PRESENTATION ON

PRESENTED BY
TANVI BHANDARY JASBIR SAINI HEMLATA DUBEY KETKI GAWDE AKSHAY KODILKAR PRASAD YADAV PG04 PG05 PG07 PG10 PG19 PG34

DEFINITION
A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements.

Benefits Ratio Analysis

Profitability Liquidity Position Solvency

Safety & Security of the loans & advances Financial Stability Quality Of The Management

CLASSIFICATION OF RATIOS

Liquidity Ratio
Short-term financial position of a firm Indicate the ability of the firm to meet its short-term commitments (current liabilities) Short-term resources (current assets).

These are also known as solvency ratios. The ratios which indicate the liquidity of a firm are:
Current ratio Quick ratio or acid test ratio

Liquidity Ratio
Quick Ratio or Acid Test Ratio

Current Ratio
It is calculated by dividing current assets by current liabilities. Current ratio = Current assets Current liabilities Conventionally a current ratio of 2:1 is considered satisfactory

This is a ratio between quick current assets and current liabilities (alternatively quick liabilities).
Quick ratio = quick assets Current liabilities/(quick liabilities)

Networking Capital To Sales Ratio NetWorking Capital To Sales Ratio = Current Assets Current Liabilities Sales

Measures to understand firms ability to meet its short terms obligations it Conventionally a quick ratio of 1:1 is compares the networking capital with sales considered satisfactory.

PROFITABILITY RATIOS
ROCE Gross Profit Margin

Return on Total Assets

Net Profit Margin

Return on Equity

Operating

Leverage ratios
The different ratios are: Debt equity ratio Proprietary ratio Interest coverage ratio Debt service coverage ratio Capital Gearing ratio

Activity Ratio
Inventory turnover ratio Fixed asset turnover ratio Total asset turnover ratio Debtors turnover ratio Creditors turnover ratio Capital turnover ratio

Market value ratio

Price Earning Ratio Earning per share Earnings yield ratio Dividend yield ratio

Market Value Ratio

Price Earning Ratio
Earning per Share This ratio highlights the relationship between the market price of a share and the current earnings per share Price earning ratio = market price This measure expresses how many pence the company is earning for every share held. Earnings per Share = Net profit after taxpreference dividends No of ordinary shares Earnings Yield Ratio It serves as a guiding ratio for the intended investor Earnings yield ratio = Earning per share Market price per share Dividend yield ratio = Dividend per share market price per share Dividend Yield Ratio This ratio shows the prospective investors the effective return which he can expect on proposed investment

earnings per share

Lets See an Example

PARTICULAR
GROSS PROFIT RATIO G/P Ratio --------------*100 SALES

1999
64000 --------------* 100 300000

2000
76000 --------------* 100 374000

=21.33%

=20.32%

OPERATING EXPENSES TO SALES RATIO Operating expense ---------------------------* 100 sales OPERATING PROFIT RATIO Operating profit ------------------------* 100 sales CAPITAL TURNOVER RATIO Sales ------------------------* 100 Capital employed

49000 -----------* 100 300000

= 16.33%

57000 ------------* 100 374000

=15.24%

15000 ----------* 100 300000

=5%

19000 -----------* 100 374000

= 5.08%

300000 -----------100000 =3times

374000 --------------147000 =2.54 times

STOCK TURNOVER RATIO COGS ------------------Average stock

236000 -------------------------40000+60000 -----------------2 = 4.72

298000 ------------------------60000+94000 -----------------2 = 3.87

DEBTOR COLLECTION PERIOD

365 days/12 months --------------------------------Debtor turnover ratio

365 -------5.4

365 -----------4.17

=68days

=88days

* NEW FUND BEING INTRODUCED IN THE BUSINESS *PURCHASE HAS REMAINED CONSTANT

Advantages of Ratio Analysis

Interpreting and evaluating income statements and balance sheets . Financial data more meaningful Determine relative magnitudes of financial quantities Effective decisions about the firm's credit worthiness Predicting potential business earnings financial business strengths assist in spotting business weaknesses

Performance

External factors eg pollution

Inflation

Factors Affecting Ratio Analysis

Management changes Yearly comparisons

State of the economy

Performance of competitors

Limitations

Environmental Conditions Affected by Estimates & Assumptions.

Concentrating on financial factors.