1. Title of the project: Ratio Analysis
Project Number: 1
Student Name: Avishek Sen Sarma
Registration Number: 21125740020
(Batch-06)
2. Introduction
Ratio analysis of financial statements is another tool that helps
identify changes in a company’s financial situation. A single
ratio is not sufficient to adequately judge the financial
situation of the company. Several ratios must be analyzed
together and compared with prior-year ratios, or even with
other companies in the same industry. This comparative
aspect of the analysis is extremely important in financial
analysis. It is important to note that ratios are parameters and
not precise or absolute measurements. Thus, ratios must be
interpreted cautiously to avoid erroneous conclusions. An
analyst should attempt to get behind the numbers, place them
in their proper perspective, and, if necessary, ask the right
questions for further types of ratio analysis.
3. Advantages of Ratio Analysis
Ratio analysis is widely used as a powerful tool of financial statement analysis. It establishes the
numerical or quantitative relationship between two figures of a financial statement to ascertain
strengths and weaknesses of a firm as well as its current financial position and historical
performance. It helps various interested parties to make an evaluation of certain aspect of a firm’s
performance.
Following are some important advantages of ratio analysis
• Forecasting and Planning
• Budgeting
• Measurement of Operating Efficiency
• Inter-firm Comparison
• Decision-making process.
• Diagnosis of financial ills.
• Evaluation of financial performances
• Short and long term planning.
• Study of financial trends;
4. Limitations of Ratio Analysis
Some of the most important limitations of ratio analysis include:
1. Reliability of ratio depends upon the reliability of the original data / information collected.
2. Increases, decreases and constant changes in the price distort the comparison over period of years
3. The benefits of ratio analysis depend on correct interpretation. Many times it is observed that due
to small errors in original data it leads to false conclusions.
4. A ratio-analysis should not be used as only way for assessing the performance of the firm.
5. If there is window-dressing then the ratios calculated will fail to give the correct picture and it will be
mismanagement.
6. It can be quite difficult to ascertain the reason for the results of a ratio. For example, a current ratio of
2:1 might appear to be excellent, until you realize that the company just sold a large amount of its stock
to bolster its cash position. A more detailed analysis might reveal that the current ratio will only
temporarily be at that level, and will probably decline in the near future.
7. It can be dangerous to conduct a ratio analysis comparison between two firms that are pursuing
different strategies. For example, one company may be following a low-cost strategy, and so is willing to
accept a lower gross margin in exchange for more market share. Conversely, a company in the same
industry is focusing on a high customer service strategy where its prices are higher and gross margins are
higher, but it will never attain the revenue levels of the first company.
5. Types of Ratios
Ratios can be broadly classified into four groups:
• Liquidity ratios;
• Capital Structure / Leverage ratios;
• Profitability ratios and
• Activity ratios.
As per the Task given in the captioned project I have taken financial statement of Bank of Baroda
from their official websites. From financial statement I have calculated -2- ratios under each type
of ratio and mentioned comments on each of them. At the end of the report I have mentioned the
inference based on calculations
6. Liquidity Ratio
• A liquidity ratio is a type of financial ratio used to determine a company’s ability
to pay its short-term debt obligations. The metric helps determine if a company
can use its current, or liquid, assets to cover its current liabilities.
• The liquidity ratio affects the credibility of the company as well as the credit
rating of the company. If there are continuous defaults in repayment of a short-
term liability then this will lead to bankruptcy. Hence this ratio plays important
role in the financial stability of any company and credit ratings.
• Three liquidity ratios are commonly used – the current ratio, quick ratio, and cash
ratio. In each of the liquidity ratios, the current liabilities amount is placed in the
denominator of the equation, and the liquid assets amount is placed in the
numerator.
7. Types of Liquidity Ratios
1. Current Ratio
• Current Ratio = Current Assets / Current Liabilities
• The current ratio is the simplest liquidity ratio to calculate and interpret. Anyone can easily find
the current assests and current liabilities line items on a company’s balance sheet. Divide current
assets by current liabilities, and you will arrive at the current ratio.
2. Quick Ratio
• Quick Ratio = (Cash + Accounts Receivables + Marketable Securities) / Current Liabilities
• The quick ratio is a stricter test of liquidity than the current ratio. Both are similar in the sense
that current assets is the numerator, and current liabilities is the denominator.
• However, the quick ratio only considers certain current assets. It considers more liquid assets such
as cash, accounts receivables, and marketable securities. It leaves out current assets such as
inventory and prepaid expenses because the two are less liquid. So, the quick ratio is more of a
true test of a company’s ability to cover its short-term obligations.
3. Cash Ratio
• Cash Ratio = (Cash + Marketable Securities) / Current Liabilities
• The cash ratio takes the test of liquidity even further. This ratio only considers a company’s most
liquid assets – cash and marketable securities. They are the assets that are most readily available
to a company to pay short-term obligations.
8. Particulars Mar'21 Mar'20 Mar'19
Liabilities 12 Months 12 Months 12 Months
Share Capital 1035.53 925.37 5572.36
Reserves & Surplus 76010.19 70930.84 45410.73
Net Worth 77045.72 71856.22 50983.10
Secured Loan 66847.93 93069.31 67201.30
Unsecured Loan 966996.93 945984.43 638689.72
TOTAL LIABILITIES 1110890.58 1110909.95 756874.11
Gross Block 8016.25 8889.29 6990.30
(-) Acc. Depreciation .00 .00 .00
Net Block 8016.25 8889.29 6990.30
Capital Work in Progress .00 .00 .00
Investments 261220.27 274614.61 182298.08
Inventories .00 .00 .00
Sundry Debtors .00 .00 .00
Cash and Bank 120412.82 121901.12 89229.62
Loans and Advances 765715.44 752510.49 502469.41
Total Current Assets 886128.26 874411.61 591699.03
9. Current Liabilities 44474.19 47005.56 24113.29
Provisions .00 .00 .00
Total Current Liabilities 44474.19 47005.56 24113.29
NET CURRENT ASSETS 841654.07 827406.05 567585.74
Misc. Expenses .00 .00 .00
TOTAL ASSETS(A+B+C+D+E) 1110890.58 1110909.95 756874.11
10. Calculation of Liquidity Ratio
Particulars For FY 2020-21 For FY 2019-20 For FY 2018-19
Current Ratio 0.06 0.06 0.05
Quick Ratio 18.09 16.70 21.94
11. Solvency Ratio
• A solvency ratio is a performance metric that helps us examine a company’s
financial health. In particular, it enables us to determine whether the company
can meet its financial obligations in the long term.
• Solvency ratios are used by prospective business lenders to determine the
solvency state of a business. Companies that have a higher solvency ratio are
deemed more likely to meet the debt obligations while companies with a lower
solvency ratio are more likely to pose a risk for the banks and creditors. Solvency
ratios vary with the type of industry, but as a good measure a solvency ratio of
0.5 is always considered as a goo
• Solvency ratios should not be confused with liquidity ratios. They are totally
different. Liquidity ratios determine the capability of a business to manage its
short-term liabilities while the solvency ratios are used to measure a company’s
ability to pay long-term debts.
12. Types of Solvency Ratios
1. Debt to equity ratio
• Debt to equity is one of the most used debt solvency ratios. It is also represented as D/E ratio. Debt to equity ratio is calculated by dividing a
company’s total liabilities with the shareholder’s equity. These values are obtained from the balance sheet of the company’s financial
statements.
• It is an important metric which is used to evaluate a company’s financial leverage. This ratio helps understand if the shareholder’s equity
has the ability to cover all the debts in case business is experiencing a rough time.
• It is represented as Debt to equity ratio = Long term debt / shareholder’s funds
2. Debt Ratio
• Debt ratio is a financial ratio that is used in measuring a company’s financial leverage. It is calculated by taking the total liabilities and
dividing it by total capital. If the debt ratio is higher, it represents the company is riskier.
• The long-term debts include bank loans, bonds payable, notes payable etc.
• It is represented as Debt Ratio = Long Term Debt / Capital or Debt Ratio = Long Term Debt / Net Assets
3. Interest Coverage Ratio
• The interest coverage ratio is used to determine whether the company is able to pay interest on the outstanding debt obligations. It is
calculated by dividing company’s EBIT (Earnings before interest and taxes) with the interest payment due on debts for the accounting
period.
• It is represented as Interest coverage ratio = EBIT / interest on long term debt
Where EBIT = Earnings before interest and taxes or Net Profit before interest and tax.
13. Profitality Ratio
• Profitability ratios assess a company's ability to earn profits from its sales or operations, balance
sheet assets, or shareholders' equity.
• Profitability ratios indicate how efficiently a company generates profit and value for shareholders.
• Higher ratio results are often more favourable, but these ratios provide much more information
when compared to results of similar companies, the company's own historical performance, or
the industry average.
• For most profitability ratios, having a higher value relative to a competitor's ratio or relative to the
same ratio from a previous period indicates that the company is doing well. Profitability ratios are
most useful when compared to similar companies, the company's own history, or average ratios
for the company's industry.
• Profitability ratios are generally falls into two categories—margin ratios and return ratios.
• Margin ratios give insight on a company's ability to turn sales into a profit. Return ratios give
several different ways to examine how well a company generates return for its shareholders.
• Some common examples of profitability ratios are the Gross profit margin, EBIDTA margin, Net
profit margin, return on assets (ROA), and return on equity (ROE).
14. Calculation of Profitability Ratios
Particulars For FY 2020-21 For FY 2019-20 For FY 2018-19
Net Profit Margin 1.17 0.71 0.87
Return on Assets 148.99 155.51 173.66
15. Inference
• The current ratio of BOB is less than one (0.08), which is not a good
sign for the business. It doesn’t mean that the company may go
bankrupt overnight, but it is something that the company should look
at immediately. The reason for this unhealthy liquidity ratio may be:
1.The company was focusing on the repayment of its long-term debts.
2.The company was converting its current assets to long-term assets.
3.The company was spending a substantial amount on R&D activities.
4. The company’s operating cycle would be in trouble.
16. • The Quick Ratio is a ratio calculated to know the liquidity condition of the business. In other words, a company can use its
cash and near cash assets to repay its short-term financial obligations. Here in our case, Quick Ratio is more than one
showing healthy liquidity condition
• The net profit margin can indicate how well the company converts its sales into profits. In other words, the percentage
calculated by the net profit margin equation is the percentage of your revenues that are profits that the company gets to
keep.
Conversely, this ratio also indicates the amount of revenue you are losing through costs and expenses associated with your
business. It can help analysts figure out whether a business should focus on whittling back spending.
Both net sales and net income are related to each other, in that expenses can increase prices and decrease sales (depending
on your product and audience). It may not always be easy to determine the exact relationship.
For example, increasing expenses to produce a higher quality product could attract enough customers to increase net sales.
On the other hand, an increase in expenses could also decrease net sales if too many of those expenses are passed onto the
customers in the form of higher prices. If customers decide the price hike isn't worth the higher quality product, revenue will
fall.
•Return on assets (ROA)
1. a measure of a company's ability to generate profit, computed as: net income divided by average total assets
2. total assets is the sum of current and non-current assets, or can also be computed as total liabilities plus total capital (or
equity)
3. generally, the higher the ROA, the better; but it should be compared to a benchmark to provide better insights
