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### 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
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