Financial Performance Analysis Using Ratio Analysis

Financial Statements-

 Balance Sheet  Financial Position on Particular Date.

 Profit & Loss A/c -> Income & expenses during the year, Net
profit
 Cash Flow Statement Movement of Cash in Different Activities
 Notes on Accounts

Tools for Financial Analysis:

 Comparative Statements
 Common Size Statements
 Cash flow Statement
 Trend Analysis
 Ratio Analysis*- is one of the Imp Tool for Financial Analysis.

A Ltd B Ltd

Net Profit -6 Cr Net Profit 60 Cr

Sales A Ltd- 120 Cr Sales of B Ltd- 200 CR

Net Profit Ratio = Np/ Sales *100

5% 30%
Ratios shows the Mathematical relationship between 2 or more variables
(Figures)

Forms of Ratios-

1) Pure Ratio- 2:1, 4:1

2) Time Ratio- 3 Times, 4 times , Share Capital is Rs.10 Lakhs, Reserves is

Rs.2 Lakhs, 10/2 =5Times

Share capital is 5 times of Reserves

3. Percentage Form - 25%, 35%

Classification of Ratios/ Types of Formula:-

A. Liquidity Ratios: Liquidity means ability of business to pay its short

term liabilities or how fast assets converted into cash.
1. Current Ratio = Current Assets
Current Liabilities
The Standard Current Ratio should be 2:1
2. Quick Ratio / Acid Test ratio / Liquid Ratio = Quick Assets
Quick liabilities
Quick Assets = Current Assets- Stock- Prepaid Expenses
Quick liabilities = Current Liabilities – Bank Overdraft
The Standard Quick Ratio should be 1:1
3. Working Capital Ratio= CA- CL
B. Leverage Ratios/ Capital Structure Ratios
Leverage Ratios are used to measure the ability of business to pay its
Long term liabilities & it also checks the relationship between the
Capital structure of Company
Capital Structure- Equity Capital, Preference Capital, Reserves &
Surplus, Debt Capital, Etc
1. Equity Ratio- This ratio indicate the Proportion of Owners fund to
Total Fund invested in the business
ER= Shareholders Fund
Total Capital Employed
Shareholders Fund = Equity Share Capital+ Pref Share Capital +
Reserves & Surplus
Total Capital Employed = Fixed Assets + CA – Current Liabilities
= FA + WC

2. Debt Ratio – it is used to analyze long term solvency of a business

DEBT RATIO = Total Debt
Capital Employed
Total Debt= Short Term + Long Term borrowings

3. Debt Equity Ratio – it shows relationship between the Shareholders

Fund & Debt Funds
D/E Ratio = Total Debt
Shareholders Equity /Fund
4. Capital Gearing Ratio: Fixed Income bearing Fund (Debt+ Pref Shares)
Fluctuating Income Bearing Funds (ESC + R&S)
 It shows relationship between fixed & fluctuating income bearing
securities
5. Interest Coverage Ratio = It measure the firms ability to pay the
fixed interest liabilities out of profit.
IC Ratio = Earning Before Int & Taxes / Interest
(It will be in Times)

C. Turnover Ratios / Activity Ratios: means Ratios which are linked

or related to Turnover
1. Capital Turnover Ratio= Sales / Capital Employed
2. Fixed Assets Turnover ratio = Sales / Fixed Assets
3. Working Capital T/o Ratio = Sales / WC
4. Stock Turnover Ratio = COGS / Avg Stock
COGS= Sales – GP or
COGS= Op Stock+ Pur+ Direct Exp- Cl.stock
Avg Stock = Op. Stock + Cl. Stock / 2
5. Debtors Turnover Ratio = Net Sales / Total Receivables
6. Creditors Turnover Ratio =Total Net Purchases / Total Creditors
D.PROFITABILITY RATIOS – It measures the Profitability or
operational efficiency of firm
1. Return on Equity Shareholders’ fund
= Profit After tax- Pref Dividend
Equity Shareholders Fund (ESC+ RS)

2. Return on Shareholders’ fund

= Profit After tax
Shareholders Fund (ESC+PSC+ RS)
3. EPS (Earning Per Share) = Profit After tax- Pref Dividend
No of Equity Share
4. Price Earning Ratio = it shows payback period to the investors
P/E Ratio = MPS / EPS
5. Dividend Per Share = Total Dividend / No of Equity Shares
6. Return on Capital Employed = EBIT / Total Capital Employed
(Return on Investment)
7. G P Ratio = Gross Profit / Net Sales x 100
8. N P Ratio = Net Profit / Net Sales x 100
9. Expense Ratio = Expenses / Sales x 100
10.Operating Expenses Ratio = (COGS + Operating exps) x 100
Net Sales