This document provides an overview of financial statement analysis and ratio analysis. It defines key financial statements like the income statement, balance sheet, and statement of cash flows. It also explains the purpose of ratio analysis is to evaluate a firm's performance, liquidity, profitability, and financial stability by calculating and comparing various financial ratios over time and against industry benchmarks. Common ratios covered include liquidity, leverage, activity, and profitability ratios. Ratio analysis is a useful tool but requires comparing ratios to standards and accounting for company and industry differences.
DuPont analysis is a useful technique to break down the different return on equity (ROE) generators. The ROE decomposition helps investors to concentrate separately on key indicators of financial success to define strengths and weaknesses.
Three main financial metrics drive equity return (ROE): operating performance, asset usage performance, and financial leverage. Operating output is a net profit margin or a net income separated by overall revenue or profits.
The efficiency of asset usage is determined by the turnover ratio of the assets. Leverage is calculated by the equity multiplier, equal to average assets divided by average equities.
The component parts of a firm's return on equity (ROE) are calculated using a DuPont analysis. This allows an investor to assess, which financial activities contribute the most to the ROE changes
DuPont analysis is a useful technique to break down the different return on equity (ROE) generators. The ROE decomposition helps investors to concentrate separately on key indicators of financial success to define strengths and weaknesses.
Three main financial metrics drive equity return (ROE): operating performance, asset usage performance, and financial leverage. Operating output is a net profit margin or a net income separated by overall revenue or profits.
The efficiency of asset usage is determined by the turnover ratio of the assets. Leverage is calculated by the equity multiplier, equal to average assets divided by average equities.
The component parts of a firm's return on equity (ROE) are calculated using a DuPont analysis. This allows an investor to assess, which financial activities contribute the most to the ROE changes
Profitability Ratio
A profitability ratio is a measure of financial ratio defining the profit percent and return percent from the business using data from financial statements at a specific point of time
It assess business’s ability to generate gross profit, operating profit and net profit from the sales using data from profit& loss statement
It even takes into consideration various return generating ability of business in terms of return on assets, return on capital employed, return on equity, return on investment using data from balance sheet
Types of profitability ratio
Gross Profit Ratio, Net Profit Ratio, Operating Profit Ratio, Return on Assets, Return on Equity, Return on Investment, Return on Capital Employed
Gross Profit Ratio
Gross Profit Ratio(GPR) is a profitability ratio that shows the relationship between gross profit and the revenue from net sales
GPR = (퐆퐫퐨퐬퐬 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬)
Net Profit Ratio
The net profit ratio is equal to how much net profit is generated as a ratio of revenue earned through sales
Net Profit Ratio = (퐍퐞퐭 푷풓풐풇풊풕)/(퐍퐞퐭 푺풂풍풆풔)
Operating Profit Margin is a profitability ratio used to calculate the percentage of operating profit a company produces from its operations, prior to deduction of taxes and interest charges
Operating Profit Ratio
Operating Profit Ratio = (퐎퐩퐞퐫퐚퐭퐢퐧퐠 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬)
Return on assets (ROA) is a kind of profitability measure used to determine returns on assets relevant when compared across the companies or previous performance of the company
Return On Asset = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐀퐬퐬퐞퐭퐬)
Return on equity (ROE) is a measure of financial performance calculated by dividing net profit by average shareholders' equity
ROE = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐄퐪퐮퐢퐭퐲)
Return on capital employed is a profitability ratio used in valuation of company’s financial position depicting the return out of capital employed
ROCE = 퐄퐁퐈퐓/(퐂퐚퐩퐢퐭퐚퐥 퐄퐦퐩퐥퐨퐲퐞퐝)
Return on investment is a profitability measure used by businesses to identify the efficiency of business in generating return out of an investment
ROI = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐂퐨퐬퐭 퐨퐟 퐈퐧퐯퐞퐬퐭퐦퐞퐧퐭)
Ratio analysis refers to the analysis and interpretation of the data collected from the financial statements (i.e., Profit and Loss Statement, Balance Sheet and Fund/Cash Flow statement etc.)
Thank You for Watching
DevTech Finance
The Cash Flow Statement translates earnings in the Income Statement into cash inflows. Explained in detail above as a part of the topic “Financial accounting”, is brought to you by Welingkar’s Distance Learning Division.
For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/SlideshareFaccounting
Join us on Facebook: http://www.facebook.com/welearnindia
Follow us on Twitter: https://twitter.com/WeLearnIndia
Read our latest blog at: http://welearnindia.wordpress.com
Subscribe to our Slideshare Channel: http://www.slideshare.net/welingkarDLP
Ratio: It is the quantitative relation between two amounts showing the number of times one value contains or is contained within the other.
Accounting Ratio: It means ratio calculated on the basis of accounting information.
Ratio analysis: A ratio analysis is a quantitative analysis of information contained in a company's financial statements. Ratio analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability and solvency.
Ratios are categorized into following basic categories:
1. Liquidity Ratios
2. Solvency Ratios
3. Activity or Turnover Ratios
4. Profitability Ratios
Profitability Ratio
A profitability ratio is a measure of financial ratio defining the profit percent and return percent from the business using data from financial statements at a specific point of time
It assess business’s ability to generate gross profit, operating profit and net profit from the sales using data from profit& loss statement
It even takes into consideration various return generating ability of business in terms of return on assets, return on capital employed, return on equity, return on investment using data from balance sheet
Types of profitability ratio
Gross Profit Ratio, Net Profit Ratio, Operating Profit Ratio, Return on Assets, Return on Equity, Return on Investment, Return on Capital Employed
Gross Profit Ratio
Gross Profit Ratio(GPR) is a profitability ratio that shows the relationship between gross profit and the revenue from net sales
GPR = (퐆퐫퐨퐬퐬 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬)
Net Profit Ratio
The net profit ratio is equal to how much net profit is generated as a ratio of revenue earned through sales
Net Profit Ratio = (퐍퐞퐭 푷풓풐풇풊풕)/(퐍퐞퐭 푺풂풍풆풔)
Operating Profit Margin is a profitability ratio used to calculate the percentage of operating profit a company produces from its operations, prior to deduction of taxes and interest charges
Operating Profit Ratio
Operating Profit Ratio = (퐎퐩퐞퐫퐚퐭퐢퐧퐠 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬)
Return on assets (ROA) is a kind of profitability measure used to determine returns on assets relevant when compared across the companies or previous performance of the company
Return On Asset = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐀퐬퐬퐞퐭퐬)
Return on equity (ROE) is a measure of financial performance calculated by dividing net profit by average shareholders' equity
ROE = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐄퐪퐮퐢퐭퐲)
Return on capital employed is a profitability ratio used in valuation of company’s financial position depicting the return out of capital employed
ROCE = 퐄퐁퐈퐓/(퐂퐚퐩퐢퐭퐚퐥 퐄퐦퐩퐥퐨퐲퐞퐝)
Return on investment is a profitability measure used by businesses to identify the efficiency of business in generating return out of an investment
ROI = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐂퐨퐬퐭 퐨퐟 퐈퐧퐯퐞퐬퐭퐦퐞퐧퐭)
Ratio analysis refers to the analysis and interpretation of the data collected from the financial statements (i.e., Profit and Loss Statement, Balance Sheet and Fund/Cash Flow statement etc.)
Thank You for Watching
DevTech Finance
The Cash Flow Statement translates earnings in the Income Statement into cash inflows. Explained in detail above as a part of the topic “Financial accounting”, is brought to you by Welingkar’s Distance Learning Division.
For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/SlideshareFaccounting
Join us on Facebook: http://www.facebook.com/welearnindia
Follow us on Twitter: https://twitter.com/WeLearnIndia
Read our latest blog at: http://welearnindia.wordpress.com
Subscribe to our Slideshare Channel: http://www.slideshare.net/welingkarDLP
Ratio: It is the quantitative relation between two amounts showing the number of times one value contains or is contained within the other.
Accounting Ratio: It means ratio calculated on the basis of accounting information.
Ratio analysis: A ratio analysis is a quantitative analysis of information contained in a company's financial statements. Ratio analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability and solvency.
Ratios are categorized into following basic categories:
1. Liquidity Ratios
2. Solvency Ratios
3. Activity or Turnover Ratios
4. Profitability Ratios
Financial analysis for juhayna & domty co . graduation project zagzig uni...Eslam Fathi
Financial Analysis is the process of selecting, evaluating, and identifying the financial
strength and weaknesses of the firm by properly establishing relationship between
items of financial statements. Firms, bank, loan officers and business owners all use
Financial analysis to learn more about a company’s current financial health as well as its
potential.
Ratio analysis advantages and limitations (Complete Chapter)Syed Mahmood Ali
The aim of this PPT's to provide complete knowledge of Ratio Analysis chapter covering all the formula's for any university student of B.com, M.com, BBA and MBA.
Ratios and Formulas in Customer Financial AnalysisFinancial stat.docxcatheryncouper
Ratios and Formulas in Customer Financial Analysis
Financial statement analysis is a judgmental process. One of the primary objectives is identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. The judgment process can be improved by experience and the use of analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the analysis of relationships between two or more line items on the financial statement. Financial ratios are usually expressed in percentage or times. Generally, financial ratios are calculated for the purpose of evaluating aspects of a company's operations and fall into the following categories:
· Liquidity ratios measure a firm's ability to meet its current obligations.
· Profitability ratios measure management's ability to control expenses and to earn a return on the resources committed to the business.
· Leverage ratios measure the degree of protection of suppliers of long-term funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time.
· Efficiency, activity or turnover ratios provide information about management's ability to control expenses and to earn a return on the resources committed to the business.
A ratio can be computed from any pair of numbers. Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be derived. A standard list of ratios or standard computation of them does not exist. The following ratio presentation includes ratios that are most often used when evaluating the credit worthiness of a customer. Ratio analysis becomes a very personal or company driven procedure. Analysts are drawn to and use the ones they are comfortable with and understand.
1. Liquidity Ratios
Working Capital
Working capital compares current assets to current liabilities, and serves as the liquid reserve available to satisfy contingencies and uncertainties. A high working capital balance is mandated if the entity is unable to borrow on short notice. The ratio indicates the short-term solvency of a business and in determining if a firm can pay its current liabilities when due.
Formula
Current Assets - Current Liabilities
Acid Test or Quick Ratio
A measurement of the liquidity position of the business. The quick ratio compares the cash plus cash equivalents and accounts receivable to the current liabilities. The primary difference between the current ratio and the quick ratio is the quick ratio does not include inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio will be lower than its current ratio. It is a stringent test of liquidity.
Formula
Cash + Marketable Securities + Accounts Receivable
Current Liabilities
Current Ratio
provides an indication of the liquidity of the business by comparing the amount of current assets to current liabilities. A business's curren ...
Financial ratios and their use in understanding Financial StatementsPranav Dedhia
An introduction and in-depth understanding on the importance of Financial ratios in understanding financial statements of business entities along with relevant examples
Affordable Stationery Printing Services in Jaipur | Navpack n PrintNavpack & Print
Looking for professional printing services in Jaipur? Navpack n Print offers high-quality and affordable stationery printing for all your business needs. Stand out with custom stationery designs and fast turnaround times. Contact us today for a quote!
Business Valuation Principles for EntrepreneursBen Wann
This insightful presentation is designed to equip entrepreneurs with the essential knowledge and tools needed to accurately value their businesses. Understanding business valuation is crucial for making informed decisions, whether you're seeking investment, planning to sell, or simply want to gauge your company's worth.
RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...BBPMedia1
Marvin neemt je in deze presentatie mee in de voordelen van non-endemic advertising op retail media netwerken. Hij brengt ook de uitdagingen in beeld die de markt op dit moment heeft op het gebied van retail media voor niet-leveranciers.
Retail media wordt gezien als het nieuwe advertising-medium en ook mediabureaus richten massaal retail media-afdelingen op. Merken die niet in de betreffende winkel liggen staan ook nog niet in de rij om op de retail media netwerken te adverteren. Marvin belicht de uitdagingen die er zijn om echt aansluiting te vinden op die markt van non-endemic advertising.
Attending a job Interview for B1 and B2 Englsih learnersErika906060
It is a sample of an interview for a business english class for pre-intermediate and intermediate english students with emphasis on the speking ability.
LA HUG - Video Testimonials with Chynna Morgan - June 2024Lital Barkan
Have you ever heard that user-generated content or video testimonials can take your brand to the next level? We will explore how you can effectively use video testimonials to leverage and boost your sales, content strategy, and increase your CRM data.🤯
We will dig deeper into:
1. How to capture video testimonials that convert from your audience 🎥
2. How to leverage your testimonials to boost your sales 💲
3. How you can capture more CRM data to understand your audience better through video testimonials. 📊
Implicitly or explicitly all competing businesses employ a strategy to select a mix
of marketing resources. Formulating such competitive strategies fundamentally
involves recognizing relationships between elements of the marketing mix (e.g.,
price and product quality), as well as assessing competitive and market conditions
(i.e., industry structure in the language of economics).
What is the TDS Return Filing Due Date for FY 2024-25.pdfseoforlegalpillers
It is crucial for the taxpayers to understand about the TDS Return Filing Due Date, so that they can fulfill your TDS obligations efficiently. Taxpayers can avoid penalties by sticking to the deadlines and by accurate filing of TDS. Timely filing of TDS will make sure about the availability of tax credits. You can also seek the professional guidance of experts like Legal Pillers for timely filing of the TDS Return.
Buy Verified PayPal Account | Buy Google 5 Star Reviewsusawebmarket
Buy Verified PayPal Account
Looking to buy verified PayPal accounts? Discover 7 expert tips for safely purchasing a verified PayPal account in 2024. Ensure security and reliability for your transactions.
PayPal Services Features-
🟢 Email Access
🟢 Bank Added
🟢 Card Verified
🟢 Full SSN Provided
🟢 Phone Number Access
🟢 Driving License Copy
🟢 Fasted Delivery
Client Satisfaction is Our First priority. Our services is very appropriate to buy. We assume that the first-rate way to purchase our offerings is to order on the website. If you have any worry in our cooperation usually You can order us on Skype or Telegram.
24/7 Hours Reply/Please Contact
usawebmarketEmail: support@usawebmarket.com
Skype: usawebmarket
Telegram: @usawebmarket
WhatsApp: +1(218) 203-5951
USA WEB MARKET is the Best Verified PayPal, Payoneer, Cash App, Skrill, Neteller, Stripe Account and SEO, SMM Service provider.100%Satisfection granted.100% replacement Granted.
Skye Residences | Extended Stay Residences Near Toronto Airportmarketingjdass
Experience unparalleled EXTENDED STAY and comfort at Skye Residences located just minutes from Toronto Airport. Discover sophisticated accommodations tailored for discerning travelers.
Website Link :
https://skyeresidences.com/
https://skyeresidences.com/about-us/
https://skyeresidences.com/gallery/
https://skyeresidences.com/rooms/
https://skyeresidences.com/near-by-attractions/
https://skyeresidences.com/commute/
https://skyeresidences.com/contact/
https://skyeresidences.com/queen-suite-with-sofa-bed/
https://skyeresidences.com/queen-suite-with-sofa-bed-and-balcony/
https://skyeresidences.com/queen-suite-with-sofa-bed-accessible/
https://skyeresidences.com/2-bedroom-deluxe-queen-suite-with-sofa-bed/
https://skyeresidences.com/2-bedroom-deluxe-king-queen-suite-with-sofa-bed/
https://skyeresidences.com/2-bedroom-deluxe-queen-suite-with-sofa-bed-accessible/
#Skye Residences Etobicoke, #Skye Residences Near Toronto Airport, #Skye Residences Toronto, #Skye Hotel Toronto, #Skye Hotel Near Toronto Airport, #Hotel Near Toronto Airport, #Near Toronto Airport Accommodation, #Suites Near Toronto Airport, #Etobicoke Suites Near Airport, #Hotel Near Toronto Pearson International Airport, #Toronto Airport Suite Rentals, #Pearson Airport Hotel Suites
The world of search engine optimization (SEO) is buzzing with discussions after Google confirmed that around 2,500 leaked internal documents related to its Search feature are indeed authentic. The revelation has sparked significant concerns within the SEO community. The leaked documents were initially reported by SEO experts Rand Fishkin and Mike King, igniting widespread analysis and discourse. For More Info:- https://news.arihantwebtech.com/search-disrupted-googles-leaked-documents-rock-the-seo-world/
Unveiling the Secrets How Does Generative AI Work.pdfSam H
At its core, generative artificial intelligence relies on the concept of generative models, which serve as engines that churn out entirely new data resembling their training data. It is like a sculptor who has studied so many forms found in nature and then uses this knowledge to create sculptures from his imagination that have never been seen before anywhere else. If taken to cyberspace, gans work almost the same way.
2. Meaning of Financial
Statements
Financial statements are summaries of the operating,
financing, and investment activities of a firm.
According to the Financial Accounting Standards
Board (FASB), the financial statements of a firm should
provide sufficient information that is useful to
investors and
creditors
in making their investment and credit decisions in an
informed way.
3.
The financial statements are expected to be prepared in
accordance with a set of standards known as generally
accepted accounting principles (GAAP).
The financial statements of publicly traded firms must be
audited at least annually by independent public
accountants.
The auditors are expected to attest to the fact that these
financial statements of a firm have been prepared in
accordance with GAAP.
4. Types of Financial Statements and
Reports
The Income Statement
The Balance Sheet
The Statement of Cash Flows
5. The Income Statement
An income statement is a summary of the revenues and
expenses of a business over a period of time, usually either
one month, three months, or one year.
Summarizes the results of the firm’s operating and financing
decisions during that time.
Operating decisions of the company apply to production and
marketing such as sales/revenues, cost of goods sold,
administrative and general expenses (advertising, office
salaries)
6. The Balance Sheet
A summary of the assets, liabilities, and equity of a business at a particular point in time, usually at the
end of the firm’s fiscal year.
Assets
(Resources of the
business enterprise)
=
Fixed Assets
(Plant, Machinery, Equipment
Buildings)
Current Assets
(Cash, Marketable Securities,
Account Receivable, Inventories)
Liabilities
(Obligations of
the business)
+
Equity
(ownership left over
Residual)
Long-term
Common stock outstanding
(Notes, bonds, &
Additional paid-in capital
Capital Lease
Retained Earnings
Obligation)
Current Liabilities
(Accounts Payable,
Wages and salaries,
Short-term loans
Any portion of long-term
Indebtedness due in one-year)
7. THE STATEMENT OF CASH
FLOWS
The statement is designed to show how the firm’s operations have
affected its cash position and to help answer questions such as these:
Is the firm generating the cash needed to purchase additional fixed assets
for growth?
Is the growth so rapid that external financing is required both to maintain
operations and for investment in new fixed assets?
Does the firm have excess cash flows that can be used to repay debt or to
invest in new products?
8. Importance of Financial Statements
Financial statements report both on a firm’s position
at a point in time and on its operations over some
past period.
From management’s viewpoint, financial statement
analysis is useful both as a way to
anticipate future conditions and
more important, as a starting point for planning actions
that will influence the future course of events or
to show whether a firm’s position has been improving or
deteriorating over time.
9. Meaning of Ratio Analysis
Ratio analysis is a systematic use of ratio to
interpret/assess the performance status of the
firm.
It is a widely used tool of financial analysis.
The term ratio refers to
numerical or
quantitative relationship between two
items/variables.
The basic objective of ratio analysis is
to
compare the risk and return relationship of
firms of different sizes.
10. Ratio
analysis helps in finding out the
strengths and weakness of a firm.
The relationship in ratio can be expressed
in:(i) percentage- e.g. net profit are 25% of Sales
(ii) fraction – e.g. net profit is one-fourth of Sales.
(iii) proportion: e.g. relationship between net profit
and sales is 1:4.
11. Nature of Ratio analysis
A
financial ratio is a relationship between two
accounting numbers.
Ratios help to make a qualitative judgment
about the firm’s financial performance.
12. Basis or Standard of
Comparison
Time
series analysis
Inter-firm analysis
Industry analysis
Comparison with standard
13.
Ratio analysis begins
with the calculation of a set of financial ratios
designed to show the relative strengths and weaknesses of
a company as compared to
Other firms in the industry
Leadings firms in the industry
The previous year of the same firm
Ratio analysis helps to show whether the firm’s
position has been improving or deteriorating
Ratio analysis can also help plan for the future.
15. Liquidity Ratio
Ability
of the firm to satisfy its short term
obligations as they become due.
A liquid asset is one that can be easily
converted into cash at a fair market value
Liquidity question deals with this question
Will the firm be able to meet its current
obligations?
Three
measures of liquidity
Current Ratio
Quick/Acid Test Ratio
Cash ratio
16. Liquidity Ratios..
Current assets
Current liabilities
Current assets – Inventories
Quick ratio =
Current liabilities
Cash + Marketable securities
Cash ratio =
Current liabilities
Current ratio =
Current assets are those assets which can be converted
into cash easily in one accounting period.
Cash in hand+ bank+ stock + debtors+ bills receivables
+prepaid expenses
Current liabilities are those which have to be paid in one
accounting year
Bank overdraft+ provision for tax+ creditors+ outstanding
expenses+ bills payable+ dividend payable
17. Current Ratio : It is the relationship between the current
assets and current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern
are Rs.4,00,000 and Rs.2,00,000 respectively, then the
Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1
The ideal Current Ratio preferred by Banks is 1.33 : 1
Current Assets : Raw Material, Work-in Progress. Finished
Goods, Debtors, Bills Receivables, Cash, marketable securities,
prepaid expenses
Current Liabilities : Trade Creditors, Installments of Term Loan,
payable within one year, bank overdraft, provision of taxation,
outstanding expenses
18. Acid Test/Quick ratio
One limitation of current ratio is that it fails to
convey the liquidity of the form as it consider one
Rupees cash equal to one Rupee of Stock or
receivables.
A rupee of cash is more readily available ( i.e.
more liquid) to meet current obligations than a
rupee of, say, inventory.
The acid test ratio is a measure of liquidity
designed to overcome this defect of the current
ratio.
19.
The acid- test ratio referred to as quick ratio
because it is a measurement of firm’s ability to
convert its current assets quickly into cash to
meet its current liabilities.
The acid-test ratio between quick current assets and
current liabilities and is calculated by dividing the quick
assets by the current liabilities.
Acid- test ratio: Quick Assets/Current liabilities
Quick assets: Current Assets- Inventory- prepaid exp.
20. Turnover Ratios
Liquidity
ratios relate to the liquidity of the
firm as a whole.
Another way of examining the liquidity is to
determine how efficiently the capital
employed is rotated in the business.
The ratios to measure these are referred to
as turnover ratio or Activity ratio.
21. Cost of goods sold: Sales- Gross profit
Average inventory: Simple average of opening
and closing stock inventory
Interpretation: Generally, a high inventory ratio
means that the company is efficiently managing
and selling its inventory. The faster the inventory
sells, the less funds the company has tied up.
22. Example: A firm has sold good worth Rs 3,00,000
with a margin of 20percent. The stock at beginning
and the end of the year was Rs 35,000 and Rs.
45,000 respectively.
What is the Inventory turnover ratio?
Days of inventory holding period indicates how
long the stock is held in the company. Longer
the period indicates the inefficiency of the
company.
23.
Debtors turnover ratio or accounts receivable turnover
ratio indicates the velocity of debt collection of a firm.
In simple words it indicates the number of times average
debtors (receivable) are turned over during a year.
Interpretation: The higher the value of ratio, the more
efficient is the management of debtors or more liquid the
debtors are. Similarly, low debtors turnover ratio implies
inefficient management of debtors or less liquid debtors.
It is the reliable measure of the time of cash flow from
credit sales.
There is no rule of thumb which may be used as a norm
to interpret the ratio as it may be different from firm to
firm.
24. Example:
A firm has made credit sales of Rs
2,40,000 during the year. The outstanding
amount of debtors at the beginning and the
end of the year respectively was Rs 27,500
and Rs 32,500.
Determine the debtors turnover ratio.
25. Creditors Turnover Ratio (Creditor’s Velocity):
Net Credit Purchases
--------------------------Average Creditors
Payment Period:
Months (or days) in a year
----------------------------------Creditors Turnover
27. Solvency Ratios
Solvency
refers to the ability of the firm to pay
its long term liabilities like loan and other
obligations.
These ratio show whether company can pay
the long term liabilities.
Is the company solvent?.
What is the proportion of debt and equity in the
company?
29. Debt- Equity Ratio
The
relationship between borrowed funds
and owner’s capital is a popular measure of
long term financial solvency of a firm.
The relationship is shown by the debt-equity
ratio.
D-E ratio measures the ratio if long-term, or
total debt to shareholders equity.
30. Profitability Ratios
Net
result of a number of policies and
decisions
Show the combined effect of liquidity, asset
management, and debt management on
operating results
31. PROFITABILITY RATIOS
The
profitability ratios are calculated to
measure the operating efficiency of the
company.
Generally, two major types of profitability
ratios are calculated:
1.
2.
31
profitability in relation to sales
profitability in relation to investment.
37. UTILITY OF RATIO ANALYSIS
the ability of the firm to meet its current
obligations;
the extent to which the firm has used its long-term
solvency by borrowing funds;
the efficiency with which the firm is utilizing its
assets in generating sales revenue
the overall operating efficiency and performance of
the firm.
37
38. Diagnostic Role of Ratios
Profitability
analysis
Assets utilization
Liquidity analysis
Strategic Analysis
38
39. CAUTIONS IN USING RATIO
ANALYSIS
Standards
for comparison
Company differences
Price level changes
Different definitions of variables
Changing situations
Historical data
39