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14
Financial ratios are useful indicators of a firm's performance and financial situation. Financial ratios
can be used to analyze trends and to compare the firm's financials to those of other firms. Ratio
analysis is the calculation and comparison of ratios which are derived from the information in a
company's financial statements. Financial ratios are usually expressed as a percent or as times per
period. Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of
ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its
historical performance and current financial condition can be determined. The term ratio refers to the
numerical or quantitative relationship between two variables. With the help of ratio analysis
conclusion can be drawn regarding several aspects such as financial health, profitability and
operational efficiency of the undertaking. Ratio points out the operating efficiency of the firm i.e.
whether the management has utilized the firm’s assets correctly, to increase the investor’s wealth. It
ensures a fair return to its owners and secures optimum utilization of firm’s assets. Ratio analysis
helps in inter-firm comparison by providing necessary data. An inter firm comparison indicates
relative position. It provides the relevant data for the comparison of the performance of different
departments. If comparison shows a variance, the possible reasons of variations may be identified
and if results are negative, the action may be initiated immediately to bring them in line. Yet another
dimension of usefulness or ratio analysis, relevant from the View point of management is that it
throws light on the degree efficiency in the various activity ratios measures this kind of operational
efficiency.
A. Liquidity Ratios
B. Profitability Ratios
C. Market Ratios
D. Income over Expense Ratio
A) LIQUIDITY RATIOS
15
Liquidity ratios measure a firm’s ability to meet its current obligations. These include:
Advances to Deposit ratio:
This ratio shows the ratio of advance to deposits which means that how much
advances were made with respect to deposits.
Formula is
Advances to Deposit ratio = Total advances (in the year)
Total deposits (in the year)
1.1
0.87
1.01
0.7
0.77
2004
2005
2006
2007
2008
adv/dep ratio
Rupees in --- 000 ---
YEAR
2004
2005
2006
2007
2008
Advances
11,737,275 19,622,929 31,052,169
81,932,379
80,344,193
Deposits
10,648,570 22,554,274 30,566,540 116,671,219 104,586,167
Ratio
1.10
0.87
1.01
0.70
0.77
Interpretation
As we can see from the above graph that the net advances in 2008 are 80.34 billion which is 2%
less than the previous year. In reality the surge in advances is 5 billion but provision against non
advances this year. Advances in 2007 are the highest because of the loaning to the
commercial, consumers and SME sector.
Earning Assets to Assets ratio:
This ratio shows the relation between earnings assets and total assets. Earning assets
are those which directly contribute in earnings of a business.
The formula is
Earning Assets to Asset Ratio = Earning Assets
Assets
0.3
0.29
0.29
0.24
0.24
2004
2005
2006
2007
2008
Earning Assets to Asset Ratio
RUPEES IN --- 000 ---
YEAR
2004
2005
2006
2007
2008
Earning Assets 4,967,239
9,285,427
13,464,36
4
42,449,386
42,938,188
Total Assets
16,557,46
32,018,71
46,428,84
176,872,44
178,909,11
17
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can be used to analyze trends and to compare the firm's financials to those of other firms. Ratio
analysis is the calculation and comparison of ratios which are derived from the information in a
company's financial statements. Financial ratios are usually expressed as a percent or as times per
period. Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of
ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its
historical performance and current financial condition can be determined. The term ratio refers to the
numerical or quantitative relationship between two variables. With the help of ratio analysis
conclusion can be drawn regarding several aspects such as financial health, profitability and
operational efficiency of the undertaking. Ratio points out the operating efficiency of the firm i.e.
whether the management has utilized the firm’s assets correctly, to increase the investor’s wealth. It
ensures a fair return to its owners and secures optimum utilization of firm’s assets. Ratio analysis
helps in inter-firm comparison by providing necessary data. An inter firm comparison indicates
relative position. It provides the relevant data for the comparison of the performance of different
departments. If comparison shows a variance, the possible reasons of variations may be identified
and if results are negative, the action may be initiated immediately to bring them in line. Yet another
dimension of usefulness or ratio analysis, relevant from the View point of management is that it
throws light on the degree efficiency in the various activity ratios measures this kind of operational
efficiency.
A. Liquidity Ratios
B. Profitability Ratios
C. Market Ratios
D. Income over Expense Ratio