ratio analysis enlarged version-b.v.raghunandan
TRANSCRIPT
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Ratio Analysis
B.V.Raghunandan,SVS College,
Bantwal
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Definition
Ratio Analysis is a financial technique of measuring the strength and weakness of an organisation out of information available from financial reports specifically from the Balance Sheet and Income Statement
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Advantages
• Measuring the efficiency of organisations• Measuring the liquidity position of the companies• Measuring the capacity of companies to borrow in the
future• Understanding the overall financial position of
organisations• Estimating the solvency of the companies• Helping in forecasting
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Disadvantages• Only quantitative tools• Manipulation of accounting
figures• Too many analytical tools lead to
varied interpretation• Based on past data• Same data may be interpreted in
different ways• Vested interests• Measuring the changes in price
levels• Accounting policies have the
impact• Only symptoms and not cure
Page 5Different Ratios
A] Liquidity Ratios
B] Solvency Ratios
C] Activity Ratios
D] Profitability Ratios
E] Shareholders’ Ratios
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A] Liquidity Ratio
• Current Ratio =
• Acid Test Ratio=
• Working Capital Turnover Ratio =
bilitiesCurrentLia
etsCurrentAss
bilityCurrentLia
gStockCloetsCurrentAss sin
italWorkingCap
Sales
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A. Liquidity Ratios
• Used to study the ability of the organisation in meeting short-term payments or obligations
• Includes:
1) Current Ratio,
2) Acid Test Ratio and
3) Working Capital Turnover Ratio
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1) Current Ratio
• Relation between current assets and current liabilities
• Long Term Sources Financing the Current assets give a stable base for the liquidity of the organisation
• Normally , the ratio should not be less than 2 i.e., the current assets should be double the size of current liabilities
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Measurement of Current Ratio
Current Ratio = bilitiesCurrentLia
etsCurrentAss
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Precautions to be Taken for Current Ratio
• Proper Valuation of assets and liabilities
• Provision for Bad Debts• Useless Inventory Deducted• Loose Tools are not current
assets• Short Term Investment can be
part of current assets• Long Term investment like
capital of subsidiary is not current asset
• Advance payments for fixed assets should be excluded
• Instalment payments are part of current liabilities
• Bank overdraft and cash credit are part of current liabilities
• Bills Receivables are a part of current assets
• Bank Loans should not be treated as current liabilities
• Advances to Employees or Utilities are to be treated as current assets
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2) Acid Test Ratio/Quick Ratio
• It is the ratio between quick assets and quick liabilities
• Quick assets include current assets except inventory and pre-paid expenses
• Quick liabilities include current liabilities other than bank overdraft
• A 1:1 ratio is healthy• Healthy indicator of cash management
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Measurement of Acid Test Ratio
Acid Test Ratio =
litiesQuickLiabi
sQuickAsset
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3) Working Capital Turn-over Ratio
• Shows the efficiency of usage of working capital
• Relation between Sales and Working Capital
• Determination of number of times the working capital is turned over to achieve the maximum profit
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Measurement of Working Capital Turnover Ratio
lkingCapitaAverageWor
NetSales
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B. Solvency Ratios
• Measure long-term liquidity ratio• Reflect the ability of the firm to pay interest
and repayment of loans at due dates on the long-term loans taken
• Avoidance of over-borrowing (over-leverage)
• Avoidance of bankruptcy by maintaining healthy solvency ratios
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Types of Solvency Ratios
1) Interest Coverage Ratio
2) Debt Ratio
3) Debt-Equity Ratio
4) Capital Gearing Ratio
5) Proprietary Ratio
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1.Interest Coverage Ratio
TermDebtLongIntereston
TaxInterestofitBefore
&Pr
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2. Debt Ratio (Debt to Total Funds ratio)
rsFundsShareholdeLTDebt
LTDebt
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3) Debt-Equity Ratio
rsFundsShareholde
btLongTermDe
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4) Capital Gearing Ratio
ndeholdersFuEquityShar
curitieseBearingSeFixedIncom
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5) Proprietary Ratio
sTotalAsset
rsFundsShareholde
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C] Activity Ratios
1) Inventory Turnover Ratio
2) Debtors Turnover Ratio
3) Average Collection Period
4) Fixed Assets Turnover Ratio
5) Total Assets Turnover Ratio
6) Capital Turnover Ratio
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1) Inventory Turnover Ratio
ckAverageSto
sSoldCostofGood
ckAverageSto
sSoldCostofGood
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2) Debtor Turnover Ratio
torsAverageDeb
sCreditSale
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3) Average Collection Period
overRatioDebtorTurn
monthsaYearday )(12/)sin(365
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4) Fixed Assets Turnover Ratio
setsNetFixedAs
NetSales
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5) Total Assets Turnover Ratio
sTotalAsset
NetSales
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6) Capital Turnover Ratio
TermFundsLong
NetSales
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D] Profitability Ratios
1) Net Profit Ratio
2) Gross Profit Ratio
3) Return on Total Assets
4) Return on Equity
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1) Net Profit Ratio
100Pr
XNetSales
axofitAfterT
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2) Gross Profit Ratio
100Pr
XSales
ofitGross
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3) Return on Total Assets
100Pr
XsTotalAsset
axofitAfterT
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4) Return on Equity
100'
PrX
FundsrsShareholde
axofitAfterT
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E) Shareholders‘ Ratio
1) Earning per Share (EPS)
2) Price-Earning Ratio (PE Ratio)
3) Dividend Yield Ratio
4) Dividend Pay-out Ratio
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1) Earning per Share
uitySharesNumberofEq
axofitAfterTPr
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2) PE Ratio
ShareEarningper
eiceperSharMar Prker
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3) Dividend Yield Ratio
100Pr
XeiceperSharMarket
rShareDividendpe
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4) Dividend Pay-out Ratio
100XShareEarningper
rShareDividendpe
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THANK YOU