Ratio Analysis

Ratio Analysis - Meaning

Ratio is a mathematical relationship between two items expressed in quantitative form Accounting ratio - quantitative relationship betweentwo or more items of the financial statements connected with each other Can be expressed (i) in proportion,(ii)in times and (iii) in percentage

Ratio Analysis - Uses

Forecasting: ratios reveal the trends in costs, sales profits etc., which will help forecasting for future Managerial control: instrument of control for sales cost and profit Facilitates Communication: convey information Measuring efficiency: measure operational efficiency by comparing with past ratios and ratios of other firms Facilitates investment decision: helpful in computing ROI Measuring financial solvency: ratios indicate the liquidity position of the Company and the proportion of borrowed funds to total resources which reveal the solvency position of the company Inter-firm comparison:

Ratio Analysis - Limitations

Practical knowledge Ratios are means not the end Interrelationship single ratio cant convey any meaning Non availability of standard norms Accuracy of financial statements Consistency in financial statements Detachment form financial statements not a substitute Time lag Change in price level.

Classification of Ratios

Classification by statements Classification by users Classification by relative importance Classification by function

Classification by statements

Classification by statements

Balance sheet ratios

Profit and loss account ratios

Mixed ratios

Liquid ratio Current ratio Proprietory ratio

G/P ratio Operating ratio N/P ratio

ROI RONW Debtors turn nover

Classification by users

Ratios for management

Operating ratio STR N/P Ratio

Classification by users

Ratios for creditors

Fixed charges cover Debt service cover D/E ratio

Ratios for shareholders

Return on shareholders fund Dividend yield Pay out ratio

Primary

ROC Asset turnover Profit ratios WC turn over Stock to CA Cato FA Creditors turnover Debtors turnover Liquid ratio Growth rate in sales Growth rate in net assets

Secondary performance ratios Classification by relative importance

Secondary credit ratios

Growth ratios

Profitability ratios

G/P ratio ROI Expense ratio STR DTR WCTR

Turn over ratios Classification by function Liquidity ratios

CR LR ALR
D/E ratio Capital gearing Proprietary ratio

Leverage ratios

Profitability Ratios
1. ROI Return on Shareholders funds Return on equity shareholders funds Return on total assets 2.Gross profit ratio 3. Operating ratio 4. Operating profit ratio 5.Expenses ratio 6.Net profit ratio 7. Earnings per share 8. price earnings ratio

Profitability Ratios
10. interest cover/fixed charges cover ratio 11.Fixed dividend cover ratio 12. Debt service coverage ratio 13. Dividend yield ratio

Return on Investment (ROI)

Return on Shareholders Funds

Return on Equity(ROE)

Return on Total Assets

Profitability ratios

Profitability ratios

Profitability ratios

Profitability ratios

Profitability ratios

Turn over ratios/activity ratios/efficiency ratios/performance ratios

Highlights the operational efficiency of the concern Operational efficiency effective, profitable and rational use of resources available Calculated with reference to cost of sales or sales and expressed in number of times

Turn over ratios

Turn over ratios

Turn over ratios

Solvency ratios/financial ratios

Express financial position of the concern Can be divided into three:

Overall solvency ratio Short term solvency/liquidity ratios Long term solvency/ leverage ratios

Overall Solvency/total debt ratio

Liquidity ratios

Leverage ratios