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Ratio analysis



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Ratio analysis

  1. 1. Ratio Analysis Presented By: Akash Sharma, Chandni Sharma, Indu Tanwar, Neha Jain and Yash Hurket Students, PGDM 12-14, IILM AHL, Jaipur
  2. 2. Introduction
  3. 3. Ratio Analysis • Ratio-analysis means the process of computing, determining and presenting the relationship of related items and groups of items of the financial statements. They provide in a summarized and concise form of fairly good idea about the financial position of a unit. They are important tools for financial analysis. • Widely used tool of financial analysis • Make related information comparable • A ratio can be expressed as percentage, fraction or proportion.
  4. 4. Three types of comparisons •Trend Analysis •Inter-firm comparisons •Comparisons with standards or industry average
  5. 5. Turnover Ratios
  6. 6. DEBTORS TURNOVER RATIO : This is also called Debtors Velocity or Average Collection Period or Period of Credit given . (Average Debtors/Sales ) x 365 for days (52 for weeks & 12 for months) CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio, which determines the creditor payment period. (Average Creditors/Purchases)x365 for days (52 for weeks & 12 for months)
  7. 7. STOCK/INVENTORY TURNOVER RATIO : (Average Inventory/Sales) x 365 for days (Average Inventory/Sales) x 52 for weeks (Average Inventory/Sales) x 12 for months Average Inventory or Stocks = (Opening Stock + Closing Stock) ----------------------------------------- 2 This ratio indicates the number of times the inventory is rotated during the relevant accounting period
  8. 8. Capital Structure Ratios
  9. 9. Capital Structure Ratio The capital structure is how a firm finances its overall operations and growth by using different sources of funds. The important Capital structure Ratios are as under:- 1. Debt-to-equity ratio  It is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders.  Shows the extent to which shareholders' equity can fulfill a company's obligations to creditors in the event of a liquidation.
  10. 10. Debt-to-Equity Ratio-: Debt / Equity Where-: Debt=Long term debt +Debentures +Mortgage Loans + Outstanding Interest On Loans and debenture. Equity=Equity Share Capital(Paid up)+Preference Share Capital(Paid up)+Reserve And Surplus –Accumulated Losses Note-Equity is also known as net worth or share holder’s fund or Proprietor’s fund.
  11. 11. Current Ratios
  12. 12. Current Ratio : It is the relationship between the current assets and current liabilities of a concern. Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1 The ideal Current Ratio preferred by Banks is1.33 : 1
  13. 13. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities. The should be at least equal to 1. Quick Current Assets : Cash/Bank Balances + Receivables up to 6 months + Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities Example : Cash 50,000 Debtors 1,00,000 Inventories 1,50,000 Total Current Assets 3,00,000 Current Liabilities 1,00,000 Current Ratio = > 3,00,000/1,00,000 = 3 : 1 Quick Ratio = > 1,50,000/1,00,000 = 1.5 : 1