RATIO ANALYSISRATIO ANALYSIS

V.SUDHEERV.SUDHEERM.B.AM.B.A

RATIO ANALYSISRATIO ANALYSIS

Ratio analysis is the process of determining and Ratio analysis is the process of determining and interpreting numerical relationship based on interpreting numerical relationship based on financial statements. It is the technique of financial statements. It is the technique of interpretation of financial statements with the help interpretation of financial statements with the help of of accountingaccounting ratiosratios derived from the balance derived from the balance sheet and profit and loss account.sheet and profit and loss account.

Classification Of RatiosClassification Of Ratios

Analysis of Short Term Financial Position Analysis of Short Term Financial Position or Test of Liquidity.or Test of Liquidity.Analysis of Long Term Financial Position Analysis of Long Term Financial Position or Test of Solvency.or Test of Solvency.Activity Ratios.Activity Ratios.Profitability Ratios.Profitability Ratios.

Important Ratios In Test Of Important Ratios In Test Of LiquidityLiquidity

Current ratio.Current ratio.Quick ratio.Quick ratio.

Current RatioCurrent RatioIt is the most widely used of all analytical devices based on the balance sheet. It establishes relationship between total current assets and current liabilities.

Current assets Current assets Current ratio=Current ratio= Current liabilitiesCurrent liabilities

Quick Ratio or Acid Test RatioQuick Ratio or Acid Test RatioIt establishes relationship between liquid assets and It establishes relationship between liquid assets and liquid liabilities. It is a refinement to current ratio and liquid liabilities. It is a refinement to current ratio and second testing device for working capital.second testing device for working capital.

Quick assetsQuick assetsQuick ratio=Quick ratio= Current liabilitiesCurrent liabilities

II. Capital structure ratios.II. Capital structure ratios.

These are also known as gearing ratios or These are also known as gearing ratios or solvency ratios.solvency ratios.These are used to analysis the long term These are used to analysis the long term solvency of any particular business solvency of any particular business concern.concern.Two aspects:Two aspects:

a)ability to repay the principal amt.a)ability to repay the principal amt. b)regular payment of interest.b)regular payment of interest.

Important Ratios In Test Of Important Ratios In Test Of SolvencySolvency

Debt-equity ratio.Debt-equity ratio.Proprietary ratio.Proprietary ratio.Solvency ratio. Solvency ratio.

a)Fixed assets to net worth ratio.a)Fixed assets to net worth ratio. b)Current assets to net worth ratio.b)Current assets to net worth ratio. c)Current liabilities to net worth ratio.c)Current liabilities to net worth ratio.

Debt servicing ratio.Debt servicing ratio.

Debt Equity RatioDebt Equity RatioIt Is calculated to measure the relative claims of It Is calculated to measure the relative claims of outsiders and the owners against the firm’s assets. This outsiders and the owners against the firm’s assets. This ratio indicates the relationship between the outsiders ratio indicates the relationship between the outsiders funds and the shareholders’ funds.funds and the shareholders’ funds. Outsiders fundsOutsiders fundsDebt equity ratio=Debt equity ratio= Shareholders fundsShareholders funds

Proprietary Ratio or Net Worth Proprietary Ratio or Net Worth RatioRatio

It establishes relationship between the proprietors fund It establishes relationship between the proprietors fund or shareholders funds and the total assetsor shareholders funds and the total assets

Proprietary funds Capital employedProprietary funds Capital employedProprietary ratio= orProprietary ratio= or Total assets Total liabilitiesTotal assets Total liabilities

Solvency RatioSolvency Ratio

It expresses the relationship between total assets and It expresses the relationship between total assets and total liabilities of a business. This ratio is a small variant total liabilities of a business. This ratio is a small variant of equity ratio and can be simply calculated as of equity ratio and can be simply calculated as 100-equity ratio100-equity ratio Total assetsTotal assetsSolvency ratio=Solvency ratio= Total liabilitiesTotal liabilities

Fixed Assets To Net WorthFixed Assets To Net Worth

It is obtained by dividing the depreciated book value of It is obtained by dividing the depreciated book value of fixed assets by the amount of proprietors funds. fixed assets by the amount of proprietors funds. Net fixed assetsNet fixed assetsFixed assets to net worth ratio=Fixed assets to net worth ratio= Net worth Net worth

Current Assets To Net Worth RatioCurrent Assets To Net Worth RatioIt is obtained by dividing the value of current assets by It is obtained by dividing the value of current assets by the amount of proprietor’s funds. The purpose of this the amount of proprietor’s funds. The purpose of this ratio is to show the percentage of proprietor’s fund ratio is to show the percentage of proprietor’s fund investment in current assets.investment in current assets.

Current assetsCurrent assetsCurrent assets to net worth ratio=Current assets to net worth ratio= Proprietor’s fundProprietor’s fund

Current Liabilities To Net WorthCurrent Liabilities To Net Worth

It is expressed as a proportion and is obtained by It is expressed as a proportion and is obtained by dividing current liabilities by proprietor's fund.dividing current liabilities by proprietor's fund.

Current liabilitiesCurrent liabilitiesCurrent liabilities to net worth ratio=Current liabilities to net worth ratio= Net worth Net worth

Fixed Charges cover or Debt Fixed Charges cover or Debt Service RatioService Ratio

This ratio is determined by dividing net profit by fixed This ratio is determined by dividing net profit by fixed interest charges.interest charges. Net profit before deduction of interestNet profit before deduction of interest and income taxand income taxDebt service ratio=Debt service ratio= Fixed interest chargesFixed interest charges

Important Ratios In Activity RatioImportant Ratios In Activity Ratio

Stock turnover ratio.Stock turnover ratio.Debtors turnover ratio.Debtors turnover ratio.Creditors turnover ratio.Creditors turnover ratio.Working capital turnover ratio.Working capital turnover ratio.Fixed assets turnover ratio.Fixed assets turnover ratio.

Stock Turnover RatioStock Turnover RatioThis ratio establishes the relationship between the cost This ratio establishes the relationship between the cost of goods sold during a given period and the average of goods sold during a given period and the average sock holding during that period. It tells us as to how sock holding during that period. It tells us as to how many times stock has turned over (sold) during the many times stock has turned over (sold) during the period. Indicates operational and marketing efficiency. period. Indicates operational and marketing efficiency. Helps in evaluating inventory policy to avoid over Helps in evaluating inventory policy to avoid over stocking.stocking. Cost of goods soldCost of goods soldInventory turnover ratio=Inventory turnover ratio= Average stockAverage stockCost of goods sold= sales-gross profitCost of goods sold= sales-gross profit = opening stock + purchases – = opening stock + purchases – closing closing stockstock Opening stock + Closing stockOpening stock + Closing stockAverage stock= Average stock= 22

Debtor Turnover RatioDebtor Turnover RatioThis ratio explains the relationship of net credit sales of This ratio explains the relationship of net credit sales of a firm to its book debts indicating the rate at which cash a firm to its book debts indicating the rate at which cash is generated by turnover of receivables or debtors.is generated by turnover of receivables or debtors.The purpose of this ratio is to measure the liquidity of the The purpose of this ratio is to measure the liquidity of the receivables or to find out the period over which receivables or to find out the period over which receivables remain uncollected.receivables remain uncollected. Net credit salesNet credit salesDebtor turnover ratio=Debtor turnover ratio= Average DebtorsAverage Debtors Opening balance + closing balance Opening balance + closing balance Average debtors=Average debtors= 22

Debtors include bills receivables along with book debtsDebtors include bills receivables along with book debts

Average Collection PeriodAverage Collection Period

Number of working day in yearNumber of working day in yearAverage collection period=Average collection period= Debtor turnover ratioDebtor turnover ratio

The average collection period represents the average The average collection period represents the average number of days for which a firm has to wait before its number of days for which a firm has to wait before its receivables are converted into cashreceivables are converted into cash

Creditors Turnover RatioCreditors Turnover RatioThis ratio indicates the number of times the creditors are This ratio indicates the number of times the creditors are paid in a year. It is useful for creditors in finding out how paid in a year. It is useful for creditors in finding out how much time the firm is likely to take in repaying its trade much time the firm is likely to take in repaying its trade creditors.creditors. Net credit purchases Net credit purchases Creditors turnover ratio=Creditors turnover ratio= Average creditorsAverage creditors

Opening balance + closing balanceOpening balance + closing balanceAverage creditors=Average creditors= 22

Number of working daysNumber of working daysAverage payment period=Average payment period= Creditors turnover ratio Creditors turnover ratio

Working Capital Turnover RatioWorking Capital Turnover RatioThis ratio indicates the number of times the working This ratio indicates the number of times the working capital is turned over in the course of the year. capital is turned over in the course of the year. Measures efficiency in working capital usage. It Measures efficiency in working capital usage. It establishes relationship between cost of sales and establishes relationship between cost of sales and working capital working capital Cost of salesCost of salesWorking capital turnover ratio=Working capital turnover ratio= Average working capitalAverage working capital

Opening + closing workingOpening + closing working capitalcapitalAverage working capital=Average working capital= 22

Fixed Assets Turnover RatioFixed Assets Turnover RatioThis ratio establishes a relationship between fixed This ratio establishes a relationship between fixed assets and sales.assets and sales.

Net salesNet salesFixed assets turnover ratio=Fixed assets turnover ratio= Fixed assetsFixed assets

Total Asset Turnover RatioTotal Asset Turnover RatioThis ratio establishes a relationship between total assets This ratio establishes a relationship between total assets and sales. This ratio enables to know the efficient and sales. This ratio enables to know the efficient utilisation of total assets of a business.utilisation of total assets of a business.

Net salesNet salesTotal assets turnover ratio=Total assets turnover ratio= Total assetsTotal assets

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