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1.Financial statements contain a number of balances.

2.These are actual figures and cannot be compared

with bench mark levels.

3.It is not possible to compare financials of two or

more companies on the basis of actual figures.

4.To make an effective comparison these figures are

reduced to ratios
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 Long Term Uses

Long Term Sources

NWC (Net Working Capital)

Short Term Sources Short Term Uses

(Current Liabilities) (Current Assets)

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 Current Asset
Current Liability

Measures the liquidity of the company with respect to

its capacity to meet its short term liabilities out of its
short term assets. Benchmark ratio 1.33:1 liability

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 (Current Asset – Stock)
(Current Liabilities – Cash Credit)

Measures the capacity to meet pressing short term

liabilities. Ratio should ideally be 1 or more.

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 Term loan + Debentures +
Deferred Credits + Deposits from public
Equity share capital + free reserves and surplus +
portion of debentures to be compulsorily converted
into equity shares

It indicates the owners stake in the business as

compared to the total long term debt. Generally
accepted level is 2:1. In project loans, term debt
including the proposed loan should not exceed 3:1
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 Total Outside Liabilities
Tangible Net Worth

It indicates the owners stake in the business as

compared to the total outstanding liabilities.
Benchmark is 3:1 with a maximum of 3.5:1. In case of
traders this ratio may be substantially higher.

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 Net Profit after Tax X 100
Tangible Net Worth

Indicates the return to the investors on the money

they have invested in the business.

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 Operating Profit+ Interest
(Net Fixed Assets + Investments+ Current assets-
Creditors-Provisions)

Indicates the return on the owners funds and long

term borrowings. An increasing ratio over the years is
a positive sign

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 Profit before interest and tax
Annual interest

It is an indicator of the firm’s interest paying capacity.

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 PAT + Depreciation + Interest on Term Debts +
Amortization of Preliminary Expenses
TL installment + Term loan interest

Reflects the firm’s capacity to service term loan

interest and installment. Ideal ratio is 2:1. Acceptable
ratio is 1.5:1

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 Net Fixed Assets + Capital Work-in-process
Term Loans + Deferred Credits + Debentures secured
by first charge over fixed assets.

Indicates the extent to which secured loans are

covered by Fixed assets. Generally accepted level is
1.5 times.

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 Net Profit X 100
Sales

Indicates the overall profitability of the firm. An

increasing trend over the years indicates a positive
outlook.

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 Gross Profit X 100
Sales

Measures the operating efficiency of the firm. An

increasing trend over the years indicates a positive
outlook

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 Net profit after tax
No. of equity shares

Reflects the profit generated per share.

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 Tangible net worth
No of shares

It indicates the worth of each share.

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 Market price of the share
Earnings per share

Reflects the earnings of the company in relation to

the market price of the share. A higher ratio indicates
the market’s confidence in the growth of the
company.

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 THANK YOU

10 May 2023