Ratio analysis is a technique used to analyze and interpret financial statements to evaluate the performance, financial position and cash flows of a business. It involves calculating and comparing various ratios using information from the financial statements. Some key ratios discussed in the document include current ratio, quick ratio, debtors turnover ratio, gross profit ratio, operating ratio, net profit ratio and expense ratios. The document also discusses ratios like debt-equity ratio, proprietary ratio, price to book ratio and price earnings ratio. Advantages of ratio analysis include simplifying accounting information and helping in comparative analysis and forecasting. Limitations include non-comparability between firms and qualitative factors being ignored.

1. PRESENTED BY :-
AFTAB.MULLA

2. DEFINATION
WHAT DO YOU MEAN BY RATION ANALYSIS
ADVANTAGES & USES
LIMITATIONS
BIBLOGRAPHY

3. According to Myers, “Ratio analysis
of financial statements is a study of
relationship among various financial
factors in a business as disclosed by
a single set of statements and a
study of trend of these factors as
shown in a series of statements.”

4. A TOOL USED BY INDIVIDUAL TO CONDUCT A
QUANTITATIVE ANALYSIS OF INFORMATION
ONE OF THE TECHNIQUE OF FINANCIAL ANALYSIS TO
EVALUATE THE FINANCIAL CONDITION AND
PERFORMANCE OF A BUSINESS CONCERN
THE COMPARISION OF ONE FIGURE TO OTHER
RELEVANT FIGURE OR FIGURES

5. TO WORKOUT THE PROFITABILITY
TO WORK THE SOLVENCY
HELPFUL IN ANALYSIS OF FINANCIAL STATEMENT
HELPFUL IN COMPARATIVE ANALYSIS OF THE PERFORMANCE
TO SIMPLIFY THE ACCOUNTING INFORMATION
TO WORKOUT THE OPERATING EFFICIENCY
TO WORKOUT SHORT-TERM FINANCIAL POSITION
HELPFUL FOR FORECASTING PURPOSES

6. LIMITED COMPARABILITY
FALSE RESULTS
EFFECT OF PRICE LEVEL CHANGES
QUALITATIVE FACTORS ARE IGNORED
EFFECT OF WINDOW-DRESSING
COSTLY TECHNIQUE
MISLEADING RESULTS
ABSENCE OF STANDARD UNVERSITY ACCEPTED
TERMINOLOGY

7. Current assets are those which are usually
converted into cash or consumed with in short
period (say one year). Current liabilities are
required to be paid in short period (say one year).
Formula of Current ratio = Current assets
Current Ratio: / current liabilities

8. Quick ratio is also known as liquid ratio or acid test
ratio. Current ratio provides a rough idea of the liquidity of a firm
so subsequently a second testing device was developed named
as acid test ratio or quick ratio. It establishes relationship
between liquid assets and current liabilities. In many businesses
a significant proportion of current assets may comprise of
inventory. Inventory, by nature, cannot be converted into ready
cash abruptly. The term liquid assets does not include inventory.
Quick ratio = Liquid
Formula of
(quick) assets / Current
Quick ratio
Liabilities
*The term liquid or quick assets includes all the current assets minus
inventory at prepaid expenses.

9. Ratio of net credit sales to average trade debtors is called debtors turnover ratio. It
is also known as receivables turnover ratio. This ratio is expressed in times.
Accounts receivables is the term which includes trade debtors and bills receivables.
It is a component of current assets and as such has direct influence on working
capital position (liquidity) of the business. Perhaps, no business can afford to make
cash sales only thus extending credit to the customers is a necessary evil. But care
must be taken to collect book debts quickly and within the period of credit allowed.
Otherwise chances of debts becoming bad and unrealizable will increase. How
effective or efficient is the credit collection? To provide answer debtors turnover ratio
or receivable turnover ratio is calculated.
FORMULA OF Receivables turnover ratio =
DEBTOR’S Annual net credit sales /
TURNOVER RATIO Average accounts receivables
*Where accounts receivables = Trade debtors + Bills receivables

10. Gross profit ratio is the ratio of gross profit to net sales i.e.
sales less sales returns. The ratio thus reflects the margin of
profit that a concern is able to earn on its trading and
manufacturing activity. It is the most commonly calculated
ratio. It is employed for inter-firm and inter-firm comparison
of trading results.
Formula of gross Gross profit = Gross profit / (Net
profit ratio sales × 100)
*Where Gross profit = Net sales - Cost of goods sold
*Cost of goods sold = Opening stock + Net purchases + Direct expenses - Closing stock
*Net sales = Sales - Returns inwards

11. The operating ratio is determined by
comparing the cost of the goods sold
and other operating expenses with net
sales.
Operating Ratio = [(Cost of goods
Formula for sold + Operating expenses /
Operating Ratio Net sates)] × 100 OR Net sales -
Gross profit
*Here cost of goods sold = Operating stock + Net purchases + Manufacturing
expenses - Closing stock
*Operating expenses = Office and administrative expenses + Selling and
distribution expenses

12. Net profit ratio (NP ratio) expresses the relationship between
net profit after taxes and sales. This ratio is a measure of the
overall profitability net profit is arrived at after taking into account
both the operating and non-operating items of incomes and
expenses. The ratio indicates what portion of the net sales is left
for the owners after all expenses have been met.
Formula of Net Net Profit Ratio =
Profit Ratio (Net profit after tax / Net sales) × 100
*It is expressed in percentage. Higher the net profit ratio, higher
is the profitability of the business.

13. The total revenue expenditure may be sub-divided into two categories with
fixed and variable. In the case of a fixed expense, the ratio will fall with
increase in sales and for a variable expense, the ratio in proportion to
sales shall nearly remain the same. Expense ratios are calculated to
ascertain the relationship that exists between operating expenses and
volume of sales. Expense ratios are calculated by dividing each item of
expense or group of expenses with the net sales so analyze the cause of
variation of the operating ratio. It indicates the portion of sales which is
consumed by various operating expenses.
Ratio of material (Direct material cost /
used to sales Net sales) × 100
Ratio of labor (Direct labor cost / Net
to sales sales) × 100

14. Ratio of factory
(Factory expenses / Net sales)
overheads to
× 100
sales
Ratio of office and (Office and
administration administration expenses
expenses to sales / Net sales) × 100
Ratio of selling (Selling and
and distribution distribution expenses /
expenses to sales Net sales) × 100
*These ratios are expressed in terms of percentage. The total
of the above ratios will be equal to the operating ratio.

15. The relationship between borrowed funds and internal owner's funds is measured by Debt-
Equity ratio. This ratio is also known as debt to net worth ratio. The total revenue
expenditure may be sub-divided into two categories with fixed and variable. In
the case of a fixed expense, the ratio will fall with increase in sales and for a
variable expense, the ratio in proportion to sales shall nearly remain the same.
Expense ratios are calculated to ascertain the relationship that exists between
operating expenses and volume of sales. Expense ratios are calculated by
dividing each item of expense or group of expenses with the net sales so
analyze the cause of variation of the operating ratio. It indicates the portion of
sales which is consumed by various operating expenses.
Formula of Debt Debt Equity Ratio =
Equity Ratio DEBT/DEBT+EQUITY

16. Proprietary ratio (also known as Equity Ratio or Net worth
to total assets or shareholder equity to total equity).
Establishes relationship between proprietor's funds to total
resources of the unit. Where proprietor's funds refer to
Equity share capital and Reserves, surpluses and Tot
resources refer to total assets.
Proprietary Ratio =
Formula of
Proprietor's funds /
Proprietary Ratio
Total assets
*This relationship highlights the fact as to what is the proportion of Proprietors
and outsiders in financing the total business

17. A ratio used to compare a stock's market value to its book value. It is
calculated by dividing the current closing price of the stock by the latest
quarter's book value per share.
A lower P/B ratio could mean that the stock is undervalued. However, it
could also mean that something is fundamentally wrong with the company.
As with most ratios, be aware that this varies by industry.
This ratio also gives some idea of whether you're paying too much for what
would be left if the company went bankrupt immediately.
P/B RATIO =
FORMULA OF P/B RATIO STOCK PRICES/TOTAL ASSETS –
INTANGIBLE ASSETS & LIABILITIES
*Also known as the “Price-Equity Ratio”

18. A valuation ratio of a company's current share price compared to its per-share earnings.
In general, a high P/E suggests that investors are expecting higher earnings growth in the
future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us
the whole story by itself. It's usually more useful to compare the P/E ratios of
one company to other companies in the same industry, to the market in general or
against the company's own historical P/E. It would not be useful for investors using the
P/E ratio as a basis for their investment to compare the P/E of a technology company
(high P/E) to a utility company (low P/E) as each industry has much different growth
prospects.
P/E RATIO =
FORMULA OF
P/E RATIO MARKET VALUE PER SHARE/
EARNINGS PER SHARE (EPS)
*Also known as “Price Multiple" or “Earnings Multiple"

19. A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures
a company's ability to generate net sales from fixed-asset investments - specifically
property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset
turnover ratio shows that the company has been more effective in using the
investment in fixed assets to generate revenues. This ratio is often used as a
measure in manufacturing industries, where major purchases are made for PP&E to
help increase output. When companies make these large purchases, prudent
investors watch this ratio in following years to see how effective the investment in
the fixed assets was.
FORMULA OF FIXED-ASSET TURNOVER =
FIXED-ASSET NET PROPERTY, PLAN,
TURNOVER RATIO EQUIPMENT

20. A ratio used to determine how easily a company can pay interest on
outstanding debt. The interest coverage ratio is calculated by dividing a
company's earnings before interest and taxes (EBIT) of one period by the
company's interest expenses of the same period. The lower the ratio,
the more the company is burdened by debt expense. When a company's
interest coverage ratio is 1.5 or lower, its ability to meet interest expenses
may be questionable. An interest coverage ratio below 1 indicates the
company is not generating sufficient revenues to satisfy interest expenses.
FORMULA OF
INTEREST COVERAGE RATIO
INTEREST
= EBIT/INTEREST EXPENSE
COVERAGE RATIO

21. A ratio that indicates what proportion of debt a company has
relative to its assets. The measure gives an idea to the leverage of
the company along with the potential risks the company faces in
terms of its debt-load. A debt ratio of greater than 1 indicates that
a company has more debt than assets, meanwhile, a debt ratio of
less than 1 indicates that a company has more assets than debt.
Used in conjunction with other measures of financial health, the
debt ratio can help investors determine a company's level of risk.
DEBT RATIO =
FORMULA OF
DEBT RATIO TOTAL DEBT/TOTAL
ASSETS

22. Indicates what portion of sales contribute to the income of
a company.
FORMULA OF PROFIT PROFIT MARGIN RATIO =
MARGIN RATIO NET INCOME/REVENUE
*This ratio is not useful for companies losing money, since they have no profit.
*A low profit margin can indicate pricing strategy and/or the impact competition has on
margins.

23. An indicator of how profitable a company is relative to its total assets. ROA gives an
idea as to how efficient management is at using its assets to generate
earnings. Calculated by dividing a company's annual earnings by its total assets, ROA
is displayed as a percentage. Sometimes this is referred to as "return on investment".
ROA tells you what earnings were generated from invested capital (assets). ROA for
public companies can vary substantially and will be highly dependent on the
industry. This is why when using ROA as a comparative measure, it is best to compare
it against a company's previous ROA numbers or the ROA of a similar company.
FORMULA OF
RETURN ON ASSET = NET
RETURN ON
INCOME/TOTAL ASSET
ASSET (ROA)

24. The amount of net income returned as a percentage of shareholders
equity. Return on equity measures a corporation's profitability by
revealing how much profit a company generates with the money
shareholders have invested. The ROE is useful for comparing the
profitability of a company to that of other firms in the same industry.
ROE =
FORMULA OF
RETURN ON EQUITY NET
(ROE) INCOME/SHAREHOLDER’S
EQUITY
*ROE is expressed as a percentage.
*Also known as "return on net worth" (RONW).

25. A ratio that indicates the efficiency and profitability of a
company's capital investments. ROCE should always be higher
than the rate at which the company borrows, otherwise any
increase in borrowing will reduce shareholders' earnings.
A variation of this ratio is return on average capital employed
(ROACE), which takes the average of opening and closing capital
employed for the time period.
ROCE =
RETURN ON CAPITAL
EMPLOYES (ROCE) EBIT/TOTAL ASSETS-
CURRENT LIABILITIES

26. The rate a taxpayer would be taxed at if taxing
was done at a constant rate, instead of
progressively. This is the net rate a taxpayer pays
if you include all forms of taxes.
EFFECTIVE TAX RATE (%) =
FORMULA OF
EFFECTIVE TAX RATE INCOME TAX
EXPENSES/PRETAX INCOME

27. www.google.com
Wikipedia