ratio analysis-b.v.raghunandan
DESCRIPTION
deals academically with the ratio analysis, their benefits, demerits and the formulae for computation of various ratiosTRANSCRIPT
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Ratio Analysis
B.V.Raghunandan,SVS College,
Bantwal-KarnatakaIndia
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Meaning of Ratio Analysis
• It is an analysis of strength and weakness of an organisation by establishing the quantitative relation among the items of Balance Sheet or Income Statement of such an organisation
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Purpose/Importance/Advantages• Analysis of financial Position• Simplification of Accounting Figures• Assessment of Operational Efficiency• Determining Trends in the long-run• Identification of Strength & Weakness• Taking Remedial Measures• Comparison of Performance
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Limitations of Ratio Analysis
• Based on Historical Data• Change in Real Value of Monetary Unit• No Standard Interpretation• Ignoring Qualitative Aspects• Difference in Accounting Methods make
comparison difficult• Ambiguity in Terms Used
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Classification of Ratios A. Liquidity Ratios
B. Solvency Ratios
C. Activity Ratios
D. Profitability Ratios
E. Shareholders' Ratios
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A. Liquidity Ratios
• Used to study the ability of the organisation in meeting short-term payments or obligations
• Includes: 1) Current Ratio, 2) Acid Test Ratio and 3) Working Capital Turnover Ratio
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1) Current Ratio
• Relation between current assets and current liabilities
• Long Term Sources Financing the Current assets give a stable base for the liquidity of the organisation
• Normally , the ratio should not be less than 2 i.e., the current assets should be double the size of current liabilities
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Measurement of Current Ratio
Current Ratio = bilitiesCurrentLiaetsCurrentAss
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2) Acid Test Ratio/Quick Ratio
• It is the ratio between quick assets and quick liabilities
• Quick assets include current assets except inventory and pre-paid expenses
• Quick liabilities include current liabilities other than bank overdraft
• A 1:1 ratio is healthy• Healthy indicator of cash management
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Measurement of Acid Test Ratio
Acid Test Ratio =
litiesQuickLiabisQuickAsset
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3) Working Capital Turn-over Ratio
• Shows the efficiency of usage of working capital
• Relation between Sales and Working Capital
• Determination of number of times the working capital is turned over to achieve the maximum profit
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Measurement of Working Capital Turnover Ratio
lkingCapitaAverageWorNetSales
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B. Solvency Ratios
• Measure long-term liquidity ratio• Reflect the ability of the firm to pay interest
and repayment of loans at due dates on the long-term loans taken
• Avoidance of over-borrowing (over-leverage)
• Avoidance of bankruptcy by maintaining healthy solvency ratios
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Types of Solvency Ratios
1) Interest Coverage Ratio
2) Debt Ratio3) Debt-Equity Ratio4) Capital Gearing
Ratio5) Proprietary Ratio
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1.Interest Coverage Ratio
TermDebtLongInterestonTaxInterestofitBefore
&Pr
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2. Debt Ratio (Debt to Total Funds ratio)
rsFundsShareholdeLTDebtLTDebt
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3) Debt-Equity Ratio
rsFundsShareholdebtLongTermDe
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4) Capital Gearing Ratio
ndeholdersFuEquitySharcuritieseBearingSeFixedIncom
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5) Proprietary Ratio
sTotalAssetrsFundsShareholde
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C] Activity Ratios
1) Inventory Turnover Ratio2) Debtors Turnover Ratio3) Average Collection Period4) Fixed Assets Turnover Ratio5) Total Assets Turnover Ratio6) Capital Turnover Ratio
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1) Inventory Turnover Ratio
ckAverageStosSoldCostofGood
ckAverageStosSoldCostofGood
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2) Debtor Turnover Ratio
torsAverageDebsCreditSale
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3) Average Collection Period
overRatioDebtorTurnmonthsaYearday )(12/)sin(365
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4) Fixed Assets Turnover Ratio
setsNetFixedAsNetSales
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5) Total Assets Turnover Ratio
sTotalAssetNetSales
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6) Capital Turnover Ratio
TermFundsLongNetSales
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D] Profitability Ratios
1) Net Profit Ratio
2) Gross Profit Ratio
3) Return on Total Assets
4) Return on Equity
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1) Net Profit Ratio
100Pr XNetSales
axofitAfterT
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2) Gross Profit Ratio
100Pr XSales
ofitGross
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3) Return on Total Assets
100Pr XsTotalAssetaxofitAfterT
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4) Return on Equity
100'
Pr XFundsrsShareholdeaxofitAfterT
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E) Shareholders‘ Ratio
1) Earning per Share (EPS)
2) Price-Earning Ratio (PE Ratio)
3) Dividend Yield Ratio 4) Dividend Pay-out
Ratio
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1) Earning per Share
uitySharesNumberofEqaxofitAfterTPr
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2) PE Ratio
ShareEarningpereiceperSharMar Prker
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3) Dividend Yield Ratio
100Pr
XeiceperSharMarket
rShareDividendpe
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4) Dividend Pay-out Ratio
100XShareEarningperrShareDividendpe
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THANK YOU