ratio analysis ppt[1]

8/6/2019 Ratio Analysis Ppt[1]

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Ratio analysisRatio analysis

IsIs aa methodmethod oror process process by by whichwhich thetherelationshiprelationship ofof itemsitems oror groupsgroups ofof itemsitems inin thethefinancialfinancial statementsstatements areare computed,computed, andand

presentedpresented..

IsIs anan importantimportant tooltool ofof financialfinancial analysisanalysis..

IsIs usedused toto interpretinterpret thethe financialfinancial statementsstatements soso

thatthat thethe strengthsstrengths andand weaknessesweaknesses ofof aa firm,firm, itsitshistoricalhistorical performance performance andand currentcurrent financialfinancialconditioncondition cancan bebe determineddetermined..


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RatioRatio

AA mathematicalmathematical yardstickyardstick thatthat measuresmeasures

thethe relationshiprelationship between between twotwo figuresfigures oror

groupsgroups ofof figuresfigures whichwhich areare relatedrelated totoeacheach otherother andand areare mutuallymutually interinter--

dependentdependent..

ItIt cancan be be expressedexpressed asas aa pure pure ratio,ratio,percentage,percentage, oror asas aa raterate


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Words of cautionWords of caution

AA ratioratio isis notnot anan endend inin itselfitself.. TheyThey areare onlyonly aa

meansmeans toto getget toto knowknow thethe financialfinancial positionposition ofof

anan enterpriseenterprise..

ComputingComputing ratiosratios doesdoes notnot addadd anyany informationinformation

toto thethe availableavailable figuresfigures..

ItIt onlyonly revealsreveals thethe relationshiprelationship inin aa moremore

meaningfulmeaningful wayway soso asas toto enableenable usus toto drawdrawconclusionsconclusions therethere fromfrom..


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Utility of RatiosUtility of Ratios

AccountingAccounting ratiosratios areare veryvery usefuluseful inin

assessingassessing thethe financialfinancial position position andand

profitabilityprofitability ofof anan enterpriseenterprise..

HoweverHowever itsits utilityutility lieslies inin comparisoncomparison ofof

thethe ratiosratios..


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Utility of RatiosUtility of Ratios

ComparisonComparison maymay bebe inin anyany oneone ofof thethe followingfollowing

formsforms::

ForFor thethe samesame enterpriseenterprise overover aa numbernumber ofof yearsyears

ForFor twotwo enterprisesenterprises inin thethe samesame industryindustry

ForFor oneone enterpriseenterprise againstagainst thethe industryindustry asas aa wholewhole

ForFor oneone enterpriseenterprise againstagainst aa prepre--determineddetermined standardstandard

ForFor interinter--segmentsegment comparisoncomparison withinwithin thethe samesameorganisationorganisation


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Classification of RatiosClassification of Ratios

Ratios can be broadly classified into four groupsRatios can be broadly classified into four groups

namely:namely:

Liquidity ratiosLiquidity ratios Capital structure/leverage ratiosCapital structure/leverage ratios

Profitability ratiosProfitability ratios

Activity ratiosActivity ratios


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Liquidity ratiosLiquidity ratios

TheseThese ratiosratios analyseanalyse thethe shortshort--termterm financialfinancial

positionposition ofof aa firmfirm andand indicateindicate thethe abilityability ofof thethe firmfirm

toto meetmeet itsits shortshort--termterm commitmentscommitments (current(current

liabilities)liabilities) outout ofof itsits shortshort--termterm resourcesresources (current(currentassets)assets)..

TheseThese areare alsoalso knownknown asas solvencysolvency ratiosratios.. TheThe

ratiosratios whichwhich indicateindicate thethe liquidityliquidity ofof aa firmfirm areare::

Current ratioCurrent ratio

Liquidity ratio or Quick ratio or acid test ratioLiquidity ratio or Quick ratio or acid test ratio


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Current ratioCurrent ratio

ItIt isis calculatedcalculated by by dividingdividing currentcurrent assetsassets byby

currentcurrent liabilitiesliabilities..

Current ratio =Current ratio = Current assetsCurrent assets wherewhere

Current liabilitiesCurrent liabilities

ConventionallyConventionally aa currentcurrent ratioratio ofof 22::11 isisconsideredconsidered satisfactorysatisfactory


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CURRENT ASSETSCURRENT ASSETSincludeinclude

InventoriesInventories ofof rawraw material,material, WIP,WIP, finishedfinished goods,goods,

storesstores andand spares,spares,

sundrysundry debtors/receivables,debtors/receivables,

shortshort termterm loansloans depositsdeposits andand advances,advances,

cashcash inin handhand andand bank,bank,

prepaidprepaid expenses,expenses,

incomesincomes receivablesreceivables andand

marketablemarketable investmentsinvestments andand shortshort termterm securitiessecurities..


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CURRENT LIABILITIESCURRENT LIABILITIES

includeinclude

sundry creditors/bills payable,sundry creditors/bills payable,

outstanding expenses,outstanding expenses,

unclaimed dividend,unclaimed dividend,advances received,advances received,

incomes received in advance,incomes received in advance,

provision for taxation,provision for taxation,

proposed dividend,proposed dividend,instalments of loans payable within 12 months,instalments of loans payable within 12 months,

bank overdraft and cash creditbank overdraft and cash credit


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Quick Ratio or Acid Test RatioQuick Ratio or Acid Test Ratio

ThisThis isis aa ratioratio betweenbetween quickquick currentcurrent assetsassets andand currentcurrent

liabilitiesliabilities (alternatively(alternatively quickquick liabilities)liabilities)..

ItIt isis calculatedcalculated by by dividingdividing quickquick currentcurrent assetsassets byby

currentcurrent liabilitiesliabilities (quick(quick currentcurrent liabilities)liabilities)

QuickQuick ratioratio == quick quick assetsassets wherewhere

CurrentCurrent liabilities/(quickliabilities/(quick liabilities)liabilities)

ConventionallyConventionally aa quickquick ratioratio ofof 11::11 isis consideredconsidered

satisfactorysatisfactory..


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Capital structure/ leverage ratiosCapital structure/ leverage ratios

TheseThese ratiosratios indicateindicate thethe longlong termterm solvencysolvency

ofof aa firmfirm andand indicateindicate thethe abilityability ofof thethe firmfirm

toto meetmeet itsits longlong--termterm commitmentcommitment withwith

respectrespect toto

(i)(i) repaymentrepayment ofof principal principal onon maturitymaturity oror inin

predeterminedpredetermined instalmentsinstalments atat duedue datesdates andand

(ii)(ii) periodic periodic payment payment ofof interestinterest duringduring thethe

periodperiod ofof thethe loanloan..


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Capital structure/ leverage ratiosCapital structure/ leverage ratios

TheThe differentdifferent ratiosratios areare::

DebtDebt equityequity ratioratio

ProprietaryProprietary ratioratio DebtDebt toto totaltotal capitalcapital ratioratio

InterestInterest coveragecoverage ratioratio

DebtDebt serviceservice coveragecoverage ratioratio


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LONGLONG--TERMTERM FUNDSFUNDS areare longlong--termterm loansloans whetherwhether

securedsecured oror unsecuredunsecured likelike debentures,debentures, bonds,bonds, loansloans

fromfrom financialfinancial institutionsinstitutions etcetc..

SHAREHOLDERSSHAREHOLDERS FUNDSFUNDS areare equityequity shareshare

capitalcapital plusplus preferencepreference shareshare capitalcapital plusplus reservesreserves andand

surplussurplus minusminus fictitiousfictitious assetsassets (eg(eg.. PreliminaryPreliminary

expenses,expenses, pastpast accumulatedaccumulated losses,losses, discountdiscount onon issueissue

ofof sharesshares etcetc..))


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Proprietary ratioProprietary ratio

ThisThis ratioratio indicatesindicates thethe generalgeneral financialfinancial strengthstrength ofof thethe

firmfirm andand thethe longlong-- termterm solvencysolvency ofof thethe businessbusiness..

ThisThis ratioratio isis calculatedcalculated byby dividingdividing proprietorsproprietors fundsfunds byby

totaltotal fundsfunds..

ProprietaryProprietary ratioratio == proprietorsproprietors fundsfunds wherewhere

TotalTotal funds/assetsfunds/assets

AsAs aa roughrough guideguide aa 6565%% toto 7575%% proprietaryproprietary ratioratio isisadvisableadvisable


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PROPRIETORSPROPRIETORS FUNDSFUNDS areare samesame asas

explainedexplained inin shareholdersshareholders fundsfunds

TOTALTOTAL FUNDSFUNDS areare allall fixedfixed assetsassets andand allall

currentcurrent assetsassets..

Alternatively

Alternatively itit cancan be be calculatedcalculated asasproprietors proprietors fundsfunds plusplus longlong--termterm fundsfunds plusplus

currentcurrent liabilitiesliabilities..


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Debt to total capital ratioDebt to total capital ratio

InIn thisthis ratioratio thethe outsideoutside liabilitiesliabilities areare relatedrelated toto

thethe totaltotal capitalisationcapitalisation ofof thethe firmfirm.. ItIt indicatesindicates

whatwhat proportionproportion ofof thethe permanentpermanent capitalcapital ofof thethe

firmfirm isis inin thethe formform ofof longlong--termterm debtdebt..

Debt to total capital ratio =Debt to total capital ratio =longlong-- term debtterm debt

Shareholders funds + longShareholders funds + long-- term debtterm debt

Conventionally a ratio of 2/3 is consideredConventionally a ratio of 2/3 is considered

satisfactorysatisfactory..


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Interest coverage ratioInterest coverage ratio

ThisThis ratioratio measuresmeasures thethe debtdebt servicingservicing capacitycapacity ofof aa firmfirm

inin soso farfar asas thethe fixedfixed interestinterest onon longlong--termterm loanloan isis

concernedconcerned.. ItIt showsshows howhow manymany timestimes thethe interestinterest

chargescharges areare coveredcovered byby EBITEBIT outout ofof whichwhich theythey willwill bebe

paidpaid..

InterestInterest coveragecoverage ratioratio == EBITEBIT

InterestInterest

AA ratioratio ofof 66 toto 77 timestimes isis consideredconsidered satisfactorysatisfactory..HigherHigher thethe ratioratio greatergreater thethe abilityability ofof thethe firmfirm toto paypay

interestinterest outout ofof itsits profitsprofits.. ButBut tootoo highhigh aa ratioratio maymay

implyimply lesserlesser useuse ofof debtdebt and/orand/or veryvery efficientefficient operationsoperations


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Debt service coverage ratioDebt service coverage ratio

ThisThis isis aa moremore comprehensivecomprehensive measuremeasure toto computecompute thethedebtdebt servicingservicing capacitycapacity ofof aa firmfirm.. ItIt showsshows howhow manymanytimestimes thethe totaltotal debtdebt serviceservice obligationsobligations consistingconsisting ofofinterestinterest andand repaymentrepayment ofof principalprincipal inin instalmentsinstalments arearecoveredcovered byby thethe totaltotal operatingoperating fundsfunds afterafter paymentpayment ofoftaxtax..

DebtDebt serviceservice coveragecoverage ratioratio ==

EAT+EAT+ interestinterest ++ depreciationdepreciation ++ otherother nonnon--cashcash expexp

InterestInterest ++ principalprincipal instalmentinstalmentEATEAT isis earningsearnings afterafter taxtax..

GenerallyGenerally financial financial institutionsinstitutions considerconsider 22::11 asas aasatisfactorysatisfactory ratioratio..


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TheseThese ratiosratios measuremeasure thethe operatingoperating efficiencyefficiency ofofthethe firmfirm andand itsits abilityability toto ensureensure adequateadequate returnsreturns

toto itsits shareholdersshareholders..

TheThe profitabilityprofitability ofof aa firmfirm cancan bebe measuredmeasured byby itsitsprofitabilityprofitability ratiosratios..

FurtherFurther thethe profitabilityprofitability ratiosratios cancan bebe determineddetermined

(i)(i) inin relationrelation toto salessales andand

(ii)(ii) inin relationrelation toto investmentsinvestments


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ProfitabilityProfitability ratiosratios inin relationrelation toto salessales::

grossgross profitprofit marginmargin

NetNet profitprofit marginmargin ExpensesExpenses ratioratio


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Profitability ratios in relation to investmentsProfitability ratios in relation to investments

ReturnReturn onon assetsassets (ROA)(ROA)

R

eturnR

eturn onon capitalcapital employedemployed (RO

CE)(RO

CE) ReturnReturn onon shareholdersshareholders equityequity (ROE)(ROE)

EarningsEarnings perper shareshare (EPS)(EPS)

DividendDividend perper shareshare (DPS)(DPS)

DividendDividend payoutpayout ratioratio (D/P)(D/P)

PricePrice earningearning ratioratio (P/E)(P/E)


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Gross profit marginGross profit margin

ThisThis ratioratio isis calculatedcalculated by by dividingdividing grossgross

profitprofit byby salessales.. ItIt isis expressedexpressed asas aa percentagepercentage..

GrossGross profit profit isis thethe resultresult ofof relationshiprelationship

betweenbetween prices,prices, salessales volumevolume andand costscosts..

GrossGross profitprofit marginmargin == grossgross profitprofit xx 100100NetNet salessales


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Gross profit marginGross profit margin

AA firmfirm shouldshould havehave aa reasonablereasonable grossgross profitprofit

marginmargin toto ensureensure coveragecoverage ofof itsits operatingoperating

expensesexpenses andand ensureensure adequateadequate returnreturn toto thethe

ownersowners ofof thethe businessbusiness ieie.. thethe shareholdersshareholders..

ToTo judgejudge whetherwhether thethe ratioratio isis satisfactorysatisfactory oror

not,not, itit shouldshould bebe comparedcompared withwith thethe firmsfirms pastpast

ratiosratios oror withwith thethe ratioratio ofof similarsimilar firmsfirms inin thethesamesame industryindustry oror withwith thethe industryindustry averageaverage..


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Net profit marginNet profit margin

ThisThis ratioratio isis calculatedcalculated byby dividingdividing netnet profitprofit bybysalessales.. ItIt isis expressedexpressed asas aa percentagepercentage..

ThisThis ratioratio isis indicativeindicative ofof thethe firmsfirms abilityability totoleaveleave aa marginmargin ofof reasonablereasonable compensationcompensation totothethe ownersowners forfor providingproviding capital,capital, afterafter meetingmeetingthethe costcost ofof production,production, operatingoperating chargescharges andand thethecostcost ofof borrowedborrowed fundsfunds..

NetNet profitprofit marginmargin ==netnet profitprofit afterafter interestinterest andand taxtax xx 100100

NetNet salessales


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Net profit marginNet profit margin

AnotherAnother variantvariant ofof netnet profitprofit marginmargin isis operatingoperating

profitprofit marginmargin whichwhich isis calculatedcalculated asas::

OperatingOperating profitprofit marginmargin ==

netnet profitprofit beforebefore interestinterest andand taxtax xx 100100

NetNet salessales

HigherHigher thethe ratio,ratio, greatergreater isis thethe capacitycapacity ofof thethefirmfirm toto withstandwithstand adverseadverse economiceconomic conditionsconditions

andand vicevice versaversa


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Expenses ratioExpenses ratioThese ratios are calculated by dividing the various expenses byThese ratios are calculated by dividing the various expenses bysales. The variants of expenses ratios are:sales. The variants of expenses ratios are:

Material consumed ratio =Material consumed ratio = Material consumedMaterial consumed x 100x 100

Net salesNet sales

Manufacturing expenses ratio =Manufacturing expenses ratio = manufacturing expensesmanufacturing expenses xx100100

Net salesNet salesAdministration expenses ratio =Administration expenses ratio = administration expensesadministration expenses x 100x 100

Net salesNet sales

Selling expenses ratio =Selling expenses ratio = Selling expensesSelling expenses x 100x 100

Net salesNet sales

Operating ratio =Operating ratio = cost of goods sold plus operating expensescost of goods sold plus operating expenses xx100100

Net salesNet sales

Financial expense ratio =Financial expense ratio = financial expensesfinancial expenses x 100x 100

Net salesNet sales


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Expenses ratioExpenses ratio

TheThe expensesexpenses ratiosratios shouldshould bebe comparedcompared overover aa

periodperiod ofof timetime withwith thethe industryindustry averageaverage asas

wellwell asas withwith thethe ratiosratios ofof firmsfirms ofof similarsimilar typetype..

AA lowlow expensesexpenses ratioratio isis favourablefavourable..

TheThe implicationimplication ofof aa highhigh ratioratio isis thatthat onlyonly aa

smallsmall percentagepercentage shareshare ofof salessales isis availableavailable forfor

meetingmeeting financialfinancial liabilitiesliabilities likelike interest,interest, tax,tax,dividenddividend etcetc..


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Return on assets (ROA)Return on assets (ROA)

ThisThis ratioratio measuresmeasures thethe profitabilityprofitability ofof thethe totaltotal fundsfunds ofofaa firmfirm.. ItIt measuresmeasures thethe relationshiprelationship betweenbetween netnet profitsprofitsandand totaltotal assetsassets.. TheThe objectiveobjective isis toto findfind outout howhowefficientlyefficiently thethe totaltotal assetsassets havehave been been usedused by by thethe

managementmanagement..ReturnReturn onon assetsassets ==

netnet profitprofit afterafter taxestaxes plusplus interestinterest xx 100100

TotalTotal assetsassets

TotalTotal assetsassets excludeexclude fictitiousfictitious assetsassets.. AsAs thethe totaltotal assetsassetsatat thethe beginningbeginning ofof thethe yearyear andand endend ofof thethe yearyear maymay notnotbebe thethe same,same, averageaverage totaltotal assetsassets maymay bebe usedused asas thethedenominatordenominator..


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Return on capital employed (ROCE)Return on capital employed (ROCE)

ThisThis ratioratio measuresmeasures thethe relationshiprelationship betweenbetween netnet profitprofit andand capitalcapitalemployedemployed.. ItIt indicatesindicates howhow efficientlyefficiently thethe longlong--termterm fundsfunds ofofownersowners andand creditorscreditors areare beingbeing usedused..

ReturnReturn onon capitalcapital employedemployed ==

netnet profitprofit afterafter taxestaxes plusplus interestinterest xx 100100

CapitalCapital employedemployed

CAPITALCAPITAL EMPLOYEDEMPLOYED denotesdenotes shareholdersshareholders fundsfunds andand longlong--termterm borrowingsborrowings..

ToTo havehave aa fairfair representationrepresentation ofof thethe capitalcapital employed,employed, averageaveragecapitalcapital employedemployed maymay bebe usedused asas thethe denominatordenominator..


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TOTALTOTAL SHAREHOLDERSSHAREHOLDERS EQUITYEQUITY

includesincludes preference preference shareshare capitalcapital plusplus equityequity

shareshare capitalcapital plus plus reservesreserves andand surplussurplus lessless

accumulatedaccumulated losseslosses andand fictitiousfictitious assetsassets.. ToTo

havehave aa fair fair representationrepresentation ofof thethe totaltotal

shareholdersshareholders funds,funds, averageaverage totaltotal shareholdersshareholders

fundsfunds maymay bebe usedused asas thethe denominatordenominator


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ReturnReturn onon ordinaryordinary shareholdersshareholders equityequity ==

netnet profitprofit afterafter taxestaxes prefpref.. dividenddividend xx 100100

Ordinary

Ordinary shareholdersshareholders equityequity oror netnet worthworth

ORDINARYORDINARY SHAREHOLDERSSHAREHOLDERS EQUITYEQUITY

OROR NETNET WORTHWORTH includesincludes equityequity shareshare capitalcapital

plusplus reservesreserves andand surplussurplus minusminus fictitiousfictitious assetsassets..


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Earnings per share (EPS)Earnings per share (EPS)

ThisThis ratioratio measuresmeasures thethe profitprofit availableavailable toto thethe

equityequity shareholdersshareholders onon aa perper shareshare basisbasis.. ThisThis

ratioratio isis calculatedcalculated byby dividingdividing netnet profitprofit availableavailable

toto equityequity shareholdersshareholders byby thethe numbernumber ofof equityequity

sharesshares..

EarningsEarnings perper shareshare ==

netnet profitprofit afterafter taxtax preferencepreference dividenddividend

NumberNumber ofof equityequity sharesshares


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Dividend per share (DPS)Dividend per share (DPS)

ThisThis ratioratio showsshows thethe dividenddividend paid paid toto thetheshareholdershareholder onon aa perper shareshare basisbasis.. ThisThis isis aa betterbetterindicatorindicator thanthan thethe EPSEPS asas itit showsshows thethe amountamount ofof

dividenddividend receivedreceived byby thethe ordinaryordinary shareholders,shareholders,whilewhile EPSEPS merelymerely showsshows theoreticallytheoretically howhow muchmuchbelongsbelongs toto thethe ordinaryordinary shareholdersshareholders

DividendDividend perper shareshare ==

DividendDividend paidpaid toto ordinaryordinary shareholdersshareholders

NumberNumber ofof equityequity sharesshares


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Dividend payout ratio (D/P)Dividend payout ratio (D/P)

ThisThis ratioratio measuresmeasures thethe relationshiprelationship between between thethe

earningsearnings belongingbelonging toto thethe ordinaryordinary shareholdersshareholders andand thethe

dividenddividend paidpaid toto themthem..

DividendDividend paypay outout ratioratio ==

totaltotal dividenddividend paidpaid toto ordinaryordinary shareholdersshareholders xx 100100

NetNet profitprofit afterafter taxtax preferencepreference dividenddividend

ORORDividendDividend paypay outout ratioratio == DividendDividend perper shareshare xx 100100

EarningsEarnings perper shareshare


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Price earning ratio (P/E)Price earning ratio (P/E)

ThisThis ratioratio isis computedcomputed byby dividingdividing thethe marketmarket

priceprice ofof thethe sharesshares byby thethe earningsearnings perper shareshare.. ItIt

measuresmeasures thethe expectationsexpectations ofof thethe investorsinvestors andand

marketmarket appraisalappraisal ofof thethe performanceperformance ofof thethe firmfirm..PricePrice earningearning ratioratio == marketmarket priceprice perper shareshare

EarningsEarnings perper shareshare


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Activity ratiosActivity ratios

TheseThese ratiosratios areare alsoalso calledcalled efficiencyefficiency ratiosratios // assetassetutilizationutilization ratiosratios oror turnoverturnover ratiosratios.. TheseThese ratiosratiosshowshow thethe relationshiprelationship between between salessales andand variousvariousassetsassets ofof aa firmfirm.. TheThe variousvarious ratiosratios underunder thisthis groupgroupareare::

Inventory/stockInventory/stock turnoverturnover ratioratio

DebtorsDebtors turnoverturnover ratioratio andand averageaverage collectioncollectionperiodperiod

Asset

Asset turnoverturnover ratioratio

CreditorsCreditors turnoverturnover ratioratio andand averageaverage creditcreditperiodperiod


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Inventory /stock turnover ratioInventory /stock turnover ratio

ThisThis ratioratio indicatesindicates thethe numbernumber ofof timestimes inventoryinventory isisreplacedreplaced duringduring thethe yearyear.. ItIt measuresmeasures thethe relationshiprelationshipbetween between costcost ofof goodsgoods soldsold andand thethe inventoryinventory levellevel..ThereThere areare twotwo approachesapproaches forfor calculatingcalculating thisthis ratio,ratio,namelynamely::

InventoryInventory turnoverturnover ratioratio == costcost ofof goodsgoods soldsold

AverageAverage stockstock

AVERAGEAVERAGE STOCKSTOCKcancan bebe calculatedcalculated asas

OpeningOpening stockstock ++ closingclosing stockstock

22

AlternativelyAlternatively

InventoryInventory turnoverturnover ratioratio == salessales__________________

ClosingClosing inventoryinventory


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Inventory /stock turnover ratioInventory /stock turnover ratio

AA firmfirm shouldshould havehave neitherneither tootoo highhigh nornor tootoo

lowlow inventoryinventory turnoverturnover ratioratio.. TooToo highhigh aa ratioratio

maymay indicateindicate veryvery lowlow levellevel ofof inventoryinventory andand aa

dangerdanger ofof beingbeing outout ofof stockstock andand incurringincurring highhigh

stockstock outout costcost.. OnOn thethe contrarycontrary tootoo lowlow aa

ratioratio isis indicativeindicative ofof excessiveexcessive inventoryinventory

entailingentailing excessiveexcessive carryingcarrying costcost..


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Debtors turnover ratio and averageDebtors turnover ratio and average

collection periodcollection period

ThisThis ratioratio isis aa testtest ofof thethe liquidityliquidity ofof thethe debtorsdebtors

ofof aa firmfirm.. ItIt showsshows thethe relationshiprelationship betweenbetween

creditcredit salessales andand debtorsdebtors..

DebtorsDebtors turnoverturnover ratioratio ==

Credit salesCredit sales

Average Debtors and bills receivablesAverage Debtors and bills receivables

AverageAverage collectioncollection periodperiod ==

Months/daysMonths/days inin aa yearyear

DebtorsDebtors turnoverturnover


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Debtors turnover ratio and averageDebtors turnover ratio and average

collection periodcollection period

TheseThese ratiosratios areare indicativeindicative ofof thethe efficiencyefficiency ofofthethe tradetrade creditcredit managementmanagement.. AA highhigh turnoverturnoverratioratio andand shortershorter collectioncollection period period indicateindicate

prompt prompt payment payment by by thethe debtordebtor.. OnOn thethecontrarycontrary lowlow turnoverturnover ratioratio andand longerlongercollectioncollection period period indicatesindicates delayeddelayed paymentspaymentsbyby thethe debtordebtor..

InIn generalgeneral aa highhigh debtordebtor turnoverturnover ratioratio andandshortshort collectioncollection periodperiod isis preferablepreferable..


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Asset turnover ratioAsset turnover ratio

DependingDepending onon thethe differentdifferent conceptsconcepts ofof assetsassets employed,employed, therethere areare

manymany variantsvariants ofof thisthis ratioratio.. TheseThese ratiosratios measuremeasure thethe efficiencyefficiencyofof aa firmfirm inin managingmanaging andand utilisingutilising itsits assetsassets..

TotalTotal assetasset turnoverturnover ratioratio == sales/costsales/cost ofof goodsgoods soldsold

AverageAverage totaltotal assetsassetsFixedFixed assetasset turnoverturnover ratioratio == sales/costsales/cost ofof goodsgoods soldsold

AverageAverage fixedfixed assetsassets

CapitalCapital turnoverturnover ratioratio == sales/costsales/cost ofof goodsgoods soldsold

Average

Average capitalcapital employedemployed

WorkingWorking capitalcapital turnoverturnover ratioratio == sales/costsales/cost ofof goodsgoods soldsold

NetNet workingworking capitalcapital


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Creditors turnover ratio and averageCreditors turnover ratio and average

credit periodcredit period

ThisThis ratioratio showsshows thethe speedspeed withwith whichwhich paymentspaymentsareare mademade toto thethe supplierssuppliers forfor purchasespurchases mademade

fromfrom themthem.. ItIt showsshows thethe relationshiprelationship betweenbetween

creditcredit purchasespurchases andand averageaverage creditorscreditors..CreditorsCreditors turnoverturnover ratioratio ==

credit purchasescredit purchases

Average creditors & bills payables

Average creditors & bills payables

AverageAverage creditcredit periodperiod == months/daysmonths/days inin aa yearyear

CreditorsCreditors turnoverturnover ratioratio


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Creditors turnover ratio and averageCreditors turnover ratio and average

credit periodcredit period

HigherHigher creditorscreditors turnoverturnover ratioratio andand shortshort creditcredit

period period signifiessignifies thatthat thethe creditorscreditors areare beingbeingpaid paid promptly promptly andand itit enhancesenhances thethe

creditworthinesscreditworthiness ofof thethe firmfirm..

ratio analysis ppt[1]

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