Basic note about Ratio Analysis

It is possible to look at the financial health of a corporation by looking at some of its key
financial ratios. Ratio analysis can also be used as a diagnostic tool to find the sources of
financial trouble at a company.
The ratios may be divided into these types:
1. Liquidity ratios, that look at the availability of cash for operations.
2. Asset management ratios evaluate the efficient utilization of the resources.
3. Debt management ratios keep track of debt to be within reasonable bounds, and keep
the debt level at its optimal level.
4. Profitability ratios measure the degree of accounting profits.
5. Market value ratios help investors discriminate between overvalued and undervalued
securities while making investment decisions.
Let us review these ratios and their significance.
6. Liquidity Ratios:
Liquidity ratios ratios focus on the availability of cash to manage the day to day operations of the
company. In particular,
We define the current ratio as Current ratio = Total current assets Total current liabilities
The current ratio of a company gives us a quick way to look at its current assets and current
liabilities. They should be nearly equal to one another. Next, we look at a more stringent ratio
that gives us the cash position of the firm more accurately by removing the value of the
inventories from the current assets. This gives us the quick ratio, or the acid test ratio, as follows:
Quick, or Acid Test = Current assets  inventories Current liabilities (3.6)
7. Asset Management Ratios:
The asset management ratios evaluate the efficiency of use of the principal assets of a company,
such as its inventory.
Inventory Turnover = Cost of goods sold Inventories (average)
That is, the company should try to sell the goods for cash.
To measure the efficiency of this operation, we define the Days Sales Outstanding as
Days sales outstanding = Receivables Sales per day
Fixed assets turnover = Annual sales Net fixed assets
Total assets turnover = Annual sales Total assets (average)
Group Assignment
The following Trading and Profit and Loss Account of ABC
Company. For the year December 2019 is given below: 

Particular Particular

To Opening Stock    76,250.00 by sale 5,000,000.00

 Purchases     315,250.00 closing stock 98, 5000.00

Carriage and Freight     2,000.00

  Wages     5,000.00  

Gross Profit b/d  2,000,000.00

To Administration expenses     101,000.00 By Gross Profit b/d  2,000,000.00

     Selling and Dist. expenses    12,000.00 Non-operating incomes

  Non‐operating expenses  2,000.00    Interest on Securities  1,500.00

    Financial Expenses     7,000.0 Dividend on shares 3,750.00

    Net Profit C/D   84,000.00  Profit on sale of shares 750.00

Determine the following Question, by using or showing each steps: 

1. Gross Profit Ratio   
2.  Expenses Ratio  
3.   Operating Ratio 
4. Net Profit Ratio         
5.    Operating (Net) Profit Ratio 
6.   Stock Turnover Ratio.    
  Assignment dead line or the assignment may submit on April 30, 2020

Debt Management Ratios:

The corporations borrow money to do their business because debt capital is cheaper than the
equity capital. We define its debt ratio, or leverage ratio as follows
Debt ratio = Total debt Total assets
Interest coverage = EBIT Interest charges (3.12)
Profitability Ratios:
The next set of ratios measure the ability of a company to generate profits.
Net profit margin = Net income Total operating revenue
We define gross profit margin as follows:
Gross profit margin = EBIT Total operating revenue
Another ratio that the investors like to review is net return on assets. We may define it as
Net return on assets = Net income Total average assets (3.15)
Gross return on assets = EBIT Total average assets (3.16)
Return on common equity = Net income to stock holders Average common equity
Interest coverage = EBIT Interest charges (3.12)
Profitability Ratios:
The next set of ratios measure the ability of a company to generate profits.
Net profit margin = Net income Total operating revenue
We define gross profit margin as follows:
Gross profit margin = EBIT Total operating revenue
Another ratio that the investors like to review is net return on assets. We may define it as
Net return on assets = Net income Total average assets (3.15)
Gross return on assets = EBIT Total average assets (3.16)
Return on common equity = Net income to stock holders Average common equity
Dividend payout ratio = Total cash dividends Net income
Market Value:
From an investor's point of view, it is important to see the difference between the market value
of the stock of a company, and its accounting value, or book value.
we define the Market/Book ratio as
Market/Book ratio = Market price/share Book value/share (3.21)
The investors hunting for bargains like to see this ratio as small as possible.
We complete our list by including two more ratios, defined as follows:
P-E ratio = Market price/share Earnings/share and
Dividend yield = Dividend per share Market price per share