A

STUDY OF RATIO ANALYSIS

PROJECT REPORT SUBMITTED TO
SAVITRIBAL PHULE PUNE UNIVERSITY, FOR THE
AWARD OF
BACHELOR IN BUSINESS ADMINISTRATION
(BBA)
SUBMITTED BY
Mr. SHIVAM SHIVKUMAR KHARULE
UNDER THE GUIDANCE OF
Prof. Prerna Tulve
THROUGH
SNBP COLLEGE OF ARTS COMMERCE SCIENCE
AND MANAGEMENT STUDIES, MORWADI,
PIMPRI
 CERTIFICATE
This is to certify that Shivam Shivkumar Kharule of
the class TY BBA, . Has Satisfactorily completed
project and semester 5 . As laid down by the
Savitribai Phule Pune University Pune
for the academic year 2022-2023
 ACKNOWLEDGMENT
Firstly, I would Like to Praise and Thank Almighty to Help
Me Successfully Come till This Point of My Life. May He
Always Keep Showering His Blessings on All of Us.
I Wish to Express My Deep Sense of Gratitude to Prof.
Prema Miss for Her Valuable Advice and Guidance to
Me Throughout My Project.
I Would Like to Place on Record My Sincere Thanks to
Memorandum with Reference to Business
Communication.
I Would Like to Express My Willingness and Gratitude to
Prema Miss for Giving Me an Opportunity to do
Project on Memorandum. Lastly, But Not the Least
Express My Gratitude to My Beloved Parents and
Brothers and I Would Like to
Thank My Friends and All the Other People Who Directly
and Indirectly Help Me During This Project
SHIVAM SHIVKUMAR KHARULE
 DECLERATION:
I, the undersigned Mr. SHIVAM SHIVKUMAR
KHARULE hereby declare that the Project report
entitled "Memorandum, with
reference to Business Communication Written and
Submitted by Me to University of Pune in Partial
fulfilment of The Requirement for Award of Degree
of Bachelor of Business Administration Under the
Guidance of Prof. Prema Mam Is my original Work
the Empirical Findings and Suggestion in The Report
Are Based on The Original Information Collected By
me
Place:
Date:.

Name & Sign Of Student

 Ratio Analysis

Executive Summary:
 This report is an analysis of the financial
operations and performance of the company for
themonth of November 2012. This report
will provide an assessment and analysis of
theprofitability, liquidity, performance and
financial position of the Sports Station using
figuresfrom the financial statements for the
month of November 2012.In the analysis,
financial ratios were used to gain a critical
review of the specific areas ofassessment of
the company’s performance. The ratios were
able to provide a clear view of theoverall
performance of the company.From the ratios we
can say that the month of November 2012 has
not been profitable mainlybecause of high
expenditures mainly rates and insurance. Gross
Profit margin is very good whichimplies that
direct costs are properly monitored.The
company has a healthy liquidity positionwhich
means that it can rely on its current assets to
finance the current liabilities and does nothave
to commit to long term debts. However, it can
be noticed that the future does not lookbright,
firstly because of recurring losses and secondly
because unhealthy financing structuregiving
that it relies a heavily on debts.It has been
recommended that the company should look
into ways of improving sales in periodof low
demand to improve profitability and also
increase financing to expand and grow
thebusiness.The analysis is limited mainly due
to the fact that it is based on one month
transactions, andhence no comparative study
has been made possible. Given the nature of the
business, it wouldhave been interesting to
evaluate the business by comparing with past
months results and
Introduction:
The term “ratio analysis” refers to the
analysis of the financial statements in
conjunction with
the interpretations of financial results of a
particular period of operations, derived with
the help of ‘ratio’. Ratio analysis is used to
determine the financial soundness of a
business concern.

In this blog post, we will introduce ratio

analysis, what it is used for, what are the
advantages and
disadvantages of it and its limitations.

A financial ratio or accounting ratio is a

relative magnitude of two selected numerical
values taken from an enterprise's financial
statements. Often used in accounting, there are
many standard ratios used to try to evaluate the
overall financial condition of a corporation or
other organization. Financial ratios may be used
by managers within a firm, by current and
potential shareholders (owners) of a firm, and
by a firm's creditors. Financial analysts use
financial ratios to compare the strengths and
weaknesses in various companies.[1] If shares in
a company are traded in a financial market, the
market price of the shares is used in certain
financial ratios.
Ratios can be expressed as a decimal value, such
as 0.10, or given as an equivalent percent value,
such as 10%. Some ratios are usually quoted as
percentages, especially ratios that are usually or
always less than 1, such as earnings yield, while
others are usually quoted as decimal numbers,
especially ratios that are usually more than 1,
such as P/E ratio; these latter are also
called multiples. Given any ratio, one can take
its reciprocal; if the ratio was above 1, the
reciprocal will be below 1, and conversely. The
reciprocal expresses the same information, but
may be more understandable: for instance, the
earnings yield can be compared with bond
yields, while the P/E ratio cannot be: for
example, a P/E ratio of 20 corresponds to an
earnings yield of 5%.

Ratio analysis is a quantitative method of

gaining insight into a company's liquidity,
operational efficiency, and profitability by
studying its financial statements such as the
balance sheet and income statement. Ratio
analysis is a cornerstone of fundamental equity
analysis.

Investors and analysts employ ratio

analysis to evaluate the financial health of
companies by scrutinizing past and current
financial statements. Comparative data can
demonstrate how a company is performing over
time and can be used to estimate likely future
performance. This data can also compare a
company's financial standing with industry
averages while measuring how a company
stacks up against others within the same
sector.
 Investors can use ratio analysis easily, and
every figure needed to calculate the ratios is found
on a company's financial statements.
Ratios are comparison points for companies. They
evaluate stocks within an industry. Likewise, they
measure a company today against its historical
numbers. In most cases, it is also important to
understand the variables driving ratios as
management has the flexibility to, at times, alter its
strategy to make its stock and company ratios more
attractive. Generally, ratios are typically not used in
isolation but rather in combination with other ratios.
Having a good idea of the ratios in each of the four
previously mentioned categories will give you a
comprehensive view of the company from different
angles and help you spot potential red flags.
Ratio Analysis Ratio Analysis can be
defined as the study and interpretation of
relationships between various financial
variables, by investors or lenders. It is a
quantitative investment technique used for
comparing a company's financial
performance to the market in general. A
change in these ratios helps to bring about
a change in the way a company works. It
helps to identify areas where the
management needs to change.
Types of Ratios Calculated A number of ratios
are calculated by companies for evaluating their
short and long term performance and also to
know liquidity and profitability. Some of the
most commonly used ratios are:
Liquidity ratios: Can be defined as a ratio that
indicates what proportion of a company's assets
can be readily converted into cash in the short
term. Some of the liquidity ratios are: • Current
ratio • Quick ratio • Defensive interval ratio •
Activity ratio • Acid turnover • Receivable
turnover • Inventory turnover Profitability ratio:
Can be defined as a ratio that explains the
profitability of a company during a specific
period of time. It explains how profitable a
company is. These ratios can be compared
during different financial years to see the overall
performance of a company. Some of the
profitability ratios calculated are: • Return on
assets • Return on common stock equity • Profit
margin • Leverage ratio • Debt ratio • Equity
ratio • Debt to equity ratio • Times interest
earned • Degree of financial leverage • Per
share ratios • Earnings per share • Price
earnings ratio • Book value per share • Yield on
common stock • Dividend payout ratio

Accounts payable is the amount of money that

a company owes to its vendors for goods and
services purchased on credit. It is a current
liability of a company and has to be fulfilled
within a year.
Accounts payable result in negative cash flow
of a company at the time they are paid off.
Every company keeps a track of its accounts
payable and also the time period when it is to
be paid.
Accounts Payable Auditing Professional
auditors insist their clients to provide approved
invoices, supporting documents and expense
reports at the time of making payments through
checks and other methods. This helps to keep a
track of all the documentation related to
purchase and also keep a check on the
genuineness of invoice. Inflated or duplicate
invoices get eliminated at this stage.
Advantages of Accounts Payable Outsourcing
Outsourcing the accounts payable process can
help the organization by: Providing a method of
internal control Providing expense
administration Providing monthly reconciliation
of accounts payable Saving time and man
hours Preventing fraudulent invoices Preventing
overpayment and duplicate invoices

Accounts receivable is the amount of money

owed to an individual, company, organization
for the goods / services provided to them. It is a
current asset of a company and represents the
amount that customers owe to a business.
Accounts receivable are payable by the
customers within a year from the date of sale of
goods / services.

Accounts receivable recognition Accounts

receivable valuation Accounts receivable
disposal These processes can be cumbersome
and time consuming therefore, large
organizations either use accounting softwares
or outsource the process to professional
accounting firms. This helps to manage it in a
better way.
Organizations realize that not all debts will be
collected and recovered, so they make an
allowance for bad debts, that are in turn
subtracted from the total accounts receivable.
Accounting firms collect debts on behalf of their
clients through settlement offers, payment plan
negotiation and sometimes legal action.
Objectives & Scope:
Interpreting the financial statements and other
financial data is essential for all stakeholders of an
entity. Ratio Analysis hence becomes a vital tool for
financial analysis and financial management. Let us
take a look at some objectives that ratio analysis
fulfils.

Browse more Topics under Accounting Ratios

• Types of Ratios
• Liquidity Ratios
• Activity (or turnover) Ratios
• Solvency Ratios
•Profitability Ratios
1] Measure of Profitability
Profit is the ultimate aim of every organization. So if
I say that ABC firm earned a profit of 5 lakhs last
year, how will you determine if that is a good or bad
figure? Context is required to measure profitability,
which is provided by ratio analysis. Gross Profit
Ratios, Net Profit Ratio, Expense ratio etc provide a
measure of the profitability of a firm. The
management can use such ratios to find out problem
areas and improve upon them.

2] Evaluation of Operational Efficiency

Certain ratios highlight the degree of efficiency of a
company in the management of its assets and other
resources. It is important that assets and financial
resources be allocated and used efficiently to avoid
unnecessary expenses. Turnover Ratios and
Efficiency Ratios will point out any mismanagement
of assets.

3] Ensure Suitable Liquidity

Every firm has to ensure that some of its assets are
liquid, in case it requires cash immediately. So
the liquidity of a firm is measured by ratios such as
Current ratio and Quick Ratio. These help a firm
maintain the required level of short-term solvency.
4] Overall Financial Strength
There are some ratios that help determine the firm’s
long-term solvency. They help determine if there is a
strain on the assets of a firm or if the firm is over-
leveraged. The management will need to quickly
rectify the situation to avoid liquidation in the future.
Examples of such ratios are Debt-Equity Ratio,
Leverage ratios etc.

5] Comparison
The organizations’ ratios must be compared to the
industry standards to get a better understanding of its
financial health and fiscal position. The management
can take corrective action if the standards of the
market are not met by the company. The ratios can
also be compared to the previous years’ ratio’s to see
the progress of the company. This is known as trend
analysis.

The ratio analysis is one of the most powerful

tools of financial analysis. The firm is answerable to
the owners, the creditors and employees. The firm
can reach a number of parties. On the other hand,
parties interested in the business can compute ratios
based on the financial statements of the firm. The
analysis is not restricted to any one aspect but takes
into account all aspects such as earning capacity of
the firm, financial obligation, liquidity and solvency
aspects, liquidity and profitability concepts.
Interpreting the financial statements and other
financial data is essential for all stakeholders of an
entity. Ratio Analysis hence becomes a vital tool for
financial analysis and financial management. Let us
take a look at some objectives that ratio analysis
fulfils.
6] Measuring Efficiency
Operating ratios are calculated for the purpose
of measuring the operational efficiency of the
business.

7] Solvency of the Business

Solvency ratios establish the relationship
between the total assets and total liabilities of a
concern. It helps to show whether the firm has
enough assets to fulfill its debt obligations. Any
firm which has enough assets will be
considered solvent.
8] Financial Status of the Company
Fixed assets ratio and debt-equity ratio come
under this category. These ratios are used to
determine the financial status of the company. It
is also useful for determining and comparing
the long-term and short-term financial standing
of the firm. For long-term financial status,
various ratios such as proprietary ratios and
fixed assets ratios are used. Current and Liquid
ratios are used for determining short-term
financial status.

9] Comparative Analysis
Ratios can be used for making temporal
comparisons between the performances of the
business. It can also be used for comparing two
business identities having similar or different
features. This analysis helps in determining the
strengths and shortcomings of a business.

Objectives of Ratio Analysis are:

1. Simplify accounting information.
2. Determine liquidity or Short-term solvency
and Long-term solvency. Short-term solvency
is the ability of the enterprise to meet its
short-term financial obligations. Whereas,
Long-term solvency is the ability of the
enterprise to pay its long-term liabilities of
the business.
3. Assess the operating efficiency of
the business.
4. Analyze the profitability of the business.
5. Help in comparative analysis, i.e. inter-firm
and intra-firm comparisons.
Review Of Literature:
Firms and Companies include ‘Ratios’ in
their external report to which it can be referred
as ‘highlights’. Only with the help of ratios the
financial statements are meaningful. It is
therefore, not surprising that ratio analysis
feature are prominently in the literature on
financial management. According to Mcleary
(1992) ratio means “an expression of a
relationship between any two figures or groups
of figures in the financial statements of an
undertaking”.

This ratio is expressed in percentage. If the

ratio is high it shows that the company is
utilizing its assets in better way to generate its
income. If the ratio is less it shows that the
company is in difficult position to meet its debt.
Formula to find the return on assets ratio is: -
return on assets = net profit / total assets.
Whereas net profit means the amount arriving
after deducting all the expenses which includes
taxes also. In addition to this he also explains
about the profit margin ratio (PMR). PMR is the
ratio which expresses the relationship between
profit and sales.
In this ratio he explains about the three types of
business inventory like raw materials, work in
progress and finished goods. Formula to find
the inventory turnover ratio and average age of
inventory is: - inventory turnover = costs of
goods sold/average inventory, Average age of
inventory = 360 days/inventory turnover ratio.
• Lucia Jenkins (2009), has identified the use of
many financial ratios which are helpful in
gaining more clear output of a particular
company’s or firm’s financial matter. According
to him he thinks that variable and fixed costs of
the firms are very important.
ReviewReview of Literature refers to the collection
of the results of the various researches relating to
the present study. It takes into consideration the rese
arch of the previous researchers which arerelated to
the present research in any way. Here are
the reviews of the previous researches relatedwith
the present study:

Bollen (1999) conducted a study on Ratio

Variables on which he found three different
uses of ratio variables in aggregate data analysis:
(1) as measures of theoretical concepts, (2) as a
meansto control an extraneous factor, and (3) as a
correction for heteroscedasticity. In the use of
ratiosas indices of concepts, a problem can arise
if it is regressed on other indices or variables
thatcontain a common component. For
example, the relationship between two per
capita measuresmay be confounded with the
common population component in each
variable. Regarding thesecond use of ratios, only
under exceptional conditions will ratio variables be
a suitable means of controlling an extraneous
factor. Finally, the use of ratios to correct for
heteroscedasticity is alsooften misused. Only
under special conditions will the common form
forgers soon with
ratiovariables correct for heteroscedasticity.
Alternatives to ratios for each of these cases
arediscussed and evaluated.
Research Methodology:
The various kinds of financial ratios available
may be broadly grouped into the following six
silos, based on the sets of data they provide:
1. Liquidity Ratios
Liquidity ratios measure a company's ability to
pay off its short-term debts as they become
due, using the company's current or quick
assets. Liquidity ratios include the current ratio,
quick ratio, and working capital ratio.
2. Solvency Ratios
Also called financial leverage ratios, solvency
ratios compare a company's debt levels with its
assets, equity, and earnings, to evaluate the
likelihood of a company staying afloat over the
long haul, by paying off its long-term debt as
well as the interest on its debt. Examples of
solvency ratios include: debt-equity ratios, debt-
assets ratios, and interest coverage ratios.
3. Profitability Ratios
These ratios convey how well a company can
generate profits from its operations. Profit
margin, return on assets, return on equity,
return on capital employed, and gross margin
ratios are all examples of profitability ratios.
4. Efficiency Ratios
Also called activity ratios, efficiency
ratios evaluate how efficiently a company uses
its assets and liabilities to generate sales and
maximize profits. Key efficiency ratios include:
turnover ratio, inventory turnover, and days'
sales in inventory.
5. Coverage Ratios
Coverage ratios measure a company's ability
to make the interest payments and other
obligations associated with its debts. Examples
include the times interest earned ratio and
the debt-service coverage ratio.
6. Market Prospect Ratios
These are the most commonly used ratios in
fundamental analysis. They include dividend
yield, P/E ratio, earnings per share (EPS),
and dividend payout ratio. Investors use these
metrics to predict earnings and future
performance.
For example, if the average P/E ratio of all
companies in the S&P 500 index is 20, and the
majority of companies have P/Es between 15
and 25, a stock with a P/E ratio of seven would
be considered undervalued. In contrast, one
with a P/E ratio of 50 would be considered
overvalued. The former may trend upwards in
the future, while the latter may trend
downwards until each aligns with its intrinsic
value.
7.Profitability Ratios
This type of ratio analysis suggests the returns
generated from the Business with the Capital
Invested.

8.Gross Profit Ratio

It represents the company’s operating profit

after adjusting the cost of the goods that are
sold. The higher the gross profit ratio, the lower
the cost of goods sold, and the greater
satisfaction for the management.
Gross Profit Ratio Formula = Gross Profit/Net
Sales*100.
Net Profit Ratio

It represents the company’s overall profitability

after deducting all the cash & no cash expenses:
the higher the net profit ratio, the higher
the net worth, and the stronger the balance
sheet.
Net Profit Ratio Formula = Net Profit/Net
Sales*100

9.Operating Profit Ratio

It represents the soundness of the company and

the ability to pay off its debt obligations.

Operating Profit Ratio Formula = Ebit/Net

sales*100
Finding & Conclusion:
When investors wish to compare the financial
performance of different companies, a highly
valuable tool at their disposal is ratio analysis.
Ratio analysis can provide insight into
companies' relative financial health and future
prospects. It can yield data about profitability,
liquidity, earnings, extended viability, and more.
The results of such comparisons can mean
more powerful decision-making when it comes
to selecting companies in which to invest.
It's important that investors understand that a
single ratio from just one company can't give
them a reliable idea of a company's current
performance or potential for future financial
success. Use a variety of ratios to analyze
financial information from various companies
that interest you in order to make investment
decisions.
Bibliography:
http://www.google.com
http://www.wikipedia.com
http://chrome.com
http://businessmanagement.com
http://secondarymarket.com