This document provides an overview of ratio analysis for assessing the financial position and performance of a company. It begins with introducing ratio analysis and its uses. Then it discusses different types of ratios - liquidity ratios, leverage ratios, activity ratios, and profitability ratios. For each type, it explains the important ratios calculated under that category. For key ratios like current ratio, debt-equity ratio, inventory turnover ratio, it provides the formula to calculate them as well as guidelines on the ideal ratios. The document serves as a comprehensive guide to ratio analysis and interpreting various financial ratios.

1. WELCOME

2. RATIO ANALYSIS
Presented By:
Manish Pannu
16104001
MBA- Finance

3. Table of Contents:
01
02
03
04
Profile of the organisation
Concepts of Ratio Analysis
Interpreting Various Ratio’s
Queries

4. PROFILE OF THE ORGANISATION
A2it is an integrated IT solutions and service provider.
Services:
AUTOMOTIVE
INDUSTRY
APPLICATION
DEVELOPMENT
INDUSTRY
INTEGRATED
SERVICES
SOFTWARE
PRODUCT
ENGINEERING
ENGINE
OPTIMISATION
SEARCH

5. SWOT ANALYSIS
STRENGTHS
High Technology for Database
(e.g. PHP, Java Script)
High quality products & good
service
Excellent Reference
customers
WEAKNESS
Little Brand Recognition
Organic Growth No outside
Funding
Website traffic is low compared
to competition

6. OPPORTUNITIES THREATS
Create “ Add-on” to existing
product
Emerging Market & Increasing
No. of Customers
Expending Sector As Moving
into new attractive Market
Large & well funded
competitors
Price War between competitors
& company
Rapid Technology Change

7. RATIO ANALYSIS:
Is a method or process by which the relationship of
items or group of items in the financial statements are
computed and presented.
Is used to interpret the financial statements so that the
strengths & weaknesses of a firm, its historical
performance & current financial condition can be
determined.

8. UTILITY OF RATIOS
Accounting ratios are very useful in assessing the financial
position & Profitability of an enterprise.
However Utility lies in comparison of ratios.
For the same time over a No. of yrs.
For two enterprises in the same industry
For one enterprise against the industry as whole

9. HOW A RATIO IS EXPRESSED
•As Percentage-
EX- If net profit is Rs. 25000/- & the sales is Rs. 1,00,000/-
then the net profit can be said to 25% of the sales.
•As Proportion-
The above figure may be expressed in terms of the net
profit to sales 1:4
•As Pure Numbers/Times-
The same can also be expressed in an alternatively way
such as the sale is 4times of the net profit or profit is 1/4th
of the sales.

10. CLASSIFICATION OF RATIOS
Liquidity ratios Leverage ratios
Profitability ratios Activity ratios
RATIOS

11. LIQUIDITY RATIOS
The Liquidity ratios are used to test the short term
solvency or liquidity position of the business.
It enables to know whether short term liabilities can
be paid out of short term assets.
It indicates whether a firm has adequate working
capital to carry out routine business activity.
It is a valuable add to the management in checking
the efficiency with which working capital is being
employed.

12. IMPORTANT RATIO IN TEST OF LIQUIDITY
Current Ratio
Quick Ratio
Absolute liquid Ratio

13. CURRENT RATIO
It is most widely used of all analytical devices based on
balance sheet. It establishes relationship between total
current assets & current liabilities
Current assets
Current ratio = ----------------------
Current liabilities
Ideal ratio: 2:1
High Ratio indicates under trading and over capitalisation.
Low ratio indicates over trading & under capitalisation.

14. QUICK RATIO or ACID TEST RATIO
It establishes relationship between liquid assets & liquid
liabilities. It is a refinement to current ratio & second testing
device for working capital
Quick assets
Quick Ratio = ---------------------------
Current Liabilities
Ideal ratio: 1:1
Usually, a high acid test ratio is an indication that the firm is
liquid and has ability to meet its current or liquid liabilities in
time
Low quick ratio represents that the firm’s liquidity position is
not good.

15. ABSOLUTE LIQUID RATIO
This ratio establishes a relationship between absolute liquid
assets to quick liabilities.
Absolute liquid assets
Absolute liquid ratio= --------------------------------
Current liabilities
Ideal ratio: 1:2
It means that if the ratio is 1:2 or more than this the concern
can be taken as liquid.
If the ratio is less than the standard of 1:2, it means the
concern is not liquid.

16. LEVERAGE RATIOS ( Capital structure or
long term solvency )
Long term solvency ratios denote the ability of the
organisation to repay the loan & interest.
When an organisation’s assets are more than its liabilities is
known as solvent organisation.
Solvency indicates that position of an enterprise where it is
capable of meeting long term obligations.

17. IMPORTANT RATIOS IN TEST OF SOLVENCY
Debt- equity
ratio
Proprietary ratio
Solvency ratio
Fixed assets to
net worth ratio
Current assets
to net worth ratio
Capital gearing
ratio
Current liabilities
to net worth ratio
Fixed assets
ratio

18. DEBT TO EQUITY RATIO
It is calculated to measure the relative claims of outsiders &
the owner against the firm’s assets. This ratio indicates the
relation ship between the outsiders funds & the share holders
fund.
outsiders funds
Debt equity ratio= -----------------------------
Share holders fund
Ideal ratio: 2:1
It means for every 2 shares there is 1 debt. If the debt is less
than 2 times the equity, it means the creditors are relatively
less & financial structure is sound.
If the debt is more than 2 times the equity, the state of long
term creditors are more & indicate weak financial structure.

19. PROPRIETARY RATIO OR NET WORTH RATIO
It establishes relationship between the proprietors fund or
shareholders funds & the total assets.
Proprietary funds
Proprietary ratio= ----------------------------
Total assets
capital employed
------------------------
Total liabilities
or
Ideal ratio: 0.5:1
Higher the ratio better the long term solvency(financial)
position of the company This ratio indicates the extent to
which the assets of the company can be lost without affecting
the interest of the creditors of the company .

20. SOLVENCY RATIO
It expresses the relationship between total assets & total
liabilities of a business. This ratio is a small variant of equity &
can be simply calculated 100-equity ratio.
Total assets
Solvency ratio= ----------------------
Total liabilities
No standard ratio is fixed in this regard. It may be compare
with similar, such organisations to evaluate the solvency
position. Higher the solvency position. Higher the solvency
ratio, the stronger is its financial position & vice-versa.

21. FIXED ASSETS TO NET WORTH
It is obtained by dividing the depreciated book value of fixed
assets by the amount of proprietors funds.
Net fixed assets
Fixed assets to net worth ratio = ------------------------
Net worth
Ideal ratio: 0.75:1
A higher ratio, say, 100% means that there are no outside
liabilities & all the funds employed are those of shareholders.
In such a case the return to shareholders would be lower rate
of dividend & this is also a sign of over capitalisation.

22. CURRENT LIABILITIES TO NET WORTH
It is expressed as a proportion & is obtained by dividing
current liabilities by proprietor’s fund.
Current liabilities
Current liabilities to net worth ratio= --------------------------
Net worth
Ideal ratio: 1:3
This ratio indicates the relative contribution of short term
creditors & owners to the capital of an enterprise. If the ratio
is high, it means it is difficult to obtain long term funds by the
business.

23. CAPITAL GEARING RATIO
It expresses the relationship between equity capital & fixed
interest bearing securities & fixed dividend bearing shares.
Fixed interest bearing securities + fixed dividend bearing shares
CGR = --------------------------------------------------------------------------------------
Equity shareholders funds
Components of fixed interest
bearing securities
Components of equity
shareholders funds
Debentures
Long-term loans
Long-term fixed deposits
Equity share capital
Accumulated reserves & profits
Less losses & fictitious assets

24. INTERPRETATION OF CAPITAL GEARING RATIO
When fixed interest bearing securities & fixed dividend bearing
shares are higher than equity shareholders funds, the company
is said to be highly geared.
When the fixed interest hearing securities are fixed, dividend
bearing shares share equal to equity share capital it is said to be
‘evenly geared’.
When the fixed interest bearing securities & fixed dividend
bearing shares are lower than equity share capital it is said to be
‘low geared’ .

25. FIXED ASSETS RATIO
It establishes the relationship between fixed assets & capital
employed.
Fixed assets
Fixed assets ratio = ----------------------
Capital employed
Ideal ratio: 0.67:1
This ratio enables to know how fixed assets are financed i.e.
By use of short term funds or by long term funds. This ratio
should not be more than 1

26. ACTIVITY RATIO
Activity ratios indicate the performance of an organisation.
This indicate the effective utilization of the various assets of the
organisation.
Most of the ratio falling under this category is based on
turnover & hence these ratios are called as turnover ratios.

27. IMPORTANT RATIOS IN ACTIVITY RATIO
Stock turnover ratio
Debtors turnover ratio
Creditors turnover ratio
Fixed assets turnover
ratio

28. STOCK TURNOVER RATIO
This ratio establishes the relationship between the cost of
goods sold during a given period of time & the average stock
holding during that time.
Indicates operational & marketing efficiency,.
Helps in evaluating inventory policy to avoid over stocking.
Cost of goods sold
Inventory turnover ratio = -------------------------
Average stock
COGS= sales-gross profit
= opening stock + purchases-closing stock
Average stock= opening + closing / 2
Ideal ratio: 8 times

29. DEBTORS TURNOVER RATIO
This ratio explains the relationship of net credit sales of a
firm to its book debts indicating the rate at which cash is
generated by turnover of receivables or debtors.
The purpose of this ratio is to measure the liquidity of the
receivables or to find out the period over which receivables
remain uncollected.
Net credit sales
Debtor turnover ratio = -------------------------
Average Debtors
Average debtor = opening bal. + closing bal. / 2
(Debtors include BR along with book debts).
Average Collection period = No. Of working days in year / Debtors turnover ratio
Ideal ratio: 10 times (Debt collection period of 30 – 36 days)

30. CREDITORS TURNOVER RATIO
This ratio indicates the no. Of times the creditors are paid
in a year.
It is useful for creditors in finding out how much time the
firm is likely to take in repaying its trade creditors.
Net credit Purchases
Creditor turnover ratio = ------------------------------
Average creditors
Average creditors = opening bal. + closing bal. / 2
Average Collection period = No. Of working days in year / Creditors turnover ratio
Ideal ratio: 12 times (Debt collection period of 30 days)

31. Net sales
Fixed assets turnover ratio = --------------------
Fixed assets
FIXED ASSETS TURNOVER RATIO
This ratio establishes a relation between fixed assts &
sales.
Ideal ratio: 5 times
A high ratio indicates better utilisation of fixed assets
A low ratio indicates under utilisation of fixed assets

32. PROFITABILITY RATIOS
Profitability ratios indicate the profit earning capacity of a
business.
Profitability ratios are calculated either in relation to sales or
in relation to investments
Gross profit ratio Operating ratio
Expense ratio

33. Gross profit
Gross profit ratio = -----------------------
Net sales
COGS + operating expenses
Operating ratio = ----------------------------------------- * 100
Net sales
A low gross profit ratio may indicate unfavourable purchasing,
higher the gross profit ratio better the results.
Higher the ratio the less favourable it is because it would leave a
smaller margin to meet interest, dividend & other corporate needs .
Expense ratio
It establishes relationship between individual operating
expenses & net sales revenue.
•COGS ratio = COGS / Net sales * 100
•Admin & office exp. Ratio = office & admin. Exp / net sales * 100.
COGS = cost of goods sold

34. Any
Queries?
??