Financial Statements Analysis

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FINANCIAL STATEMENTS ANALYSIS

Ratio Analysis

Common Size Statements Importance and Limitations of Ratio Analysis
© Tata McGraw-Hill Publishing Company Limited, Management Accounting

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Ratio Analysis

Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined.

© Tata McGraw-Hill Publishing Company Limited, Management Accounting

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Basis of Comparison
1) Trend Analysis involves comparison of a firm over a period of time, that is, present ratios are compared with past ratios for the same firm. It indicates the direction of change in the performance – improvement, deterioration or constancy – over the years. 2) Interfirm Comparison involves comparing the ratios of a firm with those of others in the same lines of business or for the industry as a whole. It reflects the firm’s performance in relation to its competitors. 3) Comparison with standards or industry average.
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Types of Ratios
Liquidity Ratios Capital Structure Ratios

Profitability Ratios

Efficiency ratios

Integrated Analysis Ratios

Growth Ratios
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000 1.Net Working Capital Net working capital is a measure of liquidity calculated by subtracting current liabilities from current assets. Management Accounting .000 Rs 30.00.00.000 6-6 © Tata McGraw-Hill Publishing Company Limited.000 Particulars Current assets Current liabilities NWC Company A Rs 1. Table 1: Net Working Capital Particulars Company A Company B Total current assets Total current liabilities NWC Table 2: Change in Net Working Capital Rs 1.000 25.20.000 20.00.000 60.000 Company B Rs 2.80.000 1.00.000 75.000 10.000 1.

Management Accounting 6-7 .Liquidity Ratios Liquidity ratios measure the ability of a firm to meet its short-term obligations © Tata McGraw-Hill Publishing Company Limited.

000 Rs 10.80.000 3:1 6-8 Particulars Current Assets Current Liabilities Current Ratio Firm A Rs 1.Current Ratio Current Ratio is a measure of liquidity calculated dividing the current assets by the current liabilities Current Ratio = Current Assets Current Liabilities Firm B Rs 30. Management Accounting .000 = 3:2 (1.20.000 Rs 1.5:1) © Tata McGraw-Hill Publishing Company Limited.

Management Accounting 6-9 .Acid-Test Ratio The quick or acid test ratio takes into consideration the differences in the liquidity of the components of current assets Quick Assets Current Liabilities Acid-test Ratio = Quick Assets = Current assets – Stock – Pre-paid expenses © Tata McGraw-Hill Publishing Company Limited.

10 .5 : 1 © Tata McGraw-Hill Publishing Company Limited.000 2:1 0.Example 1: Acid-Test Ratio Cash Debtors Inventory Total current assets Total current liabilities (1) Current Ratio (2) Acid-test Ratio Rs 2.000 8.000 2. Management Accounting 6 .000 12.000 16.

Supplementary Ratios for Liquidity Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio © Tata McGraw-Hill Publishing Company Limited.11 . Management Accounting 6 .

Inventory Turnover Ratio The ratio indicates how fast inventory is sold. Cost of goods sold Inventory turnover ratio = Average inventory The cost of goods sold means sales minus gross profit. A high ratio is good from the viewpoint of liquidity and vice versa. © Tata McGraw-Hill Publishing Company Limited.12 . The average inventory refers to the simple average of the opening and closing inventory. A low ratio would signify that inventory does not sell fast and stays on the shelf or in the warehouse for a long time. Management Accounting 6 .

00.00. What is the inventory turnover ratio? Inventory turnover ratio = (Rs 3. (6) © Tata McGraw-Hill Publishing Company Limited. Management Accounting 6 .000) ÷ 2 6 (times = per year) 12 months Inventory = = 2 months holding period Inventory turnover ratio.000) (Rs 35.000 and Rs 45.000 – Rs 60.000 with a gross profit margin of 20 per cent.000 + Rs 45. The stock at the beginning and the end of the year was Rs 35.Example 2: Inventory Turnover Ratio A firm has sold goods worth Rs 3.000 respectively.13 .

if any. A low ratio shows that debts are not being collected rapidly. from customers. Debtors turnover ratio = Net credit sales Average debtors Net credit sales consist of gross credit sales minus returns. © Tata McGraw-Hill Publishing Company Limited. Management Accounting 6 .14 . A high ratio is indicative of shorter time-lag between credit sales and cash collection.Debtors Turnover Ratio The ratio measures how rapidly receivables are collected. Average debtors is the simple average of debtors (including bills receivable) at the beginning and at the end of year.

Management Accounting 6 .000 (Rs 27.500) ÷ 2 = 12 Months Debtors turnover ratio.500 and Rs 32.500 + Rs 32. Debtors turnover ratio = Rs 2. Determine the debtors turnover ratio.15 .5 Months © Tata McGraw-Hill Publishing Company Limited.40.Example 3: Debtors Turnover Ratio A firm has made credit sales of Rs 2.000 during the year. (8) 8 (times = per year) Debtors collection period = 1.40.500. The outstanding amount of debtors at the beginning and at the end of the year respectively was Rs 27.

Returns to suppliers.Creditors Turnover Ratio A low turnover ratio reflects liberal credit terms granted by suppliers. Creditors turnover ratio = Net credit purchases Average creditors Net credit purchases = Gross credit purchases .16 . Management Accounting 6 . Average creditors = Average of creditors (including bills payable) outstanding at the beginning and at the end of the year. © Tata McGraw-Hill Publishing Company Limited. while a high ratio shows that accounts are to be settled rapidly. The creditors turnover ratio is an important tool of analysis as a firm can reduce its requirement of current assets by relying on supplier’s credit.

17 .500 respectively.500) ÷ 2 = 4 (times per year) = 12 months Creditors turnover ratio. Management Accounting 6 .000) (Rs 42.Example 4: Creditors Turnover Ratio The firm in previous Examples has made credit purchases of Rs 1. (4) = 3 months © Tata McGraw-Hill Publishing Company Limited. Find out the creditors turnover ratio. The amount payable to the creditors at the beginning and at the end of the year is Rs 42.500 and Rs 47.000.80. Creditors turnover ratio Creditor’s payment period = (Rs 1.80.500 Rs 47.

5 months – 3 months 0.18 . collections from debtors and payment to creditors.5 months As a rule. the shorter is the cash cycle. © Tata McGraw-Hill Publishing Company Limited. The cash cycle captures the interrelationship of sales. Management Accounting 6 . The combined effect of the three turnover ratios is summarised below: Inventory holding period Add: Debtor’s collection period Less: Creditor’s payment period 2 months + 1.The summing up of the three turnover ratios (known as a cash cycle) has a bearing on the liquidity of a firm. the better are the liquidity ratios as measured above and vice versa.

Management Accounting 6 .19 . Defensiveinterval ratio Liquid assets = Projected daily cash requirement Projected daily cash requirement = Projected cash operating expenditure Number of days in a year (365) © Tata McGraw-Hill Publishing Company Limited.DEFENSIVE INTERVAL RATIO Defensive interval ratio is the ratio between quick assets and projected daily cash requirement.

Determine the defensive-interval ratio. Projected daily cash requirement = Defensive-interval ratio = Rs 1.20 © Tata McGraw-Hill Publishing Company Limited. Management Accounting .500.000. It has liquid current assets amounting to Rs 40.500 365 Rs 40.000 Rs 500 = Rs 500 = 80 days 6 .82.82.Example 5: Defensive Interval Ratio The projected cash operating expenditure of a firm from the next year is Rs 1.

Cash-flow from operations ratio Cash-flow from operations Current liabilities = © Tata McGraw-Hill Publishing Company Limited. Management Accounting 6 .Cash-flow From Operations Ratio Cash-flow from operation ratio measures liquidity of a firm by comparing actual cash flows from operations (in lieu of current and potential cash inflows from current assets such as inventory and debtors) with current liability.21 .

there are two different types of leverage ratios.22 . Management Accounting 6 .Leverage Capital Structure Ratio There are two aspects of the long-term solvency of a firm: (i) Ability to repay the principal when due. Accordingly. and (ii) Regular payment of the interest . First type: These ratios are computed from the balance sheet Second type: These ratios are computed from the Income Statement (a) Debt-equity ratio (b) Debt-assets ratio (c) Equity-assets ratio (a) Interest coverage ratio (b) Dividend coverage ratio © Tata McGraw-Hill Publishing Company Limited. Capital structure or leverage ratios throw light on the long-term solvency of a firm.

the creditors would lose heavily.I. To the creditors. Debt-equity ratio measures the ratio of long-term debt + Other Current Total Debt Debt-equitytotal de3bt to shareholders equity Liabilities = Total external term or ratio = Shareholders’ equity Obligations If the D/E ratio is high. the owners are putting up relatively less money of their own. © Tata McGraw-Hill Publishing Company Limited. A low D/E ratio has just the opposite implications. a relatively high stake of the owners implies sufficient safety margin and substantial protection against shrinkage in assets. Management Accounting Long-term Debt + Short 6 . If the project should fail financially.23 . It is danger signal for the lenders and creditors. Debt-equity ratio Debt-equity ratio measures the ratio of long-term or total debt to shareholders equity.

24 .For the company also. Management Accounting 6 . the servicing of debt is less burdensome and consequently its credit standing is not adversely affected. The disadvantage of low debt-equity ratio is that the shareholders of the firm are deprived of the benefits of trading on equity or leverage. its operational flexibility is not jeopardised and it will be able to raise additional funds. © Tata McGraw-Hill Publishing Company Limited.

000 — 300 — 300 105 195 19.000 200 800 300 120 180 63 117 58.000 800 200 300 30 270 94. Management Accounting .35) Earnings after taxes Return on equity (per cent) A 1.Trading on Equity Trading on equity (leverage) is the use of borrowed funds in expectation of higher return to equity-holders.000 1.000 600 400 300 60 240 84 156 26 D 1.5 175.5 (Amount in Rs thousand) B 1. Trading on Equity Particular (a) Total assets Financing pattern: Equity capital 15% Debt (b)Operating profit (EBIT) Less: Interest Earnings before taxes Less: Taxes (0.5 6 .25 © Tata McGraw-Hill Publishing Company Limited.5 21.9 C 1.

Management Accounting 6 . Debt to Total Capital The relationship between creditors’ funds and owner’s capital can also be expressed using Debt to total capital ratio.26 . + © Tata McGraw-Hill Publishing Company Limited. Debt to total capital ratio = Total debt Permanent capital Permanent Capital = Shareholders’ equity Long-term debt.II.

Debt to total assets ratio Debt to total assets ratio = Proprietary Ratio Proprietary ratio indicates the extent to which assets are financed by owners funds.27 . debentures and other borrowed funds. © Tata McGraw-Hill Publishing Company Limited. Total debt Total assets Proprietary ratio = Capital Gearing Ratio Proprietary funds X 100 Total assets Capital gearing ratio is used to know the relationship between equity funds (net worth) and fixed income bearing funds (Preference shares. Management Accounting 6 .III.

28 © Tata McGraw-Hill Publishing Company Limited. Management Accounting . EBIT (Earning before interest and taxes) Interest Dividend coverage ratio = EAT (Earning after taxes) Preference dividend 6 . Interest coverage ratio = Dividend Coverage Ratio Dividend Coverage Ratio measures the firm’s ability to pay dividend on preference share which carry a stated rate of return.Coverage Ratio Interest Coverage Ratio Interest Coverage Ratio measures the firm’s ability to make contractual interest payments.

coverage ratios mentioned above. suffer from one major limitation. they relate the firm’s ability to meet its various financial obligations to its earnings.Total fixed charge coverage ratio Total fixed charge coverage ratio measures the firm’s ability to meet all fixed payment obligations. EBIT + Lease Payment Total fixed charge = coverage ratio Interest + Lease payments + (Preference dividend + Instalment of Principal)/(1-t) Total Cashflow Coverage Ratio However. that is.29 Total cashflow = coverage ratio © Tata McGraw-Hill Publishing Company Limited. Management Accounting . Accordingly. it would be more appropriate to relate cash resources of a firm to its various fixed financial obligations. EBIT + Lease Payments + Depreciation + Non-cash expenses Lease payment + + Interest (Principal repayment) (1– t) + (Preference dividend) (1 .t) 6 .

∑ DSCR n = t=1 EATt + Interestt ∑ t=1 n + Depreciationt + OAt Instalmentt DEBT SERVICE CAPACITY Debt service capacity is the ability of a firm to make the contractual payments required on a scheduled basis over the life of the debt.Debt Service Coverage Ratio Debt-service coverage ratio (DSCR) is considered a more comprehensive and apt measure to compute debt service capacity of a business firm. Management Accounting 6 .30 . © Tata McGraw-Hill Publishing Company Limited.

14 17.00 18. Management Accounting 6 .64 15.56 5.01 19.20 18.31 .60 10.00 18.04 Nil Repayment of term loan in the year 10.00 18.70 18.08 7.00 18.33 16.40 18.Example 6: Debt-Service Coverage Ratio Agro Industries Ltd has submitted the following projections.68 lakh every year.77 36.00 18. (Figures in Rs lakh) Year 1 2 3 4 5 6 7 8 Net profit for the year 21.00 The net profit has been arrived after charging depreciation of Rs 17.61 18.67 34.12 12.41 Interest on term loan during the year 19.00 18. You are required to work out yearly debt service coverage ratio (DSCR) and the average DSCR. © Tata McGraw-Hill Publishing Company Limited.

77 36.68 4 19.05 34.08 7.00 18.56 23.09 Principal instalment Debt obligation (col.64 15.84 35.00 18.08 1. 6) 7 29.97 2. of times)] 8 1.68 17.65 1.00 18.04 18.68 17.04 Nil 6 10.09 68.68 17.56 5.64 33.20 18.96 1.62 1.00 18.81 49. 4 + col.41 3 17.32 DSCR [col. 5 ÷ col.00 18.49 70.67 34.83 6 .Solution Table 3: Determination of Debt Service Coverage Ratio (Amount in lakh of rupees) Ye ar Net profit Depreciation Interest Cash available (col.68 17.00 1.48 46.40 18.08 25.33 16.00 18. 7 (No.01 19.12 30.00 Average DSCR (DSCR ÷ 8) © Tata McGraw-Hill Publishing Company Limited.61 18.60 10.64 41.71 1.68 17. 2+3+4) 5 58.12 12.37 43.89 1 1 2 3 4 5 6 7 8 2 21.78 1.68 17.68 17.60 28.14 17. Management Accounting .70 18.

Profitability Ratios Profitability Ratios Related to Sales (i) Profit Margin (ii) Expenses Ratio Related to Investments (i) Return on Investments (ii) Return on Shareholders’ Equity 6 . Management Accounting .33 © Tata McGraw-Hill Publishing Company Limited.Profitability Ratio Profitability ratios can be computed either from sales or investment.

34 .Profit Margin Gross Profit Margin Gross profit margin measures the percentage of each sales rupee remaining after the firm has paid for its goods. Management Accounting 6 . Gross profit margin = Gross Profit X 100 Sales © Tata McGraw-Hill Publishing Company Limited.

Management Accounting . Net profit margin can be computed in three ways Earning before interest and taxes Net sales Earnings before taxes Net sales i.35 © Tata McGraw-Hill Publishing Company Limited. Net Profit Ratio = Earning after interest and taxes Net sales 6 . Pre-tax Profit Ratio = iii. Operating Profit Ratio = ii.Net Profit Margin Net profit margin measures the percentage of each sales rupee remaining after all costs and expense including interest and taxes have been deducted.

00. Other operating expenses 50.000 = 25 per cent © Tata McGraw-Hill Publishing Company Limited.00. determine (i) Gross profit margin and (ii) Net profit margin.Example 7: From the following information of a firm. Management Accounting 6 .00.000 Rs 50. 1.36 .000 Rs 2.000 = 50 per cent (2) Net profit margin = Rs 2.000 3. Sales Rs 2.00.000 2.00. Cost of goods sold 1.000 (1) Gross profit margin = Rs 1.

+ Selling exp. Operating expenses = Cost of goods sold X 100 Net sales Administrative exp. Net sales Administrative expenses iii. Selling expenses ratio = Selling expenses Net sales X 100 X 100 X 100 Cost of goods sold + Operating expenses v. Cost of goods sold = ii.37 © Tata McGraw-Hill Publishing Company Limited. Administrative expenses = Net sales iv. Management Accounting . Financial expenses = Financial expenses Net sales X 100 6 . Operating ratio = X 100 Net sales vi.Expenses Ratio i.

Return on Assets (ROA) ROA = EAT + (Interest – Tax advantage on interest) Average total assets ii.Return on Investment Return on Investments measures the overall effectiveness of management in generating profits with its available assets. Management Accounting . Return on Capital Employed (ROCE) ROCE = EAT + (Interest – Tax advantage on interest) Average total capital employed 6 .38 © Tata McGraw-Hill Publishing Company Limited. i.

Return on Shareholders’ Equity Return on shareholders equity measures the return on the owners (both preference and equity shareholders ) investment in the firm. Return on total shareholders’ equity = Net profit after taxes X 100 Average total shareholders’ equity Return on ordinary shareholders’ equity (Net worth) = Net profit after taxes – Preference dividend X 100 Average ordinary shareholders’ equity © Tata McGraw-Hill Publishing Company Limited. Management Accounting 6 .39 .

Cost activity/liquidity of i. Inventory Turnover measures the activity/liquidityused Raw materials turnover = inventory of a firm.40 . Inventory turnover measures the efficiency of various types of inventories. Inventory Turnover measures theof goods sold Inventory Turnover Ratio = Average inventory inventory of a firm. the speed with which inventory is sold © Tata McGraw-Hill Publishing Company Limited. the speed with whichmaterial inventory Average raw inventory is sold i. Management Accounting 6 .Efficiency Ratio Activity ratios measure the speed with which various accounts/assets are converted into sales or cash. Inventory Turnover measuresCost activity/liquidity of the of goods manufactured Work-in-progress turnover = Average work-in-progress inventory inventory of a firm. the speed with which inventory is sold Cost of raw materials of i.

a firm.Debtors Turnover Ratio Liquidity of a firm’s receivables can be examined in two ways. Average collection period = Months (days) in a year Debtors turnover i. © Tata McGraw-Hill Publishing Company Limited. Credit sales i. the speed with whichdebtors + Average bills receivable (B/R) Average inventory is sold 2. Management Accounting 6 .41 . the speed with which inventory is credit sales Ageing Schedule enables analysis to identify slow paying debtors. Inventory =Months (days) in a year (x) (Average Debtors + Average (B/R) Alternatively Turnover measures the activity/liquidity of inventory of a Total sold firm. Debtors turnover = measures the activity/liquidity of inventory of Inventory Turnover i.

the speed with which inventory is sold employed Cost of goods sold iv. Cost of goods sold i.Assets Turnover Ratio Assets turnover indicates the efficiency with which firm uses all its assets to generate sales. Inventorycapital turnover = Costactivity/liquidity of inventory of Turnover measures the of goods sold v. Working Net working capital a firm. Management Accounting 6 . the speed with which inventory total assets Average is sold ii. Capital turnover = Average capital a firm.42 . a firm. the speed with which inventory is sold © Tata McGraw-Hill Publishing Company Limited. Fixed assets turnover = Cost of goods sold Average fixed assets Cost of goods sold i. Total assets turnover = Inventory Turnover measures the activity/liquidity of inventory of i. Inventory Turnover measures the activity/liquidity of inventory of iii. Current assets turnover = Average current assets i.

5) 6) 7) Earnings yield = EPS/Market price per share.43 . Book value per share = Ordinary shareholders’ equity/Number of equity shares outstanding. Management Accounting 6 . 8) 9) Price-earnings (P/E) ratio = Market price of a share/EPS. Dividend payment/payout (D/P) ratio = DPS/EPS.1) 2) Return on shareholders’ equity = EAT/Average total shareholders’ equity. 4) Dividends per share (DPS) = Dividend paid to ordinary shareholders/Number of ordinary shares outstanding (N). 3) Earnings per share (EPS) = Net profit available to equity shareholders’ (EAT – Dp)/Number of equity shares outstanding (N). Return on equity funds = (EAT – Preference dividend)/Average ordinary shareholders’ equity (net worth). Dividend Yield = DPS/Market price per share. © Tata McGraw-Hill Publishing Company Limited.

Integrated Analysis Ratio Integrated ratios provide better insight about financial and economic analysis of a firm.44 . (1) Rate of return on assets (ROA) can be decomposed in to (i) Net profit margin (EAT/Sales) (ii) Assets turnover (Sales/Total assets) (2) Return on Equity (ROE) can be decomposed in to (i) (EAT/Sales) x (Sales/Assets) x (Assets/Equity) (ii) (EAT/EBT) x (EBT/EBIT) x (EBIT/Sales) x (Sales/Assets) x (Assets/Equity) © Tata McGraw-Hill Publishing Company Limited. Management Accounting 6 .

45 .Rate of Return on Assets EAT as percentage of sales EAT Divided by Sales Sales Fixed assets Gross profit = Sales less cost of goods sold Minus Expenses: Selling Administrative Interest Assets turnover Divided by Plus Total Assets Current assets Alternatively Shareholder equity Plus Long-term borrowed funds Plus Current liabilities Minus Income-tax © Tata McGraw-Hill Publishing Company Limited. Management Accounting 6 .

Return on Assets Earning Power Earning power is the overall profitability of a firm. Earning power = Net profit margin × Assets turnover Where. Inventory Turnover measurestaxes x x Earning Power = a firm.46 . Management Accounting 6 . is computed by multiplying net profit margin and assets turnover. Net profit margin = Earning after taxes/Sales Asset turnover = Sales/Total assets Earning after the activity/liquidity of inventory of Sales EAT i. the speed with which inventory isTotal Assets Total assets Sales sold © Tata McGraw-Hill Publishing Company Limited.

Table 4: Return on Assets (ROA) of Firms A and B Particulars 1.000 1 10 10 6 .000.00.00. Net sales 2.000. Total assets 4.00.00.000.000 10 1 10 Firm B Rs 40.000 40.EXAMPLE: 8 Assume that there are two firms. ROA ratio (4 × 5) (per cent) Firm A Rs 4. each having total assets amounting to Rs 4.47 © Tata McGraw-Hill Publishing Company Limited. Assets turnover (1 ÷ 3) (times) 6. A and B.000 4. Rs 40. Determine the ROA of firms A and B. Profit margin (2 ÷ 1) (per cent) 5. that is.00.00. Management Accounting .000 40. each. Firm A has sales of Rs 4. whereas the sales of firm B aggregate Rs 40.000. Table 4 shows the ROA based on two components. and average net profits after taxes of 10 per cent.000 4.00. Net profit 3.

Return on Equity (ROE) ROE is the product of the following three ratios: Net profit ratio (x) Assets turnover (x) Financial leverage/Equity multiplier Three-component model of ROE can be broadened further to consider the effect of interest and tax payments. Net Profit EBT EBIT EAT i.48 © Tata McGraw-Hill Publishing Company Limited. the ROE is composed of the following 5 components. Management Accounting . Inventory Turnover measures the activity/liquidity of x = x Sales Earnings before taxes speed with which inventory is sold Sales inventory of a firm. the EBIT As a result of three sub-parts of net profit ratio. EAT EBT x EBT EBIT x EBIT x Sales Sales Assets x Assets Equity 6 .

00.6 16 6 . 35 per cent tax rate and other operating expense of Rs 3.49 © Tata McGraw-Hill Publishing Company Limited.84 1.000 2.000 0.000 61.000 39.65 0.538 16.462 (Firm A) and Rs 39.000 4.000 2.462 77.00.000 1.538 21.79 19.A 5-way break-up of ROE enables the management of a firm to analyse the effect of interest payments and tax payments separately from operating profitability.50.538 21.462 (Firm B) for the facts contained in Example 8.26.00.50.22.000 3.00. Table 5 shows the ROE (based on the 5 components) of Firms A and B.000 2.00.00.000 61.84 10 1.22.000 0.538 12. To illustrate further assume 8 per cent interest rate.462 73.000 4.65 0. Management Accounting . Table 5: ROE (Five-way Basis) of Firms A and B Particulars Net sales Less: Operating expenses Earnings before interest and taxes (EBIT) Less: Interest (8%) Earnings before taxes (EBT) Less: Taxes (35%) Earnings after taxes (EAT) Total assets Debt Equity EAT/EBT (times) EBT/EBIT (times) EBIT/Sales (per cent) Sales/Assets (times) Assets/Equity (times) ROE (per cent) Firm A Rs 4.4 1 2 20 Firm B Rs 40.538 40.26.538 40.

Limitations Ratio analysis in view of its several limitations should be considered only as a tool for analysis rather than as an end in itself. They are as good or as bad as the data itself. The reliability and significance attached to ratios will largely hinge upon the quality of data on which they are based.Common Size Statements Preparation of common-size financial statements is an extension of ratio analysis. they are an important tool of financial analysis. It is sales in the case of income statement and totals of assets and liabilities in the case of the balance sheet. Management Accounting 6 . Nevertheless. © Tata McGraw-Hill Publishing Company Limited. These statements convert absolute sums into more easily understood percentages of some base amount.50 .

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