Arvind n Grp_faa

8/3/2019 Arvind n Grp_faa

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By:- Arvind Kumar 02Manoj Gupta 05

Dharmendra 07

Nitin Singh 15

Rohit Kumar 31

Ratio Analysis



Ratio Analysis

Ratio-analysis means the process of computing, determining andpresenting the relationship of related items and groups of items of

the financial statements. They provide in a summarized and

concise form of fairly good idea about the financial position of a

unit. They are important tools for financial analysis



Purpose

Ratios allow for better comparison through time or

between companies.

As we look at each ratio, ask yourself what the ratio is

trying to measure and why that information isimportant.

Ratios are used both internally and externally.



Classification of Ratios

Balance Sheet Ratio P&L Ratio or

Income/Revenue

Statement Ratio

Balance Sheet and

Profit & Loss Ratio

Financial Ratio Operating Ratio Composite Ratio

Current Ratio

Quick Asset Ratio

Proprietary Ratio

Debt Equity Ratio

Gross Profit Ratio

Operating Ratio

Expense Ratio

Net profit Ratio

Stock Turnover Ratio

Fixed Asset Turnover Ratio,

Return on Total Resources

Ratio,

Return on Own Funds

Ratio, Earning per Share

Ratio, Debtors· Turnover

Ratio,



Format of balance sheet for ratio analysis

LIABILITIES ASSETS

NETWORTH/EQUITY/OWNED FUNDSShare Capital/Partner·s Capital/Paid up Capital/ Owners

Funds

Reserves ( General, Capital, Revaluation & Other

Reserves)

Credit Balance in P&L A/c

FIXED ASSETS : LAND & BUILDING, PLANT &MACHINERIES

OriginalValue Less Depreciation

NetValue or BookValue orWritten down value

LONG TERM LIABILITIES/BORROWED FUNDS :

Term Loans (Banks & Institutions)

Debentures/Bonds, Unsecured Loans, Fixed Deposits,

Other LongTerm Liabilities

NON CURRENT ASSETS

Investments in quoted shares & securities

Old stocks or old/disputed book debts

LongTerm Security Deposits

Other Misc. assets which are not current or fixed in nature

CURRENT LIABILTIES

Bank Working Capital Limits such asCC/OD/Bills/Export Credit

Sundry /Trade Creditors/Creditors/Bills Payable, Short

duration loans or deposits

Expenses payable & provisions against various items

CURRENT ASSETS : Cash & Bank Balance,

Marketable/quoted Govt. or other securities, BookDebts/Sundry Debtors, Bills Receivables, Stocks &

inventory (RM,SIP,FG) Stores & Spares, Advance Payment

of Taxes, Prepaid expenses, Loans and Advances

recoverable within 12 months

INTANGIBLE ASSETS

Patent, Goodwill, Debit balance in P&L A/c, Preliminaryor Preoperative expenses



1. Current Ratio : It is the relationship between the current assets andcurrent liabilities of a concern.

Current Ratio = Current Assets/Current Liabilities

If the Current Assets and Current Liabilities of a concern are

Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratiowill be : Rs.4,00,000/Rs.2,00,000 = 2 : 1

The ideal Current Ratio preferred by Banks is 1.33 : 1

2.

Net Working Capital : This is worked out as surplus of Long TermSources over Long Tern Uses, alternatively it is the difference of

CurrentAssets and Current Liabilities.

NWC = Current Assets ² Current Liabilities



Current Assets : Raw Material, Stores, Spares, Work-in Progress. Finished

Goods, Debtors, Bills Receivables, Cash.

Current Liabilities :Sundry Creditors, Installments of Term Loan, DPG etc.payable within one year and other liabilities payable within one year.

This ratio must be at least 1.33 : 1 to ensure minimum margin of 25% of current

assets as margin from long term sources.

Current Ratio measures short term liquidity of the concern and its ability to meet

its short term obligations within a time span of a year.

It shows the liquidity position of the enterprise and its ability to meet current

obligations in time.

Higher ratio may be good from the point of view of creditors. In the long run very

high current ratio may affect profitability ( e.g. high inventory carrying cost)

Shows the liquidity at a particular point of time. The position can change

immediately after that date. So trend of the current ratio over the years to be

analyzed.

Current Ratio is to be studied with the changes of NWC. It is also necessary to

look at this ratio along with the Debt-Equity ratio.



3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities. The should be at least equal to 1.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months +Quickly realizable securities such as Govt. Securities or quickly marketable/quotedshares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example :Cash 50,000Debtors 1,00,000Inventories 1,50,000 Current Liabilities 1,00,000

Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000 = 3 : 1Quick Ratio = > 1,50,000/1,00,000 = 1.5 : 1



4. DEBT EQUITY RATIO : It is the relationship betweenborrowers fund (Debt) and Owners Capital (Equity).

Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets

For instance, if the Firm is having the following :

Capital = Rs. 200 LacsFree Reserves & Surplus = Rs. 300 Lacs

Long Term Loans/Liabilities = Rs. 800 Lacs

Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1



5. PROPRIETARY RATIO : This ratio indicates the extent to whichTangible Assets are financed by Owners Fund.Proprietary Ratio = (Tangible Net Worth/Total Tangible

Assets) x 100The ratio will be 100% when there is no Borrowing for purchasingof Assets.

6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to

Net Sales we can arrive at the Gross Profit Ratio which indicates themanufacturing efficiency as well as the pricing policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

Alternatively , since Gross Profit is equal to Sales minus Cost of Goods Sold, it can also be interpreted as below :

Gross Profit Ratio = [ (Sales Cost of goods sold)/ Net Sales]x 100

A higher Gross Profit Ratio indicates efficiency in production of the unit.



7. OPERATING PROFIT RATIO :

It is expressed as => (Operating Profit / Net Sales ) x 100

Higher the ratio indicates operational efficiency

8. NET PROFIT RATIO :

It is expressed as => ( Net Profit / Net Sales ) x 100

It measures overall profitability.



9. STOCK/INVENTORY TURNOVER RATIO :

(Average Inventory/Sales) x 365 for days

(Average Inventory/Sales) x 52 for weeks

(Average Inventory/Sales) x 12 for months

Average Inventory or Stocks = (Opening Stock + Closing Stock)

-----------------------------------------

2

. This ratio indicates the number of times the inventory isrotated during the relevant accounting period



10. DEBTORS TURNOVER RATIO : This is also called Debtors

Velocity or Average Collection Period or Period of Credit given .

(Average Debtors/Sales ) x 365 for days

(52 for weeks & 12 for months)

11. ASSET TRUNOVER RATIO : Net Sales/Tangible Assets

12. FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets

13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets

14. CREDITORS TURNOVER RATIO : This is also called Creditors

Velocity Ratio, which determines the creditor payment period.

(Average Creditors/Purchases)x365 for days

(52 for weeks & 12 for months)



15. RETRUN ON ASSETS : Net Profit after Taxes/Total Assets

16. RETRUN ON CAPITAL EMPLOYED :

( Net Profit before Interest & Tax / Average Capital Employed) x 100

Average Capital Employed is the average of the equity share

capital and long term funds provided by the owners and the

creditors of the firm at the beginning and end of the accounting

period.



Composite Ratio

17. RETRUN ON EQUITY CAPITAL (ROE) :Net Profit after Taxes / Tangible Net Worth

18. EARNING PER SHARE : EPS indicates the quantum of net profit

of the year that would be ranking for dividend for each share of

the company being held by the equity share holders.

Net profit after Taxes and Preference Dividend/ No. of Equity

Shares

19. PRICE EARNING RATIO : PE Ratio indicates the number of times

the Earning Per Share is covered by its market price.

Market Price Per Equity Share/Earning Per Share



20. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most

important one which indicates the ability of an enterprise to

meet its liabilities by way of payment of installments of Term

Loans and Interest thereon from out of the cash accruals and

forms the basis for fixation of the repayment schedule in

respect of the Term Loans raised for a project. (The Ideal DSCR

Ratio is considered to be 2 )

PAT + Depr. + Annual Interest on Long Term Loans & Liabilities

---------------------------------------------------------------------------------

Annual interest on Long Term Loans & Liabilities + Annual

Installments payable on Long Term Loans & Liabilities

(Where PAT is Profit after Tax and Depr. is Depreciation)



Usesy

Different companies operate in different industries eachhaving different environmental conditions such as regulation,market structure, etc. Such factors are so significant that acomparison of two companies from different industriesmight be misleading.

y Financial accounting information is affected by estimates andassumptions. Accounting standards allow different accountingpolicies, which impairs comparability and hence ratio analysisis less useful in such situations.

y

Ratio analysis explains relationships between pastinformation while users are more concerned about currentand future information.



Significance

Decision Making

Financial Forecasting and Planning

Communication

Co-ordination is Facilitated Control is more Effective:



y Decision making :Mass of information contained in the

financial statements may be unintelligible a confusing. Ratios

help in highlighting the areas deserving attention and

corrective action facilitating decision making.

y Financial Forecasting and Planning:Planning and

forecasting can be done only by knowing the past and the

present. Ratio help the management in understanding the

past and the present of the unit. These also provide useful

idea about the existing strength and weaknesses of the unit.



y Communication: Ratios have the capability of

communicating the desired information to the relevant

persons in a manner easily understood by them to enable

them to take stock of the existing situation.

y Control is more Effective: System of planning and

forecasting establishes budgets, develops forecast statements

and lays down standards. Ratios provide actual basis. Actual

can be compared with the standards. Variances to be

computed an analyzed by reasons and individuals. So it is

great help in administering an effective system of control.



Limitation of ratio Analysis

Ratios are tools of quantitative analysis, which ignore

qualitative points of view.

Ratios are generally distorted by inflation

Ratios give false result, if they are calculated fromincorrect accounting data

Ratios are calculated on the basis of past data. Therefore, they

do not provide complete information for future forecasting.

Ratios may be misleading, if they are based on false orwindow-dressed accounting information



THANK YOU

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Arvind n Grp_faa