# Ratio Analysis

It is process of identifying strength and weakness in various area of an organization with the help of ratios of relevant accounting figures. Ratio is the mathematical expression of relationship between two figures and the expression may b either in the form of pure ratio or percentage

Ratio Analysis involves four steps Selection of relevant accounting data from financial statement  Constructing ratios of related accounting figures  Comparing the ratio thus constructed with standard ratio which may b the corresponding past ratio of the firm  Interpretation of ratio  .

Classification of accounting Ratio according to source    Balance sheet ratio Profit& loss account ratio Mixed ratio According to different aspects of firm’s operation  Liquidity  Long-term solvency  Efficiency or turnover ratio  Profitability ratio .

long –term solvency position  Signal of corporate sickness  .Importance of Ratio analysis Forecasting and planning  Budgeting  Evaluation of departmental activity  Communication  Measurement of efficiency in utilization of assets  Inter-firm comparison  Indication of liquidity position.

Balance sheet Ratios       Current –ratio Quick ratio Cash ratio Cash to current liability Debt-equity ratio Proprietary ratio .

Profit &loss account ratio  Gross profit ratio  Operating ratio  Operating profit ratio  Net profit ratio  Interest coverage ratio .

Current Ratio/working capital ratio  Current ratio =Current Assets/current liabilities .

Factor affecting short –term liquidity position  Type of business  Type of products  Reputation of the concern  Seasonal influence  Type of asset available .

Quick ratio/Acid Test Ratio  Quick ratio= quick assets/quick liabilities Quick asset=current asset-(inventory+prepaid exp) Quick liability=current liabilities.bank O/D Ideally quick ratio should be 1:1. .

Cash ratio  Cash ratio=( cash+ marketable securities)/CL  Ideally cash ratio should be 1:2. .

b. Net sales/ average inventory  Debtor turnover ratio= credit sales/average debtor debtors collection period=365/  Creditors turnover ratio=credit purchase/ average creditors  Capital turnover ratio= sales/capital employed .Turnover ratio   Fixed asset turnover ratio= sales/FA Current asset turnover ratio=sales/CA   Working capital turnover ratio=net sales/working capital Inventory turnover ratio Cost of good sold /average inventory a.

Operating ratio= (operating cost+ cogs)/sales Operating profit ratio=operating profit/sales = (sales-operating cost-cogs)/sales Net profit ratio=Net profit after tax/sales ROCE=EBIT/capital employed Return on equity capital=( net profit after tax-preference dividend)/(equity capital+ reserve & surplus)      .Profitability Ratio  Gross profit ratio= gross profit/sales =(sales-cost of good sold)/sales.

Profitability ratio  Earning per share= (net profit after tax.preference dividend)/ no. of equity shares  Dividend Yield ratio=dividend per share/market value per share  Price –Earning ratio=market price per share/EPS  Dividend pay-out ratio=dividend per share/earning per share. .

Long-term financial position     Debt-equity ratio Proprietary ratio=shareholders wealth/total asset Interest coverage ratio(debt service)=EBIT/fixed interest charges Debt service coverage ratio= (NPAT+ depreciation+ interest on long-term loan)/(interest on Long Term Loan+instalments of long term loan) .

Cash Market capitalization= CMP* no. of share  EV/sales  Book value= Net worth /no. Of share  PEG=PE/earning growth .Valuation Ratio  EV/EBIDTA EV=Enterprise Value= Market capitalization+Debt.

PBIT Sales PBIT RONA=   Net Assets Net Assets Sales PAT Sales PBIT  PAT Net Assets  ROE      Net Worth Net Assets Sales  PBIT Net Worth   ROE  Assets turnover × Margin × Leverage 16 .DuPont Analysis DuPont Analysis integrates the important ratios to analyse a firm's profitability.

Du Pont Analysis .