INTRODUCTION

The analysis of the financial statements and interpretations of financial results of a

particular period of operations with the help of 'ratio' is termed as "ratio analysis."
Ratio analysis used to determine the financial soundness of a business concern.
Alexander Wall designed a system of ratio analysis and presented it in useful form
in the year 1909.
The term 'ratio' refers to the mathematical relationship between any two interrelated variables. In other words, it establishes relationship between two items
expressed in quantitative form.
According J. Batty, Ratio can be defined as "the term accounting ratio is used to
describe significant relationships which exist between figures shown in a balance
sheet and profit and loss account in a budgetary control system or any other part of
the accounting management."

PURPOSE OF FINANCIAL ANALYSIS

For most of us, accounting is not the easiest thing in the world to understand, and
often the terminology used by accountants is part of the problem. Financial ratio
analysis sounds pretty complicated. In fact, it is not. Think of it as batting
averages for business.

The use of financial ratios is a time-tested method of analyzing a business. Wall

Street investment firms, bank loan officers and knowledgeable business owners all
use financial ratio analysis to learn more about a companys current financial
health as well as its potential.

LIQUIDITY
In accounting, liquidity (or accounting liquidity) is a measure of the ability of a
debtor to pay their debts as and when they fall due. It is usually expressed as a ratio
or a percentage of current liabilities. Liquidity is the ability to pay short-term
obligations.
At the stock level: Liquidity refers to how easy it is to buy or sell a large number of
shares without having a big effect on share price.

At the company level: Check the liquidity of your companies to see if they would
be able to access cash quickly if necessary, for instance, to make a debt payment.
Are there enough cash and "cash equivalents" on hand to cover the payment?

At the market level: Markets and economies in general need to have liquidity, in
terms of a flow of money and credit, otherwise operations are hindered, as there's
no fuel, no grease.

LIQUIDITY MANAGEMENT
The importance of liquidity management is reflected in the fact that financial
managers spend a great deal of time in managing current assets and current
liabilities. The key issues in liquidity management are as to how much must be
invested in each component of liquidity management and how to manage these
components effectively and efficiently.
Proper management of liquidity is very important for the success of an enterprise.
The manner of management of liquidity to a very large extent determines the
success of the operation of concern.
The failure of any enterprise is undoubtedly due to poor management and absence
of management skill. Shortage of liquidity, so often advance as the main cause of
failure is nothing but the clearest evidence of poor management, which is so
common.
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LIQUIDITY RATIOS
Liquidity Ratios are also termed as Short-Term Solvency Ratios. The term liquidity
means the extent of quick convertibility of assets in to money for paying obligation
of short-term nature.
Accordingly, liquidity ratios are useful in obtaining an indication of a firm's ability
to meet its current liabilities, but it does not reveal how effectively the cash
resources can be managed.

DAYS SALES IN RECEIVABLES

ACCOUNTS RECEIVABLE TURNOVER
ACCOUNTS RECEIVABLES TURNOVER IN DAYS
DAYS SALES IN INVENTORY
INVENTORY TURNOVER
INVENTORY TURNOVER IN DAYS
OPERATING CYCLE
WORKING CAPITAL
CURRENT RATIO
ACID TEST RATIO
CASH RATIO
SALES TO WORKING CAPITAL

MILLAT TRACTORS LIMITED

The Millat Tractors Limited (MTL) was established in 1964 to introduce and
market Massey Ferguson Tractors in Pakistan. An assembly plant was set up in
1967 to assemble tractors in semi-knocked down (SKD) condition.
The company was nationalized in 1972 and started assembling and marketing
tractors on behalf of Pakistan Tractor Corporation (PTC) which was formed by the
Government for import of tractors in SKD condition. In 1980, the Government
decided on indigenization of the tractors and entrusted this task to Pakistan Tractor
Corporation.
Pakistan Tractor Corporation transferred this role of indigenization in 1981 to
Millat Tractors Limited. Just in one year's time, the company took a giant step
towards self-reliance by setting up the first engine assembly plant in Pakistan.

AL-GHAZI TRACTORS LIMITED

The Al-Ghazi Tractors Limited (AGTL), was incorporated in 1983, its plant
located in Dera Ghazi Khan, Punjab, Pakistan. Al-Ghazi Tractors plant
manufacture New Holland tractors and generators in collaboration with Fiat New
Holland. In 1991, Al-Futtaim Group of Dubai took over the management control of
Al-Ghazi Tractors by acquiring 50% of its shares. Its corporate Head Office is in
Karachi, Pakistan.

NUMBER OF DAYS SALES IN RECEIVABLES

DAYS SALES IN RECEIVABLES = GROSS RECEIVABLES/NET
SALES/365

The days' sales in accounts receivable ratio, also known as the number of days of
receivables, tells us the average number of days it takes to collect an account
receivable. Since the days' sales in accounts receivable is an average, you need to
be careful when using it.
Due to the high importance of cash in running a business, it is in a company's best
interest to collect outstanding receivables as quickly as possible. By quickly
turning sales into cash, a company has the chance to put the cash to use again ideally, to reinvest and make more sales.

ACCOUNTS RECEIVABLE TURNOVER

ACCOUNTS RECEIVABLE TURNOVER =NET SALES/AVERAGE
GROSS RECEIVABLES

The Accounts Receivable Turnover Ratio measures the number of time accounts
receivable turned over during a time period. A higher ratio indicates a shorter time
between making a sale and collecting the cash.
The ratio is based on Net Sales and Net Accounts Receivable. Remember, Net
Sales equals Sales less any allowances for returns or discounts. Net Accounts
Receivable equals Accounts Receivable less any adjustments for bad debts.

ACCOUNTS RECEIVABLE TURNOVER IN DAYS

ACCOUNTS RECEIVABLES TURNOVER IN DAYS = AVERAGE GROSS
RECEIVABLES/NET SALES/365

Accounts receivable turnover measures the efficiency of a business in collecting its

credit sales. Generally a high value of accounts receivable turnover is favorable
and lower figure may indicate inefficiency in collecting outstanding sales. Increase
in accounts receivable turnover overtime generally indicates improvement in the
process of cash collection on credit sales.

DAYS SALES IN INVENTORY

DAYS SALES IN INVENTORY =ENDING INVENTORY/COST OF
GOODS SOLD /365

A financial measure of a company's performance that gives investors an idea of

how long it takes a company to turn its inventory (including goods that are work in
progress, if applicable) into sales. Generally, the lower (shorter) the DSI the better,
but it is important to note that the average DSI varies from one industry to another.
The days' sales in inventory tells you the average number of days that it took to sell
the average inventory held during the specified one-year period. You can also think
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of it as the number of days of sales that was held in inventory during the specified
year.

INVENTORY TURNOVER
INVENTORY TURNOVER =COST OF GOODS SOLD/AVERAGE
INVENTORY

The Inventory Turnover Ratio measures the number of times inventory turned
over or was converted to sales during a time period. It may also be called the Cost
of Sales to Inventory Ratio. It is a good indication of purchasing and production
efficiency.

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In general, the higher the ratio, the more frequently the inventory turned over. You
might expect a company with a perishable inventory, such as a grocery store, to
have a very high Inventory Turnover Ratio.
Conversely, a furniture store might have a low Inventory Turnover Ratio.

INVENTORY TURNOVER IN DAYS

INVENTORY TURNOVER IN DAYS =AVERAGE INVENTORY/COST OF
GOODS SOLD/365

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Once you have calculated the Inventory Turnover Ratio, you can convert it to the
actual number of days of inventory you have on hand. This key ratio combined
with the Accounts Receivable Days on Hand and Accounts Payable Days convert
to what is called the Cash Cycle.

OPERATING CYCLE
OPERATING CYCLE =ACCOUNTS RECEIVABLES TURNOVER IN
DAYS +
INVENTORYTURNOVER IN DAYS

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The cash conversion cycle (CCC, or Operating Cycle) is the length of time
between a firm's purchase of inventory and the receipt of cash from accounts
receivable. It is the time required for a business to turn purchases into cash receipts
from customers.

Operating Cycle represents the number of days a firm's cash remains tied up within
the operations of the business. A cash flow analysis using operating cycle also
reveals in, an overall manner, how efficiently the company is managing its working
capital.

WORKING CAPITAL
WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

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Working capital is a measure of cash flow and is not a real ratio.

It represents the amount of capital invested in resources that are subject to
relatively rapid turnover (such as cash, accounts receivable and inventories) less
the amount provided by short-term creditors.

Working capital should always be a positive number. Lenders use it to evaluate a

companys ability to weather hard times. Loan agreements often specify that the
borrower must maintain a specified level of working capital.

CURRENT RATIO
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES

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The current ratio is a reflection of financial strength. It is the number of times a

companys current assets exceed its current liabilities, which is an indication of the
solvency of the business.

A current ratio can be improved by increasing current assets or by decreasing

current liabilities.
Current ratio can be improved by increasing current assets or by decreasing current
liabilities.

Steps to accomplish an improvement include:

Paying down debt
Acquiring a long-term loan (payable in more than 1 years time)
Selling a fixed asset
Putting profits back into the business

A high current ratio may mean cash is not being utilized in an optimal way. For
example, the excess
cash might be better invested in equipment.

ACID TEST RATIO

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ACID TEST RATIO =CASH EQUIVALENTS + MARKETABLE

SECURITIES + NET RECEIVABLES/CURRENTLIABILITIES

The quick ratio is also called the acid test ratio. Thats because the quick ratio
looks only at a companys most liquid assets and compares them to current
liabilities. The quick ratio tests whether a business can meet its obligations even if
adverse conditions occur.

In general, quick ratios between 0.5 and 1 are considered satisfactory, as long as
the collection of receivables is not expected to slow.

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CASH RATIO
CASH RATIO = CASH EQUIVALENTS + MARKETABLE SECURITIES
/CURRENT LIABILITIES

Cash Ratio is an indicator of company's short-term liquidity. It measures the ability

to use its cash and cash equivalents to pay its current financial obligations.
Cash ratio measures the immediate amount of cash available to satisfy short-term
liabilities. A cash ratio of 0.5:1 or higher is preferred.
Cash ratio is the most conservative look at a company's liquidity since is taking in
the consideration only the cash and cash equivalents.
Cash ratio is used by creditors when deciding how much credit, if any, they would
be willing to extend to the company.

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SALES TO WORKING CAPITAL

SALES TO WORKING CAPITAL = SALES/AVERAGE
WORKINGCAPITAL

The relationship between Net Sales and Working Capital is a measurement of the
efficiency in the way working capital is being used by the business. It shows how
working capital is supporting sales.
In general, a low ratio may indicate an inefficient use of working capital; that is,
you could be doing more with your resources, such as investing in equipment.

A high ratio can be dangerous, since a drop in sales, which causes a serious cash
shortage, could leave your company vulnerable to creditors.

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