Ratio analysis involves computing relationships between financial statement items to interpret a firm's strengths, weaknesses, historical performance, and current condition. Ratios are classified into liquidity, capital structure, profitability, and activity ratios. Liquidity ratios measure short-term solvency, capital structure ratios measure long-term solvency, profitability ratios measure operating efficiency and returns, and activity ratios measure resource utilization. Caution must be exercised when interpreting ratios, which are best analyzed over time, against industry benchmarks, or through inter-firm comparison.
Ratio analysis involves calculating and comparing financial ratios to analyze a firm's financial statements and determine its strengths, weaknesses, and financial condition. Ratios compare various data points in the financial statements to reveal important relationships. Common types of ratios include liquidity ratios, capital structure ratios, profitability ratios, and activity ratios. Ratio analysis is an important financial analysis tool that allows users to evaluate trends over time, compare performance to competitors or standards, and identify areas for improvement.
Ratio analysis involves calculating and comparing financial ratios to analyze a firm's financial statements and determine its strengths, weaknesses, and financial condition. Ratios compare various data points in the financial statements and are used to interpret the relationships between different elements. Common types of ratios include liquidity ratios, capital structure ratios, profitability ratios, and activity ratios. Financial ratios provide insight into a firm's performance, position, and prospects when analyzed over time and compared against industry standards or competitors.
Ratio Analysis By- Ravi Thakur From CMD Ravi Thakur
Ratio analysis is a technique used to analyze financial statements and evaluate the performance, financial position, and cash flows of a business or corporation. Ratios can be used to compare a company's performance over several years, compare a company to other companies, and assess its operating and financial efficiency. Some key points covered in the document include:
- Ratio analysis involves calculating and interpreting various financial ratios to analyze trends, evaluate performance, assess risk, and make comparisons.
- Common types of ratios include liquidity ratios, leverage ratios, activity ratios, and profitability ratios.
- Ratio analysis helps lenders and others evaluate a company's liquidity position, profitability, solvency, financial stability, management quality, and risk.
This document provides information on ratio analysis including its definition, purpose, types of ratios, and how they are calculated and interpreted. Ratio analysis is a technique used to analyze financial statements and evaluate the performance, financial position, and viability of a business entity. It involves calculating various financial ratios using data from the income statement, balance sheet, and cash flow statement, and comparing them over time and against industry benchmarks to gain insight into the entity's profitability, liquidity, leverage, and operating efficiency. The document outlines various financial ratios that can be computed such as the current ratio, quick ratio, debt-to-equity ratio, and discusses how ratios are expressed and important considerations in their use and interpretation.
The document discusses various types of financial ratios used in ratio analysis. It defines ratios and explains their calculation and significance. The key ratios discussed are:
1. Liquidity ratios like current ratio and quick ratio, which measure a firm's ability to meet short-term obligations.
2. Leverage or capital structure ratios like debt-to-equity ratio and debt-to-total funds ratio, which assess long-term solvency.
3. Activity or turnover ratios like inventory turnover and debtors turnover, which evaluate efficiency of resource use.
4. Profitability ratios like gross profit ratio and return on equity, which examine profit generation.
The document provides formulas and interpretations
The document discusses ratio analysis, which involves determining the quantitative relationship between items in financial statements. It defines different types of ratios like liquidity, leverage, activity, and profitability ratios. Specific ratios discussed include current ratio, quick ratio, debt-equity ratio, debt-to-total funds ratio, proprietary ratio, and fixed assets to proprietor's funds ratio. Advantages of ratio analysis include aiding analysis, comparative studies, locating weaknesses, and forecasting. Limitations include inability to compare firms with different accounting policies and ratios being impacted by inflation.
Ratio analysis involves calculating and analyzing financial ratios to interpret a firm's financial statements and evaluate its performance. It is used to assess the firm's strengths and weaknesses, historical performance, current financial condition, operating efficiency, financial soundness, and earning capacity. Ratios can be classified into liquidity ratios, solvency/capital structure ratios, profitability ratios, and activity ratios. Common ratios include the current ratio, quick ratio, debt-to-equity ratio, return on assets, gross profit margin, and interest coverage ratio. Ratio analysis is an important tool to evaluate firms and make comparisons over time, between firms, and against industry standards.
Ratio analysis involves calculating relationships between financial statement items to interpret a firm's financial condition and performance. Ratios can be classified into liquidity, capital structure, profitability, and activity ratios. Liquidity ratios measure short-term solvency, capital structure ratios measure long-term solvency, profitability ratios measure operating efficiency and returns, and activity ratios measure asset utilization and efficiency. Ratios are compared over time, against industry standards, or between firms to identify strengths, weaknesses, and trends.
Ratio analysis involves calculating and comparing financial ratios to analyze a firm's financial statements and determine its strengths, weaknesses, and financial condition. Ratios compare various data points in the financial statements to reveal important relationships. Common types of ratios include liquidity ratios, capital structure ratios, profitability ratios, and activity ratios. Ratio analysis is an important financial analysis tool that allows users to evaluate trends over time, compare performance to competitors or standards, and identify areas for improvement.
Ratio analysis involves calculating and comparing financial ratios to analyze a firm's financial statements and determine its strengths, weaknesses, and financial condition. Ratios compare various data points in the financial statements and are used to interpret the relationships between different elements. Common types of ratios include liquidity ratios, capital structure ratios, profitability ratios, and activity ratios. Financial ratios provide insight into a firm's performance, position, and prospects when analyzed over time and compared against industry standards or competitors.
Ratio Analysis By- Ravi Thakur From CMD Ravi Thakur
Ratio analysis is a technique used to analyze financial statements and evaluate the performance, financial position, and cash flows of a business or corporation. Ratios can be used to compare a company's performance over several years, compare a company to other companies, and assess its operating and financial efficiency. Some key points covered in the document include:
- Ratio analysis involves calculating and interpreting various financial ratios to analyze trends, evaluate performance, assess risk, and make comparisons.
- Common types of ratios include liquidity ratios, leverage ratios, activity ratios, and profitability ratios.
- Ratio analysis helps lenders and others evaluate a company's liquidity position, profitability, solvency, financial stability, management quality, and risk.
This document provides information on ratio analysis including its definition, purpose, types of ratios, and how they are calculated and interpreted. Ratio analysis is a technique used to analyze financial statements and evaluate the performance, financial position, and viability of a business entity. It involves calculating various financial ratios using data from the income statement, balance sheet, and cash flow statement, and comparing them over time and against industry benchmarks to gain insight into the entity's profitability, liquidity, leverage, and operating efficiency. The document outlines various financial ratios that can be computed such as the current ratio, quick ratio, debt-to-equity ratio, and discusses how ratios are expressed and important considerations in their use and interpretation.
The document discusses various types of financial ratios used in ratio analysis. It defines ratios and explains their calculation and significance. The key ratios discussed are:
1. Liquidity ratios like current ratio and quick ratio, which measure a firm's ability to meet short-term obligations.
2. Leverage or capital structure ratios like debt-to-equity ratio and debt-to-total funds ratio, which assess long-term solvency.
3. Activity or turnover ratios like inventory turnover and debtors turnover, which evaluate efficiency of resource use.
4. Profitability ratios like gross profit ratio and return on equity, which examine profit generation.
The document provides formulas and interpretations
The document discusses ratio analysis, which involves determining the quantitative relationship between items in financial statements. It defines different types of ratios like liquidity, leverage, activity, and profitability ratios. Specific ratios discussed include current ratio, quick ratio, debt-equity ratio, debt-to-total funds ratio, proprietary ratio, and fixed assets to proprietor's funds ratio. Advantages of ratio analysis include aiding analysis, comparative studies, locating weaknesses, and forecasting. Limitations include inability to compare firms with different accounting policies and ratios being impacted by inflation.
Ratio analysis involves calculating and analyzing financial ratios to interpret a firm's financial statements and evaluate its performance. It is used to assess the firm's strengths and weaknesses, historical performance, current financial condition, operating efficiency, financial soundness, and earning capacity. Ratios can be classified into liquidity ratios, solvency/capital structure ratios, profitability ratios, and activity ratios. Common ratios include the current ratio, quick ratio, debt-to-equity ratio, return on assets, gross profit margin, and interest coverage ratio. Ratio analysis is an important tool to evaluate firms and make comparisons over time, between firms, and against industry standards.
Ratio analysis involves calculating relationships between financial statement items to interpret a firm's financial condition and performance. Ratios can be classified into liquidity, capital structure, profitability, and activity ratios. Liquidity ratios measure short-term solvency, capital structure ratios measure long-term solvency, profitability ratios measure operating efficiency and returns, and activity ratios measure asset utilization and efficiency. Ratios are compared over time, against industry standards, or between firms to identify strengths, weaknesses, and trends.
The document discusses liquidity ratios, which analyze a firm's short-term financial position and ability to meet current liabilities with current assets. It defines the current ratio as current assets divided by current liabilities, with 1.5:1 typically considered satisfactory. The quick or acid test ratio measures a firm's ability to use quick assets like cash to pay current liabilities immediately, excluding inventory from current assets. Both ratios above 1 indicate a company can meet short-term obligations, while ratios below 1 suggest potential issues with liquidity. The document provides an example calculation of both ratios.
Here are the key ratios calculated from the financial information provided:
1. Tangible Net Worth for 2005-06: Capital (300) + Reserves (140) - Goodwill (50) = 390
2. Current Ratio for 2006-07: Current Assets (170 + 30 + 170 + 20 + 240 + 190) / Current Liabilities (580 + 70 + 80 + 70) = 820/800 = 1.02
3. Debt Equity Ratio for 2005-06: Total Debt (Bank Term Loan 320 + Unsec. Long Term Loan 150) / Tangible Net Worth (390) = 470/390 = 1.2
Ratio analysis is a method used to interpret financial statements and assess the strengths and weaknesses of a firm. Ratios measure the relationship between different financial metrics and can be used to compare performance over time, between firms, or against standards. Key types of ratios include liquidity, capital structure, profitability, and activity ratios which analyze different aspects of a firm's financial health and operations. Calculating ratios on its own does not provide value; analysis and comparison are required to draw meaningful conclusions.
Ratio analysis is a technique used to interpret financial statements and evaluate the operating performance and financial position of a company. It involves calculating and comparing various financial ratios related to liquidity, profitability, and solvency. Some key liquidity ratios discussed in the document include the current ratio, acid-test ratio, and cash ratio. Turnover ratios measure how efficiently a company manages its assets, such as inventory and accounts receivable. The document provides formulas and interpretations for various financial ratios.
Liquidity Ratios are an integral part of financial statement analysis. These are various measures to find or to ascertain the firm’s ability to meet the short term expenses or liabilities and convertibility to liquid assets (for further reading click the link) into cash on requirement. Copy the link given below and paste it in new browser window to get more information on Liquidity Ratio:- http://www.transtutors.com/homework-help/accounting/financial-statement-analysis-liquidity-ratios/
This document discusses working capital management. It defines working capital as the relationship between a firm's short-term assets and short-term liabilities, with the goal of ensuring the firm can continue operations and meet upcoming expenses and debt obligations. It covers key working capital concepts like net and gross working capital, current assets and current liabilities, and factors that influence working capital levels and financing approaches, such as liquidity, profitability and risk considerations.
This document discusses the importance and limitations of ratio analysis and defines various types of ratios used to analyze a company's liquidity, leverage, turnover, profitability, and valuation. Key ratios covered include the current ratio, debt-equity ratio, inventory turnover ratio, return on assets, price-earnings ratio, and more. Ratio analysis enables comparison of a firm's performance over time and against industry benchmarks across areas such as liquidity, solvency, efficiency, and profitability. However, comparisons can be limited by differing firm situations and lack of industry data.
The document discusses the analysis of financial statements. It defines financial statement analysis as the classification and interpretation of items in statements like the income statement and balance sheet. This helps evaluate the financial strengths and weaknesses of a company. The document outlines different types of analysis including external, internal, horizontal, and vertical analysis. It also describes various techniques used like comparative statements, trend analysis, common-size statements, and ratio analysis. Key ratios are discussed including liquidity, leverage, profitability, and activity ratios.
This document discusses ratio analysis and provides a comparison of ratio analyses between two prominent Bangladeshi banks, AB Bank Limited and Eastern Bank Limited, from 2012 to 2016. Ratio analysis involves calculating and presenting relationships between financial statement items to analyze a company's financial position and performance over time and compared to other companies. The document analyzes several key ratios for the two banks, including the advances to deposits ratio, non-performing loan ratio, capital adequacy ratio, cost to income ratio, return on equity, return on assets, earnings per share, and book value per share. It finds that Eastern Bank Limited generally demonstrated better performance and financial stability based on these ratios over the period analyzed.
The document provides an overview of key financial statements and concepts related to banking. It discusses the balance sheet, income statement, and statement of cash flows. It then explains key components of these statements like assets, liabilities, equity, net income, and cash flow. The document also covers concepts like leverage, net interest margin, types of bank deposits and assets, and measures of money supply.
Assessing risk in a business has a lot to do with understanding the business' gearing (or leverage) ratio. This presentation takes highlights what you need to look for when analysing the ratio and some of the adjustments that sometimes have to be made.
The document discusses various financial ratios used to analyze the financial position of a business. It defines financial ratios as relationships between accounting figures expressed mathematically. Financial ratio analysis is used to study information in financial statements, ascertain a business's overall financial position, and interpret key information. The document then discusses various types of ratios including liquidity ratios, solvency ratios, activity ratios, and profitability ratios. It provides examples of specific ratios like the current ratio, quick ratio, debt-to-equity ratio, and return on assets ratio and how they are calculated and interpreted.
Ratio analysis is used to evaluate a company's financial health and performance. Ratios are calculated using numbers from financial statements and compared over time and against industry benchmarks. The document discusses various types of ratios like liquidity, profitability, and solvency ratios and their formulas and interpretations. It also covers the uses and limitations of ratio analysis as well as break-even analysis which is used to evaluate sales volumes required to cover costs and make a profit.
Liquidity ratio By- Deepak Madan (M.com, B.ed)deepak madan
This document discusses accounting ratios, specifically liquidity ratios. It defines liquidity ratios as ratios that assess a firm's ability to pay current liabilities. Two key liquidity ratios are discussed in detail:
The current ratio compares current assets to current liabilities and measures a firm's ability to pay off current debts with current assets. A ratio of 2:1 is generally considered adequate.
The quick ratio compares more liquid current assets (excluding inventory and prepaid expenses) to current liabilities and measures a firm's ability to pay current debts within a month. A ratio of 1:1 is generally considered adequate.
The document provides the detailed formulas and interpretations of these two important liquidity ratios.
This document discusses ratio analysis, which involves interpreting numerical relationships based on financial statements to evaluate a company's performance. Ratios are classified into liquidity ratios, which assess short-term solvency, and solvency ratios, which evaluate long-term financial position. Key liquidity ratios discussed are current ratio, quick ratio, and absolute liquidity ratio. Important solvency ratios mentioned include debt-equity ratio, proprietary ratio, and fixed assets to net worth ratio. The document provides formulas and interpretations for these ratios.
The document discusses the liquidity ratio, which indicates how prepared someone is to meet short-term financial obligations without income. The liquidity ratio is calculated by dividing liquid assets by monthly expenses. Liquid assets include cash savings that can be accessed, while expenses used are immediate monthly costs like rent that cannot be delayed. A higher liquidity ratio means more months of expenses can be covered without income. The appropriate ratio depends on individual factors like income level and expenses.
The document discusses ratio analysis, which is a technique used in financial analysis to evaluate various financial metrics of a business. It provides classifications and examples of different types of ratios, including liquidity ratios like current ratio and quick ratio, solvency ratios like debt-equity ratio and proprietary ratio, and profitability ratios. Ratio analysis is an important tool for financial institutions to evaluate the financial viability, performance, and risk of businesses when deciding whether to approve loans and credits.
This document discusses various financial ratios used to evaluate a company's liquidity and debt obligations. It defines current ratio, quick ratio, and cash ratio as measures of liquidity, calculated by dividing different levels of current assets by current liabilities. A higher ratio indicates greater ability to meet short-term debts. Debt ratio is defined as total debt divided by total assets to indicate the percentage of assets financed by debt. The document then provides an example company's current assets, liabilities, and calculates its quick and current ratios to demonstrate its liquidity.
Ratio analysis is used to evaluate the financial performance and health of a business. Ratios show the mathematical relationship between two related figures and can be used for trend analysis and comparisons between firms. There are several types of ratios including liquidity ratios that measure short-term financial strength, activity/turnover ratios that measure efficiency, and profitability ratios. Current ratio, quick ratio, and inventory turnover ratio are some examples discussed. Ratios should be interpreted both individually and in comparison to past ratios and industry standards to evaluate performance over time.
Ratio analysis is an important tool for financial analysis that involves calculating and analyzing relationships between key financial data points from statements. It helps assess a company's liquidity, profitability, solvency, financial stability, and risk. When using ratios, it is important to compare the same company over multiple years, against industry benchmarks, and be aware of factors like accounting differences that could distort comparisons. Key ratios include current ratio, acid test ratio, debt-equity ratio, proprietary ratio, and gross profit ratio.
This document provides an overview of management accounting concepts including ratio analysis, funds flow analysis, cash flow analysis, marginal costing, standard costing, budgetary control, costing for decision making, and responsibility accounting. It then discusses various types of ratios in detail, including liquidity ratios like current ratio and quick ratio, solvency ratios like debt-equity ratio and interest coverage ratio, activity ratios like stock turnover ratio and debtors turnover ratio, and profitability ratios like gross profit ratio and net profit ratio. Finally, it discusses cash flow statements, their objectives, important definitions as per accounting standards, and classification of cash flows.
Financial statement analysis involves various techniques to evaluate a company's financial health and performance, including ratio analysis. Ratio analysis calculates statistical relationships between financial data points to gain insights. Key ratios discussed in the document include liquidity ratios like the current ratio and quick ratio, leverage ratios like the debt-to-equity ratio, activity ratios like inventory turnover ratio, and profitability ratios. Calculating and analyzing ratios helps understand a company's liquidity, creditworthiness, operational efficiency, and profit generating ability.
The document discusses liquidity ratios, which analyze a firm's short-term financial position and ability to meet current liabilities with current assets. It defines the current ratio as current assets divided by current liabilities, with 1.5:1 typically considered satisfactory. The quick or acid test ratio measures a firm's ability to use quick assets like cash to pay current liabilities immediately, excluding inventory from current assets. Both ratios above 1 indicate a company can meet short-term obligations, while ratios below 1 suggest potential issues with liquidity. The document provides an example calculation of both ratios.
Here are the key ratios calculated from the financial information provided:
1. Tangible Net Worth for 2005-06: Capital (300) + Reserves (140) - Goodwill (50) = 390
2. Current Ratio for 2006-07: Current Assets (170 + 30 + 170 + 20 + 240 + 190) / Current Liabilities (580 + 70 + 80 + 70) = 820/800 = 1.02
3. Debt Equity Ratio for 2005-06: Total Debt (Bank Term Loan 320 + Unsec. Long Term Loan 150) / Tangible Net Worth (390) = 470/390 = 1.2
Ratio analysis is a method used to interpret financial statements and assess the strengths and weaknesses of a firm. Ratios measure the relationship between different financial metrics and can be used to compare performance over time, between firms, or against standards. Key types of ratios include liquidity, capital structure, profitability, and activity ratios which analyze different aspects of a firm's financial health and operations. Calculating ratios on its own does not provide value; analysis and comparison are required to draw meaningful conclusions.
Ratio analysis is a technique used to interpret financial statements and evaluate the operating performance and financial position of a company. It involves calculating and comparing various financial ratios related to liquidity, profitability, and solvency. Some key liquidity ratios discussed in the document include the current ratio, acid-test ratio, and cash ratio. Turnover ratios measure how efficiently a company manages its assets, such as inventory and accounts receivable. The document provides formulas and interpretations for various financial ratios.
Liquidity Ratios are an integral part of financial statement analysis. These are various measures to find or to ascertain the firm’s ability to meet the short term expenses or liabilities and convertibility to liquid assets (for further reading click the link) into cash on requirement. Copy the link given below and paste it in new browser window to get more information on Liquidity Ratio:- http://www.transtutors.com/homework-help/accounting/financial-statement-analysis-liquidity-ratios/
This document discusses working capital management. It defines working capital as the relationship between a firm's short-term assets and short-term liabilities, with the goal of ensuring the firm can continue operations and meet upcoming expenses and debt obligations. It covers key working capital concepts like net and gross working capital, current assets and current liabilities, and factors that influence working capital levels and financing approaches, such as liquidity, profitability and risk considerations.
This document discusses the importance and limitations of ratio analysis and defines various types of ratios used to analyze a company's liquidity, leverage, turnover, profitability, and valuation. Key ratios covered include the current ratio, debt-equity ratio, inventory turnover ratio, return on assets, price-earnings ratio, and more. Ratio analysis enables comparison of a firm's performance over time and against industry benchmarks across areas such as liquidity, solvency, efficiency, and profitability. However, comparisons can be limited by differing firm situations and lack of industry data.
The document discusses the analysis of financial statements. It defines financial statement analysis as the classification and interpretation of items in statements like the income statement and balance sheet. This helps evaluate the financial strengths and weaknesses of a company. The document outlines different types of analysis including external, internal, horizontal, and vertical analysis. It also describes various techniques used like comparative statements, trend analysis, common-size statements, and ratio analysis. Key ratios are discussed including liquidity, leverage, profitability, and activity ratios.
This document discusses ratio analysis and provides a comparison of ratio analyses between two prominent Bangladeshi banks, AB Bank Limited and Eastern Bank Limited, from 2012 to 2016. Ratio analysis involves calculating and presenting relationships between financial statement items to analyze a company's financial position and performance over time and compared to other companies. The document analyzes several key ratios for the two banks, including the advances to deposits ratio, non-performing loan ratio, capital adequacy ratio, cost to income ratio, return on equity, return on assets, earnings per share, and book value per share. It finds that Eastern Bank Limited generally demonstrated better performance and financial stability based on these ratios over the period analyzed.
The document provides an overview of key financial statements and concepts related to banking. It discusses the balance sheet, income statement, and statement of cash flows. It then explains key components of these statements like assets, liabilities, equity, net income, and cash flow. The document also covers concepts like leverage, net interest margin, types of bank deposits and assets, and measures of money supply.
Assessing risk in a business has a lot to do with understanding the business' gearing (or leverage) ratio. This presentation takes highlights what you need to look for when analysing the ratio and some of the adjustments that sometimes have to be made.
The document discusses various financial ratios used to analyze the financial position of a business. It defines financial ratios as relationships between accounting figures expressed mathematically. Financial ratio analysis is used to study information in financial statements, ascertain a business's overall financial position, and interpret key information. The document then discusses various types of ratios including liquidity ratios, solvency ratios, activity ratios, and profitability ratios. It provides examples of specific ratios like the current ratio, quick ratio, debt-to-equity ratio, and return on assets ratio and how they are calculated and interpreted.
Ratio analysis is used to evaluate a company's financial health and performance. Ratios are calculated using numbers from financial statements and compared over time and against industry benchmarks. The document discusses various types of ratios like liquidity, profitability, and solvency ratios and their formulas and interpretations. It also covers the uses and limitations of ratio analysis as well as break-even analysis which is used to evaluate sales volumes required to cover costs and make a profit.
Liquidity ratio By- Deepak Madan (M.com, B.ed)deepak madan
This document discusses accounting ratios, specifically liquidity ratios. It defines liquidity ratios as ratios that assess a firm's ability to pay current liabilities. Two key liquidity ratios are discussed in detail:
The current ratio compares current assets to current liabilities and measures a firm's ability to pay off current debts with current assets. A ratio of 2:1 is generally considered adequate.
The quick ratio compares more liquid current assets (excluding inventory and prepaid expenses) to current liabilities and measures a firm's ability to pay current debts within a month. A ratio of 1:1 is generally considered adequate.
The document provides the detailed formulas and interpretations of these two important liquidity ratios.
This document discusses ratio analysis, which involves interpreting numerical relationships based on financial statements to evaluate a company's performance. Ratios are classified into liquidity ratios, which assess short-term solvency, and solvency ratios, which evaluate long-term financial position. Key liquidity ratios discussed are current ratio, quick ratio, and absolute liquidity ratio. Important solvency ratios mentioned include debt-equity ratio, proprietary ratio, and fixed assets to net worth ratio. The document provides formulas and interpretations for these ratios.
The document discusses the liquidity ratio, which indicates how prepared someone is to meet short-term financial obligations without income. The liquidity ratio is calculated by dividing liquid assets by monthly expenses. Liquid assets include cash savings that can be accessed, while expenses used are immediate monthly costs like rent that cannot be delayed. A higher liquidity ratio means more months of expenses can be covered without income. The appropriate ratio depends on individual factors like income level and expenses.
The document discusses ratio analysis, which is a technique used in financial analysis to evaluate various financial metrics of a business. It provides classifications and examples of different types of ratios, including liquidity ratios like current ratio and quick ratio, solvency ratios like debt-equity ratio and proprietary ratio, and profitability ratios. Ratio analysis is an important tool for financial institutions to evaluate the financial viability, performance, and risk of businesses when deciding whether to approve loans and credits.
This document discusses various financial ratios used to evaluate a company's liquidity and debt obligations. It defines current ratio, quick ratio, and cash ratio as measures of liquidity, calculated by dividing different levels of current assets by current liabilities. A higher ratio indicates greater ability to meet short-term debts. Debt ratio is defined as total debt divided by total assets to indicate the percentage of assets financed by debt. The document then provides an example company's current assets, liabilities, and calculates its quick and current ratios to demonstrate its liquidity.
Ratio analysis is used to evaluate the financial performance and health of a business. Ratios show the mathematical relationship between two related figures and can be used for trend analysis and comparisons between firms. There are several types of ratios including liquidity ratios that measure short-term financial strength, activity/turnover ratios that measure efficiency, and profitability ratios. Current ratio, quick ratio, and inventory turnover ratio are some examples discussed. Ratios should be interpreted both individually and in comparison to past ratios and industry standards to evaluate performance over time.
Ratio analysis is an important tool for financial analysis that involves calculating and analyzing relationships between key financial data points from statements. It helps assess a company's liquidity, profitability, solvency, financial stability, and risk. When using ratios, it is important to compare the same company over multiple years, against industry benchmarks, and be aware of factors like accounting differences that could distort comparisons. Key ratios include current ratio, acid test ratio, debt-equity ratio, proprietary ratio, and gross profit ratio.
This document provides an overview of management accounting concepts including ratio analysis, funds flow analysis, cash flow analysis, marginal costing, standard costing, budgetary control, costing for decision making, and responsibility accounting. It then discusses various types of ratios in detail, including liquidity ratios like current ratio and quick ratio, solvency ratios like debt-equity ratio and interest coverage ratio, activity ratios like stock turnover ratio and debtors turnover ratio, and profitability ratios like gross profit ratio and net profit ratio. Finally, it discusses cash flow statements, their objectives, important definitions as per accounting standards, and classification of cash flows.
Financial statement analysis involves various techniques to evaluate a company's financial health and performance, including ratio analysis. Ratio analysis calculates statistical relationships between financial data points to gain insights. Key ratios discussed in the document include liquidity ratios like the current ratio and quick ratio, leverage ratios like the debt-to-equity ratio, activity ratios like inventory turnover ratio, and profitability ratios. Calculating and analyzing ratios helps understand a company's liquidity, creditworthiness, operational efficiency, and profit generating ability.
Ratio analysis measures relationships between financial variables to show how a firm's situation compares to its past, other firms, and the industry. Ratios are used to identify performance, standardize information, provide early warnings, and enable trend spotting. Key types of ratios include liquidity, activity, debt, and profitability. Liquidity ratios measure a firm's ability to pay obligations and include current, quick, and cash ratios. Activity ratios evaluate efficiency through measures like inventory turnover, accounts receivable period, and asset turnover.
Ratio analysis is an important tool for financial analysis that allows assessment of key financial metrics like liquidity, profitability, solvency, and risk. It involves calculating and analyzing relationships between items and groups of items from financial statements. Common ratios used in ratio analysis include the current ratio, quick ratio, debt-equity ratio, and profitability ratios. Ratio analysis is useful for lenders in evaluating the financial position, performance, strengths, and weaknesses of a business. It provides insights into the liquidity, operational efficiency, and credit risk of companies.
The document discusses various types of ratios used in ratio analysis for evaluating the financial performance and position of a business. It provides definitions and interpretations for liquidity ratios like current ratio and quick ratio, solvency ratios like debt-equity ratio and proprietary ratio, activity ratios like stock turnover ratio and debtor turnover ratio, and profitability ratios like gross profit ratio, net profit ratio, and return on capital employed. Formulas and ideal ratios are given for each type of financial ratio.
The document provides an overview of ratio analysis, fund flow statements, and cash flow statements. It discusses various types of ratios like liquidity ratios, leverage ratios, and activity ratios. It explains key liquidity ratios like current ratio, quick ratio, and cash ratio. It also discusses leverage ratios like debt ratio and debt-equity ratio. The document then covers activity or turnover ratios and provides formulas for inventory turnover ratio and assets turnover ratio. It defines a fund flow statement and cash flow statement and discusses their purpose and limitations.
This document discusses ratio analysis and various types of ratios used to analyze a company's financial performance and health. It begins by explaining that ratio analysis compares financial statement figures to provide useful insights beyond absolute numbers. It then covers several categories of ratios:
1. Liquidity or short-term solvency ratios measure a firm's ability to pay short-term debts and include the current ratio and quick ratio.
2. Capital structure or long-term solvency ratios assess financial leverage and include the debt ratio and interest coverage ratio.
3. Asset management or turnover ratios evaluate efficiency in deploying assets and include total asset turnover, fixed asset turnover, and inventory turnover.
4. Profitability
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.
This document discusses liquidity ratios and how they can change based on a company's financial decisions. It defines two key liquidity ratios: the current ratio and acid test ratio. The current ratio measures current assets available to cover current liabilities, while the acid test only considers more liquid current assets. The document then demonstrates how taking on short-term debt or increasing capital can impact these ratios, making liquidity stronger by applying long-term resources to current assets but weaker by using short-term debt for fixed assets.
The document discusses liquidity and the procedures used to analyze a firm's liquidity. Liquidity refers to a firm's ability to pay off short-term debts and is analyzed by examining current assets like cash, accounts receivable, and inventory. Key parties interested in a firm's liquidity include owners, managers, bankers, investors, and creditors. Common ratios used to measure liquidity are the current ratio, quick ratio, cash ratio, and analysis of working capital. These ratios compare current assets to current liabilities to evaluate a firm's short-term financial health and ability to meet obligations.
The document discusses various types of financial ratios used to analyze companies. It describes liquidity ratios like current ratio and acid test ratio which measure a company's ability to meet short-term obligations. Leverage ratios like debt-equity ratio and debt-asset ratio assess the financial risk from a company's use of debt. Efficiency ratios examine how effectively a company uses its assets. Profitability ratios evaluate a company's net profit margins and returns on assets and equity.
This document discusses various types of financial ratios used to analyze a company's financial statements, including liquidity ratios, leverage ratios, efficiency ratios, and profitability ratios. It provides definitions and calculations for key ratios within each category, such as current ratio and quick ratio for liquidity, debt-equity ratio for leverage, inventory turnover for efficiency, and return on assets (ROA) and return on equity (ROE) for profitability. These ratios are used to evaluate a company's short-term solvency, use of debt financing, asset utilization, and earnings generation.
This document discusses ratio analysis, which involves calculating and presenting relationships between financial statement items. Ratios are used to interpret financial statements and assess a firm's strengths/weaknesses, historical performance, and current financial condition. The document categorizes ratios into liquidity, capital structure/leverage, profitability, and activity ratios. It provides definitions and calculations for key ratios within each category such as current ratio, debt-to-equity ratio, net profit margin, inventory turnover ratio, and discusses how ratios can be used for analysis and comparison purposes.
This document discusses accounting ratios and their use in analyzing financial statements. It defines ratios as mathematical relationships between two or more numbers that can be expressed as fractions, proportions, percentages or numbers of times. The main types of ratios discussed are liquidity ratios, solvency ratios, activity ratios, and profitability ratios. Liquidity ratios like the current ratio and quick ratio assess a firm's ability to meet short-term obligations. Solvency ratios like the debt-equity ratio evaluate long-term financial stability. Activity ratios examine how efficiently a firm uses its resources. Profitability ratios measure financial performance and return. The document provides formulas and explanations for various key ratios and their significance in financial analysis.
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.
Liquidity Ratios
This type of ratio helps in measuring the ability of a company to take care of its short-term debt obligations. A higher liquidity ratio represents that the company is highly rich in cash.
The types of liquidity ratios are: –
Current Ratio or Working Capital Ratio
Quick Ratio or Liquidity Ratio or Acid Test Ratio
Absolute Liquid Ratio or Cash Ratio
Stock to Working Capital Ratio
Current Ratio: The current ratio is the ratio between the current assets and current liabilities of a company. The current ratio is used to indicate the liquidity of an organization in being able to meet its debt obligations in the upcoming twelve months. A higher current ratio will indicate that the organization is highly capable of repaying its short-term debt obligations.
Current Ratio = Current Assets / Current Liabilities
Current Assets:
Current Assets means cash and those assets which can be converted into cash within one year in ordinary course of business.
Current Liabilities:
Current Liabilities are those which are to be paid by the firm in one year.
Quick Ratio or Liquidity Ratio or Acid Test Ratio :
The quick ratio is used to ascertain information pertaining to the capability of a company in paying off its current liabilities on an immediate basis.
The formula used for the calculation of a quick ratio is-
Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivables) / Current Liabilities
. Absolute Liquid Ratio or Cash Ratio:
The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents:
Cash ratio = Cash and Cash equivalents / Current Liabilities
Stock to Working Capital Ratio:
It is calculated by dividing the value of stock (or inventories such as raw materials, work in progress, finished goods, stores and packing materials) by the Working capital.
Ratio analysis is an important tool for financial analysis that involves calculating and presenting relationships between financial statement items. There are three main forms ratios can take: pure ratios involving simple division, percentages, and rates expressed as number of times over a period. Ratios can be classified based on the financial statements they use, their function, or the intended user. Key ratios discussed include the current ratio, quick/liquidity ratio, and stock to working capital ratio, which measure liquidity and solvency. Understanding ratios and comparing them to standards helps analyze a company's financial performance and position.
Efficient market Hypothesis that explains the Capital asset pricing modelDr Yogita Wagh
The efficient market hypothesis (EMH) states that stock prices already reflect all known information and that it is impossible for investors to outperform the market over time. There are three forms of the EMH - weak, semi-strong, and strong - with each incorporating more types of information. Most evidence supports the weak and semi-strong forms, indicating that technical and fundamental analysis do not reliably beat the market. If markets are efficient, the optimal investment strategy is a passive, diversified approach rather than trying to pick individual stocks.
The document describes the key components of a financial system including suppliers and demanders of funds, methods of transferring capital through direct or indirect means using financial intermediaries or markets, and the major institutions and instruments that make up India's formal financial system such as banks, markets, and services like funds intermediation and risk management. A well-functioning financial system is characterized by elements such as a strong legal framework, stable currency, and sound banking and securities markets.
capital budgeting introduction,types of techniques and capital rationingDr Yogita Wagh
Capital budgeting is the process that companies use to evaluate potential long-term investments and major capital expenditures. There are four main questions addressed in capital budgeting: 1) How do firms decide whether to invest in long-lived assets? 2) How are choices made between mutually exclusive investments? 3) How are different capital budgeting techniques related? 4) Which techniques do firms actually use? Common capital budgeting techniques include net present value (NPV), internal rate of return (IRR), payback period, average rate of return, and profitability index. These techniques are used to evaluate projects, make acceptance/rejection decisions between mutually exclusive projects, and determine project selection under capital rationing constraints.
The document discusses financial services regulation in the UK. It provides information on the purpose of regulation, how regulation has developed over time, and the key regulatory bodies in the UK - the Prudential Regulation Authority (PRA), Financial Policy Committee (FPC), and Financial Conduct Authority (FCA). The FCA is responsible for regulating conduct in the financial markets and oversees firms to ensure they are authorized and individuals working in controlled functions are approved persons. The FCA also promotes the Treating Customers Fairly (TCF) initiative to protect consumers.
Corporate restructuring involves changing aspects of a company such as its capital structure, operations, or ownership. It can take various forms such as mergers, acquisitions, divestitures, spin-offs, etc. A unique example is Reliance Industries' family arrangement scheme in 2006, which segregated businesses and assets between two brothers. The scheme demerged RIL's businesses into four new companies. RIL shareholders received shares in the new companies, increasing the total value of their holdings. This allowed clean separation of the businesses and provided benefits to shareholders.
Corporate restructuring is the process of reorganizing aspects of a company, such as its capital structure, operations, or ownership. It can occur for reasons like making a company more competitive, surviving adverse economic conditions, or pursuing new strategic directions. Common forms of corporate restructuring include mergers, acquisitions, divestitures, spin-offs, and other transactions that change a company's scope outside of ordinary business operations. Restructuring aims to provide benefits like sales enhancement, cost reductions, operating efficiencies, management improvements, and addressing underperforming parts of the business.
1) Hire purchase allows a customer to receive goods immediately but pay for them through installments, with ownership transferring once all installments are paid.
2) The legal framework for hire purchase transactions is regulated by the Hire Purchase Act of 1972, which defines key aspects of the agreement such as installment payments and transferring ownership.
3) When evaluating hire purchase financially, the desirability is determined by comparing the present value of the net cash outflow under hire purchase to leasing, considering interest, tax implications, depreciation and salvage value.
The document discusses equipment leasing, including:
1) Equipment leasing provides companies use of fixed assets through contractual rental payments that are tax deductible. The lessee uses the asset while the lessor owns it.
2) When evaluating a lease, companies compare the cost of leasing an asset to the cost of financing its purchase. If leasing costs less, the asset is leased; if financing costs less, the asset is purchased.
3) Lease accounting records leasing transactions on companies' financial statements according to whether the company is lessor or lessee. This provides transparency into leasing's impact on company value and finances.
This document provides an overview of financial policy and strategic planning. It discusses strategic planning processes, objectives and goals. It also covers corporate planning, financial planning, and financial models. Specifically, it defines strategic planning and discusses the strategic planning process. It outlines objectives of strategic planning including financial, internal, customer, and learning/growth objectives. It also defines corporate planning and financial planning, outlining types of financial plans. The document then discusses financial models, their uses, limitations, development process, and types including three statement, LBO, consolidation, IPO, budget, and forecast models. It concludes by covering applications of financial modeling in fields like investment banking, project finance, and corporate finance.
This document provides an overview of the Indian financial system, including its key constituents and components. It discusses the importance of financial regulation in maintaining stability and integrity. The main objectives of financial regulatory bodies in India are financial stability, consumer protection, maintaining market confidence, and reducing financial crime. The financial system consists of financial markets, intermediation, and instruments. Major components include money markets, capital markets, foreign exchange markets, and credit markets. Common financial instruments include treasury bills, certificates of deposit, commercial papers, and various equity and debt instruments.
The document discusses financial services regulation in the UK. It provides information on the purpose of regulation, how regulation has developed over time, and the key regulatory bodies in the UK - the Prudential Regulation Authority (PRA), Financial Policy Committee (FPC), and Financial Conduct Authority (FCA). The FCA is responsible for regulating conduct in the financial services industry and aims to achieve its objective of protecting consumers through its "Treating Customers Fairly" (TCF) approach.
Ratio analysis involves computing relationships between financial statement items to interpret a firm's strengths, weaknesses, historical performance, and current condition. Ratios are classified into liquidity, capital structure, profitability, and activity ratios. Liquidity ratios measure short-term solvency and ability to meet current commitments, such as current and quick ratios. Capital structure ratios indicate long-term solvency and ability to repay debt, like debt-equity and proprietary ratios. Ratios are most informative when compared over time, against industry standards, or between firms.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Lecture slide titled Fraud Risk Mitigation, Webinar Lecture Delivered at the Society for West African Internal Audit Practitioners (SWAIAP) on Wednesday, November 8, 2023.
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How Does CRISIL Evaluate Lenders in India for Credit RatingsShaheen Kumar
CRISIL evaluates lenders in India by analyzing financial performance, loan portfolio quality, risk management practices, capital adequacy, market position, and adherence to regulatory requirements. This comprehensive assessment ensures a thorough evaluation of creditworthiness and financial strength. Each criterion is meticulously examined to provide credible and reliable ratings.
1. Elemental Economics - Introduction to mining.pdfNeal Brewster
After this first you should: Understand the nature of mining; have an awareness of the industry’s boundaries, corporate structure and size; appreciation the complex motivations and objectives of the industries’ various participants; know how mineral reserves are defined and estimated, and how they evolve over time.
Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
Seminar: Gender Board Diversity through Ownership NetworksGRAPE
Seminar on gender diversity spillovers through ownership networks at FAME|GRAPE. Presenting novel research. Studies in economics and management using econometrics methods.
BONKMILLON Unleashes Its Bonkers Potential on Solana.pdfcoingabbar
Introducing BONKMILLON - The Most Bonkers Meme Coin Yet
Let's be real for a second – the world of meme coins can feel like a bit of a circus at times. Every other day, there's a new token promising to take you "to the moon" or offering some groundbreaking utility that'll change the game forever. But how many of them actually deliver on that hype?
[4:55 p.m.] Bryan Oates
OJPs are becoming a critical resource for policy-makers and researchers who study the labour market. LMIC continues to work with Vicinity Jobs’ data on OJPs, which can be explored in our Canadian Job Trends Dashboard. Valuable insights have been gained through our analysis of OJP data, including LMIC research lead
Suzanne Spiteri’s recent report on improving the quality and accessibility of job postings to reduce employment barriers for neurodivergent people.
Decoding job postings: Improving accessibility for neurodivergent job seekers
Improving the quality and accessibility of job postings is one way to reduce employment barriers for neurodivergent people.
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"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
Independent Study - College of Wooster Research (2023-2024)
Ratio analysis
1. Ratio analysis
Ratio analysis
Is a method or process by which the
Is a method or process by which the
relationship of items or groups of items in the
relationship of items or groups of items in the
financial statements are computed, and
financial statements are computed, and
presented.
presented.
Is an important tool of financial analysis.
Is an important tool of financial analysis.
Is used to interpret the financial statements so
Is used to interpret the financial statements so
that the strengths and weaknesses of a firm, its
that the strengths and weaknesses of a firm, its
historical performance and current financial
historical performance and current financial
condition can be determined.
condition can be determined.
2. Ratio
Ratio
‘
‘A mathematical yardstick that measures
A mathematical yardstick that measures
the relationship between two figures or
the relationship between two figures or
groups of figures which are related to
groups of figures which are related to
each other and are mutually inter-
each other and are mutually inter-
dependent’.
dependent’.
It can be expressed as a pure ratio,
It can be expressed as a pure ratio,
percentage, or as a rate
percentage, or as a rate
3. Words of caution
Words of caution
A ratio is not an end in itself. They are only a
A ratio is not an end in itself. They are only a
means to get to know the financial position of
means to get to know the financial position of
an enterprise.
an enterprise.
Computing ratios does not add any information
Computing ratios does not add any information
to the available figures.
to the available figures.
It only reveals the relationship in a more
It only reveals the relationship in a more
meaningful way so as to enable us to draw
meaningful way so as to enable us to draw
conclusions there from.
conclusions there from.
4. Utility of Ratios
Utility of Ratios
Accounting ratios are very useful in
Accounting ratios are very useful in
assessing the financial position and
assessing the financial position and
profitability of an enterprise.
profitability of an enterprise.
However its utility lies in comparison of
However its utility lies in comparison of
the ratios.
the ratios.
5. Utility of Ratios
Utility of Ratios
Comparison may be in any one of the following
Comparison may be in any one of the following
forms:
forms:
For the same enterprise over a number of years
For the same enterprise over a number of years
For two enterprises in the same industry
For two enterprises in the same industry
For one enterprise against the industry as a whole
For one enterprise against the industry as a whole
For one enterprise against a pre-determined standard
For one enterprise against a pre-determined standard
For inter-segment comparison within the same
For inter-segment comparison within the same
organisation
organisation
6. Classification of Ratios
Classification of Ratios
Ratios can be broadly classified into four groups
Ratios can be broadly classified into four groups
namely:
namely:
Liquidity ratios
Liquidity ratios
Capital structure/leverage ratios
Capital structure/leverage ratios
Profitability ratios
Profitability ratios
Activity ratios
Activity ratios
7. Liquidity ratios
Liquidity ratios
These ratios analyse the short-term financial
These ratios analyse the short-term financial
position of a firm and indicate the ability of the firm
position of a firm and indicate the ability of the firm
to meet its short-term commitments (current
to meet its short-term commitments (current
liabilities) out of its short-term resources (current
liabilities) out of its short-term resources (current
assets).
assets).
These are also known as ‘solvency ratios’. The
These are also known as ‘solvency ratios’. The
ratios which indicate the liquidity of a firm are:
ratios which indicate the liquidity of a firm are:
Current ratio
Current ratio
Liquidity ratio or Quick ratio or acid test ratio
Liquidity ratio or Quick ratio or acid test ratio
8. Current ratio
Current ratio
It is calculated by dividing current assets by
It is calculated by dividing current assets by
current liabilities.
current liabilities.
Current ratio =
Current ratio = Current assets
Current assets where
where
Current liabilities
Current liabilities
Conventionally a current ratio of 2:1 is
Conventionally a current ratio of 2:1 is
considered satisfactory
considered satisfactory
9. CURRENT ASSETS
CURRENT ASSETS
include –
include –
Inventories of raw material, WIP, finished goods,
Inventories of raw material, WIP, finished goods,
stores and spares,
stores and spares,
sundry debtors/receivables,
sundry debtors/receivables,
short term loans deposits and advances,
short term loans deposits and advances,
cash in hand and bank,
cash in hand and bank,
prepaid expenses,
prepaid expenses,
incomes receivables and
incomes receivables and
marketable investments and short term securities
marketable investments and short term securities.
.
10. CURRENT LIABILITIES
CURRENT LIABILITIES
include –
include –
sundry creditors/bills payable,
sundry creditors/bills payable,
outstanding expenses,
outstanding expenses,
unclaimed dividend,
unclaimed dividend,
advances received,
advances received,
incomes received in advance,
incomes received in advance,
provision for taxation,
provision for taxation,
proposed dividend,
proposed dividend,
instalments of loans payable within 12 months,
instalments of loans payable within 12 months,
bank overdraft and cash credit
bank overdraft and cash credit
11. Quick Ratio or Acid Test Ratio
Quick Ratio or Acid Test Ratio
This is a ratio between quick current assets and current
This is a ratio between quick current assets and current
liabilities (alternatively quick liabilities).
liabilities (alternatively quick liabilities).
It is calculated by dividing quick current assets by
It is calculated by dividing quick current assets by
current liabilities (quick current liabilities)
current liabilities (quick current liabilities)
Quick ratio =
Quick ratio = quick assets
quick assets where
where
Current liabilities/(quick liabilities)
Current liabilities/(quick liabilities)
Conventionally a quick ratio of 1:1 is considered
Conventionally a quick ratio of 1:1 is considered
satisfactory.
satisfactory.
12. QUICK ASSETS & QUICK
QUICK ASSETS & QUICK
LIABILITIES
LIABILITIES
QUICK ASSETS
QUICK ASSETS are current assets (as stated
are current assets (as stated
earlier)
earlier)
less prepaid expenses and inventories.
less prepaid expenses and inventories.
QUICK LIABILITIES
QUICK LIABILITIES are current liabilities (as
are current liabilities (as
stated earlier)
stated earlier)
less bank overdraft and incomes received in
less bank overdraft and incomes received in
advance.
advance.
13. Capital structure/ leverage ratios
Capital structure/ leverage ratios
These ratios indicate the long term solvency
These ratios indicate the long term solvency
of a firm and indicate the ability of the firm
of a firm and indicate the ability of the firm
to meet its long-term commitment with
to meet its long-term commitment with
respect to
respect to
(ii)
(ii) repayment of principal on maturity or in
repayment of principal on maturity or in
predetermined instalments at due dates and
predetermined instalments at due dates and
(iii)
(iii) periodic payment of interest during the
periodic payment of interest during the
period of the loan.
period of the loan.
14. Capital structure/ leverage ratios
Capital structure/ leverage ratios
The different ratios are:
The different ratios are:
Debt equity ratio
Debt equity ratio
Proprietary ratio
Proprietary ratio
Debt to total capital ratio
Debt to total capital ratio
Interest coverage ratio
Interest coverage ratio
Debt service coverage ratio
Debt service coverage ratio
15. Debt equity ratio
Debt equity ratio
This ratio indicates the relative proportion of debt and
This ratio indicates the relative proportion of debt and
equity in financing the assets of the firm. It is
equity in financing the assets of the firm. It is
calculated by dividing long-term debt by shareholder’s
calculated by dividing long-term debt by shareholder’s
funds.
funds.
Debt equity ratio =
Debt equity ratio = long-term debts
long-term debts where
where
Shareholders funds
Shareholders funds
Generally, financial institutions favour a ratio of 2:1
Generally, financial institutions favour a ratio of 2:1.
.
However this standard should be applied having regard
However this standard should be applied having regard
to size and type and nature of business and the degree of
to size and type and nature of business and the degree of
risk involved.
risk involved.
16. LONG-TERM FUNDS
LONG-TERM FUNDS are long-term loans whether
are long-term loans whether
secured or unsecured like – debentures, bonds, loans
secured or unsecured like – debentures, bonds, loans
from financial institutions etc.
from financial institutions etc.
SHAREHOLDER’S FUNDS
SHAREHOLDER’S FUNDS are equity share
are equity share
capital plus preference share capital plus reserves and
capital plus preference share capital plus reserves and
surplus minus fictitious assets (eg. Preliminary
surplus minus fictitious assets (eg. Preliminary
expenses, past accumulated losses, discount on issue
expenses, past accumulated losses, discount on issue
of shares etc.)
of shares etc.)
17. Proprietary ratio
Proprietary ratio
This ratio indicates the general financial strength of the
This ratio indicates the general financial strength of the
firm and the long- term solvency of the business.
firm and the long- term solvency of the business.
This ratio is calculated by dividing proprietor’s funds by
This ratio is calculated by dividing proprietor’s funds by
total funds.
total funds.
Proprietary ratio =
Proprietary ratio = proprietor’s funds
proprietor’s funds where
where
Total funds/assets
Total funds/assets
As a rough guide a 65% to 75% proprietary ratio is
As a rough guide a 65% to 75% proprietary ratio is
advisable
advisable
18. PROPRIETOR’S FUNDS
PROPRIETOR’S FUNDS are same as
are same as
explained in shareholder’s funds
explained in shareholder’s funds
TOTAL FUNDS
TOTAL FUNDS are all fixed assets and all
are all fixed assets and all
current assets.
current assets.
Alternatively it can be calculated as
Alternatively it can be calculated as
proprietor’s funds plus long-term funds plus
proprietor’s funds plus long-term funds plus
current liabilities.
current liabilities.
19. Debt to total capital ratio
Debt to total capital ratio
In this ratio the outside liabilities are related to
In this ratio the outside liabilities are related to
the total capitalisation of the firm. It indicates
the total capitalisation of the firm. It indicates
what proportion of the permanent capital of the
what proportion of the permanent capital of the
firm is in the form of long-term debt.
firm is in the form of long-term debt.
Debt to total capital ratio =
Debt to total capital ratio =long- term debt
long- term debt
Shareholder’s funds + long- term debt
Shareholder’s funds + long- term debt
Conventionally a ratio of 2/3 is considered
Conventionally a ratio of 2/3 is considered
satisfactory
satisfactory.
.
20. Interest coverage ratio
Interest coverage ratio
This ratio measures the debt servicing capacity of a firm
This ratio measures the debt servicing capacity of a firm
in so far as the fixed interest on long-term loan is
in so far as the fixed interest on long-term loan is
concerned. It shows how many times the interest
concerned. It shows how many times the interest
charges are covered by EBIT out of which they will be
charges are covered by EBIT out of which they will be
paid.
paid.
Interest coverage ratio =
Interest coverage ratio = EBIT
EBIT
Interest
Interest
A ratio of 6 to 7 times is considered satisfactory
A ratio of 6 to 7 times is considered satisfactory.
.
Higher the ratio greater the ability of the firm to pay
Higher the ratio greater the ability of the firm to pay
interest out of its profits. But too high a ratio may
interest out of its profits. But too high a ratio may
imply lesser use of debt and/or very efficient operations
imply lesser use of debt and/or very efficient operations
21. Debt service coverage ratio
Debt service coverage ratio
This is a more comprehensive measure to compute the
This is a more comprehensive measure to compute the
debt servicing capacity of a firm. It shows how many
debt servicing capacity of a firm. It shows how many
times the total debt service obligations consisting of
times the total debt service obligations consisting of
interest and repayment of principal in instalments are
interest and repayment of principal in instalments are
covered by the total operating funds after payment of
covered by the total operating funds after payment of
tax.
tax.
Debt service coverage ratio =
Debt service coverage ratio =
EAT+ interest + depreciation + other non-cash exp
EAT+ interest + depreciation + other non-cash exp
Interest + principal instalment
Interest + principal instalment
EAT is earnings after tax.
EAT is earnings after tax.
Generally financial institutions consider 2:1 as a
Generally financial institutions consider 2:1 as a
satisfactory ratio
satisfactory ratio.
.
22. Profitability ratios
Profitability ratios
These ratios measure the operating efficiency of
These ratios measure the operating efficiency of
the firm and its ability to ensure adequate returns
the firm and its ability to ensure adequate returns
to its shareholders.
to its shareholders.
The profitability of a firm can be measured by its
The profitability of a firm can be measured by its
profitability ratios.
profitability ratios.
Further the profitability ratios can be determined
Further the profitability ratios can be determined
(i) in relation to sales and
(i) in relation to sales and
(ii) in relation to investments
(ii) in relation to investments
23. Profitability ratios
Profitability ratios
Profitability ratios in relation to sales:
Profitability ratios in relation to sales:
gross profit margin
gross profit margin
Net profit margin
Net profit margin
Expenses ratio
Expenses ratio
24. Profitability ratios
Profitability ratios
Profitability ratios in relation to investments
Profitability ratios in relation to investments
Return on assets (ROA)
Return on assets (ROA)
Return on capital employed (ROCE)
Return on capital employed (ROCE)
Return on shareholder’s equity (ROE)
Return on shareholder’s equity (ROE)
Earnings per share (EPS)
Earnings per share (EPS)
Dividend per share (DPS)
Dividend per share (DPS)
Dividend payout ratio (D/P)
Dividend payout ratio (D/P)
Price earning ratio (P/E)
Price earning ratio (P/E)
25. Gross profit margin
Gross profit margin
This ratio is calculated by dividing gross
This ratio is calculated by dividing gross
profit by sales. It is expressed as a percentage.
profit by sales. It is expressed as a percentage.
Gross profit is the result of relationship
Gross profit is the result of relationship
between prices, sales volume and costs.
between prices, sales volume and costs.
Gross profit margin =
Gross profit margin = gross profit
gross profit x 100
x 100
Net sales
Net sales
26. Gross profit margin
Gross profit margin
A firm should have a reasonable gross profit
A firm should have a reasonable gross profit
margin to ensure coverage of its operating
margin to ensure coverage of its operating
expenses and ensure adequate return to the
expenses and ensure adequate return to the
owners of the business ie. the shareholders.
owners of the business ie. the shareholders.
To judge whether the ratio is satisfactory or
To judge whether the ratio is satisfactory or
not, it should be compared with the firm’s
not, it should be compared with the firm’s
past ratios or with the ratio of similar firms in
past ratios or with the ratio of similar firms in
the same industry or with the industry average.
the same industry or with the industry average.
27. Net profit margin
Net profit margin
This ratio is calculated by dividing net profit by
This ratio is calculated by dividing net profit by
sales. It is expressed as a percentage.
sales. It is expressed as a percentage.
This ratio is indicative of the firm’s ability to
This ratio is indicative of the firm’s ability to
leave a margin of reasonable compensation to
leave a margin of reasonable compensation to
the owners for providing capital, after meeting
the owners for providing capital, after meeting
the cost of production, operating charges and the
the cost of production, operating charges and the
cost of borrowed funds.
cost of borrowed funds.
Net profit margin =
Net profit margin =
net profit after interest and tax
net profit after interest and tax x 100
x 100
Net sales
Net sales
28. Net profit margin
Net profit margin
Another variant of net profit margin is operating
Another variant of net profit margin is operating
profit margin which is calculated as:
profit margin which is calculated as:
Operating profit margin =
Operating profit margin =
net profit before interest and tax
net profit before interest and tax x 100
x 100
Net sales
Net sales
Higher the ratio, greater is the capacity of the
Higher the ratio, greater is the capacity of the
firm to withstand adverse economic conditions
firm to withstand adverse economic conditions
and vice versa
and vice versa
29. Expenses ratio
Expenses ratio
These ratios are calculated by dividing the various expenses by
These ratios are calculated by dividing the various expenses by
sales. The variants of expenses ratios are:
sales. The variants of expenses ratios are:
Material consumed ratio =
Material consumed ratio = Material consumed
Material consumed x 100
x 100
Net sales
Net sales
Manufacturing expenses ratio =
Manufacturing expenses ratio = manufacturing expenses
manufacturing expenses x
x
100
100
Net sales
Net sales
Administration expenses ratio =
Administration expenses ratio = administration expenses
administration expenses x 100
x 100
Net sales
Net sales
Selling expenses ratio =
Selling expenses ratio = Selling expenses
Selling expenses x 100
x 100
Net sales
Net sales
Operating ratio =
Operating ratio = cost of goods sold plus operating expenses
cost of goods sold plus operating expenses x
x
100
100
Net sales
Net sales
Financial expense ratio =
Financial expense ratio = financial expenses
financial expenses x 100
x 100
Net sales
Net sales
30. Expenses ratio
Expenses ratio
The expenses ratios should be compared over
The expenses ratios should be compared over
a period of time with the industry average as
a period of time with the industry average as
well as with the ratios of firms of similar type.
well as with the ratios of firms of similar type.
A low expenses ratio is favourable.
A low expenses ratio is favourable.
The implication of a high ratio is that only a
The implication of a high ratio is that only a
small percentage share of sales is available for
small percentage share of sales is available for
meeting financial liabilities like interest, tax,
meeting financial liabilities like interest, tax,
dividend etc.
dividend etc.
31. Return on assets (ROA)
Return on assets (ROA)
This ratio measures the profitability of the total funds of
This ratio measures the profitability of the total funds of
a firm. It measures the relationship between net profits
a firm. It measures the relationship between net profits
and total assets. The objective is to find out how
and total assets. The objective is to find out how
efficiently the total assets have been used by the
efficiently the total assets have been used by the
management.
management.
Return on assets =
Return on assets =
net profit after taxes plus interest
net profit after taxes plus interest x 100
x 100
Total assets
Total assets
Total assets exclude fictitious assets. As the total assets
Total assets exclude fictitious assets. As the total assets
at the beginning of the year and end of the year may not
at the beginning of the year and end of the year may not
be the same, average total assets may be used as the
be the same, average total assets may be used as the
denominator.
denominator.
32. Return on capital employed (ROCE)
Return on capital employed (ROCE)
This ratio measures the relationship between net profit and
This ratio measures the relationship between net profit and
capital employed. It indicates how efficiently the long-term
capital employed. It indicates how efficiently the long-term
funds of owners and creditors are being used.
funds of owners and creditors are being used.
Return on capital employed =
Return on capital employed =
net profit after taxes plus interest
net profit after taxes plus interest x 100
x 100
Capital employed
Capital employed
CAPITAL EMPLOYED
CAPITAL EMPLOYED denotes shareholders funds and long-
denotes shareholders funds and long-
term borrowings.
term borrowings.
To have a fair representation of the capital employed, average
To have a fair representation of the capital employed, average
capital employed may be used as the denominator.
capital employed may be used as the denominator.
33. Return on shareholders equity
Return on shareholders equity
This ratio measures the relationship of profits to
This ratio measures the relationship of profits to
owner’s funds. Shareholders fall into two
owner’s funds. Shareholders fall into two
groups i.e. preference shareholders and equity
groups i.e. preference shareholders and equity
shareholders. So the variants of return on
shareholders. So the variants of return on
shareholders equity are
shareholders equity are
Return on total shareholder’s equity =
Return on total shareholder’s equity =
net profits after taxes
net profits after taxes x 100
x 100
Total shareholders equity
Total shareholders equity
.
.
34. TOTAL SHAREHOLDER’S EQUITY
TOTAL SHAREHOLDER’S EQUITY
includes preference share capital plus equity
includes preference share capital plus equity
share capital plus reserves and surplus less
share capital plus reserves and surplus less
accumulated losses and fictitious assets. To
accumulated losses and fictitious assets. To
have a fair representation of the total
have a fair representation of the total
shareholders funds, average total shareholders
shareholders funds, average total shareholders
funds may be used as the denominator
funds may be used as the denominator
35. Return on ordinary shareholders equity =
Return on ordinary shareholders equity =
net profit after taxes – pref. dividend
net profit after taxes – pref. dividend x 100
x 100
Ordinary shareholders equity or net
Ordinary shareholders equity or net
worth
worth
ORDINARY SHAREHOLDERS EQUITY
ORDINARY SHAREHOLDERS EQUITY
OR NET WORTH
OR NET WORTH includes equity share capital
includes equity share capital
plus reserves and surplus minus fictitious assets.
plus reserves and surplus minus fictitious assets.
36. Earnings per share (EPS)
Earnings per share (EPS)
This ratio measures the profit available to the
This ratio measures the profit available to the
equity shareholders on a per share basis. This
equity shareholders on a per share basis. This
ratio is calculated by dividing net profit available
ratio is calculated by dividing net profit available
to equity shareholders by the number of equity
to equity shareholders by the number of equity
shares.
shares.
Earnings per share =
Earnings per share =
net profit after tax – preference dividend
net profit after tax – preference dividend
Number of equity shares
Number of equity shares
37. Dividend per share (DPS)
Dividend per share (DPS)
This ratio shows the dividend paid to the
This ratio shows the dividend paid to the
shareholder on a per share basis. This is a better
shareholder on a per share basis. This is a better
indicator than the EPS as it shows the amount of
indicator than the EPS as it shows the amount of
dividend received by the ordinary shareholders,
dividend received by the ordinary shareholders,
while EPS merely shows theoretically how much
while EPS merely shows theoretically how much
belongs to the ordinary shareholders
belongs to the ordinary shareholders
Dividend per share =
Dividend per share =
Dividend paid to ordinary shareholders
Dividend paid to ordinary shareholders
Number of equity shares
Number of equity shares
38. Dividend payout ratio (D/P)
Dividend payout ratio (D/P)
This ratio measures the relationship between the
This ratio measures the relationship between the
earnings belonging to the ordinary shareholders and the
earnings belonging to the ordinary shareholders and the
dividend paid to them.
dividend paid to them.
Dividend pay out ratio =
Dividend pay out ratio =
total dividend paid to ordinary shareholders
total dividend paid to ordinary shareholders x 100
x 100
Net profit after tax –preference dividend
Net profit after tax –preference dividend
OR
OR
Dividend pay out ratio =
Dividend pay out ratio = Dividend per share
Dividend per share x 100
x 100
Earnings per share
Earnings per share
39. Price earning ratio (P/E)
Price earning ratio (P/E)
This ratio is computed by dividing the market
This ratio is computed by dividing the market
price of the shares by the earnings per share. It
price of the shares by the earnings per share. It
measures the expectations of the investors and
measures the expectations of the investors and
market appraisal of the performance of the firm.
market appraisal of the performance of the firm.
Price earning ratio =
Price earning ratio = market price per share
market price per share
Earnings per share
Earnings per share
40. Activity ratios
Activity ratios
These ratios are also called efficiency ratios / asset
These ratios are also called efficiency ratios / asset
utilization ratios or turnover ratios. These ratios
utilization ratios or turnover ratios. These ratios
show the relationship between sales and various
show the relationship between sales and various
assets of a firm. The various ratios under this group
assets of a firm. The various ratios under this group
are:
are:
Inventory/stock turnover ratio
Inventory/stock turnover ratio
Debtors turnover ratio and average collection
Debtors turnover ratio and average collection
period
period
Asset turnover ratio
Asset turnover ratio
Creditors turnover ratio and average credit
Creditors turnover ratio and average credit
period
period
41. Inventory /stock turnover ratio
Inventory /stock turnover ratio
This ratio indicates the number of times inventory is
This ratio indicates the number of times inventory is
replaced during the year. It measures the relationship
replaced during the year. It measures the relationship
between cost of goods sold and the inventory level.
between cost of goods sold and the inventory level.
There are two approaches for calculating this ratio,
There are two approaches for calculating this ratio,
namely:
namely:
Inventory turnover ratio =
Inventory turnover ratio = cost of goods sold
cost of goods sold
Average stock
Average stock
AVERAGE STOCK
AVERAGE STOCK can be calculated as
can be calculated as
Opening stock + closing stock
Opening stock + closing stock
2
2
Alternatively
Alternatively
Inventory turnover ratio =
Inventory turnover ratio = sales
sales_________
_________
Closing inventory
Closing inventory
42. Inventory /stock turnover ratio
Inventory /stock turnover ratio
A firm should have neither too high nor too
A firm should have neither too high nor too
low inventory turnover ratio. Too high a ratio
low inventory turnover ratio. Too high a ratio
may indicate very low level of inventory and a
may indicate very low level of inventory and a
danger of being out of stock and incurring high
danger of being out of stock and incurring high
‘stock out cost’. On the contrary too low a
‘stock out cost’. On the contrary too low a
ratio is indicative of excessive inventory
ratio is indicative of excessive inventory
entailing excessive carrying cost.
entailing excessive carrying cost.
43. Debtors turnover ratio and average
Debtors turnover ratio and average
collection period
collection period
This ratio is a test of the liquidity of the debtors
This ratio is a test of the liquidity of the debtors
of a firm. It shows the relationship between
of a firm. It shows the relationship between
credit sales and debtors.
credit sales and debtors.
Debtors turnover ratio =
Debtors turnover ratio =
Credit sales
Credit sales
Average Debtors and bills receivables
Average Debtors and bills receivables
Average collection period =
Average collection period =
Months/days in a year
Months/days in a year
Debtors turnover
Debtors turnover
44. Debtors turnover ratio and average
Debtors turnover ratio and average
collection period
collection period
These ratios are indicative of the efficiency of
These ratios are indicative of the efficiency of
the trade credit management. A high turnover
the trade credit management. A high turnover
ratio and shorter collection period indicate
ratio and shorter collection period indicate
prompt payment by the debtor. On the
prompt payment by the debtor. On the
contrary low turnover ratio and longer
contrary low turnover ratio and longer
collection period indicates delayed payments
collection period indicates delayed payments
by the debtor.
by the debtor.
In general a high debtor turnover ratio and
In general a high debtor turnover ratio and
short collection period is preferable
short collection period is preferable.
.
45. Asset turnover ratio
Asset turnover ratio
Depending on the different concepts of assets employed, there
Depending on the different concepts of assets employed, there
are
are
many variants of this ratio. These ratios measure the efficiency
many variants of this ratio. These ratios measure the efficiency
of a firm in managing and utilising its assets.
of a firm in managing and utilising its assets.
Total asset turnover ratio =
Total asset turnover ratio = sales/cost of goods sold
sales/cost of goods sold
Average total assets
Average total assets
Fixed asset turnover ratio =
Fixed asset turnover ratio = sales/cost of goods sold
sales/cost of goods sold
Average fixed assets
Average fixed assets
Capital turnover ratio =
Capital turnover ratio = sales/cost of goods sold
sales/cost of goods sold
Average capital employed
Average capital employed
Working capital turnover ratio =
Working capital turnover ratio = sales/cost of goods sold
sales/cost of goods sold
Net working capital
Net working capital
46. Asset turnover ratio
Asset turnover ratio
Higher ratios are indicative of efficient
Higher ratios are indicative of efficient
management and utilisation of resources while
management and utilisation of resources while
low ratios are indicative of under-utilisation of
low ratios are indicative of under-utilisation of
resources and presence of idle capacity.
resources and presence of idle capacity.
47. Creditors turnover ratio and average
Creditors turnover ratio and average
credit period
credit period
This ratio shows the speed with which payments
This ratio shows the speed with which payments
are made to the suppliers for purchases made
are made to the suppliers for purchases made
from them. It shows the relationship between
from them. It shows the relationship between
credit purchases and average creditors.
credit purchases and average creditors.
Creditors turnover ratio =
Creditors turnover ratio =
credit purchases
credit purchases
Average creditors & bills payables
Average creditors & bills payables
Average credit period =
Average credit period = months/days in a year
months/days in a year
Creditors turnover ratio
Creditors turnover ratio
48. Creditors turnover ratio and average
Creditors turnover ratio and average
credit period
credit period
Higher creditors turnover ratio and short credit
Higher creditors turnover ratio and short credit
period signifies that the creditors are being
period signifies that the creditors are being
paid promptly and it enhances the
paid promptly and it enhances the
creditworthiness of the firm.
creditworthiness of the firm.