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RATIO ANALYSIS
Contd.
A low ratio may indicate that a firm may not be able to pay its
obligations on time. A high ratio may possibly a failure to
properly utilise the firms resources.
Current assets Inventories
Acid Test ratio =
---------------------------------Current liabilities Bank borrowings
This ratio concentrates on the immediately arising liabilities
and the highly liquid assets that will be used to meet these
obligations
A high quick ratio indicates that cash and / or receivables are
excessive, both possible signs of lax management
A low quick ratio indicates the possibility of difficulties in
prompt payment of bills in the near future.
RATIO ANALYSIS
Contd
Sales
Account receivables Turnover = ----------------------Accounts Receivables
A high ratio indicates a strict credit policy and aggressive
collection procedures.
A lower ratio indicates a large quantity of receivables and that
perhaps the firm is experiencing difficulties in collecting its
unpaid bills.
Accounts Receivables
Average Collection period = ---------------------------- x 365
Sales
This ratio indicates how many days it took to accumulate the
account receivables.
RATIO ANALYSIS
Contd
ROFITABILITY RATIOS :
Operating Profit(EBIT)
Profit margin ratio
=
-------------------------Sales
This ratio indicates the overall operational efficiency of the firm
to withstand adverse conditions, which may arise from several
sources such as, falling prices, rising costs, and declining sales.
Goss Profit
Gross profit margin ratio = ----------------Sales
(Gross profit = Sales cost of Sales)
It indicates the relation between production costs and selling
price.
RATIO ANALYSIS
Contd
Sales
Asset turn over Ratio =
-------------Total Assets
High ratio indicates, Increasing profits
Operating profit (EBIT)
Return on Investment
=
---------------------------Assets
A high ratio indicates efficient use of the assets and managements
skill
Leverage Ratios:
These are also called capital structure ratios,
indicate the long-term financial position of the firm and the relative
position of debt and equity in the financial structure of the firm
RATIO ANALYSIS
Contd
Debt Equity Ratio: Two version of the ratio are:
Term Liabilities
Total outside liabilities
Debt Equity Ratio =(i) ------------------ (ii)------------------------Tangible Net worth
Tangible Net worth
Should be 3:1 upto 10 lakh & 2:1 above 10 lakh
Total outside liabilities
Debt Assets Ratio
= ---------------------------------Total Assets
A high ratio represents a great risk to creditors.
A low ratio represents security to creditors.
RATIO ANALYSIS
Contd
RATIO ANALYSIS
Contd
Cash flow coverage ratio:
This ratio is a wider measure of the debt servicing ability as it
considers both the interest and the principal repayment
obligations
Cash flow coverage ratio =
=
Earning before Interest & tax + Depreciation
Debt interest
+ Repayment of loan
1 - Tax rate
The ratio can be calculated including other fixed changes like base
payments and preference dividend.
RATIO ANALYSIS
Production costs
High/ Low
Assets
How many
Idle ?
affect
Contd
Sales
Adequate
Interest
is it excessive
affect
explains
Selling price
Asset Turnover
Gross Profit
Margin
explains
explains
Profit
Margin
Return on
explains Investment
Return of
Equity
explains
Earning
Power
RATIO ANALYSIS
Contd.
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RATIO ANALYSIS
Contd.
11
RATIO ANALYSIS
Contd.
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