * 100
Panasonic = 32,00,000 + 2,50,000 / 40,00,000 * 100= 86.25 %
WALTON = 37,44,000 + 3,00,000 / 48,00,000 * 100 = 84.25 %
 Net profit ratio : net profit / sales * 100
Panasonic : 2,14,400 / 40,00,000 * 1oo = 5.36 %
WALTON : 3,30,000 / 48,00,000 * 100 = 6.88 %

15.  Return on equity : net profit after tax / shareholder ‘s funds
 Shareholder’s funds = equity share capital + reserves & surplus –
preliminary expenses
Panasonic : 15,00,000 + 8,00, 000 – 24,0000 = 22,76,000
WALTON : 19,20,000 + 11,30,000 – 20,000 = 30,30,000
R.O.E. for Panasonic = 2,14,4000/ 22,76,000 * 100 = 9.42 %
R.O.E. for WALTON = 3,30,000 / 30,30,000 * 100 = 10.89 %
 Earning per share (E.P.S.): net profit after tax / no. of equity shares
Panasonic : 2,14,400 / 1,50,000 = 1.43 per shares
WALTON : 3,30,000 / 1,92,000 = 1.72 per shares

16.  COMMENT: Gross profit ratio has improved by 2 % which reflects
an increase in the sales price of goods sold without corresponding
increase in the cost of sales.
 Operating ratio has also come down by 2 %. Lowering of operating
ratio has resulted in higher margin of profit on sales.
 Net profit ratio has gone up from 5.36 % to 6.88 % which is an
indication of improvement in the overall efficiency and
profitability of the firm.
 Return on equity has also gone up from 9.42 % to 10.89 % which
indicates that shareholder’s funds are being utilized more
efficiently. There are better prospects of declaration and creation of
reserves.
 Earning per share has also gone up from 1.43 to 1.72 which
indicates that overall profitability of the company is improving .
This ratio also indicates that market price of these companies
share is likely to go up.

17.  Conclusion : overall profitability and financial position of
WALTON has improved in comparison of Panasonic.