RATIO ANALYSIS

1. Balance sheet ratios.

2. Profit and loss account ratios

3. Balance sheet and profit and loss account ratios

Ratio may also classify from the angle of users. We take RATIO ANALYSIS

1. From share holders point of view

2. From short-term creditors point of view

3. From long-term creditors point of view

A. BALANCE SHEET RATIOS

1. Current ratio or Working capital ratio

2. Liquidity ratio or Quick ratio

3. Property ratio

4. Asset property ratio

B. PROFIT AND LOSS ACCOUNT RATIOS:

1. Gross profit ratio

2. Operating ratio

3. Expenses ratio

4. Net profit ratio

5. Stock turn over ratio

C. BALANCE SHEET AND PROFIT AND LOSS ACCOUNT RATIOS

1. Return on total resources

2. Return on own funds

 3. Turnover of fixed assets

4. Turnover of debtors

5. Earnings per share

Several ratios can be calculated from the accounting data contained in the financial

statement. These ratios can be grouped into various classes according to the financial

activity or function to be evaluated. The important ratios used in this financial analysis

can be grouped as follows.

LIST OF RATIOS

LIQUIDITY RATIOS:

The liquidity ratios measure the ability of a firm to meet its short term obligations

and reflect the short-term obligations and reflect the short-term financial strength or

solvency of the firm.

The ratios which indicate the liquidity of a firm are:

(1) Current ratio

(2) Quick ratio

(3) Net working capital ratio

(1) Current ratio:

The current ratio is computed by dividing current assets by current liabilities.

Current assets normally include cash, marketable securities, accounts receivables and

inventories. Current liabilities consists of accounts payable short-term notes payable

current maturates of long term debt, accrued income taxes, sundry creditors, bills

payables and other accrued expenses.

(2) Quick ratio:

 The quick ratio is calculated by deducting inventories from current assets and

dividing the remainder by current liabilities. Inventories are typically the least liquid of a

firm's current assets and assets on which losses are most likely to occur in the event of

liquidation. The term quick assets refer to current assets, which can be converted into

cash immediately or at a short notice without diminution in value.

(3) Net Working Capital Ratio:

The difference between the current assets and current liabilities is called net

working capital. The net working capital ratio is calculated by dividing net working

capital with net assets or capital employed. The ratio is used as a measure of firm's

liquidity. The ratio measures the firm's potential reservoir of funds.

LEVERAGE RATIOS.

Leverage ratios, which measure the funds applied by the owners as compared

with financing provided by the firm's creditors, have a number of implications. Firms

with low leverage ratios have less risk of loss when the economy is in a down turn, but

they also have lower competing firms. This provides an insight into the financial

performance and condition of the enterprise in comparison with other firms in the

industry.

(a) Fixed assets ratio:

This ratio will be analyzed to interpret the asset values based on historic cost. An

increased in the fixed assets may result from the replacement of an asset at an increased

price or the purchase of an additional asset intended to increase production capacity. The

ratio of the accumulated depreciation provision to the total of fixed assets at cost might
be used as an indicator of the average age of the assets, particularly when the depreciation

rates are noted in accounts.

(b) Total liabilities to total assets ratio:.

Current liabilities are generally excluded from the computation of leverage ratios.

This ratio is computed by dividing total liabilities by total assets. Total liabilities

include long-term as well as current liabilities. Total assets include fixed assets from

which miscellaneous expenditure and loss of the company should be deducted.

ACTIVITY RATIOS:

Activity ratios are concerned with measuring the efficiency of asset management.

These ratios are also called turnover ratios, because they indicate the speed with which

assets are being converted to turned over into sales

The ratios, which indicate the activity of a firm, are:

1. Debtors turnover ratio

2. Fixed assets turnover ratio

3. Capital employed turnover ratio

4. Total assets turnover ratio

5. Working capital turnover ratio

(1) Debtors turnover ratio:

The major activity ratio is the receivables or debtors turnover ratio. Allied and closely

related ton this is the average collection period. The debtor' turnover ratio is a test of the

liquidity of the debtors of the firm. The liquidity of a firm's receivables can be examined

in two ways,

Accordingly there are two types of debtors turnover ratio:

 1 Debtors/receivables turnover ratio

2 Average collection period. .

The debtor’s turnover shows the relationship between sales and debtors of a firm.

This approach requires two types of data. First, credit sales, which may not be readily

available to the analyst. The second type of ratio for measuring the liquidity of a firm's

debtors is the average collection period. This ratio is in fact interrelated with the

dependent upon, the receivables turnover ratio.

(2) Fixed assets turnover ratio:

The fixed assets turnover ratio measures the efficiency with the firm in utilizing

its investment in fixed assets such as land, building, plant and machinery, furniture etc.

The fixed assets turnover ratio is sales divided by net fixed assets.

(3) Capital employed turnover ratio:

Capital employed may be defined as non-current liabilities plus owner’s equity.

Thus it pennants the permanent capital or long run funds entrusted to the firm by

creditors and owners. In an equivalent way, the term capital employed can be defined as

working capital plus non-current assets.

(4) Total assets Turnover Ratio: .

The total assets turnover ratio is a significant ratio, since it shows the firm's ability of

generating sales from all the financial resources committed to the firm. As with the fixed

asserts, the total assets turnover should be continuously used. In the denominator of this

ratio, assets are net of depreciation.

(5) Working capital turnover ratio:

Working capital is the difference between the current assets and the current liabilities.

This ratio is ascertained by dividing sales with working capital. This ratio indicates the

extent of working capital turned over in achieving sales of the firm.

PROFITABILITY RATIOS:

The important profitability ratios are

1. Net profit ratio

2. Return on investment

3. Dividend covers

4. Return on capital employed

(1) Net profit ratio:

This ratio indicates the earnings out of every 100 rupees of sales and does the unit

make a direct measure of the annual profit. Here, the net profit is taken as net profit after-

tax.

(2) Return on investment:

Return on investment analysis provides a strong incentive for optimal utilization

of the assets of the company. This encourages managers to obtain assets that will provide

a satisfactory return on investment and to dispose of assets that are not providing an

acceptable .return. In selecting amongst alternative long-term investment proposals.

Return on investment provides a suitable measure for assessment of profitability of each

proposal.

(3) Dividend covers:

 This ratio indicates the number of times the dividends are covered by net profit.

This highlights the amount retained by a company for financing of future operations.

(4) Return on capital employed:

This ratio is ascertained by dividing sales which capital employed. This ratio indicated
the efficiency in utilization of capital employed in generating the revenue.