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Ratio AnalysisRatio Analysis
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Meaning of Ratio AnalysisMeaning of Ratio Analysis
It is a:It is a:
Technique of analysis and interpretationTechnique of analysis and interpretation
Only a means to better understand theOnly a means to better understand the
financial strength and weakness.financial strength and weakness.
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Steps for Ratio AnalysisSteps for Ratio Analysis
Selection of relevant data based on the objective of analysisSelection of relevant data based on the objective of analysis
Calculation of appropriate ratiosCalculation of appropriate ratios
Compare the RatiosCompare the Ratios
Interpr
etation of th
eRatiosInt
erpr
etation of th
eRatios
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Types of RatiosTypes of Ratios
RatiosRatios
LiquidityLiquidity
RatioRatio
CapitalCapital
structurestructure
RatioRatio
Activity/Activity/
TurnoverTurnover
RatioRatio
ProfitabilityProfitability
RatioRatio
Based onBased on
SalesSales
Based onBased on
Invst.Invst.
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Liquidity RatioLiquidity Ratio
Acid test Ratio = Quick AssetsAcid test Ratio = Quick Assets
Current LiabilitiesCurrent LiabilitiesWhereWhere
Quick Assets = Current AssetsQuick Assets = Current Assets S
tockS
tock Prepaid ExpPrepaid Exp
OROR
Cash (in hand)+ Cash (at Bank) + Debtors + B/RCash (in hand)+ Cash (at Bank) + Debtors + B/R
+ Short term invst.+ Short term invst.
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Capital Structure RatioCapital Structure Ratio
DebtDebt--Equity Ratio = DebtEquity Ratio = Debt
EquityEquity
OROR
Long term LoanLong term Loan
Sh. Holders FundSh. Holders FundWhere,Where,
Debt/Debt/ LongLong termterm LoanLoan == DebenturesDebentures ++ MortgageMortgage LoanLoan ++LoanLoan forfor moremore thanthan 55 yearsyears
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Proprietor Ratio = Share Holders FundProprietor Ratio = Share Holders Fund
Total FundTotal FundWhere,Where,
Shareholders Fund = Equity share Capital + PreferenceShareShareholders Fund = Equity share Capital + PreferenceSharecapital + Reserve and Surplus + P &L.capital + Reserve and Surplus + P &L.
Total Fund = Total Debt + Shareholders FundTotal Fund = Total Debt + Shareholders Fund
Capital Structure RatioCapital Structure Ratio
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Debt to total fund Ratio = Share Holders FundDebt to total fund Ratio = Share Holders Fund
Total FundTotal FundWhere,Where,
Debt/Debt/ LongLong termterm LoanLoan == DebenturesDebentures ++ MortgageMortgage LoanLoan ++ LoanLoan forfor moremore
thanthan 55 yearsyears
Total Fund = Total Debt + Shareholders FundTotal Fund = Total Debt + Shareholders Fund
Capital Structure RatioCapital Structure Ratio
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Activity RatioActivity Ratio
Stock Turnover Ratio= COGSStock Turnover Ratio= COGS
Avg. StockAvg. StockWhere,Where,
COGS = Cost of goods sold = Opening stock + PurchasesCOGS = Cost of goods sold = Opening stock + Purchases ClosingClosingStockStock
Avg. Stock = Opening Stock + Closing StockAvg. Stock = Opening Stock + Closing Stock
22
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Debtors Turnover Ratio= Net credit SalesDebtors Turnover Ratio= Net credit Sales
Avg. DebtorsAvg. DebtorsWhere,Where,
Net Credit Sales = Total SalesNet Credit Sales = Total Sales Cash SalesCash Sales Sales returnSales return
Average Debtors = Opening Debtors + Closing DebtorsAverage Debtors = Opening Debtors + Closing Debtors
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Debt Collection Period = 12 or 365Debt Collection Period = 12 or 365
DTRDTR
(in months or days respectively)(in months or days respectively)
Activity RatioActivity Ratio
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Activity RatioActivity Ratio
Creditors Turnover Ratio= Net credit PurchasesCreditors Turnover Ratio= Net credit Purchases
Avg. CreditorsAvg. Creditors
where,where,
Net Credit Purchases = Total PurchasesNet Credit Purchases = Total Purchases Cash PurchasesCash Purchases
Purchase returnPurchase return
Average Creditors = Opening Creditors + Closing creditorsAverage Creditors = Opening Creditors + Closing creditors
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Debt Payment Period = 12 or 365Debt Payment Period = 12 or 365CTRCTR
(in months or days respectively)(in months or days respectively)
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Profitability RatioProfitability Ratio (Based on Sales)(Based on Sales)
Gross Profit Ratio = Gross ProfitGross Profit Ratio = Gross Profit
Net SalesNet SalesWhere,Where,
Gross Profit = Net SalesGross Profit = Net Sales COGSCOGS
Net Profit Ratio = Net ProfitNet Profit Ratio = Net Profit
Net SalesNet Sales
where,where,Net Profit = Gross ProfitNet Profit = Gross Profit NonNon--operating Expensesoperating Expenses
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Return on Capital Employed =EBITReturn on Capital Employed =EBIT
Avg. Cap EmployedAvg. Cap EmployedWhereWhere
Avg. Cap. Employed= Opening + ClosingAvg. Cap. Employed= Opening + Closing
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OROR
= Closing= Closing C. Yr Profits after tax C. Yr Profits after tax
= Opening + C. Yr. Profit after tax= Opening + C. Yr. Profit after tax
Capital Employed= Equity share capital +Capital Employed= Equity share capital +
Preference share capital + all reserves + P&L +Preference share capital + all reserves + P&L +
Long term LoanLong term Loan Fictitious AssetsFictitious Assets
Profitability RatioProfitability Ratio (Based on Investment)(Based on Investment)
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Return on Shareholders Fund:Return on Shareholders Fund:
Return on total shareholders fund =Return on total shareholders fund =
N.P after interest and tax * 100N.P after interest and tax * 100Total shareholders FundTotal shareholders Fund
Return on Equity shareholders Fund=Return on Equity shareholders Fund=
Net profit after interest and tax * 100Net profit after interest and tax * 100
Equity shareholders FundEquity shareholders Fund
Profitability RatioProfitability Ratio (Based on Investment)(Based on Investment)
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Earning per share (EPS) =Earning per share (EPS) =
Net profitNet profit-- Div. on preference shareDiv. on preference share
Number of Equity sharesNumber of Equity shares
Dividend per share =Dividend per share =
Div paid to equity shareholderDiv paid to equity shareholder
Number of Equity sharesNumber of Equity shares
Profitability RatioProfitability Ratio (Based on Investment)(Based on Investment)
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Dividend pay out ratio =Dividend pay out ratio =
Dividend per shareDividend per share
Earning Per ShareEarning Per Share
Profitability RatioProfitability Ratio (Based on Investment)(Based on Investment)
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QUESTIONQUESTION