atio analysis is a study of relationship among various financial factors in a business

8/7/2019 atio analysis is a study of relationship among various financial factors in a business

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The following limitations of the ratio analysis are:

False result: ratio are calculated from the financial statement; so , the

reliability of ratio and its analysis is dependent upon the correctness of

the financial statement. If the figures are not true and fair, the analysis

gives a false picture of the affairs.

Not comparable if different firm follow different accounting policies:

when result of two enterprises are compared, it should be kept in mind

that the enterprise may follow different accounting policies. In such case

comparison is not possible.

Personal bias: personal judgement play an important role in preparing

financial statements and therefore, the accounting ratios are also not freefrom this limitation.

Affect of price level changes: changes in price level affects the

comparability of ratio.

Ratio as a tools for establishing true profitability and financial

position of a company, may be classified as :

1.Liquidity Ratios

2.Solvency Ratios3.Activity Ratios

4.Profitability Ratios


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Liquidity Ratio measures the short term solvency, i.e., the firms ability to pay

its current dues. They compromise of current ratio and liquidity ratio.

CurrentRatio

This ratio shows short term financial soundness of the business. Higher ratio

means better capacity to meet its current obligation. The ideal current ratio is

2:1.

Current Ratio = Current Assets/Current Liabilities

Current Assets = Inventories +Sundry Debtors + Cash And Bank Balances +

OtherCurrent Assets + Loans And Advances

=Rs.38819.03

Current Liabilities = Current Liabilities + Provisions

=Rs.38173.85

Current Ratio = Rs.38819.03/Rs.38173.85

=1.02:1

ANALYSIS

The current ratio of Idea CellularLtd. is 1.02:1. It indicates that the current

assets are 1.02 times the current liability.

Although the current ratio of 2:1 is considered to be the satisfactory. In

comparison to it the current ratio of idea cellular ltd. is fair which indicate that

short-term financial soundness of the business is not so good but fair. The idea

cellular ltd may not be able to meet its current liabilities on time and inadequate

working capital.


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Quick ratio

This quick ratio is fairly stringent measures of liquidity. It is based on those

current assets which are highly liquid. Quick ratio of 1:1is considered as ideal.

Quick Ratio = QuickAssets/Current Liabilities

QuickAssets OrLiquid Assets = Current Assets-Stock

=Rs. (38819.03-466.99)

=Rs.38819.03



Rs.38173.85

Quick Ratio=Rs.38352.04/Rs.38173.85

=1.005:1

ANALYSIS

The quick ratio of an Idea cellular ltd is 1.005:1.A

quick ratio of 1:1 is usuallyconsidered favourable, since for every rupee of current liabilities, there is a

rupee of quick assets. It indicates that the firm is better placed to meet it

current liabilities at a short notice.


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The term solvency implies ability of an enterprise to meet its long-term in

debtness and thus, solvency ratios convey an enterprises ability to meet its

long to Debt Ratio and proprietary Ratio.

Debt-Equity RatioThis position judges the long term financial position and soundness of the long

term financial policies of the firm. lower the ratio higher the protection enjoyed

by the lenders.

It can be calculated as:

Debt-Equity Ratio =

= 65264.13118536.09

= 0.5505844

ANALYSIS

The Debt-Equity ratio of a Idea Cellular Ltd is0.5505844. It indicates that the

Equity of a firm is more than the debt of a firm which means the lower debt-

equity ratio. Thus the firm is lesser dependent upon the outsiders for its

existence. A firm has the larger safety margin for creditors since owners equity

is considered as a margin of safety by creditors. But it cant be considered

satisfactory.


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Total assets to debt ratio

This ratio measures the safety margin available to the suppliers of long term

debts. It measures the extent to which the debt is being covered by assets.


Total assets to debt ratio =

Total assets to debt ratio = 192715.43

65264.13 = 2.9528537

ANALYSIS

The Total assets to debt equity ratio of idea cellular ltd are 2.9528537 which

means that the total assets are more than the debt. The total asset is fair

enough of a firm to pay the debt. It represents the higher security to lenders

for extending long term loans to business. At last the ratio is very good and

acceptable.

Proprietary ratio

This ratio shows the extent to which the proprietor has financed the total

assets. Higher the ratio, greater the satisfaction for lenders and creditors.


Proprietary ratio =

= 118536.09

192715.43

= 0.6150835


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ANALYSIS

The proprietary ratio is 0.6150835, which shows the extent to which the total

assets have been financed by the proprieto r. It shows that the assets of the

enterprise have been partly financed by borrowed funds.

It is also termed as a turnover ratio. The ratios are usually calculated on the

basis of sales or cost of sales. The important activity ratios are:

Inventory turnover ratioThis ratio measures how fast the stock is moving through the firm and

generating sales. Higher the ratio, the more efficient management of

inventories and vice-versa.

Inventory Turnover Ratio = Cost Of Goods Sold/Average Stock

Cost Of Goods Sold = Opening Stock + Purchases - Closing Stock

=Rs. 0.22

Average Stock = (Opening Stock +Closing Stock)/2

=Rs. (427.29+466.99)/2

=Rs.447.14

Inventory Turnover Ratio = Rs.0.22/Rs.447.14

=0.00049times

ANALYSIS

The inventory turnover ratio is 0.00049 times. The ratio is not so good; it is

very low which indicates that the investment in stock is not judicious. It means

that the stock holding period is not normal.

Debtors turnover ratio:


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Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivable

**************Here Credit Sales Are Not Give, So Formula Is Not Calculated

Creditors turnover ratio:

Creditors Turnover Ratio = Net Credit Purchase/Average Payables

*********** No Credit Purchase. So it cannot be calculated.

Working Capital turnover ratio:

Working Capital Turnover Ratio = Net Sales/Working Capital

Net Sales=Service Revenue + Sales Of Trading Goods

=Rs. (118502.21+0.22)

=Rs.118502.43

Working Capital = Current Assets-Current Liabilities

=Rs.(38819.03-38173.85)

=-Rs.645.18

Working Capital Turnover Ratio=Rs.118502.43/Rs.645.18 = 183.67 times.

ANALYSIS

The working capital turnover ratio of an Id ea Cellular ltd. is so good. It indicates

that the working capital has been efficiently employed in the process of

carrying on of business.


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Fixed assets turnover ratio:

Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets

Net Sales=Service Revenue + Sales Of Trading Goods

=Rs. (118502.21+0.22)

=Rs.118502.43

Net Fixed Assets = Fixed Assets Depreciation

=Rs.153896.4

Fixed Assets Turnover Ratio=Rs.118502.43/Rs.153896.4

=0.77 Times

ANALYSIS

The fixed assets turnover ratio of an Idea Cellular Ltd. is 0.77 times. The ratio is

not so good which indicate that the fixed assets are not so much efficiently

utilised in the firm to earn revenue.

In general terms, efficiency in business is measured by profitability. Thus the

profitability is of utmost importance for a concern.


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Gross profit ratio:

It can be calculated as;

Gross profit ratio =

100

Gross profit ratio 0f 2010 = X 100

118502.43

= 24.42%

Gross profit ratio 0f 2009 = 27804.44/98570.8

= 28.20%

ANALYSIS

The Gross profit ratio of an Idea Cellular ltd in 2009 is 28.20 % and in 2010 is

24.42%. It indicates that the business profit have gone a decrease from 28.20%

to 24.42%. This may be due to the disposal of stock at the reduced selling

price.

OPERATING RATIO =

Operating ratio of 2009 = 71171.77/ 98570.8

= 72.20371%

Operating ratio of 2010 = 90358.54/118502.33

= 76.24368%


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ANALYSIS

The operating ratio of an enterprise in 2009 is 72.203% and in 2010 is 76.24%

which indicate that the operational efficiency of the enterprise has gone an

increase which is not a good indicator as the profit margin has reduced.

NET PROFIT RATIO =

Net profit ratio of 2010 = 10536.55/118502.33

= 0.088%

Net profit ratio of 2009 = 10012.11/ 98570.8 =0.10 %

ANALYSIS

The net profit has decrease from 0.10% to 0.088%. It means that the firm is not

so much efficient . It might be because there is not effective control on different

expenses. The operating expenses has gone a huge increase from 70,982.3 to

90,358.32.

Return on investment =

X 100

Return on investment in 2010 =

= 7.562%


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Return on investment in 2009 =

= 7.71508 %

ANALYSIS

The return on investment in 2009 is 7.71508% and in 2010 is 7.562% which

shows the trend that the return on investment has gone a slightly decrease from

previous year. The ratio is not so satisfactory.

EARNING PER SHARE

Earnings per share =

Earnings per share in 2010 =

= 3.19305089

Earnings per share in 2009 = 10012110000/3100095209

= 3.229613713

ANALYSIS

As the profit of the idea cellular has gone a decrease, it has a effect on a EPS .

It has also reduced from 3.22 to 3.19, but it has not such effect.

PRICE EARNING RATIO


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PRICE EARNING RATIO =

Price Earnings ratio in 2010 = 65.50 / 3.39 = 9.32153392

Price earning ratio in 2009 = 58.05/3.42 = 16.97368421

ANALYSIS

The net profit of a idea cellular limited has decrease from 0.10% to 0.08%. Thereason for this may be:

y An increase in the operating ratio from 72.2% to 76.2%. The resources

have not been used efficiently.

y The focus of the firm is to increase its net sales not to earn profit.


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atio analysis is a study of relationship among various financial factors in a business

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