Ratio Analysis-B.V.Raghunandan
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Transcript of Ratio Analysis-B.V.Raghunandan
Ratio Analysis
B.V.Raghunandan,SVS College,
Bantwal-KarnatakaIndia
Meaning of Ratio Analysis
• It is an analysis of strength and weakness of an organisation by establishing the quantitative relation among the items of Balance Sheet or Income Statement of such an organisation
Purpose/Importance/Advantages• Analysis of financial Position• Simplification of Accounting Figures• Assessment of Operational Efficiency• Determining Trends in the long-run• Identification of Strength & Weakness• Taking Remedial Measures• Comparison of Performance
Limitations of Ratio Analysis
• Based on Historical Data• Change in Real Value of Monetary Unit• No Standard Interpretation• Ignoring Qualitative Aspects• Difference in Accounting Methods make
comparison difficult• Ambiguity in Terms Used
Classification of Ratios A. Liquidity Ratios
B. Solvency Ratios
C. Activity Ratios
D. Profitability Ratios
E. Shareholders' Ratios
A. Liquidity Ratios
• Used to study the ability of the organisation in meeting short-term payments or obligations
• Includes: 1) Current Ratio, 2) Acid Test Ratio and 3) Working Capital Turnover Ratio
1) Current Ratio
• Relation between current assets and current liabilities
• Long Term Sources Financing the Current assets give a stable base for the liquidity of the organisation
• Normally , the ratio should not be less than 2 i.e., the current assets should be double the size of current liabilities
Measurement of Current Ratio
Current Ratio = bilitiesCurrentLiaetsCurrentAss
2) Acid Test Ratio/Quick Ratio
• It is the ratio between quick assets and quick liabilities
• Quick assets include current assets except inventory and pre-paid expenses
• Quick liabilities include current liabilities other than bank overdraft
• A 1:1 ratio is healthy• Healthy indicator of cash management
Measurement of Acid Test Ratio
Acid Test Ratio =
litiesQuickLiabisQuickAsset
3) Working Capital Turn-over Ratio
• Shows the efficiency of usage of working capital
• Relation between Sales and Working Capital
• Determination of number of times the working capital is turned over to achieve the maximum profit
Measurement of Working Capital Turnover Ratio
lkingCapitaAverageWorNetSales
B. Solvency Ratios
• Measure long-term liquidity ratio• Reflect the ability of the firm to pay interest
and repayment of loans at due dates on the long-term loans taken
• Avoidance of over-borrowing (over-leverage)
• Avoidance of bankruptcy by maintaining healthy solvency ratios
Types of Solvency Ratios
1) Interest Coverage Ratio
2) Debt Ratio3) Debt-Equity Ratio4) Capital Gearing
Ratio5) Proprietary Ratio
1.Interest Coverage Ratio
TermDebtLongInterestonTaxInterestofitBefore
&Pr
2. Debt Ratio (Debt to Total Funds ratio)
rsFundsShareholdeLTDebtLTDebt
3) Debt-Equity Ratio
rsFundsShareholdebtLongTermDe
4) Capital Gearing Ratio
ndeholdersFuEquitySharcuritieseBearingSeFixedIncom
5) Proprietary Ratio
sTotalAssetrsFundsShareholde
C] Activity Ratios
1) Inventory Turnover Ratio2) Debtors Turnover Ratio3) Average Collection Period4) Fixed Assets Turnover Ratio5) Total Assets Turnover Ratio6) Capital Turnover Ratio
1) Inventory Turnover Ratio
ckAverageStosSoldCostofGood
ckAverageStosSoldCostofGood
2) Debtor Turnover Ratio
torsAverageDebsCreditSale
3) Average Collection Period
overRatioDebtorTurnmonthsaYearday )(12/)sin(365
4) Fixed Assets Turnover Ratio
setsNetFixedAsNetSales
5) Total Assets Turnover Ratio
sTotalAssetNetSales
6) Capital Turnover Ratio
TermFundsLongNetSales
D] Profitability Ratios
1) Net Profit Ratio
2) Gross Profit Ratio
3) Return on Total Assets
4) Return on Equity
1) Net Profit Ratio
100Pr XNetSales
axofitAfterT
2) Gross Profit Ratio
100Pr XSales
ofitGross
3) Return on Total Assets
100Pr XsTotalAssetaxofitAfterT
4) Return on Equity
100'
Pr XFundsrsShareholdeaxofitAfterT
E) Shareholders‘ Ratio
1) Earning per Share (EPS)
2) Price-Earning Ratio (PE Ratio)
3) Dividend Yield Ratio 4) Dividend Pay-out
Ratio
1) Earning per Share
uitySharesNumberofEqaxofitAfterTPr
2) PE Ratio
ShareEarningpereiceperSharMar Prker
3) Dividend Yield Ratio
100Pr
XeiceperSharMarket
rShareDividendpe
4) Dividend Pay-out Ratio
100XShareEarningperrShareDividendpe
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