RATIO ANALYSIS

GROUP ASSIGNMENT
DONE BY :
SHAILINI.M.SHAH
ANU DAMODARAN
KRITIKA MATHUR
ASHWATHI
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INTRODUCTION TO RATIO
ANALYSIS
 A ratio is defined as a relationship between
two numbers of the same kind.
 The ratio analysis is one of the most
useful and common methods of analyzing
financial statement.
 Ratio enables the mass of data to
be summarized and simplified.

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 IMPORTANCE OF RATIO
ANALYSIS
Ratio analysis of a firm’s financial statement is of
interest to a number of parties mainly:
 Shareholders - interested with earning
capacity of the firm.
 Creditors - interested in knowing the ability
of firm to meet financial obligation.
 Financial Executives - concerned with
evolving analytical tools that will measure and
compare costs, efficiency liquidity and
profitability with a view to making intelligent
decisions.

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 IMPORTANCE OF RATIO
ANALYSIS
Enables the banker or lender to arrive at the
following factors :
 Liquidity position
 Profitability
 Solvency
 Financial Stability
 Quality of the Management
 Safety & Security of the loans & advances to
be or already been provided
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How a Ratio is expressed?
 As Percentage - such as 25% or 50% .
 As Proportion – The figures may be
expressed in terms of the relationship as 1 :
4.
 As Pure Number /Times - The same can
also be expressed in an alternatively way for
example the sale is 4 times of the net profit
or profit is 1/4th of the sales.

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Classification of Ratios

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 ADVANTAGES OF RATIO
ANALYSIS
 Aids to measure general efficiency.
 Aids to measure financial liquidity and
solvency.
 Aids in forecasting and planning.
 Facilitates decision making.
 Effective control and performance tool.

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 LIMITATIONS OF RATIO
ANALYSIS
 Limitations of recording: Ratio analysis is
based on financial statement, which
are themselves subject to limitations.
 Changes in accounting procedure: Most
often firms for their valuation follow
different methods hence comparison will
be practically of no use.

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 Lack of proper standard:
It is very difficult to ascertain the standard
ratio in order to make proper comparison.
Because ratios differ from firm to firm and
industry to industry.
 Limited use of single ratio: A single ratio
will not be able to convey anything.
 Too many ratios: Are likely to confuse
instead of revealing meaningful
conclusions.
 Personal bias: Different people may
interpret the same ratio in different ways.

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 ANALYSIS AND
INTERPRETATIONS
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 RATIOS ANALYSED
1. Current Ratio
2. Debt/Equity Ratio
3. Net Profitability Ratio
4. Gross Profitability Ratio
5. Inventory Turnover Ratio
6. Debtor’s Turnover Ratio
7. Creditor’s Turnover Ratio
8. Return on Capital Employed
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 CURRENT RATIO
 The current ratio establishes the
relationship between the current assets and
the current liabilities. The ideal ratio is 2:1.
Current Assets
 Current Ratio = --------------------------
Current liabilities

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 CURRENT CURRENT
YEARS ASSETS LIABILITES RATIO
(A) (B) (A/B)
2009-2010 52703.71 27479.45 1.91
2010-2011 82175.67 37195.10 2.2

CURRENT RATIO
2.2
2.1
2
1.9
1.8
1.7 CURRENT
RATIO

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INTERPRETATION:

 Here the current ratio seems to assure that the

company is in a position to pay off any short
term liabilities with liquid assets such as cash
and bank balances, inventory, accounts
receivables and short-term assets(can be
converted to cash).

 This means that the company appears to be

doing well and liquidity has remained stable.

 It can be seen that the current ratio has been

increased from 1.91 to 2.2.

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 DEBT/EQUITY RATIO
 This ratio is calculated to measure the
relative proportion of outsider’s funds
invested in the company.
Long term debt
 Debt Equity Ratio = ---------------------
Shareholder’s fund

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YEARS DEBT EQUITY RATIO
(A) (B) (A/B)
2009-2010 1,63,579.72 49,029.03 3.33
2010-2011 1,99,491.75 57,014.55 3.49

debt/equity ratio

3.5
3.4
3.3
3.2 debt/equity
ratio

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INTERPRETATIONS

 A Debt to Equity ratio of 3.49 means that debt

holders have a 3.49 times more claim on assets
than equity holders.

 Thus this does not appear to be a healthy

situation for the company , which means they
cannot borrow more from banks.

 The Debt to Equity ratio has increased from

3.33 to 3.49 and hence decreases the protection
of creditors.

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 NET PROFITIBILITY
RATIO
 This ratio establishes the relationship
between the amount of net profit or net
income and the amount of sales revenue.
Net Profit
 Net Profit Ratio = ------------------- * 100%
Sales

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 NET PROFIT SALES RATIO
Year (A) (B)
(A/B*100%)
2009-2010 6,320.47 251489.41 2.51%
2010-2011 8786.56 340047.99 2.58%

NET PROFIT RATIO

2.6
2.55
2.5 NET
2.45 PROFIT
RATIO

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INTERPRETATIONS

 This is a low margin of profit indicating a low margin of

safety, higher risk that a decline in sales will erase
profits and result in a net loss.

 Different strategies and product mix should be used to

get higher profit margin.

 Net profit margin is mostly used to compare a

companies results overtime.

 In this case net profit margin has negligibly increased

from 2.51 to 2.58.

 To compare Net profit margin between companies in

the same industry might have little meaning as we can’t
say which is more efficient or less efficient.
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 GROSS PROFITIBILITY
RATIO
 This ratio establishes the relationship
between gross profit on sales and net sales
in terms of percentage indicating the
percentage of gross profit earned on sales.
Gross Profit
 Gross Profit Ratio = ------------------- * 100%
Sales

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 GROSS NET SALES
YEAR PROFIT RATIO
(A) (B) (A/B*100)
2009-2010 18702.14 251489.41 7.43%
2010-2011 20617.72 340047.99 6.06%

GROSS PROFIT RATIO

8
6 GROSS
4 PROFIT
2 RATIO
0
2009-2010 2010-2011
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INTERPRETATIONS

 In this case the Gross Profit Ratio does not

seem to be good enough and hence
indicates reduced efficiency in production
of the unit.

 Gross profit has decreased from 7.43 to

6.06.

 Gross profit margin can be used to compare

a company with its competitors.

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 INVENTORY TURNOVER
RATIO
 Inventory turnover ratio which is also called
stock turnover ratio or stock velocity
establishes the relationship between
the cost of goods sold during a given period
and the average of the costs of opening and
closing stocks.
Cost of goods sold
 Stock Turnover Ratio : -------------------------
Inventory holdings
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 COST OF INVENTORY
YEAR GOODS HOLDINGS RATIO
SOLD (B) (A/B)
(A)
2009-2010 251489.41 15821.36 15.89
2010-2011 340047.99 23832.49 14.26
INVENTORY TURNOVER RATIO
16
15.5
15
14.5
14 INVENTORY
13.5
13 TURNOVER
RATIO

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INTERPRETATIONS

 This ratio can reflect both on the quality of the

inventory and the efficiency of management.
 Typically, the higher the turnover rate, the
greater the likelihood that profits would be
larger and less working capital bound up in
inventory.
 In this case the turnover rate is low and
indicates more working capital being bound up
in inventory.
 The inventory turnover ratio has decreased
from 15.89 to 14.26.

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 DEBTORS TURNOVER
RATIO
 Debtor turnover ratio, also known as
receivables turnover ratio or debtors
velocity establishes the relationship
between the net credit sales of the year and
the average receivable
Net Sales
 Debtors Turnover Ratio = ---------------------
Debtors

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 NET SALES DEBTORS
YEAR RATIO

2009-2010 251489.41 12686.88 19.82

2010-2011 340047.99 15954.32 21.31

DEBTORS TURNOVER RATIO

22
21
20 DEBTORS
TURNOVER
19
RATIO

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INTERPRETATIONS

 In this case debtor turnover ratio is good

which indicates that we are collecting
money fast.

Here debtor turn over ratio has increased
from 19.82 to 21.31.

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 CREDITORS TURNOVER
RATIO
 This ratio, also known as payable turnover
ratio establishes the relationship between
the net credit purchases and the average
trade creditors.
Net Purchases
 Creditors Turnover Ratio = -------------------
Creditors

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 NET CREDITORS
YEAR PURCHASE RATIO
S
2009-2010 1408.82 11523.99 0.12
2010-2011 1378.51 15384.08 0.089

CREDITORS TURNOVER RATIO

0.15
0.1
0.05 CREDITORS
TURNOVER
0
RATIO

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INTERPRETATIONS

 In this case , there is a low turnover which means

that it takes longer for the company to pay off its
creditors.

 The ratio has fallen from 0.12 to 0.089, it means the

company is now taking longer to repay creditors.

 This may be the result of low sales, or other issues.

 A continued drop may be a cause for concern as it

suggests the company cannot control its debt and
may be at risk of bankruptcy.

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 RETURN ON CAPITAL
EMPLOYED(ROCE)
 A ratio that indicates the efficiency and
profitability of a company's capital
investments.

Calculated as:

PROFIT BEFORE
INTEREST AND TAX
 ROCE = ________________
CAPITAL EMPLOYED
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 PROFIT CAPTIAL
YEAR BEFORE EMPL0YED RATIO
TAX
2009-2010 251489.41 12686.88 19.82
2010-2011 28648.65 133641.06 21.43

RETURN ON CAPITAL
EMPLOYED
22
21
20 RETURN ON
19 CAPITAL
EMPLOYED

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INTERPRETATIONS

 The company has been utilising the capital

invested in a favourable manner with
returns increasing as compared to the
previous financial year.

 The ROCE has increased from 19.82 to

21.43.

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 The current position of the company when
assessed on the basis of current ratio and
ROCE appears to be healthy though
negligibly.
 It should be noted that the Debtors
turnover ratio is high, thus indicating that
the company is promptly receiving its debts
back.
 On the basis of profitability, inventory
turnover ratio and creditors turnover
ratio, the company does not appear to be
performing at a satisfactory level.

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 CONCLUSION &
RECOMMENDATION
Considering the above mentioned points it is
advisable that the management should
change its strategies in terms of better
utilization of current assets to pay back its
creditors on time, rework its pricing policies
in order to avoid pressure on profit margins.

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THANK YOU

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