Financial Ratio Analysis

Introduction:
Financial statements are prepared primarily for decision making. They play a dominant
role in setting the frame work of managerial decisions. But information provided in the
financial statements is not analysis end in itself as no meaning full conclusions can be
drawn from these statements alone. However, the information provided in the financial
statements is of the immense use in making decisions through analysis and
interpretation of financial statements. Financial ratio analysis is the process of
identifying of financial strength and the weakness of the firm by properly
establishing a relationship between the items of the balance sheet and the
profit and loss account. There are various methods used in analyzing financial
statements such as comparative statements, schedules of changes in working capital,
common size percentages, funds analysis and the ratio analysis. The ratio analysis is
the most powerful tool of financial analysis.
We performed the ratio analysis BATA PAKISTAN LIMITED which is a listed
company
ANALYSIS OF ACCOUNTING RATIOS:
Now we shall analyze some important factors like liquidity, profitability, long term
solvency and activities of firm with the help of ratios which are usually brought under
observation by the creditors, investors, management and other stake holders.

Liquidity Ratios

Leverage Ratios

Profitability Ratios
Liquidity Ratios:
These are the most important ratios from the lenders point of view. These are the
ratios which measure the short term solvency or financial position of firm. These ratios
are calculated to comment upon the short-term paying capacity of a concern or a firms
ability to meet its current obligations.
The various liquidity ratios are current ratio, liquid ratio (Acid Test Ratio) and
absolute liquid ratio.

Current Ratio:
Current ratio measures general liquidity and is widely used to make the analysis for a
short term financial position or liquidity of a firm. Current ratio is basically a relationship
between current assets and current liabilities.
Current Assets
Current Ratio =
Current Liabilitie s

2009 (Rs. 000) 2010 (Rs.000)

2,577,448 3,459,297
= =
1,147,336 1,300,867
= 2.24:1 = 2.65:1

Interpretation:
The current ratio of Bata Pakistan Ltd. up to 2009 shows that it has the ability to meet
all its obligations in respect of financial debts. But the ratio up to 2010 is the indication
that the enterprise has been in good liquid position since last one year. It is an
attractive sign for the stakeholders to keep full confidence in the operations and policies
of the enterprise. The company can avail easily short term borrowing facility from banks
and financial institutions with more reliably than the previous year as its current position
is better than the previous year. We will find the company pay the tax refunds due from
government.
Liquid Ratio (Acid Test Ratio):
This ratio shows better liquidity than the current ratio as it is a relationship between
liquid assets and current liabilities. Liquid assets include all current assets except
prepayments and stock because prepayments usually are not converted into cash and
stock takes much time to be converted into cash.

Acid Test Ratio

2009 (Rs. 000) 2010 (Rs.000)
Liquid Assets Liquid Assets
= =
Current Liabilitie s Current Liabilitie s

Liquid Assets = Current Assets - (Stock + Prepayments +Stores and Spares)

2,5577,448(786+1281862+233,399) 3,459,297(1,157+1,527,032+410,517)
=
1,147,336 1,300,867
= 0.92:1 = 1.16:1
Interpretation:
The liquid ratio of Bata Pakistan Ltd. is showing its better liquidity position and its liquid
ratio is better than the requirement that is usually observed by the banks and other
financial institutions .Bata Pakistan Ltd 2010 year ration is 1.16 that is good sign for the
company and provisos year 2009 ration is 0.92The stake holders especially creditors
can rely on the company because Bata Pakistan Ltd. has liquid assets to pay the short
term liabilities in time or when they will become due. The liquidity of the enterprise has
been increased from the last year which is an indication of the better business
operations and policies.
Analysis of Profitability: (profitability Ratios)
Profit earning is considered essential for the survival of the business and it is primary
motive of any business. A business needs profit not only for its existence but also for
expansion and diversification. The investors want adequate return on their investments
creditors want higher security for their interest and loan and so on. A business
enterprise can discharge its obligations to the various segments of the society only
thorough earning profits. Profit is a useful measure of overall efficiency of a business.
Profitability ratios are measured by the investors and share holders to assess the
management in order to assess how efficiently the business operations are being
carried out. Profitability is the main base for liquidity as well solvency. Creditors,
bankers and financial institutions are interested in profitability ratios since they indicate
liquidity of the business to meet interest obligations and regular improved profits to
enhance the long term solvency of the business. Owners are interested in profitability to
indicate the growth and also the rate of return on their investments. Generally
profitability ratios are calculated with respect to sales and with respect to investments.
Following ratios are calculated with respect to sales.
Gross Profit Ratio (Gross Profit Margin):
Gross Profit ratio is a ratio of Gross Profit to Net Sales expressed as percentage. It
expresses the relationship directly between gross profit and sales and indirectly
between cost of goods sold and sales.
Gross Pr ofit
Gross Profit Ratio = 100
Net Sales

2009 (Rs. 000) 2010 (Rs.000)

2,672,213 3,331,928
100 100
6,428,490 8,329,829
= 41.56% = 40%
Interpretation:
The gross profit percentage of BATA Pakistan Ltd. has been reduced from year 2010
ratio is 40% and 2009 ratio is 41.56%.in this case of the company the exceptional case
We can say that enjoy the monopoly in the market Management should assess that
why their cost has been increased. However this GP Margin is still up to the mark GP
margin can be made by increasing sales, by decreasing cost and adopting better
purchase policies.
Net Profit Ratio:
This is the ratio of net profit (before tax) to net sales expresses as percentage:
 Net Pr ofit aftereTaxation
Net Profit Ratio = 100
Net Sales

2009 (Rs. 000) 2010 (Rs.000)

585,512 871,293
= 100 = 100
6,428,490 8,329,829
= 9.1% = 10.45%
Interpretation:

Net profit ratio of the BATA Pakistan Ltd is increased from year 2010 ratio is 10.45%
and year 2009 ratio is 9.1%. There is good sign for the company How ever the
expenses incurred in the running of the business are also increase but at a faster rate
then profit. Which is shoe the company very strong position

Profitability Ratios with respect to Investment:

Following ratios are important to find out the profitability of a company with respect to
investment. As investors demand adequate returns to their investments so with the
help of these ratios they can realize and analyze about the security and returns of their
investments

Earnings per Share:

Earnings per share is a small variation of return on equity capital and it is calculated by
net profit after tax and preference dividend dived by the total number of equity shares.
It determines the per share earnings in Rupees.
Earning After Tax
Earnings per Share =
No.Of Ordinary Shares

2009 (Rs. 000) 2010 (Rs.000)

585,512 871,293
= =
75,600 75,600
= Rs. 7.74/Share = Rs. 11.5/Share

Interpretation:
Earnings per share of Bata Pakistan Ltd. is relative increased from the previous years
and is satisfactory for the share holders with respect to their return on the shares
purchased by them. As this ratio describes the rate of dividend so it can be assumed
company is distributing high dividends. This year ration is 11.5 share that is good sign
for the company and 2009 year ratio is 7.74
Inventory Turnover Ratio:
Every firm has to maintain a certain level of inventory of finished goods so as to be able
to meet the requirements of the business. But the level of inventory should neither be
too high nor too low. A too high inventory means higher carrying costs and higher risk
of stocks becoming obsolete whereas too low inventory may mean the loss of business
opportunities. Thus, it is very essential to keep sufficient stocks in business.
Inventory turnover ratio, also known as stock turnover, is the relationship between the
cost of goods sold during a particular period of time and the cost of average inventory
during that period. It is expressed in number of times.
Cost Of Goods Sold
Inventory Turnover Ratio =
Avg. Clo sin g Stock

2009 (Rs. 000) 2010 (Rs.000)

3,756,277 4,997,901
= =
1,278,076 1,404,447
= 2.9 times = 3.55 times

Interpretation:
Bata Pakistan Ltd. stock turn over ration company show this year ratio 2010 is 3.55
good sign for the company and generally a high inventory ratio means that company is
efficiently managing and selling its inventory and control the sound sale policies, trading
in quality good reputation in the market. The year 2009 ratio is2.9 is good but the
company 2010year is good increase the ratio

Average Collection Period Ratio:

The debtors/Receivables Turnover Ratio when calculated in terms of days known as
average collection period or debtors collection period ratio. The average collection
period ratio represents the average number of days for which a firm has to wait before
its debtors are converted into cash. It can be calculated as follows:

No. of Days (average collection Period Debtor Turnover Ratio)

Avg.Trade Debtors
= 365
CreditSales

2009 (Rs. 000) 2010 (Rs.000)

23,735 22325
= 365 = 365
6,428,490 8,329,829

= 14days = 9 days

Interpretation:
Bata Pakistan Ltd. is working on relatively better debtor turnover ratio and average
debtors collection period showing that debtors are more liquid and company is much
efficient in the management of its debtors. The year 2010 ratio is 9 days that is very
excellent debtor collection period as compare 2009 year ratio is 14 days .The Bata
company is much efficiently and effectively to complete the bill receivable for the client
Creditors/Payables Turnover ratio:
This ratio is similar to Debtors/Receivable turnover ratio. It compares the creditors with
total credit purchases. It signifies the credit period enjoyed by the firm in paying
creditors. Accounts payable include both sundry creditors and bills payable. Same as
debtors turnover ratio, creditors turnover ratio can be calculated in two forms.
Payable period (Average Payment Period)

Avg.Trade Creditors
= 365
Credit Purchase

2009 (Rs. 000) 2010 (Rs.000)

988,890 924,020
= 365 = 365
2,386,004 1,648,409
= 205 Days = 151 Days

Interpretation:

Bata Pakistan Ltd payable period is excellent has improved its creditors payable from
the previous year in creditor. Creditors were paid in the span of 205 days has been
reduced in the current year to 151 days it is clear indication that company has
enhanced its creditor worthiness. Although the volume of purchase and creditor
decreased during the year 2010

Leverage Ratios

This Debt/Worth or Leverage Ratio indicates the extent to which the business is reliant
on debt financing (creditor money versus owner's equity): Generally, the higher this
ratio, the more risky a creditor will perceive its exposure in your business, making it
correspondingly harder to obtain credit.

Equity Ratio
Shareholder's funds include equity share capital plus all reserves and surpluses items.
Total assets include all assets, including Goodwill. Some authors exclude goodwill from
total assets. In that case the total shareholder's funds are to be divided by
total tangible assets. As the total assets are always equal to total liabilities., the total
liability

Equity Ratio = 100

2009 (Rs. 000) 2010 (Rs.000)

1,960,727 2,741,300
= 100 = 100
3,230,187 4,177,050
=60:40 = 65:35

Interpretation:
The equity ratio of BATA Pakistan Ltd. This is not good sign for the company because
the profit of the company is the owner and share holder. The 2009 year ratio is 60% of
the investor share in this company and only 40% share is the owner of the Bata as
compare to 2010 year ratio is 65% of the investor in this company and only 35% share
is the owner of the company is also decrease for the year 2009 ratio is very bad
condition for the company owner

Capital Gearing Ratio

Gearing is a comparison between the amount of borrowings a company has to its
shareholders funds (net worth). The result of the calculation will show as a percentage
the proportion of capital available within the company in relation to that owed to
sources outside the company. Lower figures are more acceptable, showing that the
company is predominantly financed by equity whilst high gearing shows an over
reliance on borrowings for a significant proportion of the company's capital
requirements
Gearing Ratio
Long Term Liabilities
Ordinary Share capital

2009 (Rs. 000) 2010 (Rs.000)

35,830 37,823
= = 2,665,217
1,884,644
=0.019:1 =0.014:1
Interpretation:
Capital gearing ratio is just reciprocal of debt to equity ratio. Bata Pakistan Ltd. Capital
gearing ratio for the Bata Company is excellent. The year 2010 ratio is 0.014:1 is a
efficiently and effectively for good sign for the company as compare to the year 2009
ratio is 0.019:1