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INTRODUCTION OF RATIO ANALYSIS:-

Quantitative analysis of information contained in a companys financial statements.

Ratio analysis is based on line items in financial statements like the balance sheet,income statement and cash flow statement; the ratios of one item or acombination of items - to another item or combination are then calculated. Ratioanalysis is used to evaluate various aspects of a companys operating and financial

performance such as its efficiency, liuidity, profitability and solvency. !he trendof these ratios over time is studied to check whether they are improving ordeteriorating. Ratios are also compared across different companies in the samesector to see how they stack up, and to get an idea of comparative valuations.

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Ratio analysis is a cornerstone of fundamental analysis.Ratio analysis is awidely used tool of nancial analysis. It is dened as thesystematic use of ratio to interpret the nancial statements sothat the strength and weaknesses of a rm as well as its historicalperformance and current nancial condition can be determined.

The term ratio refers to the numerical or quantitative relationshipbetween two variables. Signicance or Importance of ratioanalysis: It helps in evaluating the rms performance:

!ith the help of ratio analysis conclusion can be drawn regardingseveral aspects such as nancial health" protability andoperational e#ciency of the undertaking. Ratio points out theoperating e#ciency of the rm i.e. whether the management hasutili$ed the rm%s assets correctly" to increase the investor%swealth. It ensures a fair return to its owners and secures optimumutili$ation of rms assets It helps in inter&rm comparison:Ratio analysis helps in inter&rm comparison by providingnecessary data. 'n interrm comparison indicates relativeposition.It provides the relevant data for the comparison of the

performance of di(erent departments. If comparison shows avariance" the possible reasons of variations may be identied andif results are negative" the action may be intiated immediately tobring them in line. It simplies nancial statement:

The information given in the basic nancial statements serves nouseful )urpose unless it s interrupted and analy$ed in somecomparable terms. The ratio analysis is one of the tools in the

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hands of those who want to know something more from thenancial statements in the simplied manner.

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Ratios (-

)Rs crore*

Mar ' 14Mar ' 13Mar ' 12 Mar ' 11 Mar ' 10

+er share ratios$dusted #+ )Rs* /0.11 234.23 5/./4 63.0 //.0/

$dusted cash #+ )Rs* 46.50 222.14 17./5 /0.50 07.26

Reported #+ )Rs* /0.11 234.23 5/./4 4.35 //.65

Reported cash #+ )Rs* 46.50 222.14 17./5 6.45 07.34

8ividend per share 63.33 /.03 60.33 63.33 63.33

9perating profit per share )Rs* 77./0 264.46 25.40 40.61 227.46

:ook value )ecl rev res* per share#+ )Rs*

,01/.6/ ,//0.43 ,20.30 ,326./3 ,361.54

:ook value )incl rev res* per share#+ )Rs*

,01/.6/ ,//0.43 ,20.30 ,326./3 ,361.54

%et operating income per share#+ )Rs*

,124.64 ,5/7.27 ,015./3 ,21.13 ,606.0

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Mar ' 14Mar ' 13Mar ' 12 Mar ' 11 Mar ' 10

8ividend payout ratio )net profit* 23.04 23.2 23.34 20.1/ 26.64

8ividend payout ratio )cash profit* 1.62 1.42 1./5 22.51 2.23

#arning retention ratio 57.// 57.11 57.7/ 54.70 54.45

@ash earnings retention ratio 1.41 1.61 1.06 57./2 51.12@overage ratios

$dusted cash flow time total debt /.34 51.73 12.31 33.7 57.0/

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9. 8ividend payout ratio

. Return on capital employed ratio

;. 2arnings per share ,2)S- ratio

*

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2valuate the ability of the the company to repay principal amount of the longterm loans ,debentures" bonds" medium and long term loans etc.-.

2valuate whether the internal equities ,stockholders= funds- and e6ternalequities ,creditors= funds- are in right proportion.

Some frequently used long-term solvency ratios are given below:

*. 8ebt to equity ratio

. Times interest earned ,TI2- ratio

0. )roprietary ratio

3. >i6ed assets to equity ratio

5. ?urrent assets to equity ratio

7. ?apital gearing ratio

primary and secondary ratios. $ ratio that is of primary importance in one industry may be of

secondary importance in another industry.

N(t *r#it rati+N" rati,is a popular profitability ratio that shows relationshipbetween net profit after ta and net sales. &t is computed by dividing the net profit )after

ta* by net sales.

FORMULA:-

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!he relationship between net profit and net sales may also be epressed in percentageform.Bhen it is shown in percentage form, it is known as net profit margin. !he formula of net profitmargin is written as follows(

.a/*%(:

Sa%(! 210000

Returns inwards 3,333

'ross profit 13,333

$dministrative epenses 0,333

elling epenses 0,333

&nterest on investment 3,333

>oss on account of fire 4,333

&ncome ta 0,333

. %et profit ratio would be computed as follows(

2.6. C )D/0,333E? 233,333EE*

/. C 3.220 or 22.0=0. *Computation of net operating profit after tax:

'ross profit 13,333

>ess operating epenses(

$dministrative epenses 0,333

elling epenses 0,333 63,333FF- FF-

%et operating profit beforeta

03,333

>ess income ta 0,333

FF-

%et operating profit after ta /0,333

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FF-

r!! *r#it rati:-+" rati,is a profitability ratio that shows the relationship betweengross profit and total net sales revenue. &t is a popular tool to evaluate the operational

performance of the business . !he ratio is computed by dividing the gross profit figure by net

sales.

>ormula:

!he following formula?euation is used to compute gross profit ratio(

Bhen gross profit ratio is epressed in percentage form, it is known as gross profit margin or

gross profit percentage. !he formula of gross profit margin or percentage is given below(

!he basic components of the formula of r!! *r#it rati +" rati,are gross profit and net

sales. 'ross profit is eual to net sales minus cost of goods sold. %et sales are eual to total gross

sales less returns inwards and discount allowed. !he information about gross profit and net sales

is normally available from income statement of the company.

"ri&( (ar)i)! rati!:-+" rati,measures how many times the earnings per share)#+* has been covered by current market price of an ordinary share. &t is computed by dividing

the current market price of an ordinary share by earnings per share.

>ormula:

!he formula of price earnings ratio is given below(

9perating ratiois computed by dividing operating epenses by net sales. &t is epressed inpercentage.

>ormula:

9perating ratio is computed as follows(

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!he basic components of the formula are operating cost and net sales. 9perating cost is eual to

cost of goods sold plus operating epenses. %on-operating epenses such as interest charges,taes etc., are ecluded from the computations.

Diid()d *ayut ratidiscloses what portion of the current earnings the company ispaying to its stockholders in the form of dividend and what portion the company is ploughing

back in the business for growth in future. &t is computed by dividing the dividend per share by

the earnings per share )#+*for a specific period.

>ormula:

!he formula of dividend payout ratio is given below(

!he numerator in the above formula is the dividend per share paid to common stockholders only.

&t does not include any dividend paid to preferred stockholders.

&t can also be computed by dividing the total amount of dividend paid on common stock during a

particular period by the total earnings available to common stockholders for that period.

ar)i)! *(r !ar( +"S, ratimeasures how many dollars of net income have been earned by

each share of common stock. &t is computed by dividing net income less preferred dividend by

the number of shares of common stock outstanding during the period. &t is a popular measure of

overall profitability of the company and is usually epressed in dollars.

>ormula:

#arnings per share ratio )#+ ratio* is computed by the following

formula(

http://www.accountingformanagement.org/earnings-per-share-eps-ratio/http://www.accountingformanagement.org/earnings-per-share-eps-ratio/

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!he numerator is the net income available for common stockholders )net income less preferred

dividend* and the denominator is the average number of shares of common stock outstandingduring the year.

!he formula of #+ ratio is similar to the formula of return on common stockholders euity

ratio ecept the denominator of #+ ratio formula is the number of average shares of common

stock outstanding rather than the average common stockholders euity.