LOVELY PROFESSIONAL UNIVERSITY

MITTAL SCHOOL OF BUSINESS

COURSE CODE: - ACC205

COURSE TITLE: - COST AND MANAGEMENT ACCOUNTING

ACADEMIC TASK TITLE: - ACCOUNTING RATIOS

SUBMITTED TO: - Dr. Rajni Chabbra

STUDENT’S NAME: - Aakanksha

REGISTRATION NUMBER: - 12221973

ROLL NUMBER: - A31

SECTION: - Q2214
 TABLE OF CONTENT

S.NO PARTICULAR

1. Introduction Of Accounting Ratios

2. Types Of Accounting Ratio

3. Liquidity Ratio

4. Profitability Ratio

5. Leverage Ratio

6. Activity/ Efficiency Ratio

7.
Interpret And Comment on The Liquidity, Profitability, Efficiency
and Solvency Position of The Company Through Ratio Analysis?

8.
How Has the Company Performed Compared to Its Competitors in
The Current Year? (Any Five Ratios Are to Be Analyzed and
Compared Covering Liquidity, Profitability, Efficiency and Solvency
Position of The Firms.)
 Introduction Of Accounting Ratios

“Accounting ratios, also known as financial ratios, are quantitative metrics used to evaluate a
company's financial performance, stability, and overall health. These ratios provide insight
into various aspects of a company's operations and help investors, creditors, and management
make informed decisions.”

These ratios provide a snapshot of a company's financial health and performance. It's
important to analyse them in context and compare them to industry benchmarks or historical
data to make meaningful interpretations. Additionally, different industries may prioritize
certain ratios more than others based on their specific financial characteristics and business
models.

Types Of Accounting Ratios: -

 • LIQUIDITY RATIO: - Liquidity ratios are financial metrics that assess a company's
ability to meet its short-term financial obligations, particularly its current liabilities,
using its current assets. These ratios help determine a company's liquidity, or how
easily it can convert its assets into cash to cover its immediate debts.

1. CURRENT RATIO: - The current ratio measures a company's ability to pay its
short-term obligations with its short-term assets. A ratio greater than 1 indicates that
a company has more current assets than current liabilities, which suggests good
short-term liquidity. However, an excessively high current ratio may indicate that
the company is not efficiently using its current assets.
=current ratio= current assets/ current liabilities

= Current Assets= 3,649.58

= Current Liabilities= 3,483.23
=Current ratio= 3,649.58/3,483.23
= 1.047:1

2. QUICK ASSET RATIO: - The quick ratio is a more stringent measure of

liquidity, as it excludes inventory from current assets. This ratio provides a more
conservative assessment of a company's ability to meet its short-term obligations, as
inventory might not always be quickly converted into cash. A quick ratio of 1 or
higher is generally considered healthy.
=quick asset ratio= quick assets/ current liabilities
 =quick assets= current assets- inventories- prepaid expenses
=3,649.58-2,004.04
=1,645.54
=current liabilities= 3,483.23
=quick assets ratio=1,645.54/3,483.23
=0.47:1
These liquidity ratios are crucial for creditors and investors because they provide insight into
a company's short-term financial stability. A high liquidity ratio implies a company is well-
positioned to meet its short-term obligations, while a low ratio may indicate potential
financial distress.

• EFFICIENCY RATIO: - Efficiency ratios, also known as turnover ratios,

measure how effectively a company utilizes its assets and resources to generate sales,
cash flow, or profits. These ratios provide valuable insights into a company's
operational efficiency and can help identify areas where improvements can be made.

1. INVENTORY TURNOVER RATIO: - This ratio measures how many times a

company's inventory is sold and replaced over a specific period. A higher ratio indicates
efficient inventory management.
=inventory turnover ratio= cost of goods sold/ average inventory
 =average inventory = op. inventory + cl. Inventory /2
=2004.04+933.68/2
=1468.86
=cost of goods sold= 7087.74
=inventory turnover ratio= 7087.74/1468.86
=4.82 times

2. WORKING CAPITAL RATIO: - The working capital ratio, also known as the
current ratio, is a liquidity ratio that assesses a company's ability to meet its short-term
financial obligations using its current assets. It's one of the most commonly used financial
ratios for evaluating a company's short-term liquidity and is often used by creditors and
investors to gauge a company's financial health.
=working capital ratio = total sales/ working capital
=working capital= current assets- current liabilities
= Current Assets= 3,649.58
= Current Liabilities= 3,483.23
=working capital= 166.35

=revenue= 7,459.57
=7,459.57/166.35
=44.84 times
 • PROFITABILITY RATIO: -Profitability ratios are financial metrics that assess
a company's ability to generate profits in relation to its revenue, assets, equity, and
other financial measures. These ratios provide insight into a company's overall
financial performance and profitability.

1. GROSS PROFIT MARGIN: - This ratio measures the percentage of sales

revenue that remains after deducting the cost of goods sold (COGS). It assesses a
company's ability to control production and distribution costs.
=gross profit margin= gross profit/ total revenue*100

=gross profit= 436.18

=revenue from operations= 7,459.57
=gross profit ratio= 436.18/7,459.57*100
=5.84%

2. NET PROFIT MARGIN: - The net profit margin, or simply net

margin, measures how much net income or profit is generated as a percentage of
revenue. It is the ratio of net profits to revenues for a company or business segment.

Net profit margin is typically expressed as a percentage but can also be represented in
decimal form. The net profit margin illustrates how much of each dollar in revenue collected
by a company translates into profit.

=net profit margin = net profit/ total revenue *100

=net profit= 59.30

=total revenue= 7,459.57

= net profit margin ratio= 59.30/7,459.57*100 =0.79%

 LEVERAGE RATIO: - A leverage ratio is any financial ratio that measures the amount of debt
used to finance a company's assets or operations. Leverage ratios are used to assess a company's
financial risk and to compare companies within the same industry.

DEBT RATIO: - The debt ratio is a financial ratio that measures the percentage of a
company's assets that are financed through debt. It is calculated by dividing total debt by
total assets.
=debt ratio = total debts/ total assets

= total debts= 1,668.32

=total assets=7,413.00

=debt ratio= 1,668.32/7,413.00

=0.2250:1

DEBT TO EQUITY RATIO: - This ratio compares a company's total liabilities to its total equity. A
higher debt-to-equity ratio indicates that a company is more leveraged, or that it is using more debt
to finance its operations.
=debt to equity ratio=total debts/ total equity

=total debts= 1,668.32

=total equity= 3,011.35
=debt equity ratio= 1,668.32/3,011.35
=0.55:1
 • Interpret And Comment on The Liquidity, Profitability, Efficiency
and Solvency Position of The Company Through Ratio Analysis?

LIQUIDITY RATIO: -

- Current Ratio = Current Assets / Current Liabilities

=Current ratio= 3,649.58/3,483.23

= 1.047:1
Quick Ratio/ Acid Test Ratio= Quick Assets / Current Liabilities

quick assets ratio=1,645.54/3,483.23

=0.47:1
A current ratio of 1.047:1 means that the company has slightly more current assets
than current liabilities. This is generally considered to be a healthy current ratio, as it
indicates that the company has enough liquidity to meet its short-term obligations.
However, it is important to note that the current ratio is just one measure of a
company's financial health. It is important to consider other factors, such as the
company's industry, business model, and overall financial performance, before
making any conclusions about the company's financial health based on the current
ratio alone.

A quick assets ratio of 0.47:1 means that the company has $0.47 in quick assets for every
$1.00 in current liabilities. This is generally considered to be a low quick assets ratio, as it
indicates that the company may have difficulty meeting its short-term obligations. Quick
assets are assets that can be converted into cash quickly and without a significant loss in
value. Examples of quick assets include cash, cash equivalents, marketable securities, and
accounts receivable.

PROFITABILITY RATIO: -

• Gross Profit Ratio = Gross Profits / Net Revenue from Operations × 100
=gross profit ratio= 436.18/7,459.57*100
=5.84%

- Net Profit Ratio = Net Profit/Net Revenue × 100

= net profit margin ratio= 59.30/7,459.57*100 =0.79%
 could be several reasons for this low profitability, such as high operating costs, competitive pricing
pressures, or other financial challenges. It might also indicate that the company needs to improve its
cost management, increase its revenue, or consider other strategies to enhance its profitability.
A gross profit ratio of 5.84% for a company is relatively low. The gross profit ratio is a measure of a
company's profitability after accounting for the cost of goods sold (COGS). In this case, it means that
for every dollar in revenue the company generates, it retains $0.0584 as gross profit after deducting
the direct costs associated with producing or purchasing the goods it sells.

LEVERAGE RATIO: -

- Debt Ratio= Long-Term Debt/Net Assets

=debt ratio= 1,668.32/7,413.00

=0.2250:1

Debt to Equity Ratio = Long-Term Debts /Shareholders Funds

=debt equity ratio= 1,668.32/3,011.35 =0.55:1

debt ratio of 0.2250:1 or 22.50% indicates that the company has relatively low debt compared
to its assets. In other words, the company relies less on debt financing and has a higher
proportion of equity in its capital structure. This can be seen as a positive sign, as lower debt
levels generally mean reduced financial risk and interest expense.

While a D/E ratio of 0.55:1 is generally viewed as healthy and moderate, it's essential to
conduct a comprehensive financial analysis, taking into account other financial metrics and
industry benchmarks. Additionally, the company's ability to manage its debt effectively,
generate profits, and maintain a strong balance sheet should be evaluated to assess its overall
financial health.

ACTIVITY/ EFFICIENCY RATIO: -

Inventory Turnover Ratio= Cost of goods sold/ Average Inventory

=inventory turnover ratio= 7087.74/1468.86

=4.82 times
Working Capital Turnover ratio = Total Sales /Working Capital
Wpr =7,459.57/166.35
=44.84 times
A stock turnover ratio of 4.82 times indicates how many times a company's average inventory
is sold and replaced during a specific period, usually a year. This ratio is also known as
inventory turnover and is a crucial metric for evaluating a company's efficiency in managing
its inventory.

If this figure is accurate, it could suggest that there may be issues with the financial data or
calculation method used. It's important to review the company's financial statements, verify
the numbers, and recalculate the working capital ratio using the standard formula to ensure
the accuracy of the result.

• How Has the Company Performed Compared to Its Competitors in

The Current Year? (Any Five Ratios Are to Be Analysed and
Compared Covering Liquidity, Profitability, Efficiency and Solvency
Position of The Firms.)

• I compared the ratio of BHAGERIA INDUSTRIES LIMITED with SHREE

PUSHKAR. Which is a competitor of BHAGERIA INDUSTRY

Here is the current ratio of BHAGERIA limited: -

.1.047:1

SHREE PUSHKAR

= current assets=4,31,491.77 =current liabilities= 2,59,854.17

- Current Ratio = Current Assets / Current Liabilities

=1.6:1

In comparing the two ratios, the first one (1.6:1) is stronger and implies a healthier
financial position with more liquidity to cover short-term obligations. The second one
(1.047:1) is still acceptable but indicates a relatively thinner margin for covering
current liabilities. However, the interpretation of these ratios also depends on the
industry, company size, and specific circumstances. Generally, a current ratio above 1
 is considered a good sign, but a higher ratio is often preferred as it suggests a stronger
financial position and greater liquidity.

Here is the debt ratio of BHAGERIA limited: -

.0.2250:1SHREE PUSHKAR

- Debt Ratio= Long-Term Debt/Net Assets

=(190359.04)/584542.36

=0.32:1

0.2250:1 is lower than 0.32:1. This means that the company with a debt ratio of 0.2250:1 has
less debt relative to its equity than the company with a debt ratio of 0.32:1.
A lower debt ratio is generally considered to be more favourable, as it indicates that the
company is less risky. This is because the company has more equity to cushion itself against
potential losses.
However, it is important to note that debt ratio is just one of many factors that should be
considered when evaluating a company's financial health. Other important factors include the
company's profitability, cash flow, and industry.

Here is the gross profit ratio of Bhageria limited: - 5.84%

SHREE PUSHKAR

Gross Profit Ratio = Gross Profits / Net Revenue from Operations × 100
=39202.53/426065.52*100

= 9.20%
5.84% is lower than 9.20%. This means that the company with a gross profit ratio of 5.84%
makes less profit on each dollar of sales than the company with a gross profit ratio of 9.20%.
A higher gross profit ratio is generally considered to be more favourable, as it indicates that
the company is more efficient at generating profits. This can be due to a number of factors,
such as a higher-margin product mix, lower costs of goods sold, or greater pricing power.
However, it is important to note that gross profit ratio is just one of many factors that should
be considered when evaluating a company's financial performance.

Here is the inventory turnover ratio of Bhageria limited: - 4.82 times

Shree Pushkar

Inventory Turnover Ratio= Cost of goods sold/ Average Inventory

=412173.48/ (154314.81+129679.59/2)

=412173.48/141997.20

=2.90 times

4.82 times is higher than 2.90 times. This means that the company with an inventory turnover
ratio of 4.82 times sells its inventory faster than the company with an inventory turnover ratio
of 2.90 times.
A higher inventory turnover ratio is generally considered to be more favourable, as it
indicates that the company is more efficient at managing its inventory. This can lead to lower
inventory costs and higher profits.
However, it is important to note that inventory turnover ratio is just one of many factors that
should be considered when evaluating a company's financial performance. Other important
factors include the company's gross profit margin, operating expenses, and net profit margin.
 Here is the debt-to-equity ratio of Bhageria Limited: - 0.55:1

SHREE PUSHKAR

=equity=181232.34

=debt=(190359.04)

Debt to Equity Ratio = Long-Term Debts /Shareholders Funds

= (190359.04)/ 181232.34

=1.05:1

0.55:1 is lower than 1.05:1. This means that the company with a debt ratio of 0.55:1 has less
debt relative to its equity than the company with a debt ratio of 1.05:1.
A lower debt ratio is generally considered to be more favourable, as it indicates that the
company is less risky. This is because the company has more equity to cushion itself against
potential losses.

Thank you...