This document discusses ratio analysis and its uses. Ratio analysis involves calculating and interpreting various financial ratios to evaluate aspects of a company's performance like profitability, liquidity, efficiency, and financial stability. The document outlines different types of ratios including profitability ratios like gross profit margin, net profit margin and return on assets. It also discusses liquidity ratios like current ratio and quick ratio. Finally, it covers finance structure ratios such as debt-equity ratio and debt ratio that measure a company's use of leverage. Specific examples and interpretations of these ratios are provided for a sample company over several years.

1. RATIO ANALYSIS
The relationship of one item to another expressed in a simple mathematical
form is known as the “RATIO”. A ratio is a quotient to two numbers. It must
be interpreted against some standard. In assessing the financial stability of a
firm, a management should, part form profitability, be interested in relative
figures. A ratio is of major importance for financial analysis; it engages
qualitative measurement & shows precisely how adequate is one key item in
relation to another. To evaluate the financial condition & the purpose of the
firm the financial analyst needs certain yardsticks. The yardsticks frequently
used in ratio or an index relating two pieces of financial data to each other’s.
UTILITY OF RATIO ANALYSIS:
1. Probability.
2. Liquidity.
3. Efficiency.
4. Inter – Firm Comparison.
5. Indicates Trend.
6. Useful of Budgetary Controls.
7. Useful for Decision Making.
This ratio analysis contains five types of ratio as below:
1. Profitability Ratios.
2. Liquidity Ratios.
3. Assets Turnover Ratios.
4. Finance Structure Ratios.
5. Valuation Ratios.
Profitability Ratios:
Profitability ratio measures the degree of operating success of a company in
an accounting period. Two types of profitability ratios are there.
1. Profit Margin Ratios.
2. Rate of Return Ratios.
A profit margin ratio shows the relationship between profit & sales. Three
popular profits margin ratios are:

2. Gross Profit Margin Ratios.
Net Profit Margin Ratios.
Operating Profit Ratios.
Gross Profit Margin Ratio:
It shows the margin left after meeting manufacturing costs. It measures the
efficiency of production as well as pricing.
Gross Profit Margin Ratio = Gross Profit/ Sales X 100
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
GP Ratio 56.58 39.82 58.30 55.41 58.91
 The table shows that gross profit has been increased continuously
increased over the years with the exception of last year which had
decreased because of less sales.
 The reason for increase in the gross profit is due to increase in sale.
 Sale has been continuously increased over the years
Although the gross profit has been increased over the years it has been
found that gross profit ratio has been increased continuously.
Net Profit Margin Ratios:
It is most significant of all revenue ratios as it indicates the ultimate
profitability of the firm. This ratio is useful to the shareholders for knowing
the EPS and to investors in judging the prospects of return on their
investments higher ratio indicated higher profitability.
Net Profit Margin Ratio = Net Profit / Sales x 100.
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
NP Ratio 31.37 23.87 40.36 42.49 28.38
 In above showing continues increase in net profit till 2009 but then it
significantly decreased in year 2010 because of substantial increase in
raw materials cost and labourcosts.Company has then made up a bit in

3. 2011 because of strong demand in real estate sector that is
continuously riding high on back of developing india.
So we can say that company is smoothly & gradually growing & strong back
up.
Return on assets or Return on investments:
This is measure of profitability from a given level of investments. It is an
excellent indicator of overall performance of a company. It is also called
return on capital employed or return on investment. It measures how
efficiently the capital is employed.
Return on Assets = Net Profit / Average Total Assets X 100
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
ROI Ratio 81.35 75.59 72.91 66.10 4.27
 The ROA goes increasingevery year .
 This is showing the efficiency in the use of capital. The company can
earn more profit by optimizing the use of assets.
 The ROA has increased every year because of increase in profit every
year.
Liquidity Ratios:
Liquidity is the ability of a company to meet its short-term obligations when
fall due. A company should have enough cash % other current assets, which
can be converted in to cash so that it can pay its suppliers & lenders on
time.
In evaluating Ashok Leyland Ltd’s liquidity five ratios are presented.
Current Ratio.
Quick Ratio or Acid-test Ratio.
Net Working Capital.
Cash Generated Per Rupee of Sales.
Bank Finance Gap Ratio.
Current Ratio:
Current ratio indicates the firm’s ability to pay its current liabilities, i.e. day-
to-day financial obligations. It shows the strength of credit, strength of

4. working capital & capacity to carry on effective operations. Higher ratio i.e.
more than 2:1 indicates sound solvency position.
Current Ratio = CurrentAssets/ CurrentLiabilities.
Where,
Current Assets = Inventories + Debtors + Cash & Bank Balance + Loan &
Advances.
Current Liabilities = Liabilities + Provision
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
CR 3.51 5.03 2.96 2.34 1.75
 Composition of current ratio is very important at the time of
interpretation. Current ratio indicates the sound short term finance
from the creditor’s point of view. But on the other hand the higher
ratio indicates blocking of funds in current assets. As a conventional
rule, current ratio of 2:1 or more is considered satisfactory. To through
more light on the quality of current assets the percentage of the
current assets is to be calculated.
 However, an arbitrary standard of 2:1 should not be blindly followed.
Firm’s wit less then 2:1 current ratios may be doing well, while firms
with 2:1 or even higher may be finding great difficulties in paying their
bills. This is because the current ratio is a test of quantity not quality.
 Current Ratio is 5.03 in 2010& decreased up to 3.51 in 2011 because
current liabilities increased rapid than the increase in current assets.
 In the Current ratio it has been found decreasing than the base year,
so it is not a favorable sign for the company, it should take certain
measure to increased.
Quick Ratio or Acid Test Ratio:
The Quick Ratio is a more absolute test of a firm’s ability to meet its
immediate liabilities. It base on those current assets, which are highly liquid
inventories, is excluded from the numerators of this ratio because
inventories are deemed to be the least liquid component of current assets.
Quick Ratio = Quick Assets / Liquid Liability.
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
QR 2.49 3.56 3.83 3.28 1.36
 Generally a quick ratio of 1:1 is considered to represent a satisfactory
current financial condition. A quick ratio of 1:1 or more does not necessarily
imply sound liquidity position.

5.  A company with a high value of quick ratio can flounder if it has slow-paying,
doubtful and stretched out-in-age receivables. On the other hand, a company
with a low value of quick ratio may be prospering and paying its current
obligation in time, if it has been managing its inventories very efficiently wit
a continuous stability.
 It has same effect as Current Ratio.
In year 2007 the ratio was 1.36 , which was highest & also satisfactory level.
But then in year 2010, it was increased to 3.56 because of rapid increase in
liquid assets.
FINANCE STRUCTURE RATIOS:
It indicates the relative mix or blending of owner’s funds and outsider’s debt
funds in the total capital employed in the business. Financial leverage refers
to the use of debt finance. While debt capital is a cheater source of finance,
it is also a riskier source of finance.
Two types of ratio are commonly used to analyze financial leverage
1. Structural Ratios.
2. Converge
Structure ratio is base on the proportion of debt and equity in the financial
structure of the firm. Important structural ratios are: -
Equity Ratio or proprietary Ratio
Debt equity Ratio
Debt Ratio
Debt equity ratio:
This ratio indicates the relationship between borrowed funds and owner’s
capital. It shows the proportion of long-term external equities and internal
equities. i.e. proportion of funds provided by long-term creditors and that
provided by shareholders or proprietors.
Debt Equity Ratio = (Total long term debt/Net worth) x 100.
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
Debt to equity 1.09 0.99 0.78 0.74 10.37

6. The company has been properly able to manage its debt-equity ratio which
should be idealy 1:1.The company has been able to pay large amount of its debt
which was substantially high that is 10.37 in 2007.
Debt ratio:
It shows the relationship between long-term debt and total capital
employed. Equity ratio and debt ratio summation is always 1.
Debt ratio = long-term debt / total capital employed
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
Debt Ratio 0.21 0.25 0.33 0.43 0.32
 Interest coverage Ratio:
Thisratio indicates the use of interest bearing debt funds in generating
higher operating profit. Higher is the ratio better is the utilization of dept
fund. Higher interest cover ratio, enhance the equity earning is passed over
to the equity finance portion of the capitalization.
Interest Coverage Ratio = EBIT / Interest.
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
ICR 2.40 2.45 3.52 8.38 3.22
Company can actually go for increasing its interest coverage ratio which was
significantly better that is 8.38 in Mar 08.
Turnover Ratios
Turnover Ratios are basically Production ratios which measures the output
produced from the given input deployed. The relationship of productivity is
equal to output divided by input & assets turnover is equal to sales divided
by Assets.

7. Debtors turnover.
Fixed Assets Turnover.
Total Assets Turnover.
Inventory Turnover ratio.
Total Assets Turnover:
It shows the relationship between total assets to sales. The sales are
affected through investment in fixed assets to earn profit. The higher ratio
show that with less amount of investment in total assets, the business has
capacity to sell more as such its probability is also more.
Total Assets Turnover = Sales / Total Assets
Where Total Assets = Fixed Assets + Investments + Net Current Assets + Misc.
Expenses.
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
TAT 0.12 0.11 0.20 0.28 0.15
 Total assets turnover ratio has started decreasing from 2009 which is
not a good sign for the company.
 The company should look for increasing its use of fixed assets over
sales.
Fixed Assets Turnover Ratio:
The Fixed Assets Turnover shows the efficiency & profitability of business by
comparing the fixed assets with sales. The higher ratio shows that the fixed
assets are using efficient manner to increase the sales.
Fixed Assets Turnover Ratio = Sales / Net Fixed Assets.
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
FAT 1.18 1.11 1.08 1.23 1.44
A fixed assets turnover ratio has been increased in 2011 compared to
2010. It indicates that fixed assets utilized more efficient in business.

8. Debtor’s Turnover:
The debtor’s turnovers suggests the number of times the amount of credit
sales is collected during the year, while debtors ratio indicates the no. of
days during which the dues for credit sales are collected.
Debtor’s Turnover = Credit Sales / Average Debtors.
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
Debt Tur.R 6.64 5.62 4.95 9.96 11.0
The companys debtor turnover ratio has increased from last year which is a
good sign but company should look for further increasing the ratio.
Inventory Turnover Ratio:
Inventory Turnover Ratio is the ratio of cost of goods sold to average
inventory.It is an activity efficeiency ratio and it measures how many times
per period a company sells and replaces its inventory.
Inventory turnover ratio=Cost of goods sold/average inventory.
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
ITR 0.42 0.41 0.33
The companies performance on this front is not good.The lower inventory
turnover ratio indicates that there is obolosence risk for inventories as there
is overstocking of inventory.
Valuation Ratios:
Valuation ratios are the results of the management valuation ratio are
generally presented on a per share basis and that are more useful to the
equity invertors. The per share valuation are popular presented as
Earning per share (EPS).
Dividend pay out Ratio (DPS)
Divided yield

9. P/E Ratio.
Earning per share (EPS).
Earning per Share is an important major of corporate performance for
shareholders & potential investor. EPS figures are commonly presented in
prospectus & other material send to investor, press reports & reports of
equity analyst. AS 20 sets out the requirements for computation of EPS*
EPS is reported only foe equity share capital.
Earning Per Share = Profit after Tax / No. Of Equity Shares
Mar 11 Mar 10 Mar 09 Mar 08 Mar 08
EPS 7.48 4.51 9.12 15.10 2.65
Companies EPS have increased over last year significantly which is realy a
good sign .
Dividend pay out Ratio (DPS):
This ratio indicates the spilt of EPS between cash dividend & reinvestment of
profits. Ashok Leyland Ltd has profitable projects; show it is prefer to D/P
ratio lower, i.e. it will reinvest higher proportional profits in the business.
Dividend pay out Ratio = Dividend per Share / Earning per Share.
Mar 11 Mar 10 Mar 09 Mar 08
DPS 26.74 45.86 23.79 30.99
Company has maintained a more manageable dividend payout ratio this
year as company is on expansion track and looking for growth
opportunities.
Dividend Yield:
The Dividend Yield represents the current cash return to share holders. It is
computed by dividing the dividend per share by the average market price of share.
Dividend Yield = Dividend per Share / Average Market Price of Share X 100.

10. Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
YIELD 23.41 37.62 21.67 30.19 96.07
P/E Ratio:
This is popular measure extensively used in investment analysis. In a recent
served, 40% of well-known institutional portfolio managers and analysts in
the U.S ranked P/E ratio as the key factor in picking stocks.
P/E ratio = current market price of share/Earning per share
Mar 11 Mar 10 Mar 09 Mar 08 Mar 07
P/E Ratio 26.57