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Current Assets Current Laibilitie

Ratio analysis is a financial analysis tool used to interpret financial statements and determine a firm's strengths, weaknesses, historical performance, and current condition. Key ratios calculated include liquidity ratios and profitability ratios. Liquidity ratios like the current ratio and quick ratio focus on current assets and liabilities to measure short-term solvency. Profitability ratios like gross profit margin, net profit margin, operating profit ratio, return on assets, and return on equity measure profitability and performance. These ratios are calculated using financial data from statements to analyze various aspects of a firm's financial health.

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22 views2 pages

Current Assets Current Laibilitie

Ratio analysis is a financial analysis tool used to interpret financial statements and determine a firm's strengths, weaknesses, historical performance, and current condition. Key ratios calculated include liquidity ratios and profitability ratios. Liquidity ratios like the current ratio and quick ratio focus on current assets and liabilities to measure short-term solvency. Profitability ratios like gross profit margin, net profit margin, operating profit ratio, return on assets, and return on equity measure profitability and performance. These ratios are calculated using financial data from statements to analyze various aspects of a firm's financial health.

Uploaded by

Mane Daral
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Financial Tools

Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of
ratio to interpret the financial statements so that the strength and weakness of a firm as well as its
historical performance and current financial condition can be determined. The term ratio refers to
the numerical or quantitative relationship between two variables.
The most important and needed ratios, which are to be calculated for the purpose of this study as
mention in its objective are mentioned below
o Liquidity Ratio
o Profitability Ratio
1. Liquidity Ratio
These ratios focus on current assets and liabilities and are used to ascertain the short term
solvency position of a firm. The two primary tests of liquidity are current ratios and quick
ratio.
a. Current Ratio
The current ratio considers the total assets of accompany (both liquid and illiquid)
relative to that company’s current total liabilities.
Current Assets
Current Ratio= Current laibilitie
b. Quick Ratio
The quick ratio measures a company’s obligation with its most liquid assets.
Quick Assets
Quick Ratio= Current laibilitie

2. Profitability Ratio
A profitability ratio is a measure of profitability, which is a way to measure a company
performance.
Type of profitability ratios
 Gross Profit Margin
 Net Profit Margin
 Operating Profit Ratio(OPR)
 Return on Assets(ROA)
 Return on Equity(ROE)
Formulas to calculate this ratio are as follow
Gross profit
i. Gross profit margin= Sales
Higher gross profit margin indicate that the firm cost of goods sold is relatively
lower.
Net profit
ii. Net profit margin= Sales
It shows the operating efficiency of generating net income per rupee of sales.
operating profit
iii. OPR= Sales
It shows the pure operating efficiency of a firm as it measures only the profit earned
on operation and ignores interests and taxes.
Net Income
iv. ROA= Total Assets
It measures the overall effectiveness of management in generating profit with its
available assets.
Net Income
v. ROE= Total equity
It measures the return on the owner’s investment in the firm.

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