There are many standard ratios used to evaluate the overall financial condition of an enterprise. These ratios maybe used by managers within a firm, by current and potential shareholders and by a firm's creditors. Financial analyst use financial ratios to compare the strengths and weaknesses in various companies.
Python Notes for mca i year students osmania university.docx
Ratio Analysis in financial statements (KK MAHESH PU COLLEGE)
1.
2. RATIO ANALYSIS
KK MAHESH PU COLLEGE
BY
1.RAJKUMAR SHARMA
2.YASHASHWINI
3.ARUN NAYAK
4.NIKITH
GUIDED BY PROF D.S RAY
MCOM,MFM,MBA.
3. Ratio analysis is an accounting tool, which can be used to measure the solvency, the
profitability, and the overall financial strength of a business, by analysing its financial
accounts (specifically the balance sheet and the profit and loss account).
Accounting ratios are very easy to calculate and they enable a business to highlight which
areas of its finances are weak and therefore require immediate attention.
4. OBJECTIVES OF RATIO
ANALYSIS
1. To know the areas of an enterprise which need
more attention..
2. Helpful in comparative analysis of the
performance.
3. To provide analysis of the liquidity,solvency,
activity and profitability of an enterprise.
4. To provide information useful for making
estimates and preparing the plan for future.
6. 1) Debt Equity Ratio : It establishes the relationship between long term debts and
shareholders funds. The ideal ratio is 2:1.
Debt Equity ratio= Long term debts / Shareholder’s Funds
2) Proprietary Ratio: It establishes relationship between proprietors funds and total
assets.
Proprietary Ratio = Shareholder’s funds / Total Assets
The solvency ratio is a key metric used to measure an enterprise’s ability
to meet its debt obligations and is used often by prospective business
lenders. The solvency ratio indicates whether a company’s cash flow is
sufficient to meet its short-and long-term liabilities.
Solvency ratios
7. Solvency ratios (contd.)
3) Total Assets to Debt Ratio: It establishes relationship between total assets and
total long term debts.
Total Assets to Debt Ratio= Total Assets / Long Term Debts
4) Debt to Capital Employed Ratio: It refers to the ratio of long term debt to the
total of external and internal funds (capital employed or net assets)
Debt to Capital Employed Ratio = Long term Debts / Capital Employed
8. Solvency ratios (contd.)
5) Interest Coverage Ratio
It deals with the servicing of interest on loan. It expresses the relationship between
profits available for payment of interest and the amount of interest payable
ICR = Net profit before interest and tax / Interest on long – term debts
A higher ICR ensures safety of interest on debts. The ideal coverage ratio is 6 to 7
times.
9. The efficiency ratio is typically used to analyze how well a company
uses its assets and liabilities internally. An efficiency ratio can
calculate the turnover of receivables, the repayment of liabilities, the
quantity and usage of equity, and the general use of inventory and
machinery. This ratio can also be used to track and analyze the
performance of commercial and investment banks.
Efficiency ratios
Inventory Turnover Ratio = Cost of goods sold / Average Inventory
Asset Turnover Ratio= The asset turnover ratio measures a company's ability to
efficiently generate revenues from its assets. In other words, the asset turnover ratio
calculates sales as a percentage of the company's assets. The ratio is effective in
showing how many sales are generated from each rupee of assets a company owns.
10. Asset Turnover Ratio= Net Sales / Average Total Assets
Trade Receivables Turnover Ratio: This measures how effectively a company can actively collect its
debts and extend its credits.
Trade Receivables Turnover Ratio= Net Credit Sales / Average Trade Receivables
Efficiency ratios (contd.)
11. Profitability ratios are a class of financial metrics that are used
to assess a business's ability to generate earnings relative to
its revenue, operating costs, balance sheet assets,
and shareholders' equity over time, using data from a specific
point in time.
Profitability ratios
Gross Profit Ratio= Gross Profit / Net Sales *100
12. Net Profit Ratio: Specifically, net profit margin shows the percentage of profit your company
keeps from its sales revenue after all expenses (operating and non-operating) are paid.
Net Profit Ratio: Net Profit / Sales *100
Operating Profit Ratio: A company’s operating profit reveals how much revenue is left over after
it covers both COGS and operating expenses. The operating profit margin shows the percentage
of revenue that remains once these costs are deducted from your net sales.
Operating Profit Ratio: Operating Profit / Revenue *100
Profitability ratios (Contd.)
13. Operating ratio- operating ratio matches the operating cost to the net sales of the business. It is
calculate in order to calculate the operating efficiency of the concern.
Operating ratio= operating cost / net sales*100
return on capital employed- It measures the profit, which a firm earns on investing a unit of capital.
Return on capital employed= Net Profit before interest, tax and dividend/capital
employed*100
Return on equity- this ratio establishes the relationship between profit available to equity
shareholders with equity shareholders funds.
Return on equity= net profit before income tax/equity shareholder’s
funds*100
Profitability ratios (Contd.)
