Ratio analysis is a method of expressing the relationships between financial statement elements. It is used to evaluate a firm's performance, strengths, weaknesses, and ability to meet obligations. Ratios can be classified into liquidity, capital structure, turnover/activity, and profitability. Liquidity ratios measure short-term debt paying ability, capital structure ratios measure financial risk, turnover ratios measure asset use efficiency, and profitability ratios measure profit generation. Ratio analysis allows stakeholders to assess the firm's performance, financial condition, and risk.

2. Ratio Analysis
 A method of expressing the relationships
between any two elements on financial
statements.
 Ratio Analysis is a form of Financial
Statement Analysis that is used to obtain a
quick indication of a firm's financial
performance in several key areas.

3. OBJECTIVES:
 Objective for financial ratios is that all
the stakeholders (owners, investors,
lenders, employees etc.) can draw
conclusion about the
 Performance(present, past and future)
 Strength & weaknesses of a firm
 Can take decisions in relation to firm

4. TYPES OF RATIO
 The ratios can be classified into
the following four broad
categories :
 Liquidity Ratios
 Capital Structure/Leverage Ratios
 Turnover or Activity Ratios
 Profitability Ratios

5. LIQUIDITY RATIOS
Tell whether or not a small business will be
able to meet its maturing obligations as
they come due.
 Current Ratio
 Quick Ratio
 Absolute Liquidity Ratio

6. Current Ratio
Measures solvency by showing the firm's ability to
pay current liabilities out of current assets.
MCB HBL
1.14:1 1.16:1
Current Ratio =
Current Assets
Current Liabilities
Ideal 2 : 1

7. Quick Ratio/Liquidity Ratio/Acid Test Ratio
Shows the extent to which a firm’s most liquid assets cover
its current liabilities.
Quick Ratio =
Quick Assets
Current Liabilities
MCB HBL
1.09 1.02
Where,
Quick Assets = Current Assets-Inventories- Prepaid Expense
Ideal 1 : 1

8. Absolute Liquidity Ratio
 The absolute liquidity ratio measures the absolute
liquidity of the business. This ratio only considers the
absolute liquidity available with the firm.
Absolute Liquidity Ratio =
𝐂𝐚𝐬𝐡 + 𝐌𝐚𝐫𝐤𝐞𝐭𝐚𝐛𝐥𝐞 𝐒𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐚𝐢𝐛𝐥𝐢𝐭𝐢𝐞𝐬
• Marketable Securities = These are financial instruments
that can be easily converted to cash such as government
bonds, common stock or certificates of deposit.

9. CAPITAL STRUCTURES/LEVERAGE
RATIOS
Measure the financing provided by the firm's owners
against that supplied by its creditors.
May be defined as those ratios which measure the long
term stability and structures of the firm. These Include
 Debt to Equity ratio
 Interest Coverage Ratio
 Debt to Total Assets Ratio

10. Debt Equity Ratio
 This ratio indicates the relative proportion of debt and equity
in financing the assets of the firm.
Debt to Equity = Total Debt
Ratio Total Equity 0.75:1
MCB HBL
7.52 8.97
Generally, financial institutions favour a ratio of 2:1.

11. Interest Coverage Ratio
The interest coverage ratio is used to determine how
easily a company can pay interest expenses on
outstanding debt.
Interest coverage ratio = EBIT
Interest 3.33
MCB HBL
2.10 time 1.70 time
A ratio of 6 to 7 times is considered satisfactory.

12. Debt To Total Assets Ratio
Total debt to total assets is a leverage ratio that
defines the total amount of debt relative to assets.
The higher the ratio, higher the degree of leverage, and
consequently financial risk.
Debt Ratio = Total Debt
Total Assets
MCB HBL
6.18 9.08

13. OPERATING RATIOS
These ratios are also called efficiency ratios / asset
utilization ratios or turnover ratios.
Evaluate a firm’s overall performance and show how
effectively it is putting its resources to work.
 Inventory/Stock Turnover Ratio
 Debtor Turnover Ratio
 Creditor turnover Ratio
 Net Sales to Total Assets Ratio

14. Inventory Turnover Ratio
Tells the average number of times a firm's inventory
is “turned over” or sold out during the accounting
period.
Inventory = Cost of Goods Sold $1000000
Turnover Ratio Average Inventory $ 3500000
.29 times
It mean company sold only third of its stock during period. It
mean that it would take approximately three year to sold entire
stock.

15. Debtors Turnover Ratio
Tells the average number of days required to collect
accounts receivable.
Receivables Turnover = Credit Sales $ 50000
Ratio Average Accounts Receivable $ 15000
3.3 times
It mean that Firm collect his receivable about 3.3 times a year or
once every 110 days. When Firm make credit sales it will take
110 days to collect the cash from the sale.

16. Creditors Turnover Ratio
Tells the average number of days required to pay
accounts payable.
Credit Turnover Ratio= Credit Purchases $ 1000000
Average Payables $ 506000
1.97 times
This means that Firm pays his
vendors back on average once
every six months of twice a year.

17. Net Sales To Total Assets Ratio
Measures a firm’s ability to generate sales given its
asset base.
Net Sales to = Net Sales $ 25000
Total Assets Average Total Assets $ 75000
.33
This means that for every dollar in assets, Firm only
generates 33 cents. In other words, Firm start up in not
very efficient with its use of assets.

18. PROFITABILITY RATIOS
 These ratios are used to assess a business's ability to
generate earnings compared to its expenses and other
relevant costs incurred during a specific period of
time. These Include:
 Net Profit Ratio
 Return On Assets Ratio
 Return On Equity Ratio

19. Net Profit Ratio/ Profit Margin Ratio
 Measures the amount of net income earned with each
dollar of sales generated by comparing the net income
and net sales of a company.
Net Profit Ratio = Net Income $ 100000 ⃰ 100
Net Sales $ 1000000
10%
As you can see, Firm only converted 10 percent of her
sales into profits.

20. Net Profit to Assets (Return on Assets)
Ratio
Measures the net income produced by total assets during
a period by comparing net income to the average total
assets.
Tells how much profit a company generates for each dollar
of assets that it owns.
Return on Assets Ratio = Net Income $ 20,000,000 ⃰ 100
Average Total Assets $ 1,500,000
$ 13.3
In other words, every dollar that Investor invested in assets
during the year produced $13.3 of net income.

21. Return on Equity Ratio
• The return on equity ratio or ROE is a profitability
ratio that measures the ability of a firm to generate
profits from its shareholders investments in the
company.
• Return on Equity Ratio= Net Income $ 90000 ⃰ 100
Shareholder Equity $ 50000
180% or $ 1.80
This means that every dollar of common shareholder's equity
earned about $1.80 this year. In other words, shareholders saw a
180 percent return on their investment.