Ratio Analysis, B.Com. First Year , 2nd sem.

1. Ratio Analysis

2. Introduction
 Ratio analysis is a quantitative procedure of
obtaining a look into a firm’s functional efficiency,
liquidity, revenues, and profitability by analysing its
financial records and statement.
 It is used to interpret the financial statement so that
the strength and weakness of a firm, historical
performance and current financial condition can be
determined.
 It is an important tool Of financial analysis.

3. Classification
of ratios

5. Liquidity ratio
 These ratio analyse the short term financial position of the business and
indicate the ability of the firm to meet its short term/ Current obligation.
 The ratios which indicate the liquidity of the business are:
■ Current Ratio
■ Liquidity Ratio / Quick Ratio/ Acid test ratio
Current Ratio
Current Assets
Current Liability
A current Ratio of 2:1 is considered satisfactory.

6. Quick ratio/ Acid test ratio
Quick asset
Current Liability
A quick ratio of 1:1 is considered satisfactory

7. Leverage / Solvency ratio
 These ratio indicate the long term Solvency of a firm
and indicate the ability of a firm to meet its long term
obligation
 The Ratios indicating the long term solvency of a
business are:
■ Debt equity Ratio
■ Proprietary Ratio
■ Asset to total debt ratio
■ Interest Coverage Ratio

8. Debt equity Ratio
Long term debts
Shareholder funds
Generally, Financial Institutions favour a ratio of 2:1.
However this Standard should be applied Having regard to size ,type and nature
of business and the degree of risk involved.
PROPRIETORY Ratio
This ratio indicates the general financial strength of the firm and the long term
solvency of the business.
Proprietors funds
Total Assets

9. Debt to total Asset ratio
It indicates what proportion of the Permanent capital is in the form of long term Debt.
Long-term Debt
Shareholders fund + Long term debt
○ A ratio of 2/3 is considered satisfactory
Interest Coverage Ratio
Interest coverage ratio measure the company’s ability to honor its debt payments. Its
shows how many times the company’s earning can cover its interest payments.
EBIT
Interest on Long term debts
○ A ratio of 6 to 7 times is considered satisfactory
○ Higher the ratio greater the ability of the firm.

10. Activity/ Turnover Ratio
 These ratio is also known as Efficiency Ratio.
 Activity ratios or turnover ratios are ratios that are used to determine the
efficiency of the organization in generating revenue from its assets.
 The various ratios under this group are:
■ Inventory Turnover ratio
■ Trade receivable ratio
■ Trade payable ratio
■Working Capital turnover ratio

11. INVENTORY TURNOVER RATIO
Inventory turnover ratio is used to measure the number of times a business is able to sell and
replace its stock of goods during a given time period.
Cost of Revenue from Operations
Average inventory
○ A firm should have neither too high nor too low inventory turnover ratio.
Trade Receivable Ratio
It is used to determine the efficiency by which the business is managing the credit that is being
extended to its customers and evaluate how long does it take for the business to collect the
outstanding debt in the accounting period.
Net Credit Revenue from Operations
Average Trade Receivable.

12. Trade payable turnover ratio
Trade Payable Turnover Ratio is a financial ratio measures how efficiently a company pays its
suppliers for the goods and services it has purchased on credit.
Net Credit Purchases
Average Accounts Payable
Working capital turnover Ratio
This ratio indicates how company is using its working capital to support sales and growth.
Total sales
Average working capital

13. Profitability Ratio
 Profitability ratios are a type of accounting ratio that helps in determining
the financial performance of business at the end of an accounting period.
Profitability ratios show how well a company is able to make profits from its
operations.
 The ratios under this group are:
■ Gross profit Ratio
■ Operating Ratio
■ Operating profit Ratio
■ Net profit Ratio
■ Return on Investment

14. Gross Profit Ratio
Gross profit Ratio helps to determine the amount of profit a business makes by selling its
goods and services after subtracting its direct costs
Gross Profit
Net sales
Operating Ratio
Operating ratio is used to determine the efficiency of the management with which it is possible
to generate a certain level of sales or revenue.
Cost of Revenue from Operations + Operating Expenses
Net Revenue from Operations ( Net sales)
×100
×100

15. Operating Profit Ratio
Operating profit ratio indicates how much profit a company makes from its principal business
in relation to its total sales.
Operating Profit
Revenue from operation ( Net Sales)
Operating Profit= Net profit + Non operating expenses/ losses –
Non operating income / gains
Or
Gross profit + Other operating income- Other operating expenses
×100

16. Net Profit Ratio
Net profit ratio is a profitability ratio that is used to measures the company’s profits to the total
amount of money brought into the business.
Net Profit
Net Sales
where Net sales= Total sales- Sales return
Return On investment
It is used to measure the returns your business generates on a particular investment relative to
the investment cost.
It calculates the percentage return on investment.
ROI = Net Profit
Cost of Investment
×100

17. THANKYOU !
For Your Patience and attention
Presentation By B.COM ( Hons)- IAF GROUP-1