Question 2a: Discuss the importance of ratio analysis for inter-firm and intrafirmcomparisons including circumstances responsible for

its limitations .If any Answer: Ratio analysis implies the systematic use of ratios to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial position can be determined. With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio analysis is very useful in making inter-firm comparison as it helps to draw a comparison between the entities within the same industry or otherwise following the same accounting procedure. It provides the relevant financial information for the comparative firms with a view to improving their productivity & profitability. Ratio analysis helps in intrafirm comparison by providing necessary data. An interfirm comparison indicates relative position. It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible reasons of variations may be identified and if results are negative, the action may be initiated immediately to bring them in line. owever, in spite of being such a useful tool, it is not free from its limitations. A single ratio is of a limited use and it is essential to have a comparative study. !he base used for ratio analysis vi"# financial statements have their own limitations. Also, they consider only the $uantitative aspects of business transactions where as there are various other non$uantitative aspects such as $uality of work force which considerably affect profitability and productivity. Also, ratio analysis as a tool is also limited by changes in accounting procedures%policies.

Question 2b: Why do you understand by the term 'pay-out ratio' What factors are ta!en into consideration while determining pay-out ratio "hould a company follow a fi#ed pay-outratio policy Discuss fully. Answer: &ay-out Ratio means the amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio to determine what companies are doing with their earnings. It can be calculated as# A very low payout ratio indicates that a company is primarily focused on retaining its earnings rather than paying out dividends. !he pay-out ratio also indicates how well earnings support the dividend payment. !he lower the ratio, the more secure the dividend because smaller dividends are easier to payout than larger dividends. !he ma'or factor to be considered in determining the payout ratio is the dividend policy of the company. (oung, fast-growing companies are typically focused on reinvesting earnings in order to grow the business. As such, they generally sport low )or even "ero* dividend payout ratios. At the same time, larger, more-established companies can usually afford to return a larger percentage of earnings to stockholders. Also, another factor to be considered is the type

of industry in which the company is operating. +or e,ample, the banking sector usually pays out a large amount of its profits. -ertain other sectors like real estate investment trusts are re$uired by law to distribute a certain percentage of their earnings. +unds re$uirement of the company and its available li$uidity is another factor which is considered while determining the pay-out..ome companies prefer to follow a fi,ed payout ratio policy irrespective of the earnings made. !his is a welcome policy from the point of view of the investors. /ut, the company should take into account various important factors such as its need for future investment and growth, cash re$uirements and debt obligations.