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1.0 Ratio Analysis A financial ratio is a relationship of two values of financial statements. Ratios basically are mathematical expressions, which are calculated to derive certain conclusion. The ratio may be expressed as number of times, proportion or percentage. There are number of ratios, but which to consider for a particular type of analysis is left to the personal judgement of the analyst. As a matter of fact, all the ratios are for different purposes and have different objectives. The objectives of this chapter are to : explain the need for profitability and financial stability in both the short and long term; introduce ratios as a tool to investigate corporate performance, together with their strengths and weaknesses; illustrate the calculation of significant accounting ratios and discuss the interpretation of the results; classify ratios and examine the relationships between them; and 2.0 Uses of Ratios. Sr. No. 1 2 Ratios offer help in intra firm comparisons, industry comparison and also for inter-firm comparison. Financial position of the entity can be studied. 3.0 Limitations & problems of Ratio analysis: Sr. No. 1 2 Limitations Ratios are based on financial statements, so contain almost all of the deficiencies of those accounts. Some ratios are open for manipulation and need to be interpreted with care. E.g. stock levels may be kept artificially low at yearend, Inter-firm comparisons are faced with the problem that different organizations might use rather different accounting policies. E.g. depreciation methods etc. Detailed knowledge of a companys markets is seldom obtainable from the published accounts, but is extremely important for assessing future profitability. when comparing similar organizations operating Ratios are useful under similar conditions. Comparisons with different types of organizations can be misleading. There is a real danger that ratio analysis can lead to conclusions, which are over-simplified. e.g. high current ratio.

4.0 Sr. No. 1 2 3 4 Sr. No. 1.0 1.1 1.2 1.3 Type of Ratio Turnover Ratios Liquidity Ratios Profitability Ratios Solvency Ratios Ratios Turnover Ratios: Debtors Turnover Ratio Creditors Turnover Ratio. Inventory Turnover Ratio. Ratios Liquidity Ratios: Ratio Current Acid Test Ratio Super Quick Ratio Ratios Profitability Ratios: Gross Profit Ratio Net Profit Ratio Material cost ratio Expenses Ratios Return on Capital Employed (PF)

Types of Ratios.

Various ratios Debtors, Creditors, Inventory Current, Acid Test, Super Quick Gross profit, Net profit, ROTA, ROE, ROCE, PE Debt Equity, CGR,Interest coverage, DSCR Formula / Interpretation Average Debtors x 365 divided by Sales. Average Collection period. Average Creditors x 365 divided by Credit purchases. Average payment period. Average inventory x 365 divided by material cost Holding period of stock Formula / Interpretation Current Assets / Current Liabilities. Quick Assets / Quick liabilities. Ab. Quick Aseets / Quick liabilities Formula / Interpretation

Sr. No. 2.0 2.1 2.2 2.3 Sr. No. 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Sr. No. 4.0 4.1 4.2 4.3 4.4

Gross profit / Net sales x 100 Net profit / Net sales x 100 Material cost / Net sales x 100 Expenses / Net sales x 100 EBIT / Net Capital employed (PF) x 100

Return on EAT / Net Worth X 100 Net Worth Return on Total EBIT / Total Assets (Excluding Fictitious Assets) Ratios Formula / Interpretation Solvency Ratios: Debt Equity Ratio Total Outside Debt / Equity or Shareholders Funds. Proprietary Ratio Proprietors funds /Total Assets x 100 Interest PBIT / Fixed interest charges coverage Debt coverage PATID / (Interest + Repayment installments)