1. Ratio Analysis
B.V.Raghunandan,
SVS College,
Bantwal Page 1

2. Definition
Ratio Analysis is a financial technique of
measuring the strength and weakness of
an organisation out of information
available from financial reports
specifically from the Balance Sheet and
Income Statement
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3. Advantages
• Measuring the efficiency of organisations
• Measuring the liquidity position of the companies
• Measuring the capacity of companies to borrow in the
future
• Understanding the overall financial position of
organisations
• Estimating the solvency of the companies
• Helping in forecasting Page 3

4. Disadvantages
• Only quantitative tools
• Manipulation of accounting
figures
• Too many analytical tools lead to
varied interpretation
• Based on past data
• Same data may be interpreted in
different ways
• Vested interests
• Measuring the changes in price
levels
• Accounting policies have the
impact
• Only symptoms and not cure
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5. A] Liquidity Ratios
B] Solvency Ratios
C] Activity Ratios
D] Profitability Ratios
Different Ratios E] Shareholders’Page 5
Ratios

6. A] Liquidity Ratio
CurrentAssets
• Current Ratio =
CurrentLiabilities
CurrentAss ets Clo sin gStock
• Acid Test Ratio=
CurrentLia bility
Sales
• Working Capital Turnover Ratio =
WorkingCapital
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7. A. Liquidity Ratios
• Used to study the ability of the organisation in
meeting short-term payments or obligations
• Includes:
1) Current Ratio,
2) Acid Test Ratio and
3) Working Capital Turnover Ratio
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8. 1) Current Ratio
• Relation between current assets and current
liabilities
• Long Term Sources Financing the Current
assets give a stable base for the liquidity of the
organisation
• Normally , the ratio should not be less than 2
i.e., the current assets should be double the
size of current liabilities
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9. Measurement of Current Ratio
CurrentAssets
Current Ratio = CurrentLiabilities
Page 9

10. Precautions to be Taken for Current Ratio
• Proper Valuation of assets and • Advance payments for fixed
liabilities assets should be excluded
• Provision for Bad Debts • Instalment payments are part
• Useless Inventory Deducted of current liabilities
• Loose Tools are not current • Bank overdraft and cash credit
assets are part of current liabilities
• Short Term Investment can be • Bills Receivables are a part of
part of current assets current assets
• Long Term investment like • Bank Loans should not be
capital of subsidiary is not treated as current liabilities
current asset • Advances to Employees or
Utilities are to be treated as
current assets
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11. 2) Acid Test Ratio/Quick Ratio
• It is the ratio between quick assets and
quick liabilities
• Quick assets include current assets except
inventory and pre-paid expenses
• Quick liabilities include current liabilities
other than bank overdraft
• A 1:1 ratio is healthy
• Healthy indicator of cash management
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12. Measurement of Acid Test Ratio
QuickAssets
Acid Test Ratio =
QuickLiabilities
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13. 3) Working Capital Turn-over Ratio
• Shows the efficiency of usage of working
capital
• Relation between Sales and Working
Capital
• Determination of number of times the
working capital is turned over to achieve
the maximum profit
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14. Measurement of Working Capital
Turnover Ratio
NetSales
AverageWor kingCapital
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15. B. Solvency Ratios
• Measure long-term liquidity ratio
• Reflect the ability of the firm to pay interest
and repayment of loans at due dates on
the long-term loans taken
• Avoidance of over-borrowing (over-
leverage)
• Avoidance of bankruptcy by maintaining
healthy solvency ratios
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16. Types of Solvency Ratios
1) Interest Coverage
Ratio
2) Debt Ratio
3) Debt-Equity Ratio
4) Capital Gearing
Ratio
5) Proprietary Ratio
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17. 1.Interest Coverage Ratio
Pr ofitBefore Interest & Tax
InterestonLong TermDebt
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18. 2. Debt Ratio (Debt to Total Funds ratio)
LTDebt
LTDebt ShareholdersFunds
Page 18

19. 3) Debt-Equity Ratio
LongTermDebt
ShareholdersFunds
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20. 4) Capital Gearing Ratio
FixedIncomeBearingSecurities
EquityShareholdersFund
Page 20

21. 5) Proprietary Ratio
ShareholdersFunds
TotalAssets
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22. C] Activity Ratios
1) Inventory Turnover Ratio
2) Debtors Turnover Ratio
3) Average Collection Period
4) Fixed Assets Turnover Ratio
5) Total Assets Turnover Ratio
6) Capital Turnover Ratio
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23. 1) Inventory Turnover Ratio
CostofGood sSold
CostofGood sSold
AverageStock
AverageStock
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24. 2) Debtor Turnover Ratio
CreditSales
AverageDebtors
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25. 3) Average Collection Period
365(day sin aYear) / 12(months)
DebtorTurnoverRatio
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26. 4) Fixed Assets Turnover Ratio
NetSales
NetFixedAssets
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27. 5) Total Assets Turnover Ratio
NetSales
TotalAssets
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28. 6) Capital Turnover Ratio
NetSales
Long TermFunds
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29. D] Profitability Ratios
1) Net Profit Ratio
2) Gross Profit
Ratio
3) Return on Total
Assets
4) Return on Equity
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30. 1) Net Profit Ratio
Pr ofitAfterTax
X 100
NetSales
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31. 2) Gross Profit Ratio
Gross Pr ofit
X 100
Sales
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32. 3) Return on Total Assets
Pr ofitAfterTax
X 100
TotalAssets
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33. 4) Return on Equity
Pr ofitAfterT ax
X 100
Shareholders ' Funds
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34. E) Shareholders‘ Ratio
1) Earning per Share
(EPS)
2) Price-Earning Ratio
(PE Ratio)
3) Dividend Yield
Ratio
4) Dividend Pay-out
Ratio
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35. 1) Earning per Share
Pr ofitAfterT ax
NumberofEq uityShares
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36. 2) PE Ratio
Mar ker Pr iceperShare
EarningperShare
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37. 3) Dividend Yield Ratio
DividendperShare
X 100
Market Pr iceperShare
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38. 4) Dividend Pay-out Ratio
DividendperShare
X 100
EarningperShare
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39. THANK YOU
Page 39