RATIO ANALYSIS

Ratio analysis is defined as the systematic use of the ratio to interpret the financial statements. So

that the strengths and weaknesses of a firm, as well as its historical performance and current

financial condition can be determined. Ratio reflects a quantitative relationship helps to form a

quantitative judgment.

Nature of Ratio Analysis:

Ratio analysis is a technique of analysis and Interpretation of financial statements. It is the

process of establishing and interpreting various ratios for helping in making certain decisions. It

is only a means of understanding of financial strengths and weaknesses of a firm. There are a

number of ratios which can be calculated from the information given in the financial statements,

but the analyst has to select the appropriate data and calculate only a few appropriate ratios. The

following are the four steps involved in the ratio analysis.

 Selection of relevant data from the financial statements depending upon the objective of

the analysis.

 Calculation of appropriate ratios from the above data.

 Comparison of the calculated ratios with the ratios of the same firm in the past, or the
ratios developed from projected financial statements or the ratios of some other firms or
the comparison with ratios of the industry to which the firm belongs.

1) Liquidity Ratios: It is also known as liquidity ratios. it includes the following

1) Measures ability of a company to meet its current obligations.

2) Indicates short term financial stability of a company.

3) Indicates present cash solvency and ability to remain solvent in times of adversities.
 To measure the liquidity of a firm the following ratios can be calculated

 Current ratio

 Quick (or) Acid-test (or) Liquid ratio

(a) Current Ratio: Current ratio is useful to find out solvency of the company. High current

ratio indicates that company will be able to pay its debt maturity within a year. Low current ratio

indicates that company will not be able to meet its short term debts.

Minimum standard current ratio is 2:1.

Current Assets
Current Ratio=
Current Liabilities

(b) Quick Ratio: Quick ratio is also known as acid test ratio. It indicates immediate ability of a

company to pay off its current obligations. And also shows the solvency and financial soundness

of the business. Greater the ratio stronger the financial position of the company.

The standard quick ratio should be 1:1

Quick Assets

Quick Ratio=
Quick Liabilities
2) Profitability Ratios: The primary objectives of business undertaking are to earn profits.

Because profit is the engine, that drives the business enterprise. It measures the overall efficiency

of the business. It indicates whether utilization of business assets and funds are done efficiently

and best way or not, so as to generate adequate profits or returns.

Profitability ratios fall in two categories:

a) Gross Profit Ratio: It shows the operating efficiency of the business. It measures the

efficiency of production as well as pricing. Decrease in the ratio indicates reduction in selling

price or increase in the cost of production or decline in the business activity. Increase in the ratio

indicates increase in the selling price or reduction in the cost of production.

Gross Profit
Gross Profit Ratio = X 100
Sales

b) Operating Profit Ratio: It indicates profitability of entire business after meeting all operating

cost including direct and indirect cost of administrative and distribution expenses.

Operating Profit
Operating Profit Ratio: X 100
Sales

c) Net Profit Ratio: It shows the overall efficiency of the business. Higher the ratio indicates

higher efficiency of business and better utilization of total resources. In addition it indicates

efficiency of financing operations as well as tax management.

 Net profit after tax
Net Profit Ratio: X 100
Sales

3) Turnover Ratio: It measures how efficiently the assets are employed. These ratios are

expressed in number of times the assets is used during the period.

a) Inventory Turnover Ratio: It indicates number of times the replacement of inventory during

the given period usually a year. Higher the ratio more efficient is the management of inventory.

But higher inventory turnover ratio is not always good if it is lower level of inventory because it

invites problem of frequency stock outs and loss of sales and customer or goodwill.

Cost of Goods Sold

Inventory Turnover Ratio:
Average Stock in Hand

b) Fixed Asset Turnover Ratio: It indicates efficiency in the utilization of fixed assets like

plant and machinery by management.

Net Sales
Fixed Assets Turnover Ratio =
Fixed Assets
Solvency Ratio

a) Proprietary Ratio: It measures the relationship between funds invested in business by the

owners with the total funds invested in business. It indicates long run solvency of the business.

High ratio means company is less dependent on outside funds and company is quite solvent. Low

ratio indicates company is more dependent on outside funds solvency and solvency may be

danger.

Proprietary Fund
Proprietary Ratio:
Total Assets

b) Debt Equity Ratio: Higher the ratio less secured is the creditors, lower the ratio creditors

enjoy higher degree of safety.

Debt
Debt Equity Ratio:
Equity

Financial stability Ratios:

To measure the liquidity of a firm the following ratios can be calculate the following ratios,

Liquidity Ratios
Current Ratio:

(Rupees in lakhs)
Year Current Assets Current Liabilities Ratio
31-3-13 11378.54 6404.43 1.78
31-3-14 12814.27 6921.52 1.85
31-3-15 17147.77 7214.45 2.38

31-3-16 16770.12 8129.22 2.06

31-3-17 8582.71 1.49

12818.76

Quick Ratio
(Rupees in lakhs)
Year Current Assets Current Liabilities Ratio
31-3-13 4778.34 6404.43 0.75
31-3-14 5454.73 6921.52 0.79
31-3-15 9311.01 7214.45 1.29

31-3-16 8250.3 8129.22 1.01

31-3-17 8582.71 0.58

4954.77

PROFITABILITY RATIO

a) Gross Profit Ratio:

(Rupees in lakhs)
1Year Gross Profit Net Sales Ratio
31-3-13 10627.51 42105.51 25.24
 31-3-14 12454.8 47068.7 26.46
31-3-15 13437.6 50389 26.74

31-3-16 14238.2 51944.6 27.41

31-3-17 55448.5 26.29

14578

b) Net Profit Ratio:

(Rupees in lakhs)
1Year Net profit Net Sales Ratio
31-3-13 7418.39 42105.51 17.62
31-3-14 8785.21 47068.7 18.66
31-3-15 9607.73 50389 19.07

31-3-16 9844.71 51944.6 18.95

31-3-17 55448.5 18.4

10200.9

c) Operating Profit Ratio:

(Rupees in lakhs)
1Year Operating Profit Net Sales Ratio
31-3-13 10627.51 42105.51 25.24
31-3-14 12454.8 47068.7 26.46
31-3-15 13437.6 50389 26.74

31-3-16 14238.2 51944.6 27.41

 31-3-17 55448.5 26.29
14578

d) Operating Ratio:

(Rupees in lakhs)
Year Operating cost Net Sales Ratio
31-3-13 24769.47 42105.51 58.83
31-3-14 27481.8 47068.7 58.39
31-3-15 30314.1 50389 60.16

31-3-16 30249.4 51944.6 58.23

31-3-17 55448.5 57.67

31978.2

Turnover Ratio

a) Inventory Turnover Ratio:

(Rupees in lakhs)
Year Cost of goods sold Average inventory Ratio
31-3-13 24769.47 6119.02 4.05
31-3-14 27481.8 6979.87 3.94
31-3-15 30314.1 7598.15 3.99

31-3-16 30249.4 8178.29 3.7

31-3-17 8191.91 3.9

31978.2

b) Fixed Asset Turnover Ratio