RATIO ANALYSIS

1
RATIO ANALYSIS

• Ratios are simply a means of highlighting in
  arithmetical terms the relationship between
  figures drawn from financial statements.

2
FORMS OF EXPRESSING RATIOS

• Proportion
• Percentage
• Quotient

3
OBJECTIVES AND SIGNIFICANCE OF RATIO ANALYSIS.

• Helpful in Simplifying Financial data.
• Helpful in Determining Trends.
• Helpful in Controlling.
• Benefits to Other Parties Interested in the
  Business.
• Helpful in locating Weak Spots.
• Helpful in Comparative Study.
• Helpful in Measuring Operating efficiency.
• Overall Profitability

4
LIMITATION OF RATIO ANALYSIS

• Limited use of Single Ratio.
• Wrong Ratios Based on Wrong Data.
• Incorrect Comparison.
• Different Meaning.
• Difficulty in Forecasting.
• Lack of Qualitative Analysis.
• Difficulty of Price Level Changes.
• Lack of Proper Standards.
• Window Dressing.

5
INTERPRETATION OF RATIOS

• Interpretation of Individual Ratio.
• Interpretation by referring to a group of Ratios.
• Interpretation of Ratios by Trend.
• Interpretation by Inter-firm Comparison.

6
CLASSIFICATION OF RATIOS

• Classification According to Accounting Statement.
• Classification on the Basis of Time.
• Classification According to Importance.
• Classification According to the Purpose.

7
CLASSIFICATION ACCORDING TO ACCOUNTING STATEMENT.

• Profit and Loss Account Ratios.
• Balance Sheet Ratios.
• Profit and Loss Account and Balance Sheet Ratios.

8
CLASSIFICATION ON THE BASIS OF TIME.

• Structural Ratios.
• Trend Ratio

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CLASSIFICATION ACCORDING TO IMPORTANCE

• Primary Ratios.
• Secondary Ratios.

10
LIQUIDITY RATIOS

• CURRENT RATIO
• Current Assets
• Current Ratio ----------------------
• Current Liabilities

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• LIQUIDITY RATIO OR ACID TEST RATIO OR QUICK
  RATIO.
• Liquid Assets
• Liquidity Ratio ------------------------
• Current Liabilities.
• Or
• Liquid Assets
• Liquidity Ratio ------------------------
• Liquid Liabilities.

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• ABSOLUTE LIQUIDITY RATIO
• CashBank
• Marketable Securities
• Absolute Liquidity Ratio -----------------------
  --------
• Current Liabilities.

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• INVENTORY TURNOVER RATIO
• Cost of Goods Sold
• Inventory Turnover ----------------------------
• Ratio Average Inventory

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• DEBTORS TURNOVER RATIO
• Net Credit Sales
• Debtors Turnover -------------------------
• Ratio Average Debtors.

15

• CREDITORS TURNOVER RATIO
• Net Credit Purchases
• Creditors Turnover ----------------------------
• Ratio Average Creditors.
• Net Credit PurchasesGross Credit Purchases-
• Purchase Return

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• DEFENSIVE INTERVAL RATIO
• Quick Assets
• Defensive Interval-------------------------------
  -
• Ratio Projected Daily Cash Req.
• Projected Cash
• Operating Expenditure
• Projected Daily Cash-----------------------------
  -------
• Requirement No. of Days in a year (365)

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PROFITABILITY RATIOS

• Profitability Ratios Related to Sales
• a. Gross Profit Ratio
• Gross Profit
• Gross Profit Ratio ------------------ x 100
• Net Sales
• Net Sales Gross Sales Sales Return
• Gross Profit Net Sales Cost of Goods sold

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• Net Profit Ratio.
• Net Profit
• Net Profit Ratio --------------------x 100
• Net Sales

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• Operating Ratio.
• Operating Costs.
• Operating Ratio ------------------------ x 100
• Net Sales

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EXPENSE RATIOS

• Direct Raw Material to Sales Ratio
• Direct Material Cost
• ------------------------- x 100
• Net Sales
• b. Cost of Goods sold to Sales Ratio
• Cost of Goods Sold
• ------------------------- x 100
• Net Sales

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• Direct Labour Cost of Sales Ratio.
• Direct Labour Cost
• ------------------------- x 100
• Net Sales
• d. Factory Expenses to Sales Ratio x 100

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• e. Office and Administration Expenses to
• Sales Ratio
• Office and Administration Expenses
• ------------------------------------------- x
  100
• Net Sales
• f. Selling Expenses to Sales Ratio x 100

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PROFITABILITY RATIOS BASED ON INVESTMENT.

• RETURN ON TOTAL ASSETS
• Profit before Interest and Tax
• ------------------------------------- x 100
• Total Assets.
• Net Profit after Tax
• ------------------------ x 100
• Total Assets
• Net Profit after Tax Interest
• -----------------------------------------
• Total Assets.

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• RETURN ON NET CAPITAL EMPLOYED OR CAPITAL
  EMPLOYED
• a. From Asset Side of Balance Sheet.
• Capital EmployedFixed AssetsNet Working
  Capital OR
• Total Assets-Current Liabilities.
• OR
• b. From Liability Side of Balance Sheet
• Capital Employedlong-term LiabilitiesIssue
  Share Capital (Equity Preference) Reserve
  and Surplus (Capital and Revenue)
• Return on Capital Profit before Interest and
  Tax
• Employed ----------------------------------
  - x 100
• Capital Employed.

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Advantage of the Concept of Return on Capital
Employed

• Helps the management in finding out with how much
  efficiency capital emplyed in business is being
  used.
• Compared with that of other firms of similar
  nature.
• A comparative study of the profitability of
  various departments.
• Proper decisions regarding capital expenditure
  can be.
• Facilities necessary changes in financial
  policies.
• Reasonable and regular devidend.

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Return on Shareholders Funds

• a. Return on Total Shareholders Funds
• Net Profit after Tax
• ---------------------------------- x 100
• Total Shareholders Equity
• Total Shareholders EquityPreference Share
  CapitalOrdinary Share CapitalShare Premium
  Reserves and Surplus Accumulated Losses.

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• b. Return on Equity Shareholders Funds.
• Net Profit after tax and Preference Dividend
• ------------------------------------------------
  ----- x 100
• Equity Shareholders Funds
• Earnings Per Share of EPS
• Net Profit after Tax and Preference
  Dividend
• EPS -----------------------------------------
  -------------
• Number of Equity Shares

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• d. Dividend Per Share or DPS
• Profit distributed to Equity Shareholders
• DPS --------------------------------------------
  ---
• Number of Equity Shares.
• Dividend-Payout Ratio or D/P Ratio
• Total Dividend paid to Equity
  Shareholder
• D/P Ratio----------------------------------------
  -----------
• Total Net Profit belonging to Equity
  Shareholders
• OR
• DPS
• D/P ----------- x 100
• EPS

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• f. Dividend and Earning Yield
• DPS
• Dividend Yield ------------------------------
• Market Value per Share
• EPS
• Earning Yield -------------------------------
• Market Value per Share
• g. Price Earning Ratio
• Market Price of the share
• P/E Ratio ------------------------------------
• EPS

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TURNOVER RATIOS

• INVENTORY TURNOVER RATIO.
• Net Sales
• Inventory Turnover Ratio----------------------
• Average Inventory
• Cost to Raw Materials Consumed
• Raw Material Turnover--------------------------
  ---------------
• Ratio. Average Stock of Raw Materials
• Cost of Goods Manufactured
• Work in Progress ---------------------------
  --------------------
• Turnover Ratio Average Work-in-Progress
  Inventory

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• Debtors Turnover Ratio and Average Collection
  Period.