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10 views38 pages

Ratio

Uploaded by

alinashyju
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 PPTX, PDF, TXT or read online on Scribd
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RATIO ANALYSIS

Ratio Analysis

A technique which involves

Regrouping of data

By application of Arithmetical


relationships.
Accounting Ratios
• Relation between two or more numbers

• Expressed as a Fraction, Proportion, Percentage, No.


of times

• If numbers are from FS, it is called Accounting ratios.


Objectives
• To know the areas which need attention

• To know the potential areas to be improved

• To provide deeper analysis of profitability, liquidity,


solvency and efficiency levels
• To provide information for making cross-sectional
analysis

• Comparison with industry standards

• To provide information for projections and estimates


ADVANTAGES
• Understand efficacy of decisions.

• Simplify complex figures and establish relationships

• Helpful in comparative analysis


• Identification of problem areas

• Enables SWOT Analysis

• Various Comparisons
Limitations from the nature of FS
• Limitations of Accounting Data

• Ignores Price level changes

• Ignore qualitative/ non monetary aspects

• Variations in accounting practices

• Forecasting
Limitations of Ratios
• Means and not the End

• Lack of ability to resolve problems

• Lack of standardized definitions

• Lack of universally accepted standard levels

• Ratios based on unrelated figures.


Types of Ratios

Traditional Classification

Functional Classification
Traditional

P and L Ratios

Balance Sheet Ratios

Composite Ratios
FUNCTIONAL

Liquidity Ratios

Solvency Ratios

Activity (Turnover) Ratios

Profitability Ratios
Liquidity
Ratios

Current
Ratio

Quick
Ratio
CURRENT RATIO
• Current Assets : Current Liabilities

• Proportion of Current Assets to Current Liabilities

• 2:1 is considered safe

Current Ratio =
Quick Ratio (Liquid Ratio)
• Also Called Acid Test Ratio. 1:1 is considered safe

• Quick Assets are those assets which are quickly convertible to cash

Quick Ratio =

• Quick Assets = Current Assets – Inventory – Prepaid expense –


Advance Tax
SOLVENCY RATIOS

Debt to
Total Interest
Debt Equity Capital Proprietary
Assets to Coverage
Ratio Employed Ratio
Debt Ratio
Ratio
Debt Equity Ratio
• Relationship between long term debt and equity

• Optimum Ratio 2:1

• Debt Equity Ratio =


• Shareholders’ Fund = Share Capital + Reserves and Surplus +
Money received against share warrant +
Share application money pending allotment

OR

= Total Assets – Total External Liabilities


Debt to Capital Employed Ratio
• Ratio of long term debt to Capital Employed or Net Assets

• Debt to Capital Employed Ratio =

• Capital Employed = Shareholders Fund + Long Term


Borrowings
OR
Total Assts – Current Liabilities
• Debt to Capital Employed Ratio in relation to Total Assets
=

Total Debt = Short term Borrowings + Long term


Borrowings
Proprietary Ratio
• Relationship of Proprietor’s funds to Net Assets

• Proprietary Ratio =

• In relation to Total Assets


Proprietary Ratio =
Total Assets to Debt Ratio
• Measures the extent of the coverage of long term
debts by assets.

• Total Assets to Debt Ratio =


Interest Coverage Ratio
• Deals with servicing of interest on loan

• Express the relationship between profits available for


payment of interest and the amount of interest payable.

• Interest Coverage Ratio =


Activity or Turnover Ratios
• Indicate the speed at which activities of the business are being
performed

• Express the number of times assets employed, or for that matter, any
constituent of assets, is turned into sales in an accounting period.

• Higher turnover ratio indicates better utilisation of assets and signifies


improved efficiency and profitability.

• Also known as Efficiency ratios


1. Inventory Turnover

2. Trade Receivable Turnover

3. Trade Payable Turnover

4. Investment (Net Asset) Turnover

5. Fixed Assets Turnover

6. Working Capital Turnover


Inventory Turnover Ratio
• Determines the number of times inventory is converted into revenue
from operations during the accounting period

• Express the relation between cost of revenue from operations and


average inventory.

• Inventory Turnover Ratio =


Trade Receivables Turnover Ratio
• Express the relationship between credit revenue from operations and
trade receivables

Trade Receivables Turnover ratio =

Average Collection Period =


Trade Payables Turnover Ratio
• Express relationship between credit purchase and Trade Payables

Trade Payables Turnover ratio =

Average Payment Period =


Capital Employed (or Net Asset)
Turnover Ratio
• Reflects the relationship between Revenue from Operations and Net
Assets

• Higher Turnover means better activity and profitability

Net Asset Turnover Ratio =


Fixed Asset Turnover Ratio
• Express relation between Revenue from Operations and
Fixed Assets

• Fixed Asset Turnover Ratio =


Working Capital Turnover Ratio
• Express relationship between working capital and revenue from
operations

• Working Capital Turnover Ratio =


Profitability Ratios
• Calculated to analyse Earning Capacity of business

1. Gross Profit Ratio


2. Operating Ratio
3. Operating Profit Ratio
4. Net Profit Ratio
5. Return on Investment (or) Return on Capital Employed
• Return on Net worth

• Earnings per Share

• Book Value per Share

• Dividend Payout Ratio

• Price Earning Ratio


Gross Profit Ratio
• Relation between Gross Profit and Revenue from operation
• Expressed as a Percentage
• Higher ratio is a good sign

• Gross Profit Ratio =


Operating Ratio
• Analyse Cost of Operation in relation to Revenue from Operations

• Operating Ratio =

OR
Operating Profit Ratio
• Relation between operating profit and revenue from operations

• Operating Profit Ratio = *100

Operating Profit = Revenue from operation – operating cost

• Operating Profit Ratio = 100 – Operating Ratio


Net Profit Ratio
• Relation between Net Profit and Revenue from operation

• Net Profit Ratio =


Return on Investment (or) Capital
Employed
• Explains overall utilisation of funds by a business enterprise

• Return on Investment (RoI) =

Capital Employed = Shareholders’ Fund + Long term borrowings


OR = Total Assets – Current Liabilities

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