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  • 8/10/2019 Ratio Analysis ( Buet)


    Financial Statement and Ratio


  • 8/10/2019 Ratio Analysis ( Buet)


    Financial Statement Analysis

    Financial Statement Analysis is the application of analyticaltools to financial statements and related data for business

    decisions. It involves transformingaccounting data into useful

    information. It provides us an effective and systematic basis for

    business decision. It gives an insight about the company's

    operating performance and financial health both to the internal

    and external users of financial information.

  • 8/10/2019 Ratio Analysis ( Buet)


    Standards for Comparison

    A) Intra-company: With in the company, the company can compare the financial performance of

    the current year ith in that of the previous year. For example, the turnover of

    !eximco "extile ltd. in #$$% can be compared ith that in #$$&.

    B) Inter-Company/Competitor:

    A company can compare its financial performance ith other companies in the

    industry. For example, the turnover of !eximco "extile ltd. in #$$% can be

    compared ith that of Suare "extile ltd. in the same year.

    C) Industry Average:

    Industry average can also provide standards for comparison. D) Guidelines (rules of thums):

    (eneral standards of comparison can develop from past experiences. Forexample) #)*is the standards for the current ratio or *)*for the uic+ ratio.

  • 8/10/2019 Ratio Analysis ( Buet)


    atio Analysis A ratio expresses a mathematical relationship beteen to uantities. It can be expressed

    as a percent, rate or proportion.

    Comparison done in the absolute measure does not alays give us a true picture. -oo+ at

    the folloing figure)

    Company Company /

    0et sales 1,$$,$$$ 2,$$,$$$

    0et 3rofit 1$,$$$ 11,$$$ Apparently, e tell that Company / has operating performance better than Company . !ut

    it is not. "a+e a loo+ at the folloing figure)

    Company Company /

    0et sales 1,$$,$$$ 2,$$,$$$

    0et 3rofit 1$,$$$ 11,$$$ 0et 3rofit to net sales *$4 2.514

    So ratio analysis expresses the relative si6e of one amount to another. !ased on ratio

    analysis, e see that Company 7s profit sounds better than Company /.

  • 8/10/2019 Ratio Analysis ( Buet)


    "ypes of atiosWe classify ratios under the folloing categories)

    -iuidity and 8fficiency




    Liquidity and Efficiency Ratio:

    -iuidity refers to the ability to meet short term obligations and efficiency refers to

    the ability of being productive in using the asset. :nder this section )

    a) Current ratio:

    "he current ratio measures the relationship beteen total current asset and total

    current liabilities at a specific date.

    Current Ratio= Current Asset / Current !iailities

    A high current ratio suggest a strong liuidity position. An excessively high ratio

    means the company has invested too much in current assets comparing to its

    current obligations.

  • 8/10/2019 Ratio Analysis ( Buet)


    Current Asset Composition Current -iabilities Composition

    Cash Accounts 3ayable

    Cash 8uivalent Current notes payable

    Short term investment Current portion of any long term debt

    Accounts eceivables Accrued 8xpenses

    3repaid 8xpenses Income "ax 3ayable

    9erchandise inventory

    B) "uic# $atio/ Acid test $atio:

    "he uic+ ratio is similar to the current ratio except that it is a mere stringent test of short term


    Quick Ratio= "uic# asset/ Current !iailities Quick Asset include)


    Short term investment

    Accounts eceivables

  • 8/10/2019 Ratio Analysis ( Buet)


  • 8/10/2019 Ratio Analysis ( Buet)


    !olvency/ Leverage/ "apital !tructure Ratio : Solvency refers to a company7s long run financial viability and its ability to

    meet long term obligations.

    a) Det $atio:

    >ebt ratio measures the portion of a company7s assets contributed by creditors.

    Debt Ratio = %otal !iailities / %otal Asset

    Companies are said to be highly leveraged if a large portion of their asset is

    financed by debt.

    ) 'uity $atio:

    8uity ratio measures the portion of a company7s assets contributed by its


    Equity Ratio = %otal 'uity/ %otal Asset

  • 8/10/2019 Ratio Analysis ( Buet)


    #rofitability Ratio: 3rofitability refers to a company7s ability to use its assets efficiently to

    generate revenues ? positive cash flos@. 3rofitability also refers to

    solvency. 3rofitability atio7s are)

    a) rofit *argin ratio:

    9easures the profitability of a company. 3rofit 9argin + (,et income / ,et &ales).

    0et Income < Income after Interest and "ax

    ) Gross *argin ratio:

    Gross Margin +( Gross *argin / ,et &ales).

    (ross 9argin < Sales Cost of (oods Sold

  • 8/10/2019 Ratio Analysis ( Buet)


    C) $eturn on asset ($0A) :

    elates income to total asset invested.

    BA< 0et income Average total asset

    Average "otal Asset+( 0pening total asset1 'nding total asset) /2

    d) $eturn on 'uity ($0'):

    eturn on euity is a fundamental test of euity.


  • 8/10/2019 Ratio Analysis ( Buet)


    e) Earning per sare)


  • 8/10/2019 Ratio Analysis ( Buet)



    "est of mar+et in vie of financial statement analysis measures the ability to

    generate positive mar+et expectations. 9ar+et measures are useful hen

    analy6ing companies having publicly traded stoc+. "hese mar+et measures

    use stoc+ price in their computation. Stoc+ price reflects hat the mar+et

    ?public@ expectations are for the company. :nder this section, e have)

    a@ 3rice 8arning atio.

    b@ >ividend /ield atio.

  • 8/10/2019 Ratio Analysis ( Buet)


    a) rice 'arning (') $atio:

    "he price earning ratio measures the relationship beteen the current

    mar+et price of the stoc+ and its earning per share. "he 38 ratio can be

    vieed as an indicator of investors expected groth and ris+ for a

    company's stoc+. A high groth rate suggest a high 38 ratio and a high

    level of perceived ris+ suggest a lo 38 ratio.

    38 atio< Current *ar#et price per share/ 'arning per share

    ) Dividend 4ield:

    "he dividend yield ratio measures the relationship beteen the dividend per

    share paid and the current mar+et price of the stoc+.

    >ividend /ield atio


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