Ratio analysis is a technique that measures the financial strength and weaknesses of an organization using ratios calculated from information in the balance sheet and income statement. There are various types of ratios that serve different purposes, such as liquidity ratios that measure short-term solvency, activity ratios that measure efficiency, and profitability ratios that measure long-term performance. While ratios provide quantitative measures, they also have limitations such as being based on historical data and different interpretation.

1. Ratio Analysis
B.V.Raghunandan,
SVS College,
Bantwal Page 1

2. Definition
Ratio Analysis is a financial technique of
measuring the strength and weakness of
an organisation out of information
available from financial reports
specifically from the Balance Sheet and
Income Statement
Page 2

3. Advantages
• Measuring the efficiency of organisations
• Measuring the liquidity position of the companies
• Measuring the capacity of companies to borrow in the
future
• Understanding the overall financial position of
organisations
• Estimating the solvency of the companies
• Helping in forecasting Page 3

4. Disadvantages
• Only quantitative tools
• Manipulation of accounting
figures
• Too many analytical tools lead to
varied interpretation
• Based on past data
• Same data may be interpreted in
different ways
• Vested interests
• Measuring the changes in price
levels
• Accounting policies have the
impact
• Only symptoms and not cure
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5. A] Liquidity Ratios
B] Solvency Ratios
C] Activity Ratios
D] Profitability Ratios
Different Ratios E] Shareholders’Page 5
Ratios

6. A] Liquidity Ratio
CurrentAssets
• Current Ratio =
CurrentLiabilities
CurrentAss ets Clo sin gStock
• Acid Test Ratio=
CurrentLia bility
Sales
• Working Capital Turnover Ratio =
WorkingCapital
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7. A. Liquidity Ratios
• Used to study the ability of the organisation in
meeting short-term payments or obligations
• Includes:
1) Current Ratio,
2) Acid Test Ratio and
3) Working Capital Turnover Ratio
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8. 1) Current Ratio
• Relation between current assets and current
liabilities
• Long Term Sources Financing the Current
assets give a stable base for the liquidity of the
organisation
• Normally , the ratio should not be less than 2
i.e., the current assets should be double the
size of current liabilities
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9. Measurement of Current Ratio
CurrentAssets
Current Ratio = CurrentLiabilities
Page 9

10. Precautions to be Taken for Current Ratio
• Proper Valuation of assets and • Advance payments for fixed
liabilities assets should be excluded
• Provision for Bad Debts • Instalment payments are part
• Useless Inventory Deducted of current liabilities
• Loose Tools are not current • Bank overdraft and cash credit
assets are part of current liabilities
• Short Term Investment can be • Bills Receivables are a part of
part of current assets current assets
• Long Term investment like • Bank Loans should not be
capital of subsidiary is not treated as current liabilities
current asset • Advances to Employees or
Utilities are to be treated as
current assets
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11. 2) Acid Test Ratio/Quick Ratio
• It is the ratio between quick assets and
quick liabilities
• Quick assets include current assets except
inventory and pre-paid expenses
• Quick liabilities include current liabilities
other than bank overdraft
• A 1:1 ratio is healthy
• Healthy indicator of cash management
Page 11

12. Measurement of Acid Test Ratio
QuickAssets
Acid Test Ratio =
QuickLiabilities
Page 12

13. 3) Working Capital Turn-over Ratio
• Shows the efficiency of usage of working
capital
• Relation between Sales and Working
Capital
• Determination of number of times the
working capital is turned over to achieve
the maximum profit
Page 13

14. Measurement of Working Capital
Turnover Ratio
NetSales
AverageWor kingCapital
Page 14

15. B. Solvency Ratios
• Measure long-term liquidity ratio
• Reflect the ability of the firm to pay interest
and repayment of loans at due dates on
the long-term loans taken
• Avoidance of over-borrowing (over-
leverage)
• Avoidance of bankruptcy by maintaining
healthy solvency ratios
Page 15

16. Types of Solvency Ratios
1) Interest Coverage
Ratio
2) Debt Ratio
3) Debt-Equity Ratio
4) Capital Gearing
Ratio
5) Proprietary Ratio
Page 16

17. 1.Interest Coverage Ratio
Pr ofitBefore Interest & Tax
InterestonLong TermDebt
Page 17

18. 2. Debt Ratio (Debt to Total Funds ratio)
LTDebt
LTDebt ShareholdersFunds
Page 18

19. 3) Debt-Equity Ratio
LongTermDebt
ShareholdersFunds
Page 19

20. 4) Capital Gearing Ratio
FixedIncomeBearingSecurities
EquityShareholdersFund
Page 20

21. 5) Proprietary Ratio
ShareholdersFunds
TotalAssets
Page 21

22. C] Activity Ratios
1) Inventory Turnover Ratio
2) Debtors Turnover Ratio
3) Average Collection Period
4) Fixed Assets Turnover Ratio
5) Total Assets Turnover Ratio
6) Capital Turnover Ratio
Page 22

23. 1) Inventory Turnover Ratio
CostofGood sSold
CostofGood sSold
AverageStock
AverageStock
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24. 2) Debtor Turnover Ratio
CreditSales
AverageDebtors
Page 24

25. 3) Average Collection Period
365(day sin aYear) / 12(months)
DebtorTurnoverRatio
Page 25

26. 4) Fixed Assets Turnover Ratio
NetSales
NetFixedAssets
Page 26

27. 5) Total Assets Turnover Ratio
NetSales
TotalAssets
Page 27

28. 6) Capital Turnover Ratio
NetSales
Long TermFunds
Page 28

29. D] Profitability Ratios
1) Net Profit Ratio
2) Gross Profit
Ratio
3) Return on Total
Assets
4) Return on Equity
Page 29

30. 1) Net Profit Ratio
Pr ofitAfterTax
X 100
NetSales
Page 30

31. 2) Gross Profit Ratio
Gross Pr ofit
X 100
Sales
Page 31

32. 3) Return on Total Assets
Pr ofitAfterTax
X 100
TotalAssets
Page 32

33. 4) Return on Equity
Pr ofitAfterT ax
X 100
Shareholders ' Funds
Page 33

34. E) Shareholders‘ Ratio
1) Earning per Share
(EPS)
2) Price-Earning Ratio
(PE Ratio)
3) Dividend Yield
Ratio
4) Dividend Pay-out
Ratio
Page 34

35. 1) Earning per Share
Pr ofitAfterT ax
NumberofEq uityShares
Page 35

36. 2) PE Ratio
Mar ker Pr iceperShare
EarningperShare
Page 36

37. 3) Dividend Yield Ratio
DividendperShare
X 100
Market Pr iceperShare
Page 37

38. 4) Dividend Pay-out Ratio
DividendperShare
X 100
EarningperShare
Page 38

39. THANK YOU
Page 39