Essentials for Ratio Analysis

Ratio analysis is the calculation and comparison of ratios which are derived from the
information in a company's financial statements. Financial ratios are usually expressed
as a percent or as times per period.

a) Liquidity Ratios
Liquidity ratios measure a firm’s ability to meet its current obligations.
These include:

• Current Ratio
• Acid Test Ratio
• Working capital

b) Leverage Ratios
Leverage ratios measure the degree of protection of suppliers of long term funds.
These include:
• Times Interest Earned
• Debt Ratio
• Debt / Equity Ratio
• Debt to Tangible Net worth Ratio
• Total Capitalization Ratio

c) Profitability Ratios
Profitability ratios measure the earning ability of a firm.
These include:
• Net Profit Margin
• Return on Assets
• DuPont Return on Assets
• Operating Income Margin
• Return on Operating Assets
• Return on Total Equity
• Gross Profit Margin

d) Activity Ratios
Activity ratios measure a firm's ability to convert different accounts within their
balance sheets into cash or sales.
These include:
• Total Assets Turnover
• Fixed Assets Turnover
e) Market Ratios
Market ratios are commonly used by the investors to assess the performance of a
business as an investment and also the cost of issuing stock.
These include:
• Dividend per share
• Earning per Share
• Price/Earning Ratio

Presentation of Ratio Analysis

Ratio analysis is a very important part of your internship report and should be
presented properly.

Follow the below given format:

Name of the ratio

Formula

Step 1: Show the table as given below:

Year 20XX Year 20XX Year 20XX

Show the amounts
in numerator and
denominator and
then the final
result. i.e.
XXX\YYY
= ZZ

Step 2: Working
After the table show how you have calculated the amounts given in numerator and
denominator (for those items that require calculations).

Step 3: Graphical Presentation of Ratio/Trend Analysis

Plot the calculated ratio results on graph. You can use Bar chart or Line chart for
graphs. Do not use Pie chart.

Step 4: Interpretation
In this section interpret the graph shown above and explain that what are the
reasons/factors for decreasing or increasing trend of this ratio i.e. you have to explain
that why it has been increased or decreased over the three years.
Note:
You have to follow the same format for all the ratios that you will calculate. This
format will cover Ratio analysis and Trend analysis as in trend analysis ratios are
plotted on graphs to show the increasing\decreasing trends. So by following the
above format you will do both these analyses.
Remember, without formulas, working, graphs and interpretations your
analysis will NOT be accepted.

Instructions:
• You must provide scanned copies of all the financial statements used for
financial analysis. However, if you have downloaded the financial statements
from organization’s website then URL or web link should be provided. In this
case, scanned copies will not be required. Without providing the scanned
copies or URL of the organization’s website, your work will NOT be
accepted /evaluated.
Scanned copied should be provided in the following format:
Resolution: 200 dpi
File type: JPEG
Size: 300-400 kb
• You must perform complete financial statements analysis of the company for
the most recent three years.
• You are required to calculate/analyze all the 20 ratios mentioned above.
Skipping any calculation ratio of the above mentioned is NOT allowed.
All these ratios have been taught to you under the subject of Financial
Accounting (MGT101), Financial Statement Analysis (FIN621) and
Investment Analysis & Portfolio Management (FIN630). So consult handouts
and reference books of these courses to get help about ratios and their
formulas.
• You can get financial reports from Stock exchanges, company or from
company’s website.

Non Availability of Financial Statements for Ratio Analysis

All those students who are facing difficulty in conducting ratio analysis due to non
availability of the organization’s financial statements are required to discuss this issue
with their Course Instructor via email at: Fini619@vu.edu.pk. They will be given
guidance about how to resolve this issue as ratio analysis is a very important part of
internship report and skipping this part will NOT be accepted at all.