AITTM

RATIO ANALYSIS

ASHIMA AGARWAL

RATIO ANALYSIS

AITTM

Ratio-analysis means the process of computing, determining and presenting the relationship of related items and groups of items of the financial statements. They provide in a summarized and concise form of fairly good idea about the financial position of a unit. They are important tools for financial analysis.
ASHIMA AGARWAL

RATIO ANALYSIS

AITTM

ASHIMA AGARWAL

HOW A RATIO IS EXPRESSED?

AITTM

ASHIMA AGARWAL

CLASSIFICATION OF RATIOS
Liquidity Ratios Profitability Ratios Turnover Ratios

AITTM

Shareholders Ratios

Current Ratio Quick Ratio Proprietary Ratio Debt Equity Ratio

Return On Investment Gross Profit Ratio Operating Profit Ratio Net profit Ratio

Stock Turnover ratio Fixed Asset Turnover Ratio Debtors Turnover Ratio Working capital Turnover Ratio Creditors turnover ratio

Earning per Share Price Earnings Ratio Payout Ratio Dividend Yield Ratio

ASHIMA AGARWAL

FORMAT OF BALANCE SHEET FOR RATIO ANALYSIS

AITTM NET WORTH/EQUITY/OWNED FUNDS FIXED ASSETS : LAND & BUILDING, PLANT Share Capital/Partners Capital/Paid up & MACHINERIES , FURNITURE & FIXTURES Capital/ Owners Funds , VEHICLES Reserves ( General, Capital, Revaluation & Original Value Less Depreciation Other Reserves) Net Value or Book Value or Written down value Credit Balance in P&L A/c
LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions) Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. assets which are not current or fixed in nature CURRENT ASSETS : Cash & Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks & inventory (RM,WIP,FG) Stores & Spares, Advance Payment of Taxes, Prepaid expenses, Loans and Advances recoverable within 12 months INTANGIBLE ASSETS Patent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses AGARWAL ASHIMA

LIABILITIES

ASSETS

CURRENT LIABILTIES Bank Working Capital Limits Sundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or deposits Expenses payable & provisions against various items

Current Ratio : It is the relationship between the current assets and current liabilities of a concern. Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1

AITTM

Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses, alternatively it is the difference of Current Assets and Current Liabilities. NWC = Current Assets Current Liabilities
ASHIMA AGARWAL

Current Assets : Raw Material, Stores, Spares, Work-in Progress. Finished AITTM Goods, Debtors, Bills Receivables, Cash. Current Liabilities : Sundry Creditors, Installments of Term Loan, DPG etc. payable within one year and other liabilities payable within one year. This ratio must be at least 1.33 : 1 to ensure minimum margin of 25% of current assets as margin from long term sources. Current Ratio measures short term liquidity of the concern and its ability to meet its short term obligations within a time span of a year. It shows the liquidity position of the enterprise and its ability to meet current obligations in time. Higher ratio may be good from the point of view of creditors. In the long run very high current ratio may affect profitability ( e.g. high inventory carrying cost) Shows the liquidity at a particular point of time. The position can change immediately after that date. So trend of the current ratio over the years to be analyzed. Current Ratio is to be studied with the changes of NWC. It is also necessary to look at this ratio along with the Debt-Equity ratio.
ASHIMA AGARWAL

ACID TEST or QUICK RATIO : It is the ratio between Quick Current

Assets and Current Liabilities. The should be at least equal to 1.
AITTM

Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example : Cash 50,000 Debtors 1,00,000 Inventories 1,50,000 Total Current Assets 3,00,000

Current Liabilities 1,00,000

Current Ratio = > Quick Ratio =>

3,00,000/1,00,000 1,50,000/1,00,000

= 3:1 = 1.5 : 1
ASHIMA AGARWAL

DEBT EQUITY RATIO : It is the relationship between AITTM borrowers fund (Debt) and Owners Capital (Equity).
Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets For instance, if the Firm is having the following : Capital = Rs. 200 Lacs Free Reserves & Surplus = Rs. 300 Lacs Long Term Loans/Liabilities = Rs. 800 Lacs Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1

ASHIMA AGARWAL

AITTM

PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owners Fund. Proprietary Ratio = (Shareholders funds/Total Tangible Assets) x 100 RETURN ON INVESTMENT: It measures the profit which a firm earns on investing a unit of capital.
EBIT / Capital Employed GROSS PROFIT RATIO : By comparing Gross Profit percentage to Net
Sales we can arrive at the Gross Profit Ratio which indicates the manufacturing efficiency as well as the pricing policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

A higher Gross Profit Ratio indicates efficiency in production of the unit.
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AITTM

OPERATING PROFIT RATIO :

It is expressed as =>

(Operating Profit / Net Sales ) x 100

Higher the ratio indicates operational efficiency

NET PROFIT RATIO : It is expressed as => ( Net Profit / Net Sales ) x 100

It measures overall profitability.

ASHIMA AGARWAL

STOCK/INVENTORY TURNOVER RATIO :

AITTM

(Average Inventory/Sales) x 365 for days (Average Inventory/Sales) x 52 for weeks (Average Inventory/Sales) x 12 for months

Average Inventory or Stocks = (Opening Stock + Closing Stock) -----------------------------------------

2
. This ratio indicates the number of times the inventory is rotated during the relevant accounting period
ASHIMA AGARWAL

AITTM

DEBTORS TURNOVER RATIO : This is also called Debtors Velocity or Average Collection Period or Period of Credit given .

(Average Debtors/Sales ) x 365 for days (52 for weeks & 12 for months)
WORKING CAPITAL TURNOVER RATIO: Net Sales /Working Capital FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio, which determines the creditor payment period. (Average Creditors/Purchases)x365 for days (52 for weeks & 12 for months)
ASHIMA AGARWAL

AITTM

RETRUN ON EQUITY CAPITAL (ROE) : Net Profit after Taxes / Tangible Net Worth EARNING PER SHARE : EPS indicates the quantum of net profit of the year that would be ranking for dividend for each share of the company being held by the equity share holders. Net profit after Taxes and Preference Dividend/ No. of Equity Shares PRICE EARNING RATIO : PE Ratio indicates the number of times the Earning Per Share is covered by its market price. Market Price Per Equity Share/Earning Per Share
ASHIMA AGARWAL

PAYOUT RATIO: Dividend Per Share / EPS

AITTM

DIVIDEND YIELD RATIO: Dividend Per Share / Market Price Per Share

ASHIMA AGARWAL