SlideShare a Scribd company logo
1 of 25
Download to read offline
Ratio Analysis
Ratio
A ratio is a mathematical
relationship between two
items expressed in a
quantitative form.
Ratio Analysis
• Analysis and interpretation of financial
statements with the help of rations is termed
as “Ratio Analysis”
• Ratio Analysis involves the process of
computing, determining and presenting the
relationship of items or groups of items of
financial statements
• Ratio analysis was pioneered by Alexander
Wall who presented a system in the year
1909.
• Ratio analysis can be defined as quantitative
relationship between two or more items of
financial statements connected with each
other.
Mode of Expression of Ratio
• In Proportion
• In Rate or Times or Coefficient
• In Percentage
Steps in Ratio Analysis
• Selection of relevant
information
• Comparison of Calculated
Ratios
• Interpretation and Reporting
Advantages of Ratio Analysis
• Forecasting – Ratios reveal the trends in cost,
sales, profit and other inter-related facts
which is helpful in forecasting future events.
• Managerial Control-Ratios can be used as
“instrument of control” regarding sales, cost
and profit.
• Facilitates Communication-Ratios facilitates
the communication function of management
to convey present, future quickly and clearly
• Measuring Efficiency-Ratio helps to know
operational efficiency by comparison the
present rations
• Facilitating Investment Decisions-Ratio is
helpful in computing return on investment.
• Useful in Measuring Financial Solvency-
Ratios indicate the liquidity position of
the company.
• Inter Firm Comparisons- Ratio help the
management to compare its
performance.
Limitation of Ratio Analysis
• Practical Knowledge
• Ratios are Means
• Inter-Relationship
• Non-Availability Of Standards Or Norms
• Accuracy Of Financial Information
• Detachment From Financial Statement
• Time Lag
• Changes in Price Level
Classification of Ratio Analysis
• Classification of Ratios by Statement
• Classification by Users
• Classification by Relative Importance
• Classification of Ratio by Purpose or
Function
Profitability ratios
1. Return on Investment
2. Gross Profit Ratio
3. Net Profit Ratio
4. Operating Ratio
5. Operating Profit Ratio
6. Expense Ratio
Profitability ratios
• Profitability ratios allow for the analysis of a
firm’s profits in relation to either its trading
performance or in terms of the capital
invested in that company.
Return on investment or Overall
profitability ratio
• R.O.I=Operating Profit/Capital Employed *100
Operating Profit= Profit before interest and tax
Capital Employed are
1) Total of all assets
2) Total of fixed assets
3) Total of long term funds
4) Net Working Capital+ Fixed assets
Return on Investment
• Return on Shareholders funds = Net Profit
after interest and tax/Shareholders funds*100
• Return on Equity Shareholders funds=Net
Profit after interest, tax and Preference
dividend/Equity shareholders funds*100
• Return on Total Assets= Net Profit after
tax/Total assets *100
Gross Profit Ratio
Gross Profit Ratio=Gross profit / Net Sales
x 100
Gross profit=
Openingstock+Purchase+Direct
expenses-Sales-Closing Stock
Net Sales=Total Sales-Sales return
Net Profit ratio
• Net Profit ratio=Net Profit/Net sales X100
Net Profit includes non-operating incomes
and profits
Net Sales= Total sales-Sales return
Operating Ratio
• Operating Ratio= Cost of sales+ Operating
expenses/Net Sales X100
• Operating expenses include administration.
Selling and distribution expenses, finance
expenses
• Cost of sales=Opening stock + Purchase+
Direct expenses-Closing stock
Operating Profit Ratio
• Operating Profit ratio=Operating
Profit/SalesX100
• Operating Profit =Net Profit + Non-Operating
expenses-Non-Operating income
Expenses Ratio
• Expenses Ratio =Expenses/Net salesX100
• Expenses like Administrative, Selling and
Distribution , Financial etc.
Liquidity Ratio
• These ratios analyze the short tem financial
position of a firm and indicate the ability of
the firm to meet its short term commitments
and its short term resources.
• These are also known as solvency ratio
• Current Ratio
• Liquidity ratio
Current Ratio
• Current Ratio=Current Assets/Current
liabilities
• Current Assets includes Stock, Debtors, Cash
in hand and bank, Prepaid expenses ,bills
receivables , short term loans and advance.
• Current liabilities includes SundryCreditors,
BillsPayable,BankOverdraft,Outstanding
expenses.
Quick Ratio or Acid Test Ratio
• Quick Ratio= Quick Assets/Current liabilities
• Quick Assets=Current Assets-Stock and
prepaid expenses

More Related Content

Similar to Ratio analysis, Formulas, Advantage PPt.pptx

UNIT-IV MEASURING BUSINESS PERFORMANCE..
UNIT-IV MEASURING BUSINESS PERFORMANCE..UNIT-IV MEASURING BUSINESS PERFORMANCE..
UNIT-IV MEASURING BUSINESS PERFORMANCE..pushpait
 
financialstatementanalysis-121109105608-phpapp01.pdf
financialstatementanalysis-121109105608-phpapp01.pdffinancialstatementanalysis-121109105608-phpapp01.pdf
financialstatementanalysis-121109105608-phpapp01.pdfJennyThanushaw
 
Financialstatementanalysis 121109105608-phpapp01
Financialstatementanalysis 121109105608-phpapp01Financialstatementanalysis 121109105608-phpapp01
Financialstatementanalysis 121109105608-phpapp01Anuj Bhatia
 
Financial Statement Analysis
Financial Statement AnalysisFinancial Statement Analysis
Financial Statement AnalysisMuhammadAqibAli3
 
2. financial statement analysis
2. financial statement analysis2. financial statement analysis
2. financial statement analysisJudy Ricamara
 
Financial statement analysis
Financial statement analysisFinancial statement analysis
Financial statement analysisAnish Maman
 
Ratio analysis
Ratio analysisRatio analysis
Ratio analysiseduCBA
 
RATIO ANALYSIS BY KK MAHESH PUC STUDENTS
RATIO ANALYSIS BY KK MAHESH PUC STUDENTSRATIO ANALYSIS BY KK MAHESH PUC STUDENTS
RATIO ANALYSIS BY KK MAHESH PUC STUDENTSDibyenduSundarRay
 
Ratio Analysis in financial statements (KK MAHESH PU COLLEGE)
Ratio Analysis in financial statements (KK MAHESH  PU COLLEGE)Ratio Analysis in financial statements (KK MAHESH  PU COLLEGE)
Ratio Analysis in financial statements (KK MAHESH PU COLLEGE)Nikhil Priya
 
Financial statement analysis[1]
Financial statement analysis[1]Financial statement analysis[1]
Financial statement analysis[1]Karishma Agarwal
 
Financial statement analysis
Financial statement analysisFinancial statement analysis
Financial statement analysisAnuj Bhatia
 
Analysis and Interpretation of FS 1.pptx
Analysis and Interpretation of FS 1.pptxAnalysis and Interpretation of FS 1.pptx
Analysis and Interpretation of FS 1.pptxmarissacasarenoalmue
 

Similar to Ratio analysis, Formulas, Advantage PPt.pptx (20)

UNIT-IV MEASURING BUSINESS PERFORMANCE..
UNIT-IV MEASURING BUSINESS PERFORMANCE..UNIT-IV MEASURING BUSINESS PERFORMANCE..
UNIT-IV MEASURING BUSINESS PERFORMANCE..
 
FSA.pptx
FSA.pptxFSA.pptx
FSA.pptx
 
RATIO ANALYSIS
RATIO ANALYSISRATIO ANALYSIS
RATIO ANALYSIS
 
financialstatementanalysis-121109105608-phpapp01.pdf
financialstatementanalysis-121109105608-phpapp01.pdffinancialstatementanalysis-121109105608-phpapp01.pdf
financialstatementanalysis-121109105608-phpapp01.pdf
 
Financialstatementanalysis 121109105608-phpapp01
Financialstatementanalysis 121109105608-phpapp01Financialstatementanalysis 121109105608-phpapp01
Financialstatementanalysis 121109105608-phpapp01
 
Financial accounting
Financial accountingFinancial accounting
Financial accounting
 
Financial Statement Analysis
Financial Statement AnalysisFinancial Statement Analysis
Financial Statement Analysis
 
FS_Analysis.pptx
FS_Analysis.pptxFS_Analysis.pptx
FS_Analysis.pptx
 
2. financial statement analysis
2. financial statement analysis2. financial statement analysis
2. financial statement analysis
 
Ratio analysis
Ratio analysisRatio analysis
Ratio analysis
 
Financial statement analysis
Financial statement analysisFinancial statement analysis
Financial statement analysis
 
Ratio analysis
Ratio analysisRatio analysis
Ratio analysis
 
Ratio analysis
Ratio analysisRatio analysis
Ratio analysis
 
RATIO ANALYSIS BY KK MAHESH PUC STUDENTS
RATIO ANALYSIS BY KK MAHESH PUC STUDENTSRATIO ANALYSIS BY KK MAHESH PUC STUDENTS
RATIO ANALYSIS BY KK MAHESH PUC STUDENTS
 
Ratio Analysis in financial statements (KK MAHESH PU COLLEGE)
Ratio Analysis in financial statements (KK MAHESH  PU COLLEGE)Ratio Analysis in financial statements (KK MAHESH  PU COLLEGE)
Ratio Analysis in financial statements (KK MAHESH PU COLLEGE)
 
BA 580 chap008
BA 580 chap008BA 580 chap008
BA 580 chap008
 
Financial statement analysis[1]
Financial statement analysis[1]Financial statement analysis[1]
Financial statement analysis[1]
 
ratio analysis (1).pptx
ratio analysis (1).pptxratio analysis (1).pptx
ratio analysis (1).pptx
 
Financial statement analysis
Financial statement analysisFinancial statement analysis
Financial statement analysis
 
Analysis and Interpretation of FS 1.pptx
Analysis and Interpretation of FS 1.pptxAnalysis and Interpretation of FS 1.pptx
Analysis and Interpretation of FS 1.pptx
 

Recently uploaded

prediction of default payment next month using a logistic approach
prediction of default payment next month using a logistic approachprediction of default payment next month using a logistic approach
prediction of default payment next month using a logistic approachAdekunleJoseph4
 
Digital Indonesia Report 2024 by We Are Social .pdf
Digital Indonesia Report 2024 by We Are Social .pdfDigital Indonesia Report 2024 by We Are Social .pdf
Digital Indonesia Report 2024 by We Are Social .pdfNicoChristianSunaryo
 
Film cover research.pptx for media courseowrk
Film cover research.pptx for media courseowrkFilm cover research.pptx for media courseowrk
Film cover research.pptx for media courseowrk494f574xmv
 
Decoding Movie Sentiments: Analyzing Reviews with Data Analysis model
Decoding Movie Sentiments: Analyzing Reviews with Data Analysis modelDecoding Movie Sentiments: Analyzing Reviews with Data Analysis model
Decoding Movie Sentiments: Analyzing Reviews with Data Analysis modelBoston Institute of Analytics
 
Role of Consumer Insights in business transformation
Role of Consumer Insights in business transformationRole of Consumer Insights in business transformation
Role of Consumer Insights in business transformationAnnie Melnic
 
6 Tips for Interpretable Topic Models _ by Nicha Ruchirawat _ Towards Data Sc...
6 Tips for Interpretable Topic Models _ by Nicha Ruchirawat _ Towards Data Sc...6 Tips for Interpretable Topic Models _ by Nicha Ruchirawat _ Towards Data Sc...
6 Tips for Interpretable Topic Models _ by Nicha Ruchirawat _ Towards Data Sc...Dr Arash Najmaei ( Phd., MBA, BSc)
 
testingsdadadadaaddadadadadadadadaad.pdf
testingsdadadadaaddadadadadadadadaad.pdftestingsdadadadaaddadadadadadadadaad.pdf
testingsdadadadaaddadadadadadadadaad.pdfDSP Mutual Fund
 
Adobe Scan 06-Mar-2024 (1).pdf shavashwvw
Adobe Scan 06-Mar-2024 (1).pdf shavashwvwAdobe Scan 06-Mar-2024 (1).pdf shavashwvw
Adobe Scan 06-Mar-2024 (1).pdf shavashwvws73678sri
 
why-transparency-and-traceability-are-essential-for-sustainable-supply-chains...
why-transparency-and-traceability-are-essential-for-sustainable-supply-chains...why-transparency-and-traceability-are-essential-for-sustainable-supply-chains...
why-transparency-and-traceability-are-essential-for-sustainable-supply-chains...Jack Cole
 
Statistics For Management by Richard I. Levin 8ed.pdf
Statistics For Management by Richard I. Levin 8ed.pdfStatistics For Management by Richard I. Levin 8ed.pdf
Statistics For Management by Richard I. Levin 8ed.pdfnikeshsingh56
 
Neo4j_Exploring the Impact of Graph Technology on Financial Services.pdf
Neo4j_Exploring the Impact of Graph Technology on Financial Services.pdfNeo4j_Exploring the Impact of Graph Technology on Financial Services.pdf
Neo4j_Exploring the Impact of Graph Technology on Financial Services.pdfNeo4j
 
Inference rules in artificial intelligence
Inference rules in artificial intelligenceInference rules in artificial intelligence
Inference rules in artificial intelligencePriyadharshiniG41
 
Data Discovery With Power Query in excel
Data Discovery With Power Query in excelData Discovery With Power Query in excel
Data Discovery With Power Query in excelKapilSidhpuria3
 
Adobe Scan 06-Mar-2024 (1).pdfwvsbbsbsba
Adobe Scan 06-Mar-2024 (1).pdfwvsbbsbsbaAdobe Scan 06-Mar-2024 (1).pdfwvsbbsbsba
Adobe Scan 06-Mar-2024 (1).pdfwvsbbsbsbas73678sri
 
IBEF report on the Insurance market in India
IBEF report on the Insurance market in IndiaIBEF report on the Insurance market in India
IBEF report on the Insurance market in IndiaManalVerma4
 
DATA ANALYSIS using various data sets like shoping data set etc
DATA ANALYSIS using various data sets like shoping data set etcDATA ANALYSIS using various data sets like shoping data set etc
DATA ANALYSIS using various data sets like shoping data set etclalithasri22
 
Predictive Analysis - Using Insight-informed Data to Plan Inventory in Next 6...
Predictive Analysis - Using Insight-informed Data to Plan Inventory in Next 6...Predictive Analysis - Using Insight-informed Data to Plan Inventory in Next 6...
Predictive Analysis - Using Insight-informed Data to Plan Inventory in Next 6...ThinkInnovation
 
Rabobank_Exploring the Impact of Graph Technology on Financial Services.pdf
Rabobank_Exploring the Impact of Graph Technology on Financial Services.pdfRabobank_Exploring the Impact of Graph Technology on Financial Services.pdf
Rabobank_Exploring the Impact of Graph Technology on Financial Services.pdfNeo4j
 

Recently uploaded (19)

2023 Survey Shows Dip in High School E-Cigarette Use
2023 Survey Shows Dip in High School E-Cigarette Use2023 Survey Shows Dip in High School E-Cigarette Use
2023 Survey Shows Dip in High School E-Cigarette Use
 
prediction of default payment next month using a logistic approach
prediction of default payment next month using a logistic approachprediction of default payment next month using a logistic approach
prediction of default payment next month using a logistic approach
 
Digital Indonesia Report 2024 by We Are Social .pdf
Digital Indonesia Report 2024 by We Are Social .pdfDigital Indonesia Report 2024 by We Are Social .pdf
Digital Indonesia Report 2024 by We Are Social .pdf
 
Film cover research.pptx for media courseowrk
Film cover research.pptx for media courseowrkFilm cover research.pptx for media courseowrk
Film cover research.pptx for media courseowrk
 
Decoding Movie Sentiments: Analyzing Reviews with Data Analysis model
Decoding Movie Sentiments: Analyzing Reviews with Data Analysis modelDecoding Movie Sentiments: Analyzing Reviews with Data Analysis model
Decoding Movie Sentiments: Analyzing Reviews with Data Analysis model
 
Role of Consumer Insights in business transformation
Role of Consumer Insights in business transformationRole of Consumer Insights in business transformation
Role of Consumer Insights in business transformation
 
6 Tips for Interpretable Topic Models _ by Nicha Ruchirawat _ Towards Data Sc...
6 Tips for Interpretable Topic Models _ by Nicha Ruchirawat _ Towards Data Sc...6 Tips for Interpretable Topic Models _ by Nicha Ruchirawat _ Towards Data Sc...
6 Tips for Interpretable Topic Models _ by Nicha Ruchirawat _ Towards Data Sc...
 
testingsdadadadaaddadadadadadadadaad.pdf
testingsdadadadaaddadadadadadadadaad.pdftestingsdadadadaaddadadadadadadadaad.pdf
testingsdadadadaaddadadadadadadadaad.pdf
 
Adobe Scan 06-Mar-2024 (1).pdf shavashwvw
Adobe Scan 06-Mar-2024 (1).pdf shavashwvwAdobe Scan 06-Mar-2024 (1).pdf shavashwvw
Adobe Scan 06-Mar-2024 (1).pdf shavashwvw
 
why-transparency-and-traceability-are-essential-for-sustainable-supply-chains...
why-transparency-and-traceability-are-essential-for-sustainable-supply-chains...why-transparency-and-traceability-are-essential-for-sustainable-supply-chains...
why-transparency-and-traceability-are-essential-for-sustainable-supply-chains...
 
Statistics For Management by Richard I. Levin 8ed.pdf
Statistics For Management by Richard I. Levin 8ed.pdfStatistics For Management by Richard I. Levin 8ed.pdf
Statistics For Management by Richard I. Levin 8ed.pdf
 
Neo4j_Exploring the Impact of Graph Technology on Financial Services.pdf
Neo4j_Exploring the Impact of Graph Technology on Financial Services.pdfNeo4j_Exploring the Impact of Graph Technology on Financial Services.pdf
Neo4j_Exploring the Impact of Graph Technology on Financial Services.pdf
 
Inference rules in artificial intelligence
Inference rules in artificial intelligenceInference rules in artificial intelligence
Inference rules in artificial intelligence
 
Data Discovery With Power Query in excel
Data Discovery With Power Query in excelData Discovery With Power Query in excel
Data Discovery With Power Query in excel
 
Adobe Scan 06-Mar-2024 (1).pdfwvsbbsbsba
Adobe Scan 06-Mar-2024 (1).pdfwvsbbsbsbaAdobe Scan 06-Mar-2024 (1).pdfwvsbbsbsba
Adobe Scan 06-Mar-2024 (1).pdfwvsbbsbsba
 
IBEF report on the Insurance market in India
IBEF report on the Insurance market in IndiaIBEF report on the Insurance market in India
IBEF report on the Insurance market in India
 
DATA ANALYSIS using various data sets like shoping data set etc
DATA ANALYSIS using various data sets like shoping data set etcDATA ANALYSIS using various data sets like shoping data set etc
DATA ANALYSIS using various data sets like shoping data set etc
 
Predictive Analysis - Using Insight-informed Data to Plan Inventory in Next 6...
Predictive Analysis - Using Insight-informed Data to Plan Inventory in Next 6...Predictive Analysis - Using Insight-informed Data to Plan Inventory in Next 6...
Predictive Analysis - Using Insight-informed Data to Plan Inventory in Next 6...
 
Rabobank_Exploring the Impact of Graph Technology on Financial Services.pdf
Rabobank_Exploring the Impact of Graph Technology on Financial Services.pdfRabobank_Exploring the Impact of Graph Technology on Financial Services.pdf
Rabobank_Exploring the Impact of Graph Technology on Financial Services.pdf
 

Ratio analysis, Formulas, Advantage PPt.pptx

  • 1. Ratio Analysis Ratio A ratio is a mathematical relationship between two items expressed in a quantitative form.
  • 2. Ratio Analysis • Analysis and interpretation of financial statements with the help of rations is termed as “Ratio Analysis” • Ratio Analysis involves the process of computing, determining and presenting the relationship of items or groups of items of financial statements
  • 3. • Ratio analysis was pioneered by Alexander Wall who presented a system in the year 1909. • Ratio analysis can be defined as quantitative relationship between two or more items of financial statements connected with each other.
  • 4. Mode of Expression of Ratio • In Proportion • In Rate or Times or Coefficient • In Percentage
  • 5. Steps in Ratio Analysis • Selection of relevant information • Comparison of Calculated Ratios • Interpretation and Reporting
  • 6. Advantages of Ratio Analysis • Forecasting – Ratios reveal the trends in cost, sales, profit and other inter-related facts which is helpful in forecasting future events. • Managerial Control-Ratios can be used as “instrument of control” regarding sales, cost and profit.
  • 7. • Facilitates Communication-Ratios facilitates the communication function of management to convey present, future quickly and clearly • Measuring Efficiency-Ratio helps to know operational efficiency by comparison the present rations • Facilitating Investment Decisions-Ratio is helpful in computing return on investment.
  • 8. • Useful in Measuring Financial Solvency- Ratios indicate the liquidity position of the company. • Inter Firm Comparisons- Ratio help the management to compare its performance.
  • 9. Limitation of Ratio Analysis • Practical Knowledge • Ratios are Means • Inter-Relationship • Non-Availability Of Standards Or Norms • Accuracy Of Financial Information • Detachment From Financial Statement • Time Lag • Changes in Price Level
  • 10. Classification of Ratio Analysis • Classification of Ratios by Statement • Classification by Users • Classification by Relative Importance • Classification of Ratio by Purpose or Function
  • 11.
  • 12.
  • 13.
  • 14. Profitability ratios 1. Return on Investment 2. Gross Profit Ratio 3. Net Profit Ratio 4. Operating Ratio 5. Operating Profit Ratio 6. Expense Ratio
  • 15. Profitability ratios • Profitability ratios allow for the analysis of a firm’s profits in relation to either its trading performance or in terms of the capital invested in that company.
  • 16. Return on investment or Overall profitability ratio • R.O.I=Operating Profit/Capital Employed *100 Operating Profit= Profit before interest and tax Capital Employed are 1) Total of all assets 2) Total of fixed assets 3) Total of long term funds 4) Net Working Capital+ Fixed assets
  • 17. Return on Investment • Return on Shareholders funds = Net Profit after interest and tax/Shareholders funds*100 • Return on Equity Shareholders funds=Net Profit after interest, tax and Preference dividend/Equity shareholders funds*100 • Return on Total Assets= Net Profit after tax/Total assets *100
  • 18. Gross Profit Ratio Gross Profit Ratio=Gross profit / Net Sales x 100 Gross profit= Openingstock+Purchase+Direct expenses-Sales-Closing Stock Net Sales=Total Sales-Sales return
  • 19. Net Profit ratio • Net Profit ratio=Net Profit/Net sales X100 Net Profit includes non-operating incomes and profits Net Sales= Total sales-Sales return
  • 20. Operating Ratio • Operating Ratio= Cost of sales+ Operating expenses/Net Sales X100 • Operating expenses include administration. Selling and distribution expenses, finance expenses • Cost of sales=Opening stock + Purchase+ Direct expenses-Closing stock
  • 21. Operating Profit Ratio • Operating Profit ratio=Operating Profit/SalesX100 • Operating Profit =Net Profit + Non-Operating expenses-Non-Operating income
  • 22. Expenses Ratio • Expenses Ratio =Expenses/Net salesX100 • Expenses like Administrative, Selling and Distribution , Financial etc.
  • 23. Liquidity Ratio • These ratios analyze the short tem financial position of a firm and indicate the ability of the firm to meet its short term commitments and its short term resources. • These are also known as solvency ratio • Current Ratio • Liquidity ratio
  • 24. Current Ratio • Current Ratio=Current Assets/Current liabilities • Current Assets includes Stock, Debtors, Cash in hand and bank, Prepaid expenses ,bills receivables , short term loans and advance. • Current liabilities includes SundryCreditors, BillsPayable,BankOverdraft,Outstanding expenses.
  • 25. Quick Ratio or Acid Test Ratio • Quick Ratio= Quick Assets/Current liabilities • Quick Assets=Current Assets-Stock and prepaid expenses