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RATIO ANALYSIS

Objective of

Ratio to be Computed

 

Formula

 

Standard

 

Points for Comments

 

Analysis

   

Ratio

Actual Ratio

Higher than

Lower than Standard

     

Standard

1. Immediate

Quick Ratio

Quick Assets

 
QA QL
QA
QL

1 :

1

Rs. XX of liquid assets available for each Rs of quick liability.

1. Very good day to- day liquidity /solvency.

1. Unsatisfactory day- to-day liquidity/Solvency.

Liquidity

Quick Liabilities

 
 

2. Idle cash balance.

2. Low cash balances.

 

3. Under-investment.

3. Over-investments

2.1

Short-term

(A)

 

2 :

1

Rs. XX of current assets available for each Rs. Of current liability.

1. Very good short term liquidity /solvency.

1. Unsatisfactory short term liquidity / solvency.

Liquidity

Current Ratio

Current Assets Current Liabilities

 
CA CL
CA
CL
 
 

2. Excess stocks, bad debts, idle cash.

2. Shortage of stocks, less credit sales.

 

3. Under-trading.

Shortage of cash.

3. Over-trading.

2.2

Liquidity of

(B)

 

100 %

% of WC blocked in stocks

1. More other current assets available to pay current liabilities.

1. Less other current assets available to pay current liabilities.

Stock

Stock Working

Stock

x 100

Capital

Working Capital

 
CST WC
CST
WC

x 100

   
 

(C)

COGS

Company

Stock Holding Period is xx.

1. Stock is sold out fast.

1. Stock is sold out at a slow speed.

Stock Velocity

Average Stock

 

Standard

COGS

 

2. Same volume of sales from less stocks.

2. Same volume of sales from more stocks.

OST + CST

 

2

3. More sales from same stocks.

3. Less sales from same stocks.

4. Working Capital requirement is less

4. Working capital requirement is

         

5. Too high ratio shows stock-outs or over trading.

more.

5. Too low ratio shows obsolete stocks or under- trading.

2.3

Liquidity of

(D)

Debtors + B.R Daily Credit Sales

Normal credit

Debt collection period is XX.

1. Debts are collected at a slow speed.

1. Debts are collected fast.

Debtors

Debtors’

allowed

Velocity

   

2. Less credit is

DR

+ BR

2. More credit is given to debtors.

given to debtors.

CRS

 

3. Less chances of

 

3. More chances of bad debts.

bad debts.

2.4

Liquidity of

(E)

Creditors

Creditors + B.P Daily Credit Purchases

Company

Debt Payment Period is XX.

1. Creditors are paid late.

1. Creditors are paid fast.

Creditors

Velocity

Standard

CD

+ BP

 

2. More credit is available from creditors.

2. Less credit is available from creditors.

CRP

 
 

3. Working capital requirement is less.

3. Working capital requirement is more.

3. Long term Solvency & Stability

(A)

Proprietor’s Funds Total Assets

x 100

65% to 75%

% of total assets financed by owner’s funds.

1. Very good solvency position

1. Unsatisfactory solvency position.

Proprietory

Ratio

PF

x 100

2. No trading on equity.

2. Trading on equity.

 

TA

 
 

(B)

Debt-

Borrowed Funds Proprietors’ Funds

2 : 1

Rs. X obtained from debt, for each Rs. 1 from shareholders.

1. Low safety margin for lenders.

1. High safety margin for

Equity Ratio

 

2. More interest payments

lenders.

BF

2. Less interest

PF

 

3. Less scope more loans.

payments.

3. Scope for more

4. Trading on equity.

loans.

           

4. No trading on equity.

4. Operating or trading efficiency

(A)

Gross

G.P

x 100

 

Company

1. Margin of Rs.

1. High efficiency in managing purchases,

1. Low efficiency in managing purchases, production, labour, sales and inventory.

Profit Ratio

Net Sales

Standard

Xx

on sale of

 

Rs. 100.

 

GP

2. Rs. Xx is available to meet other expenses.

production, labour, sales and inventory.

S

x

100

 

2. High productivity.

2. Low productivity.

 

3. Large amount available to meet other expenses.

3. Small amount available to meet other expenses.

 

(B)

Operating

COGS + Opening Exp. Net Sales

x 100

Company

1. Operating cost

1. Low efficiency in managing purchases,

1. High efficiency in managing purchases, production, labour, sales and inventory.

Ratio

Standard

of

Rs. xx on

 

sale of Rs. 100.

COGS + OE

x 100

2. Rs. (100 xx) is

production, labour, sales and inventory.

 

S

the

operating

 

profit.

2. Low productivity.

2. High productivity.

3. Small amount available to meet other expenses.

3. Large amount available to meet other expenses.

 

(C)

Operating

Operating net Profit Net Sales

x 100

Company

1. Operating

1. Good control over direct and indirect

1. Less control over direct and indirect costs.

net Profit

Standard

margin of Rs.

Ratio

 

xx

on sale of

costs.

OP

x

100

Rs. 100.

2. High productivity.

2. Low productivity.

S

2. Rs. xx is available to meet non- operating expenses.

3. Large amount available to meet non-operating expenses/losses.

3. Small amount available to meet non-operating expenses/losses.

 

(D)

Expenses

Expenses

 

Company

1. Expense of Rs.

1. Less control on

1. Very good control

x 100

 

Ratio

Net Sales

 

Standard

xx

on sale of Rs

that expenditure.

on that expenditure.

 

100.

2. Low productivity.

2. High productivity.

AE or SE or FE

x 100

2. Rs. (100 xx) available to

3. Small profit available to meet other expenses.

3. Large profit available to meet other expenses.

 

S

 

meet other

expenses.

   
 

(E)

Net Profit

Net profit

Net sales

x 100

 

Company

1. Net margin of

1. Good control over all expenses.

1. Less control over all expenses.

Ratio

Standard

Rs. xx on sale

 

of

Rs. 100.

2. Unusual gains.

2. Unusual losses.

NPBT

2. Rs. xx is available for appropriate.

3. Large amount available for appropriate.

3. Small amount available for appropriate.

S

x 100

   

4. High increase in net worth.

4. Less increase in net worth.

5. Strong capacity to face bad economic situation.

5. Weak capacity to face bad economic situation.

5. Overdraft

(A)

Return on

N.P. (before int. & tax) Capital Employed

x 100

Company

1. Return of Rs. xx

1. Good profit ratios

1. Unsatisfactory profit ratios (less profit on each rupee of sales).

Profitability

Capital

Standard

on

each Rs. 100

(more profit on

Employed.

 

of

capital.

each rupee of

PBIT

x 100

2. Rs. xx is available for tax, interest and appropriations.

sales).

CE

2. Good turnover ratios (more sales on each rupee of asset used)

2. Unsatisfactory turnover ratios (less sales on each rupee of asset used)

 

3. Large amount for opportunities.

3. Small amount for opportunities.

4. High increase in net worth.

4. Low increase in net worth.

5. Scope to attract fresh funds from owners or lenders.

5. Less Scope to attract fresh funds from owners or

x 100

           

lenders.

 

(B)

Return on

N.P. (after tax) Proprietors’ Funds

x 100

 

Company

1. Return of Rs. xx on each Rs. 100 of owners funds.

1.

Large amount for appropriations.

1. Small amount for appropriations.

Proprietor’s

Standard

Fund

NPAT

x 100

2.

Scope to attract fresh funds from

2. Less scope to attract fresh funds from owners.

PF

2. Rs. xx is available for appropriations.

owners.

 

(C)

Return on

N.P. (after tax & Pref. Div.)

x 100

Company

1. Return of Rs. xx on each Rs. 100 of equity shareholders’ funds.

1. Large amount for appropriations.

1. Small amount for appropriations.

Equity Capital

Equity Cap. + Reserves

Standard

PAES

2. High increase in net worth.

2. Low increase in net worth.

EF

x 100

3. Scope to attract

3. Less scope to attract fresh funds from equity shareholders.

 

2. Rs. xx is available for appropriations.

 

fresh funds from equity shareholders.

4. High price for each equity share on stock exchange or in merger.

4. Low price for each equity share on stock exchange or in merger.

6. Capital

(A)

Capital

Pref. Capital + Debn. + Loan

 

Company

For every Rs XX from funds with fixed returns, Rs. 1 is from equity shareholders.

Higher returns for equity shareholders if rate of fixed returns is less than ROI.

Low returns / loss to equity shareholders if rate of fixed returns is more than ROI.

Structure

Gearing

Equity cap. + Reserves

Standard

PC + BF EF

 

(B)

Debt

Debt

2:1

Refer 3 (B)

Refer 3 (B)

Refer 3 (B)

Equity

Equity

 

(C)

Proprietoy

Proprietor’s Funds Total Assets

x 100

 

65% to 75%

Refer 3 (A)

Refer 3 (A)

Refer 3 (A)

Ratio

7.

Overtrading or

(A)

Proprietorss’ Funds Total Assets

 

100

Low ratio :

Refer 3 (A)

Refer 3 (A)

Refer 3 (A)

under trading

Proprietory

x

Overtrading; High ratio :

Ratio

 

Undertrading;

 

(B)

stock

Cost of goods sold Average Stock

 

Low ratio:

Refer 2.2 (C)

Refer 2.2 (C)

Refer 2.2 (C)

turnover

x

100

Overtrading; High ratio :

 

Undertrading;

 

(C)

Current

Current Assets Current Liabilities

 

Low ratio:

Refer 2 (A)

Refer 2 (A)

Refer 2 (A)

Ratio

Overtrading;

8.

Coverage

(A)

Dividend

Equity Dividend

x 100

 

Company

1. Rs. Xx is paid as dividend out of each Rs. 100 available for distribution

1. Very high dividends make short term equity shareholders very happy.

1. Very low dividends make short term equity.

 

Payout

Profit for Equity Shareholders

Standard

ED

x 100

2. Less scope to issue fresh equity shares.

PAES

2. Balance (100- xx) can be transferred to reserves.

2. Scope to issue fresh equity shares at high price.

3. Low price on stock exchange or in merger.

4. If transfers to

 

3. High price on stock exchange or in merger for equity shares.

reserves are more, it may mean high growth or bonus issue in future.

4. Less reserves may mean low growth in future and no bonus issue.

 

(B)

Interest

PBIT

Company

Earnings are xx times the Interest.

1. Strong capacity to pay interest as and when due.

2. Large balance

1. Weak capacity to pay interest as and when due.

2. Small balance

Coverage

Interest

Standard

 

profits left for tax, dividends.

profits left or tax, dividends.

3. Good scope to get more loans at low rate of interest.

3. Less scope to get more loans.

4. More loans only at

4. But less benefits of trading on equity, if assets are financed less by debt and more by

a high rate of interest.

5. But more benefits of trading on equity, if assets are financed more by debt and less by equity.