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MEANING:

Ratio analysis is the process of determining and interpreting numerical relationships based on
financial statements. A ratio is a statistical yardstick that provides a measure of the relationship
between two variables or figures.
This relationship can be expressed as a percent or as a quotient. Ratios are simple to calculate
and easy to understand. The persons interested in the analysis of financial statements can be
grouped under three heads,
i) Owners or investors
ii) Creditors and
iii) Financial executives.
Although all these three groups are interested in the financial conditions and operating results, of
an enterprise, the primary information that each seeks to obtain from these statements differs
materially, reflecting the purpose that the statement is to serve.
Investors desire primarily a basis for estimating earning capacity. Creditors are concerned
primarily with liquidity and ability to pay interest and redeem loan within a specified period.
Management is interested in evolving analytical tools that will measure costs, efficiency,
liquidity and profitability with a view to make intelligent decisions.

CLASSIFICATION OF RATIOS:
Financial ratios can be classified under the following five groups:
1) Structural
2) Liquidity
3) Profitability
4) Turnover
5) Miscellaneous.

1. STRUCTURAL GROUP:
The following are the ratios in structural group:
i) Funded debt to total capitalisation:
The term total capitalisation comprises loan term debt, capital stock and reserves and surplus.
The ratio of funded debt to total capitalisation is computed by dividing funded debt by total
capitalisation. It can also be expressed as percentage of the funded debt to total capitalisation.
Long term loans
Total capitalisation (Share capital + Reserves and surplus + long term loans)
ii) Debt to equity:
Due care must be given to the; computation and interpretation of this ratio. The definition of debt
takes two foremost. One includes the current liabilities while the other excludes them. Hence the
ratio may be calculated under the following two methods:
Long term loans + short term credit + Total debt to equity = Current liabilities and provisions
Equity share capital + reserves and surplus (or)
Long-term debt to equity =
Long term debt / Equity share capital + Reserves and surplus
iii) Net fixed assets to funded debt:
This ratio acts as a supplementary measure to determine security for the lenders. A ratio of 2:1
would mean that for every rupee of long-term indebtedness, there is a book value of two rupees
of net fixed assets:
Net Fixed assets funded debt
iv) Funded (long-term) debt to net working capital:
The ratio is calculated by dividing the long-term debt by the amount of the net working capital. It
helps in examining creditors contribution to the liquid assets of the firm.
Long term loans Net working capital

2. LIQUIDITY GROUP:
It contains current ratio and Acid test ratio.
i) Current ratio:
It is computed by dividing current assets by current liabilities. This ratio is generally an
acceptable measure of short-term solvency as it indicates the extent to which he claims of short
term creditors are covered by assets that are likely to be converted into cash in a period
corresponding to the maturity of the claims. Current assets / Current liabilities and provisions +
short-term credit against inventory
ii) Acid-test ratio:
It is also termed as quick ratio. It is determined by dividing quick assets, i.e., cash, marketable
investments and sundry debtors, by current liabilities. This ratio is a bitterest of financial strength
than the current ratio as it gives no consideration to inventory which may be very a low- moving.

3. PROFITABILITY GROUP:
It has five ratios, and they are calculated as follows:

4. TURNOVER GROUP:
It has four ratios, and they are calculated as follows:

5. MISCELLANEOUS GROUP:
It contains four ratio and they are as follows:

STANDARDS FOR COMPARISON:


For making a proper use of ratios, it is essential to have fixed standards for comparison. A ratio
by itself has very little meaning unless it is compared to some appropriate standard. Selection of
proper standards of comparison is a most important element in ratio analysis. The four most
common standards used in ratio analysis are; absolute, historical, horizontal and budgeted.
Absolute standards are those which become generally recognised as being desirable regardless of
the company, the time, the stage of business cycle, or the objectives of the analyst. Historical
standards involve comparing a companys own past performance as a standard for the present or
future.
In Horizontal standards, one company is compared with another or with the average of other
companies of the same nature.
The budgeted standards are arrived at after preparing the budget for a period Ratios developed
from actual performance are compared to the planned ratios in the budget in order to examine the
degree of accomplishment of the anticipated targets of the firm.

LIMITATIONS:
The following are the limitations of ratio analysis:
1. It is always a challenging job to find an adequate standard. The conclusions drawn from the
ratios can be no better than the standards against which they are compared.
2. When the two companies are of substantially different size, age and diversified products,,
comparison between them will be more difficult.
3. A change in price level can seriously affect the validity of comparisons of ratios computed for
different time periods and particularly in case of ratios whose numerator and denominator are
expressed in different kinds of rupees.
4. Comparisons are also made difficult due to differences of the terms like gross profit, operating
profit, net profit etc.
5. If companies resort to window dressing, outsiders cannot look into the facts and affect the
validity of comparison.

6. Financial statements are based upon part performance and part events which can only be
guides to the extent they can reasonably be considered as dues to the future.
7. Ratios do not provide a definite answer to financial problems. There is always the question of
judgment as to what significance should be given to the figures. Thus, one must rely upon ones
own good sense in selecting and evaluating the ratios.

Financial Ratios of Bank Of India

Mar'1
5

Mar '14

Mar '13

Mar '12

Mar '11

Investment Valuation Ratios


Face Value

10.00

10.00

10.00

10.00

10.00

Dividend Per Share

5.00

5.00

10.00

7.00

7.00

Operating Profit Per Share (Rs)

53.19

67.79

65.05

61.69

52.76

Net Operating Profit Per Share (Rs)

652.44 589.58

535.47

496.37

398.03

Free Reserves Per Share (Rs)

--

--

--

--

--

Bonus in Equity Capital

--

--

--

--

--

Interest Spread

5.20

5.07

5.54

5.69

5.86

Adjusted Cash Margin(%)

4.18

7.00

8.22

8.94

10.77

Profitability Ratios

Net Profit Margin

3.93

Return on Long Term Fund(%)

7.19

8.61

9.40

11.44

107.74 102.34

108.25

120.37

109.17

Return on Net Worth(%)

5.43

9.12

11.49

13.57

15.58

Adjusted Return on Net Worth(%)

5.43

9.12

11.49

13.57

15.58

Return on Assets Excluding Revaluations

472.42 465.37

401.38

343.79

292.26

Return on Assets Including Revaluations

472.42 465.37

401.38

365.33

316.40

Interest Income / Total Funds

7.29

7.39

7.63

7.77

6.98

Net Interest Income / Total Funds

1.90

2.11

2.16

2.27

2.51

Non Interest Income / Total Funds

0.71

0.84

0.90

0.91

0.85

Interest Expended / Total Funds

5.38

5.28

5.48

5.50

4.47

Operating Expense / Total Funds

1.31

1.26

1.23

1.30

1.58

Profit Before Provisions / Total Funds

1.26

1.64

1.78

1.83

1.73

Net Profit / Total Funds

0.29

0.53

0.66

0.73

0.80

Loans Turnover

0.11

0.11

0.12

0.12

0.11

Total Income / Capital Employed(%)

8.00

8.23

8.54

8.68

7.83

Interest Expended / Capital Employed(%)

5.38

5.28

5.48

5.50

4.47

Total Assets Turnover Ratios

0.07

0.07

0.08

0.08

0.07

Asset Turnover Ratio

0.07

0.08

0.08

0.08

0.07

Interest Expended / Interest Earned

73.88

71.43

71.72

70.81

64.09

Other Income / Total Income

8.88

10.17

10.56

10.44

10.83

Operating Expense / Total Income

16.37

15.33

14.43

15.01

20.20

Selling Distribution Cost Composition

--

--

--

--

--

Management Efficiency Ratios

Profit And Loss Account Ratios

Balance Sheet Ratios


Capital Adequacy Ratio

10.73

9.97

11.02

11.95

12.17

Advances / Loans Funds(%)

73.27

78.66

75.40

74.14

74.37

Credit Deposit Ratio

76.60

76.86

76.88

74.85

72.18

Investment Deposit Ratio

23.19

24.31

25.91

27.97

28.93

Cash Deposit Ratio

4.58

4.78

5.28

5.96

7.07

Total Debt to Owners Fund

16.91

15.94

15.96

16.13

18.71

Financial Charges Coverage Ratio

0.24

0.32

0.33

0.34

0.40

Financial Charges Coverage Ratio Post Tax 1.06

1.11

1.13

1.14

1.19

Debt Coverage Ratios

Leverage Ratios
Current Ratio

0.03

0.04

0.03

0.03

0.04

Quick Ratio

29.03

23.00

28.08

20.79

19.06

Dividend Payout Ratio Net Profit

19.43

11.77

21.70

17.40

17.85

Dividend Payout Ratio Cash Profit

16.65

10.87

20.34

16.38

16.89

Earning Retention Ratio

80.57

88.23

78.30

82.60

82.15

Cash Earning Retention Ratio

83.35

89.13

79.66

83.62

83.11

AdjustedCash Flow Times

266.71 161.30

130.18

111.88

113.68

Mar'1
Mar '14
5

Mar '13

Mar '12

Mar '11

Cash Flow Indicator Ratios

Earnings Per Share

25.67

42.45

Book Value

472.42 465.37

46.14

46.66

45.54

401.38

343.79

292.26