2. RATIO
It is an arithmetical
expression of relationship
between two related or
interdependent items.
3. RATIO ANALYSIS
Ratio Analysis is the
technique of analysing the
financial statements. It is a
process of determining
and interpreting
relationships between the
items of financial
statement
4. MODE OF EXPRESSION OF RATIO
In Proportion
In Rate or Times or
Coefficient
In Percentage
5. STEPS IN RATIO ANALYSIS
Selection of relevant
information
Comparison of Calculated
Ratios
Interpretation and
Reporting
6. ADVANTAGES OF RATIO ANALYSIS
Forecasting
Managerial Control
Facilitates Communication
Measuring Efficiency
Facilitating Investment Decisions
Useful in Measuring Financial Solvency
Inter Firm Comparisons
7. LIMITATION OF RATIO ANALYSIS
Practical Knowledge
Ratios Are Means
Inter-Relationship
Non-Availability Of Standards Or Norms
Accuracy Of Financial Information
Detachment From Financial Statement
Time Lag
Changes in Price Level
12. PROFITABILITY RATIOS
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.
13. GROSS PROFIT RATIO
Gross Profit Ratio is a profitability ratio that
measures the relationship between the gross profit
and net sales revenue. When it is expressed as a
percentage, it is also known as the Gross Profit
Margin.
Formula for Gross Profit ratio is
Gross Profit Ratio = Gross Profit/Net Sale × 100
14. NET PROFIT RATIO
Net profit ratio is an important profitability ratio that
shows the relationship between net sales and net
profit after tax. When expressed as percentage, it is
known as net profit margin.
Formula for net profit ratio is
Net Profit Ratio = Net Profit / Net Sale × 100
15. OPERATING RATIO
Operating ratio is calculated to determine the cost
of operation in relation to the revenue earned from
the operations.
The formula for operating ratio is as follows
Operating Ratio = (Cost of Revenue from
Operations + Operating Expenses)/Net Revenue
from Operations ×100
16. OPERATING PROFIT RATIO
Operating profit ratio is a type of profitability ratio that is
used for determining the operating profit and net revenue
generated from the operations. It is expressed as a
percentage.
The formula for calculating operating profit ratio is:
Operating Profit Ratio = Operating Profit/ Net
Sales × 100
17. RETURN ON INVESTMENT (ROI)
Return on capital employed (ROCE) or Return on
Investment is a profitability ratio that measures how
well a company is able to generate profits from its
capital. It is an important ratio that is mostly used by
investors while screening for companies to invest.
The formula for calculating.
Return on Capital Employed is :
ROCE or ROI = EBIT ÷ Capital Employed × 100
Where EBIT = Earnings before interest and taxes or
Profit before interest and taxes
Capital Employed = Total Assets – CurrentLiabilities
18. RETURN ON SHAREHOLDERS’ FUND
OR RETURN ON NET WORTH
Return on Shareholders funds is used for determining
whether the investment done by the shareholders are able
to generate profitable returns or not. It should always be
higher than the return on investment which otherwise
would indicate that the company funds are not utilised
properly.
The formula for Return on Net Worth is calculated as :
Return on Shareholders’ Fund = Profit after Tax /
Shareholders’ Funds × 100
Or Return on Net Worth = Profit after Tax /
Shareholders’ Funds × 100
19. EARNINGS PER SHARE (EPS)
Earnings per share or EPS is a profitability ratio that
measures the extent to which a company earns profit. It
is calculated by dividing the net profit earned by
outstanding shares.
The formula for calculating EPS is:
Earnings per share = Net Profit ÷ Total no. of shares
20. DIVIDEND PAYOUT RATIO
Dividend payout ratio calculates the amount paid to
shareholders as dividends in relation to the amount of net
income generated by the business.
It can be calculated as follows:
Dividend Payout Ratio (DPR) : Dividends per share /
Earnings per share
21. PRICE EARNING RATIO
This is also known as P/E Ratio. It establishes a
relationship between the stock (share) price of a
company and the earnings per share. It is very helpful for
investors as they will be more interested in knowing the
profitability of the shares of the company and how much
profitable it will be in future.
P/E ratio is calculated as follows:
P/E Ratio = Market value per share ÷ Earnings per share
