The document discusses ratio analysis, which involves calculating and interpreting various financial ratios to evaluate aspects of a company's performance and financial position. It defines key ratios including liquidity ratios, activity ratios, profitability ratios, and leverage ratios. It provides formulas and examples for specific ratios like current ratio, inventory turnover, debt-to-equity ratio, and return on equity. The purpose of ratio analysis is to help assess a company's liquidity, profitability, financial stability, and management quality.

1. Submitted by-
Aakriti Rohatgi - 04016659312
Roshnita Taneja - 03616659312

2. CONTENTS
 How does Ratio Analysis came into picture?
 What is Ratio Analysis?
 Significance of Ratio Analysis
 Purpose of Ratio Analysis
 Precautions to be taken while using ratio analysis
 Types of Ratios
 Case study

3. Learning Outcomes
 Understand the contextual environment in which
we apply financial ratios
 Explain the calculation and application of ratios
in the areas of profitability, efficiencies, liquidity,
etc. and apply them to a set of financial
statements
 Calculate different ratios from supplied company
details and interpret these ratios
 Explain the different classifications of financial
ratios
 Explore the results of ratio analysis in terms of
what it tell us about the organisation

4. NEED FOR A CHANGE..
 Traditional financial statements( balance sheet,
profit and loss accounts) do not give all the
information related to the firm
 It ignores the significance of financial operations
that the firm has undertaken in the entire year.
 Understanding Financial statements is a
complex task for a lay man(non commerce), this
gave rise to ratio analysis.

5. WHAT IS RATIO ANALYSIS ??
 Ratio-analysis means the process of computing,
determining and presenting the relationship of
related items and groups of items of the financial
statements.
 It is the systematic use of ratios to interpret the
performance and status of the firm.
 They provide information in a summarized and
concise form.

6. SIGNIFICANCE OF RATIO
ANALYSIS
The significance of a ratio can only truly be appreciated
when:
 It is compared with other ratios in the same set of
financial statements of the competitors.
 It is compared with the same ratio in previous
financial statements.
 It is compared with a standard of performance
(industry average). Such a standard may be either the
ratio which represents the typical performance of the
trade or industry, or the ratio which represents the
target set by management as desirable for the
business.

7. PURPOSE OF RATIO
ANALYSIS-
It’s a tool which enables the banker or lender to
arrive at the following factors i.e :
 Liquidity position
 Profitability
 Solvency
 Financial Stability
 Quality of the Management
 Safety & Security of the loans.

8. Before looking at the ratios there are a number of
cautionary points concerning their use that need to
be identified :
a. The dates and duration of the financial statements being
compared should be the same. If not, then wrong
conclusions will be drawn.
b. The accounts to be compared should have been prepared on
the same bases. Different treatment of stocks or
depreciations or asset valuations will distort the results.
c. In order to judge the overall performance of the firm, a
group of ratios, as opposed to just one or two should be
used. In order to identify trends at least three years of
ratios are normally required.

9. HOW A RATIO IS EXPRESSED?
 As Percentage - such as 25% or 50% . For
example if net profit is Rs.25,000/- and the sales
is Rs.1,00,000/- then the net profit can be said to
be 25% of the sales.
 As Proportion - The above figures may be
expressed in terms of the relationship between
net profit to sales as 1 : 4.
 As Pure Number /Times - The same can also
be expressed in an alternatively way such as the
sale is 4 times of the net profit or profit is 1/4th
of
the sales.

10. TYPES
 LIQUIDITY RATIOS
 ACTIVITY RATIOS
 PROFITABILITY RATIOS
 LEVERAGE RATIOS
 MARKET VALUE RATIOS

11. A: LIQUIDITY RATIOS
 The main concern of liquidity ratio is to
measures the ability of a firm to meet their short-
term obligations.
 Failure to do this will result in the total failure of
the business.
 These ratios are concerned with the examination
of the financial stability of the organization.

12. 1: CURRENT RATIOS
 It expresses the relationship between current
assets and current liabilities
 The concept behind this ratio is to find out
whether a company's short-term assets are
readily available to pay off its short-term
liabilities or not.
 Current Ratio = Current Assets/Current
Liabilities
 The ideal Current Ratio is 2 : 1

13. COMPARISON AMONG TWO FIRMS
Particulars Firm A Firm B
Current assets
Current liabilities
1,80,000
1,20,000
30,000
10,000
Current Ratio = 3 : 2 = 3 : 1

14. 2:QUICK RATIO OR ACID TEST
 It is the ratio between Quick Current Assets and Current
Liabilities.
 Acid Test or Quick Ratio = Quick Current
Assets/Current Liabilities
 Example :
 Cash 50
 Debtors 100
 Inventories 200
 Current Liabilities 100
 Total Current Assets 350
 Current Ratio = > 350/100 = 3.5 : 1
 Quick Ratio = > 150/100 = 1.5 : 1

15. 3:CASH RATIOS
 The cash ratio is an indicator of a company's
liquidity by measuring the amount of cash, cash
equivalents or invested funds there in the
current assets to cover current liabilities.
 Cash ratio = cash + cash equivalents
current liabilities
4: NET WORKING CAPITAL
 It indicates the amount of money in hand to meet
current obligations.
 Net Working Capital = Current Assets – Current
Liabilities

16. 5: DAYS PAYABLE OUTSTANDING
It indicates the number of days to settle all payables.
Days payable outstanding is an efficiency ratio that
measures the average number of days a company
takes to pay its suppliers
 Days Payable outstanding =
Average Accounts Payable * 365
COGS
Average Accounts Payable is the average of the opening
and closing balances of Accounts Payable.

17. B: ACTIVITY RATIOS
 If a business does not use its assets effectively,
investors in the business would rather take their
money and place it somewhere else.
 It is also known as Asset Management process.
 Activity ratios are used to assess how active
various assets are in the business.

18. 1: AVERAGE COLLECTION PERIOD
 The average collection period measures the quality of
debtors since it indicates the speed of their collection.
 The shorter the average collection period, the better
will be the quality of debtors, as a short collection
period implies the quick payment by the debtors.
 An excessively long collection period implies a very
liberal and inefficient credit and collection
performance.
 Debtor collection period= debtors x 365
credit sales

19. 2: INVENTORY TURNOVER
 It determines how often the stock turns over in
the business.
 It indicates the efficiency of the firm in selling its
product.
 This ratio measures the number of times in one
year that a business turns over its stock of goods
for sale.
 Stock Turnover= average stock x 365 (days)
cost of goods sold
Average Inventory = (Opening Stock + Closing Stock)
2

20. 3: TOTAL ASSETS TURNOVER
 It indicates the efficiency with which the firm
uses all its assets to generate sales.
 Asset turnover = sales
net assets

21.  Cash turnover = sales / cash and cash equivalents
 Accounts Receivable ratio= Annual Sales / average
Accounts Receivable
 Current Asset Turnover Ratio = Annual Sales /
Current Assets
 Fixed Assets Turnover ratio = Sales / Net Fixed
Assets
 Accounts Payable ratio= Annual Sales / Accounts
Payable

22.  Working capital turnover = sales / working
capital
 Days in Inventory = Average inventory / cost of
sales per day
 Days in Accounts Receivable = Accounts
Receivable / sales per day
 Days in Accounts Payable = Accounts Payable /
sales per day
 Operating cycle = Days in Inventory + Days in
Accounts Receivables.

24. C: LEVERAGE RATIOS
 A financial leverage ratio is the comparison between
debts and assets. This means that the values being
compared here are the size of debts and whatever
measurement of assets value is available.
 Technically , these ratios speak volumes about a
company’s reliance on loans and other sources of
borrowed money.
 The leverage ratio is used to calculate the financial
leverage of a company.

25. 1:DEBT TO EQUITY RATIO
 The debt-to-equity ratio is a financial ratio indicating
the relative proportion of equity and debt used to finance
the assets.
 It is the key of financial ratios and is used as a standard
for judging a company's financial standing.
 Debt to Equity Ratio = Total debt/ total equity
2: TIMES INTEREST EARNED RATIO
It is used to measure the long term viability of a business to
pay off its debts.
Times Interest Earned = Earnings before Interest & Tax
Net Interest Expense

26. 3: GEARING
 The most common use of the term 'gearing' is to describe
the level of a company's net debts compared with its
equity capital.
 It is expressed as a percentage.
 In simpler terms, gearing explains how a company
finances its operations - either through outside lenders or
through shareholders.
 Gearing =Long-term debt + Short-term debt + Bank overdrafts
Shareholders' equity
4: DEBT RATIOS
Debt Ratio is a financial ratio that indicates the
percentage of a company's assets that are provided
via debt.
Debt ratio= Total debts/ total assets

27. D:PROFITABILITY RATIOS
Gross profit Margin
Net Profit Margin
Return On Investment
Return On Equity
Earning Per Share

28. 1:GROSS PROFIT MARGIN
This ratio examines the relationship between the
profits made on trading activities only (gross
profit) against the level of turnover/sales made.
It is given by the formula
Gross Profit Margin = gross profit x 100
turnover (sales)

29. 2:NET PROFIT MARGIN
As opposed to gross profit margin this ratio
measures the relationship between the net profit
(profit made after all other expenses have been
deducted) and the level of turnover or sales made
Net Profit Margin = net profit x 100
turnover (sales)

30. 3:RETURN ON INVESTMENT
A performance measure used to evaluate the
efficiency of an investment or to compare the
efficiency of a number of different investments.
To calculate ROI, the benefit (return) of an
investment is divided by the cost of the
investment; the result is expressed as a
percentage or a ratio
ROI = After tax earnings/ total assets

31. 4:RETURN ON EQUITY
The amount of net income returned as a
percentage of shareholders equity. Return on
equity measures a corporation's profitability by
revealing how much profit a company
generates with the money shareholders have
invested.
ROE = After tax Earnings/ Stockholder’s equity

32. 5:EARNING PER SHARE
The portion of a company's profit allocated to each
outstanding share of common stock. Earnings per
share serves as an indicator of a company's
profitability.
EPS = Net income after tax- pref. dividend / no.
of issued equity shares

33. E:MARKET VALUE RATIO
Dividend Yield Ratio
Price Earning Ratio

34. 1:DIVIDEND YIELD RATIO
A financial ratio that shows how much a company
pays out in dividends each year relative to its
share price. In the absence of any capital gains,
the dividend yield is the return on investment for
a stock.
Dividend yield = Dividend per share / share price
Dividend per share = total dividend / no. of
shares outstanding

35. 2:PRICE EARNING RATIO
 A valuation ratio of a company's current share
price compared to its per-share earnings.
P/E ratio = Market price per share/ current
earnings per share
For example: a company is currently trading at
Rs.43 a share and earnings over the last 12
months were Rs.1.95 per share, the P/E ratio for
the stock would be 22.05

36. ~~CASE STUDY~~
RATIO ANALYSIS FOR JET
AIRWAYS
 Jet Airways was incorporated on April 1, 1992 as a
private company with limited liability under the
Companies Act.
 In 2005, Jet Airways Limited has filed its draft Red
Herring Prospectus with the Securities and Exchange
Board of India (Sebi) to enter the capital market with
its initial public offering. The company will offer
17,266,801 (1.72 crore shares) equity shares of Rs 10
each for cash at a price to be decided through the
book-building process. It is learnt that the value of
each share will be Rs 870. The IPO proceeds will
essentially be used to fund its international expansion
plans.
 Jet Airways IPO was subscribed 4.25 times on the
first day of the offer.

37. MANAGEMENT
Designation Names
Chairman / Chair Person Naresh Goyal
Director Ali Ghandour
Director Javed Akhtar
Director Aman Mehta
Director Victoriano P Dungca
Director I M Kadri
Director Yash Raj Chopra

38. RATIO ANALYSIS