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In Tor Duct Ion

In Tor Duct Ion

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Published by: Tej Pratap Singh Solanki on Aug 14, 2010
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10/25/2012

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INTRODUCTION
OBJECTIVE:
To understand the information contained in financial statements with aview to know the strength or weaknesses of the firm and to make forecast aboutthe future prospects of the firm and thereby enabling the financial analyst totake different decisions regarding the operations of the firm.
RATIO ANALYSIS:
Fundamental Analysis has a very broad scope. One aspect looks at thegeneral (qualitative) factors of a company. The other side considers tangibleand measurable factors (quantitative). This means crunching and analyzingnumbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results.Ratio analysis isn't just comparing different numbers from the balancesheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy ingeneral. Ratios look at the relationships between individual values and relatethem to how a company has performed in the past, and might perform in thefuture.
MEANING OF RATIO:
A ratio is one figure express in terms of another figure. It is amathematical yardstick that measures the relationship two figures, which arerelated to each other and mutually interdependent. Ratio is express by dividingone figure by the other related figure. Thus a ratio is an expression relating onenumber to another. It is simply the quotient of two numbers. It can be expressedas a fraction or as a decimal or as a pure ratio or in absolute figures as “ so
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many times”. As accounting ratio is an expression relating two figures or accounts or two sets of account heads or group contain in the financialstatements.
MEANING OF RATIO ANALYSIS:
Ratio analysis is the method or process by which the relationship of items or group of items in the financial statement are computed, determinedand presented.Ratio analysis is an attempt to derive quantitative measure or guidesconcerning the financial health and profitability of business enterprises. Ratioanalysis can be used both in trend and static analysis. There are several ratiosat the disposal of an annalist but their group of ratio he would prefer dependson the purpose and the objective of analysis.While a detailed explanation of ratio analysis is beyond the scope of thissection, we will focus on a technique, which is easy to use. It can provide youwith a valuable investment analysis tool.This technique is called
cross-sectional analysis
. Cross-sectional analysiscompares financial ratios of several companies from the same industry. Ratioanalysis can provide valuable information about a company's financial health. Afinancial ratio measures a company's performance in a specific area. Foexample, you could use a ratio of a company's debt to its equity to measure acompany's leverage. By comparing the leverage ratios of two companies, youcan determine which company uses greater debt in the conduct of its business.A company whose leverage ratio is higher than a competitor's has more debtper equity. You can use this information to make a judgment as to whichcompany is a better investment risk.However, you must be careful not to place too much importance on one ratio.You obtain a better indication of the direction in which a company is movingwhen several ratios are taken as a group.
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OBJECTIVE OF RATIOS
Ratio is work out to analyze the following aspects of business organization-A)Solvency-1)Long term2)Short term3)ImmediateB)StabilityC)ProfitabilityD)Operational efficiencyE)Credit standingF)Structural analysisG)Effective utilization of resourcesH)Leverage or external financing
FORMS OF RATIO:
Since a ratio is a mathematical relationship between to or more variables/ accounting figures, such relationship can be expressed in different ways asfollows –
A] As a pure ratio:
For example the equity share capital of a company is Rs. 20,00,000 &the preference share capital is Rs. 5,00,000, the ratio of equity share capital topreference share capital is 20,00,000: 5,00,000 or simply 4:1.
B] As a rate of times:
In the above case the equity share capital may also be described as 4times that of preference share capital. Similarly, the cash sales of a firm are
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