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16 views36 pages

GROUP-6

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Uploaded by

AD CREATION
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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RATIO ANALYSIS

TEAM MEMBERS
SHAILAJA PATTNAIK
JAYA AGRAWAL
KHETRAPATI TARASIA
ABHISHEK PRAHARAJ
SIRAJ NAYAK
TRUPTI KUMBHAR
RATIO ANALYSIS
• Ratio analysis is an important and powerful technique or method,
generally, used for analysis of Financial Statements.

• Ratios are used as a yardstick for evaluating the financial condition and
performance of a firm.

• Ratio Analysis helps to ascertain the financial condition of the firm. In


financial analysis, a ratio is compared against a benchmark for
evaluating the financial position and performance of a firm.
RATIO ANALYSIS
• Analysis and interpretation of various accounting
ratios gives a better understanding of financial
condition and performance of the firm in a better
manner than the perusal of financial statements.

• Ratios are the symptoms of health of an


organization like blood pressure, pulse or
temperature of an individual. They are the
indicators for further investigation.
Types of
Financial Ratios
RATIO ANALYSIS
In view of the diverse requirements of the various users of the ratios,
the ratios can be classified into four categories:
RATIO ANALYSIS
A. Liquidity Ratios: They measure the firm’s ability to meet current
obligations.

B. Leverage Ratios: These ratios show the proportion of debt and equity
in financing the firm’s assets.

C. Activity Ratios: They reflect the firm’s efficiency in utilizing the


assets.

D. Profitability Ratios: These ratios measure overall performance and


Limitations of
Financial Ratios
RATIO ANALYSIS

• Absence of identical situations

• Change in accounting policies

• Based on historical data

• Qualitative factors are ignored


RATIO ANALYSIS
• Ratios are only indicators, not final

• Over use could be dangerous

• Window dressing

• Problems of price level changes

• No fixed standards
Liquidity Ratios
Liquidity Ratios

1. Current Ratio

• Current ratio is defined as the relationship between current

assets and current liabilities.

• It is also known as working capital ratio.

• This is calculated by dividing total current assets by total current

liabilities.
Quick / Liquid / Acid Test Ratio
Leverage Ratios
Debt-Equity Ratio

• Debt-Equity Ratio is also known as External-Internal Equity Ratio.


• This ratio is calculated to measure the relative claims of
outsiders and owners against the firm’s assets.
• The ratio shows the relationship between the external equities
(outsiders’ funds) and internal equities (shareholders’ funds).
Total Debt Ratio (TD Ratio)

• Total Debt Ratio compares the total debts (long-term as well as


short-term) with total assets.
Interest Coverage Ratio

• Debt ratios are static and fail to indicate the ability of the firm to meet
interest obligations.
• The interest coverage ratio is used to test the firm’s debt-
servicing capacity.
• The interest coverage ratio shows the number of times the interest
charges are covered by funds that are ordinarily available to pay
interest charges.
Activity Ratios
Inventory Turnover Ratio / Inventory Velocity

• Inventory turnover ratio is also known as stock turnover ratio.

• This is calculated by dividing cost of goods sold by average inventory.


Debtors’ (Receivables) Turnover Ratio /
Debtors’ Velocity
• Debtors’ Turnover Ratio: Debtors turnover is found out by dividing
credit sales by average debtors.
Debtors’ Collection Period
• The collection period is calculated by

Signals of Collection Period


• Debtors’ Turnover Ratio indicates the speed of their collection.
• The shorter the period of collection, the better is the quality of debtors.
• A short collection period indicates the efficiency of credit management.
• The average collection period should be compared with the credit terms
and policy of the firm to judge the quality of collection efficiency.
Working Capital Turnover Ratio

• The WCT Ratio indicates the velocity of utilization of working capital of


the firm, during the year.
• The working capital refers to net working capital, which is equal to total
current assets less current liabilities. The ratio is calculated as follows:
Profitability
Ratios
Gross Profit Ratio

• Profit is a factor of sales.


• Profit is earned, after meeting all expenses, as and when sales are
made.
• The Gross Profit ratio reflects the efficiency with which a firm
produces/sells its different products.
Net Profit Ratio

• Net profit is obtained, after deducting operating expenses, interest and


taxes from gross profit.
• Net profit includes non-operating income so the later may be deducted
to arrive at profitability arising from operations.
• The net profit ratio is calculated by
Operating Expenses Ratio

• To identify the cause of fall or rise in net profit, each operating expense
ratio is to be calculated.
• This can be calculated by
Return on Investment

• Return on investment is the primary ratio that is most popularly used to


measure the overall profitability and efficiency of business.
• When return on investment is calculated on total assets, it is called
ROTA.
• Total assets are related to operating profit. Operating profit is EBIT, in
the absence of other income.
• EBIT is arrived at by adding interest and tax to net operating profit.
Return on Capital Employed
• Another way to calculate return on investment is through capital
employed or net assets.
• Net assets are equal to net fixed assets plus current assets minus
current liabilities.
• Net assets are equal to capital employed. So, net assets and
capital employed convey the same meaning, though called
differently.
• Capital employed can be calculated in two ways:
Return on Equity
• Net profits after tax, after dividend is paid to preference shareholders,
entirely belong to the equity shareholders.

• Equity shareholders would be interested to know what their real return


is on the funds invested.
Earnings per Share
• The profitability of the equity shareholders can be measured, in other
ways.

• One such measure is to calculate the earnings per equity share.

• The earnings per equity share is calculated by


Dividend Pay-out Ratio or Pay-out Ratio

• Dividend pay-out ratio is calculated to find out the proportion of


dividend distributed out of earnings per share.

• Dividend per equity share is calculated by dividing the profits, after tax,
by the number of equity shares outstanding.

• For example, if the firm has an EPS and DPS of Rs. 5 and Rs. 3
respectively, DP ratio is 3/5 i.e. 60%. So, the firm has distributed 60%
of PAT (profits after tax) as dividend among its shareholders.
Dividend Yield Ratio

• Shareholders are the true owners, interested in the earnings distributed


and paid to them as dividend.
• Therefore, dividend yield ratio is calculated to evaluate the relationship
between the dividends paid per share and the market value of the
share.
RATIO ANALYSIS
RATIO ANALYSIS
RATIO ANALYSIS
RATIO ANALYSIS

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