RATIO ANALYSIS

1. 2. 3. = LIQUIDITY RATIOS Ability to pay (short term solvency) Current ratio = Current assets Current liabilities Quick ratio = Current assets - stock Current liabilities- bank 0/d Absolute liquid ratio Cash + bank+ Short term Investments Current liabilities

Solvency ratios( capital structure ratios, leverage ratios)

To judge long term solvency Terminology Capital employed = equity + reserves+ preference + debentures+ loans Networth = equity + reserves Long term debt (LTD) = debentures + loans Short term debt = current liabilities

1. 2. 3. 4. 5.

Debt equity ratio = Long term debt Networth + Preference Debt to cap emp = Long term debt capital employed Proprietary ratio= Networth total assets Fixed assets ratio = Fixed assets Capital employed Capital gearing ratio = fixed payment sources non- fixed payment sources

6. Interest coverage ratios = EBIT Interest 7. Preference dividend coverage ratio= = PAT Preference dividend

PROFITABILITY RATIOS
Profits are compared to sales and capital to know the rate of return
1. Gross profit ratio = Gross profit x 100 sales 2. Net profit ratio = net profit x 100 sales 3. Operating profit ratio = Operating profit x sales

100

4. ROI ( ROCE) = EBIT x 100 capital employed 5. ROE = (PAT Pref div) x 100 Networth 6. ROA = PAT x 100 total assets 7. EPS = PAT - Preference div Number of equity shares 8. DPS = total dividend number of equity shares

Valuation ratios
EPS x 100 market price of share 2. Dividend yield = DPS x 100 market price of share 3. Price -Earning ratio= Market price of equity EPS 1. Earning yield =

TURNOVER RATIOS
Assets and liabilities are compared to the turnover( sales) to know the efficiency in utilization. 1.Capital turnover= sales capital employed 2.Working Cap turnover= sales working capital 3.Fixed assets turnover= sales fixed assets

4.Debtors turnover= Credit sales Debtors 5. Average collection period = 12 months or 365 days Debtors turnover 6.Creditors turnover= Credit purchases creditors 7. Average Payment period = 12 months or 365 days creditors turnover 8. stock turnover= Cost of goods sold Average stock 9. Inventory holding period = 12 months or 365 days stock turnover

Expense ratios
1. 2. 3. 4. Expenses are compared to sales COGS ratio = COGS x 100 sales OPerating exp ratio = admin+selling x 100 sales Operating ratio = COGS + op exp x 100 sales Financial exp ratio= int + tax x 100 sales

Uses of ratios
To know the financial position of the business To compare position with past years through Trend analysis To compare position with competitors through inter firm comparison To compare position with industry through industry analysis To take strategic decisions To predict bankruptcy

Limitations of ratios
Dependent on financial statements Reasons are important Only positions on 31 st march considered Problems in interfirm comparison Difference in conceptual understanding