Professional Documents
Culture Documents
RATIO ANALYSIS
Ratio analysis is the powerIul tool oI Iinancial statements analysis. A ratio is deIined as
the indicated quotient oI two mathematical expressions and as the relationship between
two or more things. The absolute Iigures reported in the Iinancial statement do not
provide meaningIul understanding oI the perIormance and Iinancial position oI the Iirm.
Ratio helps to summaries large quantities oI Iinancial data and to make qualitative
judgment oI the Iirm`s Iinancial perIormance.
Ratio analysis helps to appraise the Iirms in the term oI their proIitability and eIIiciency
oI perIormance, either individually or in relation to other Iirms in same industry. Ratio
analysis is one oI the best possible techniques available to management to impart the
basic Iunctions like planning and control. As Iuture is closely related to the immediately
past, ratio calculated on the basis historical Iinancial data may be oI good assistance to
predict the Iuture. E.g. On the basis oI inventory turnover ratio or debtor s turnover ratio
in the past, the level oI inventory and debtors can be easily ascertained Ior any given
amount oI sales. Similarly, the ratio analysis may be able to locate the point out the
various areas which need the management attention in order to improve the situation. E.g.
Current ratio which shows a constant decline trend may be indicate the need Ior Iurther
introduction oI long term Iinance in order to increase the liquidity position. As the ratio
analysis is concerned with all the aspect oI the Iirm`s Iinancial analysis liquidity,
solvency, activity, proIitability and overall perIormance, it enables the interested persons
to know the Iinancial and operational characteristics oI an organization and take suitable
decision.
Current Ratio:
Current Ratio is the indicator oI the Iirm`s commitment to meet its short-term liability.
Current Assets mean assets that will either be used up or converted into cash within a
year`s time. Current liabilities mean liabilities payable within a year or during the
operating cycle, whichever is longer.
Current assets
Current ratio
Current liabilities
Interpretation:
From the above table, last three consecutive years Irom 2008-2010 Marico shows a
positive note with good Iinancial health. But in 2011 It has gone worst to a decrease in
0.1 Irom the standard Iixed Ior a company. It is inIerred that in the current year 2011
the result is negative below 1, and is unable to meet to pay oII its obligations iI they come
due at this point. . While this shows the company is not in good Iinancial health, it does
not necessarily mean that it will go bankrupt - as there are many ways to access Iinancing
but it is deIinitely not a good sign.
Year Ratio (times)
2007 0.90
2008 1.33
2009 1.28
2010 1.35
2011 0.99
"uick Ratio:
The Quick ratio is also termed as 'Acid-Test Ratio. This ratio is ascertained by
comparing the liquid assets (i.e., assets which are immediately convertible in to cash
without much loss) to current liabilities. Prepaid expenses and stock are not taken as
liquid assets. This may be expressed as:
Quick Assets
Quick Ratio
Current Liabilities
Interpretation:
From the above table Ior the last 4 years Irom 2008-2011 the Iinancial strength oI the
company is very much accepted. As the ratio shows the strength oI a company to pay
short term obligations. Since we subtracted current inventory, it means that Ior every
Rupees oI current liabilities there are 1.70 oI easily convertible assets are holded. In
general, a quick ratio oI 1 or more is accepted by most creditors; however, quick ratios
vary greatly Irom industry to industry.