{. what is ratio analysis? detailed study of ratios what is ra? why ra? classification of ratios...
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Ratio Analysis
What is Ratio Analysis?
Detailed study of ratios
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios 𝒂𝒃𝒄
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Why Ratio Analysis? Simplifies Financial Terms
Inter-firm Comparison
Intra-firm Comparison
Planning And Forecasting
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
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Classification Of Ratios
Traditional Classification Profit and loss account ratios Balance sheet ratios Composite ratios
Functional Classification
Profitability ratios Turnover ratios Financial ratios
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Profitability Ratio
These ratios measure the operating efficiency of the firm and its ability to ensure adequate returns to its shareholders
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Profitability Ratio
1. Overall Profitability Ratio or Return on investment
= * 100
Operating profit : profit before interest tax
Capital employed : sum total of the long term funds employed in the funds
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Profitability Ratio
2. Gross Profit Ratio
Indicates the degree to which the selling price of goods per unit may decline without resulting in losses from operations to the firm
It also helps in ascertaining whether the average percentage of markup on the goods is maintained
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Profitability Ratio
3. Net Profit Ratio
An increase in the ratio over the previous period indicates improvement in the operational efficiency of the business, provided the gross profit ratio is constant.
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Turnover Ratio
Turn over ratio indicates the number of times the capital has been rotated in the process of doing business. Higher the rate of rotation, greater will be the profitability
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• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Turnover Ratio
1. Fixed assets turnover ratio
This ratio indicates the extend to which the investment in fixed assets contributed towards sales
If it is compared with previous period, it indicates whether the investment in fixed assets has been judicious or not
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Turnover Ratio
2. Working capital turnover ratio
=
Indicates whether or not the working capital has been effectively utilized in making sales
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Financial Ratio
It indicates the financial position of the company.
Financial position of the company has to be judged from two angles: long-term as well as short-term.
Long term requirements of funds should be met out of long term funds and short term requirements should be met out of short term funds.
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Financial Ratio
1. Fixed assets ratio
The ratio should be more than 1
If it is less than 1, it shows that a part of the working capital has been financed through long term funds.
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Financial Ratio
2. Current ratio
This ratio indicates the firm’s commitment to meet its short-term liabilities
An ideal current ratio is 2. it is considered as a safe margin of solvency due to the fact that if the current assets are reduced to half then also the creditors will be able to get the payments in full
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Financial Ratio
3. Liquidity ratio Or Acid test ratio Or Quick ratio
Conventionally a quick ratio of 1:1 is considered satisfactory
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Financial Ratio
4. Proprietary Ratio
This ratio is particularly important to the creditors who can find out the proportion of shareholder’s funds in the total assets employed in the business. Higher the ratio, the better it is
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
Limitations Of Accounting Ratios
Comparative study required
Ratio alone are adequate
Window dressing
Problem of price level changes
No fixed standards
• What is RA?
• Why RA?
• Classification of Ratios
• Profitability ratio
• Turnover ratio
• Financial ratio
• Limitations of accounting ratios
