RATIO ANALYSIS

Financial Statement Analysis

Presentation Submitted to

Ms. Prity Sharma

By Group 1
 LIQUIDITY RATIOS

 A class of financial metrics that is used to

determine a company's ability to pay off
its short-terms debts obligations.
 Two frequently-used liquidity ratios are the
current ratio (or working capital ratio) and the
quick ratio.
---------------------- ----------------------
Current Liabilities Current Liabilities

Current Quick
Ratio Ratio
 CURRENT RATIO

 It is an index of short term solvency of the firm.

 It also indicates the margin of net working capital
available after paying off current liabilities out of
current assets.
 The standard current ratio is 2:1
Current ●

●
Cash/Bank
Closing stock
Debtors/accounts receivables

Assets
●
Short term investments
●
Prepaid expenses

Current ●
Creditors
Bank overdraft

Liabilitie
●

●
Provision for taxation
●
Proposed dividends
●
Short term Loan

s
 Liabilities Rs. Assets Rs.
Share Capital 21,000 Fixed Assets(net) 17,000
Profit & Loss A/c 1,500 Stock 6,000
Bank Loan 2,500 Cash 3,400
Bank Overdraft 2,000 Debtors 6,600
Sundry Creditors 6,000
33,000 33,000

Current Ratio = Current Assets

-----------------------
Current Liabilities
Current assets = Stock + Cash + Debtors
6,000 + 3,400 + 6,600
16,000
Current Liabilities = Bank o/d + Sundry Creditors
2,000 + 6,000
8,000
Current ratio = 16,000/8,000 = 2 :1
 Significance of Current Ratio
The company may not be efficiently using its current assets. It may be hoarding assets
instead of using them to grow the business. Indicate that the firm may have difficulty meeting current obligations.

Low
High
Current
Curre
Ratio nt
Ratio
•The idea of having double the current assets as
compared to current liabilities is to provide for the
delays and losses in the realization of current assets.
•Firms having less than 2 : 1 ratio may be having a
better liquidity than even firms having more than 2 : 1
ratio.
•This is because of the reason that current ratio
measures the quantity of the current assets and not
the quality of the current assets.
•If a firm's current assets include debtors which are
not recoverable or stocks which are slow-moving or
obsolete, the current ratio may be high but it does
not represent a good liquidity position.
 QUICK RATIO
 It measures the capacity of the organization to
pay off current liabilities of the urgent nature
immediately.
 It could be useful in measuring the short term
liquidity of the organization.
 Ratio of at least 1:1 is considered satisfactory.
 Quick Ratio = Quick Assets / Liquid
Assets / Acid test Assets
-----------------------------------
Current Liabilities

Quick Assets = Current Assets

- Stock
- Prepaid expenses

Except Stock & prepaid expenses all other current

assets are liquid assets
Particulars Rs. Particulars Rs.
Sundry Debtors 20,000 Prepaid Expenses 30,000
Cash in hand 10,000 Short term investments 1,00,000
Machinery 7,000 Bills payable 20,000
Sundry Creditors 40,000 Debentures 2,00,000
Stock 40,000 Expenses payable 40,000

Quick Assets = Short term Investment 1,00,000

+ Cash in hand 10,000
+ Sundry Debtors 20,000
= 1,30,000
Current Liabilities = Sundry Creditors 40,000
+ Bills payable 20,000
+ Expenses payable 40,000
= 1,00,000

Quick Ratio = 1,30,000/1,00,00 = 1.3:1

 Significance of Quick Ratio
The firm is liquid and has the ability to meet its current or liquid liabilities in time A low liquidity ratio represents that the firm's liquidity position is not good.

High Low
Quick Quick
Ratio Ratio
 A liquid ratio of 1:1 does not necessarily mean
satisfactory liquidity position of the firm if all the debtors
cannot be realized and cash is needed immediately to
meet the current obligations.
 A low liquid ratio does not necessarily mean a bad liquidity
position as inventories are not absolutely non-liquid.
 A high liquidity ratio may not have a satisfactory liquidity
position if it has slow-paying debtors.
 A firm having a low liquid ratio may have a good liquidity
position if it has a fast moving inventories.
 THANK YOU

Submitted by : Aayu Sharma

Avi Sharma
Bharat Chopra
Randeep Singh
Shweta Khattar
Vedika Virmani