RATIO ANALYSIS

By Dr K K Choudhary

PPT – 1
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 Introduction of Ratio Analysis
• Ratio analysis is the process of
identifying the financial health of an
Enterprise by establishing proper
relationship between items of Financial
Statement. It is one of the important
tool of Financial Analysis . Various types
of accounting ratios are calculated and
interpreted under ratio Analysis.
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 Types of Accounting Ratios

• (A) Profitability Ratios

• (B) Activity Ratios
• (C ) Liquidity Ratios
• (D ) Solvency Ratios

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 Profitability Ratios

Profitability refers to the ability of

firm to earn maximum from
maximum profit through
utilization of available resources
and those ratios which shows the
profitability position of business .
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Analysis of various aspects of profit
Amount
(Rs)

. Gross sales / Revenue from operation

Less : sales Return
………..
………..
Net Sales / Net Revenue from operation …………
Less : Cost of Goods sold / Cost of revenue from operation ………
Gross Profit ……….
Less : Operating Expenses ……….
Net Operating Profit ……….
Less : Non operating expenses and losses (……….)
Add : Non Operating Income ………..
Profit before Interest and Tax ( PBIT ) ………..
Less : Interest on Long term loan ………..
Profit before Tax (PBT) ………..
Less : Income Tax ………..
Profit After Tax ( PAT) ………….

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 Operating Expenses
• Operating Expenses refers to those expenses
which is related to principal revenue
producing activities of business . For example
– salary, Rent, Commission , Advertisement
Expenses, Administrative Expenses, Printing
and stationery, Bad debts , Depreciation, sales
promotion expenses, Audit Fee , Interest on
bank overdraft etc

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Non Operating Expenses and losses
• Non Operating Expenses and losses refers to
those expenses and losses which is not related
to principal revenue producing activities of
business . For example – Loss on sale of
assets , Preliminary Expenses Written off ,
Goodwill Written off, Patent right Written off,
Discount on Issue of shares and Debenture
written off , Underwriting Commission, etc

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 Non Operating Income
• Non Operating Income refers to those Income
which is not earned through principal
revenue producing activities of business . For
example – Commission Received , Discount
Received , Dividend Received , Interest on
Investment , Interest on Bank Deposit , Profit
on sale of Fixed Assets, etc.

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 Types of Profitability Ratios

I. Profitability Ratios based on

sales .
II. Profitability Ratios based on
Capital Employed
III. Profitability Ratios based on
Return on Share
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Types of Profitability Ratios based on Sales

1. Gross Profit Ratio

2. Net Profit Ratio
3. Net Operating Profit Ratio
4. Net Operating Ratio
5. Particular Expenses Ratio
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 1. Gross Profit Ratios

This ratio shows the relationship

between Gross profit and Net
Revenue from Operation(Net
Sales) . Gross profit Ratio =
Gross profit x 100/ Net
Revenue from Operation
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 Gross Profit

Gross Profit = Net Revenue from

Operation (Net sales ) – Cost of
Goods Sold
Net Revenue from Operation(Net
Sales) = Revenue from Operation
( Gross Sales) – Sales Return
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 Cost of Goods Sold

Cost of Goods Sold or Cost of

Revenue from Operation =
Opening stock + Net purchase
+ Direct Expenses – Closing
Stock

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 2. Net Profit Ratio

This ratio shows the

relationship between net
profit (PAT) and Net Revenue
from operation.
Net Profit Ratio = PAT x 100/ Net
Revenue from operation
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 3. Net Operating Profit Ratio
This ratio shows the relationship
between Net operating profit (NOP)
and Net Revenue from
operation(Net Sales) .
Net Operating Profit Ratio = Net
operating Profit x 100/ Net
Revenue from operation
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 4. Operating Ratio

This ratio shows the relationship

between operating Cost and Net
Revenue from operation(Net
Sales) .
Operating Ratio = operating Cost x
100/ Net Revenue from operation
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 Operating Cost

Operating Cost is the sum of

Cost of goods sold ( Cost of
Revenue from operation) and
Operating Expenses

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 5. Particular Expenses Ratio
This ratio shows the relationship
between particular Expenses and
Net Revenue from operation(Net
Sales) .
Particular Expenses Ratio = Particular
Expenses x 100/ Net Revenue from
operation
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 Numerical Problems
• Ques : Calculate Gross Profit Ratio, Net
Operating Profit Ratio, Operating Ratio, Net
Profit Ratio and Administrative Expenses Ratio
from the following Ratio :
Sales Rs105000, Sales return Rs 5000 , Cost of
Goods Sold 60000 Administrative Expenses Rs
10000, Depreciation Rs 5000, Loss on sale of
Assets Rs 5000, Dividend Received Rs 5000,
Interest on loan Rs 10000, Income Tax Rs 5000
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 Ans :
Analysis of various aspects of profit
Amount

.
(Rs)
Gross sales / Revenue from operation 105000
Less : sales Return 5000
Net Sales / Net Revenue from operation 100000
Less : Cost of Goods sold / Cost of revenue from operation 60000
Gross Profit 40000
Less : Operating Expenses ( Adm Exp + Depreciation ) 15000
Net Operating Profit 25000
Less : Non operating expenses and losses (5000)
Add : Non Operating Income ( Dividend Received ) 5000
Profit before Interest and Tax ( PBIT ) 25000
Less : Interest on Long term loan 10000
Profit before Tax (PBT) 15000
Less : Income Tax 5000
Net Profit or Profit After Tax ( PAT) 10000

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 Computation of Ratios
• 1. Gross Profit Ratio = Gross Profit x 100 / Net Sales = 40000 x 100/ 100000 = 40 %
• 2. Net Operating Ratio = NOP x 100/ Net Sales
• = 25000 x 100/ 100000
= 25 %
• 3. Operating Ratio = Operating Cost x 100/ Net Sale = (60000+ 15000) x 100 /
100000
= 75 %
4. Net Profit Ratio = Net profit x 100/ Net Sales
= 10000x 100/ 100000= 10 %
5. Administrative Expenses Ratio = Adm. Expenses x 100/ Net Sales
= 10000 x 100 / 100000
= 10 %

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