Ratio Analysis

It is process of identifying strength and weakness in various area of

an organization with the help of ratios of relevant accounting
figures.
Ratio is the mathematical expression of relationship between two
figures and the expression may b either in the form of pure ratio
or percentage
Ratio Analysis involves four steps
Selection of relevant accounting data from financial
statement
Constructing ratios of related accounting figures
Comparing the ratio thus constructed with standard ratio
which may b the corresponding past ratio of the firm
Interpretation of ratio
Classification of
accounting Ratio
according to source

Balance sheet ratio

Profit& loss account ratio
Mixed ratio

According to different aspects of

firms operation
Liquidity
Long-term solvency
Efficiency or turnover ratio
Profitability ratio
Importance of Ratio analysis
Forecasting and planning
Budgeting
Evaluation of departmental activity
Communication
Measurement of efficiency in utilization of assets
Inter-firm comparison
Indication of liquidity position, long term solvency
position
Signal of corporate sickness
Balance sheet Ratios
Current ratio
Quick ratio
Cash ratio
Cash to current liability
Debt-equity ratio
Proprietary ratio
Profit &loss account ratio
Gross profit ratio
Operating ratio
Operating profit ratio
Net profit ratio
Interest coverage ratio
Current Ratio/working capital ratio

Current ratio =Current Assets/current liabilities

Factor affecting short term liquidity position

Type of business
Type of products
Reputation of the concern
Seasonal influence
Type of asset available
Quick ratio/Acid Test Ratio
Quick ratio= quick assets/quick liabilities

Quick asset=current asset-(inventory+prepaid exp)

Quick liability=current liabilities- bank O/D

Ideally quick ratio should be 1:1.

Cash ratio
Cash ratio=( cash+ marketable securities)/CL

Ideally cash ratio should be 1:2.

Turnover ratio(Activity Ratio)
Working capital turnover ratio=net sales/working capital
Inventory turnover ratio
a. Cost of good sold /average inventory
b. Net sales/ average inventory
. Debtor turnover ratio
= credit sales/(average debtor +Average B/R)

Debtors collection period=365/Debtor turnover ratio

. Creditors turnover ratio=credit purchase/( Avg. creditors+Avg B/P)

 Profitability Ratio
Gross profit ratio= gross profit/sales
=(sales-cost of good sold)/sales.
Operating ratio= operating cost+ cogs/sales
Operating profit ratio=operating profit/sales
= (sales-operating cost-cogs)/sales
Net profit ratio=Net profit after tax/sales
ROCE=EBIT/capital employed
Return on Net worth(RONW) Or ROE =PAT/(equity capital+ reserve &
surplus -fictitious asset)
Profitability ratio
Earning per share= (net profit after tax- preference
dividend)/ no. of equity shares
Dividend Yield ratio=dividend per share/market value
per share
Price Earning ratio=market price per share/EPS
Dividend pay-out ratio=dividend per share/earning per
share.
Long-term financial position
Debt-equity ratio
Proprietary ratio=shareholders wealth/total asset
Interest coverage ratio(debt service)=EBIT/fixed interest charges
Debt service coverage ratio= (NPAT+ depreciation+ interest on long-term
loan)/(interest on Long Term Loan+instalments of long term loan)
Fixed Asset turnover ratio = Sales /Fixed Asset
Asset Turnover= Sales/Total Asset
Valuation Ratio
EV/EBIDTA
EV=Enterprise Value= Market capitalization+Debt- Cash
Market capitalization= CMP* no. of share
EV/sales
Book value= Net worth /no. Of share
PEG=PE/earning growth
 DuPont Analysis
DuPont Analysis
integrates the important ratios to analyse a firm's profitability.
PBIT Sales PBIT
RONA=
Net Assets Net Assets Sales
PAT Sales PBIT PAT Net Assets
ROE
Net Worth Net Assets Sales PBIT Net Worth
ROE Assets turnover Margin Leverage

16
Du Pont
Analysis
 Ratio for Banking company

Credit / Deposits = (Total Advances / Total Deposits) * 100

Investments / Deposits = (Total Investments / Total Deposits) * 100

Cash / Deposits = (Cash & Bank Balance / Deposits) * 100

Interest Exp / Interest Earned = (Interest Expended / Interest Earned) * 100

Other Inc. / Total Inc. = (Other Income / Total income) * 100