SlideShare ist ein Scribd-Unternehmen logo
1 von 30
Downloaden Sie, um offline zu lesen
Presented By :- Ravi Pratap Singh
RATIO ANALYSIS
Ratio-analysis is a concept or technique which is
as old as accounting concept. Financial analysis
is a scientific tool. It has assumed important role
as a tool for appraising the real worth of an
enterprise, its performance during a period of
time and its pit falls. Financial analysis is a vital
apparatus for the interpretation of financial
statements. It also helps to find out any crosssectional and time series linkages between various
ratios.
RATIO ANALYSIS
Unlike in the past when security was considered to be
sufficient consideration for banks and financial
institutions to grant loans and advances, nowadays the
entire lending is need-based and the emphasis is on the
financial viability of a proposal and not only on security
alone. Further all business decision contains an element
of risk. The risk is more in the case of decisions relating to
credits. Ratio analysis and other quantitative techniques
facilitate assessment of this risk.
RATIO ANALYSIS
Ratio-analysis means the process of computing,
determining and presenting the relationship of
related items and groups of items of the financial
statements. They provide in a summarized and
concise form of fairly good idea about the
financial position of a unit. They are important
tools for financial analysis.
WHY FINANCIAL ANALYSIS
Lenders’ need it for carrying out the following
 Technical Appraisal
 Commercial Appraisal
 Financial Appraisal
 Economic Appraisal
 Management Appraisal
Ratio Analysis
It’s a tool which enables the banker or lender to
arrive at the following factors :
 Liquidity position
 Profitability
 Solvency
 Financial Stability
 Quality of the Management
 Safety & Security of the loans & advances to be
or already been provided
Before looking at the ratios there are a number of cautionary
points concerning their use that need to be identified :
a.The dates and duration of the financial statements being
compared should be the same. If not, the effects of seasonality may
cause erroneous conclusions to be drawn.
b.The accounts to be compared should have been prepared on the
same bases. Different treatment of stocks or depreciations or asset
valuations will distort the results.
c.In order to judge the overall performance of the firm a group of
ratios, as opposed to just one or two should be used. In order to
identify trends at least three years of ratios are normally required.
The utility of ratio analysis will get further
enhanced if following comparison is possible.
1.Between the borrower and its competitor
2.Between the borrower and the best enterprise in
the industry
3.Between the borrower and the average
performance in the industry
4.Between the borrower and the global average
How a Ratio is expressed?
As

Percentage - such as 25% or 50% . For

example if net profit is Rs.25,000/- and the sales
is Rs.1,00,000/- then the net profit can be said to
be 25% of the sales.
As Proportion
- The above figures may be
expressed in terms of the relationship between
net profit to sales as 1 : 4.
As Pure Number /Times - The same can also be
expressed in an alternatively way such as the
sale is 4 times of the net profit or profit is 1/4th of
the sales.
Classification of Ratios
Balance Sheet
Ratio

P&L Ratio or
Income/Revenue
Statement Ratio

Balance Sheet
and Profit & Loss
Ratio

Financial Ratio

Operating Ratio

Composite Ratio

Current Ratio
Quick Asset Ratio
Proprietary Ratio
Debt Equity Ratio

Gross Profit Ratio
Operating Ratio
Expense Ratio
Net profit Ratio
Stock Turnover Ratio

Fixed Asset
Turnover Ratio,
Return on Total
Resources Ratio,
Return on Own
Funds Ratio,
Earning per Share
Ratio, Debtors’
Turnover Ratio,
Format of balance sheet for ratio analysis
LIABILITIES

ASSETS

NET WORTH/EQUITY/OWNED FUNDS
Share Capital/Partner’s Capital/Paid up Capital/
Owners Funds
Reserves ( General, Capital, Revaluation & Other
Reserves)
Credit Balance in P&L A/c

FIXED ASSETS : LAND & BUILDING, PLANT &
MACHINERIES
Original Value Less Depreciation
Net Value or Book Value or Written down value

LONG
TERM
LIABILITIES/BORROWED
FUNDS : Term Loans (Banks & Institutions)
Debentures/Bonds, Unsecured Loans, Fixed
Deposits, Other Long Term Liabilities

NON CURRENT ASSETS
Investments in quoted shares & securities
Old stocks or old/disputed book debts
Long Term Security Deposits
Other Misc. assets which are not current or fixed in
nature

CURRENT LIABILTIES
Bank Working
Capital Limits such as
CC/OD/Bills/Export Credit
Sundry /Trade Creditors/Creditors/Bills Payable,
Short duration loans or deposits
Expenses payable & provisions against various
items

CURRENT ASSETS : Cash & Bank Balance,
Marketable/quoted Govt. or other securities, Book
Debts/Sundry Debtors, Bills Receivables, Stocks &
inventory (RM,SIP,FG) Stores & Spares, Advance
Payment of Taxes, Prepaid expenses, Loans and
Advances recoverable within 12 months
INTANGIBLE ASSETS
Patent, Goodwill, Debit balance in P&L A/c,
Preliminary or Preoperative expenses
Some important notes










Liabilities have Credit balance and Assets have Debit balance
Current Liabilities are those which have either become due for payment
or shall fall due for payment within 12 months from the date of Balance
Sheet
Current Assets are those which undergo change in their shape/form
within 12 months. These are also called Working Capital or Gross
Working Capital
Net Worth & Long Term Liabilities are also called Long Term Sources
of Funds
Current Liabilities are known as Short Term Sources of Funds
Long Term Liabilities & Short Term Liabilities are also called Outside
Liabilities
Current Assets are Short Term Use of Funds
Some important notes









Assets other than Current Assets are Long Term Use of Funds
Installments of Term Loan Payable in 12 months are to be taken as
Current Liability only for Calculation of Current Ratio & Quick
Ratio.
If there is profit it shall become part of Net Worth under the head
Reserves and if there is loss it will become part of Intangible
Assets
Investments in Govt. Securities to be treated current only if these
are marketable and due. Investments in other securities are to be
treated Current if they are quoted. Investments in
allied/associate/sister units or firms to be treated as Non-current.
Bonus Shares as issued by capitalization of General reserves and
as such do not affect the Net Worth. With Rights Issue, change
takes place in Net Worth and Current Ratio.
I. LIQUIDITY

RATIO:-

1. CURRENT RATIO :A) It is the relationship between the current assets and current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and
Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000
=2:1
The ideal Current Ratio preferred is 2:1
The Current Ratio expresses the relationship between current assets ( cash,
marketable securities, accounts receivable and inventories) and the current
liabilities (accounts payable, short-term loans, current maturities of long-term debt,
accrued income tax and other accrued expenses especially wages ).
B)

The current ratio determines the short term liquidity of the enterprise in order to pay
off its short term obligations.

C)

A higher current ratio is a clue that the company will be able to pay its debts
maturing within a year and vice-versa.

D)

A lower current ratio would reflect an inadequacy of working capital which may
deter smooth functioning of the enterprise.
Current Ratio measures short term liquidity of the concern and its ability to
meet its short term obligations within a time span of a year.
 It shows the liquidity position of the enterprise and its ability to meet current
obligations in time.
Higher ratio may be good from the point of view of creditors. In the long run
very high current ratio may affect the profitability ( e.g. high inventory carrying
cost)
 The current ratio changes from time to time, so it is to be analyzed over the
year for various periods.
 Current Ratio is to be studied with the changes of NWC. It is also necessary
to look at this ratio along with the Debt-Equity ratio.
 However, an excess of current assets does not necessarily mean that the debts
can be paid promptly. If current assets contain a high proportion of
uncollectible accounts receivables or inventories, there will be slow down in the
intake of cash. Hence the composition of current assets is to be looked after
while computing the current ratio.

NET WORKING CAPITAL

: This is worked out as surplus of Long Term
Sources over Long Tern Uses, alternatively it is the difference of Current
Assets and Current Liabilities.
NWC = Current Assets – Current Liabilities
2. ACID TEST or QUICK RATIO : It is a measure of judging the immediate
ability of the firm to pay off its current liabilities. It is the ratio between Quick
Current Assets and Current Liabilities. Ideally it should be 1:1
Quick Current Assets : Quick current assets include those assets which
can be liquidated immediately and at minimum loss in order to meet the
financial obligations. For eg:- Cash/Bank Balances, Receivables upto 6
months, Quickly realizable securities such as Govt. Securities or quickly
marketable/quoted shares and Bank Fixed Deposits
Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example :
Current Liabilities

1,00,000

Cash

50,000

Debtors
Inventories

1,00,000
1,50,000

T. Current Assets

Current Ratio = >
Quick Ratio
=>

3,00,000/1,00,000
1,50,000/1,00,000

3,00,000

= 3:1
= 1.5 : 1
3. Cash Position Ratio:-

It is calculated by relating cash and cash
equivalents to current liabilities. The
formula to calculate this ratio is :
 Cash Position Ratio
= Cash and cash equivalents
Current Liabilities
The standard for this ratio is 1:1

II. LEVERAGE RATIO :1. DEBT EQUITY RATIO : It is the relationship between borrower’s
fund (Debt) and Owner’s Capital (Equity).
Long Term Outside Liabilities / Tangible Net Worth
Liabilities of Long Term Nature
Total of Capital and Reserves & Surplus Less Intangible Assets
For instance, if the Firm is having the following :
Capital
= Rs. 200 Lacs
Free Reserves & Surplus
= Rs. 300 Lacs
Long Term Loans/Liabilities = Rs. 800 Lacs
Debt Equity Ratio will be

=> 800/500 i.e. 1.6 : 1
2. Debt to Total Assets Ratio : It is calculated as the proportion of total debts and
the total assets.
 Total Debts
Total Assets
Total Debts include :- Accounts payable ,
miscellaneous payable, mortgage and bonds
Total Assets include :- Fixed Assets + Current
Assets+ Intangible Assets
3. Long-term Debt to Total Capitalization :Mortgage+Bonds
Equity
III.ACTIVITY RATIO :1. Inventory Turnover Ratio :- It is computed by
dividing the cost of goods sold by the average
inventory for the period. This ratio gives the number
of times the inventory is replaced during a given
period, usually a year. Higher the ratio, better is the
performance of the firm, for it has managed to
operate with a relatively small average locking up of
funds.
2.

Average Collection Period:- It is a measure of
receivable turnover. It consists of two steps. In the
first step, the annual sales is divided by 365 to get the
average daily sales. In the second step, daily sales are
divided into accounts receivable to find the number of
days sales it tied up in receivables. This gives the
average collection period because it represents the
length of time that the firm must wait after making a
3. TOTAL ASSETS TURNOVER RATIO:This ratio expresses relationship between the amount
invested in the assets and the results accruing in terms
of sales. This is calculated by dividing the net sales by
total assets.
4. FIXED ASSETS TURNOVER RATIO :- This ratio is
expressed by dividing sales into fixed assets. It is used
to highlight the extent of utilization of the existing
plant capacity.
IV. PROFITABILITY RATIOS:These ratios are, as a matter of fact, best indicators of overall
financial health and efficiency of a business concern because
they compare return of value over and above the values put into
a business with sale or service carried on by the firm with the
help of assets employed.
Profitability as related to sales :1.

Gross Profit Ratio:- This ratio establishes relationship between
gross profit and sales to measure the relative operating
efficiency of the firm and to reflect its pricing policies.
GP Ratio = Sales – Cost of goods sold
Net Sales
Here, (Sales – cost of goods sold) refers to the Gross Profit & Net
sales refers to the (Total sales – Sales return)
2. OPERATING PROFIT RATIO :This ratio expresses the relationship between operating profit and
sales. It is worked out by dividing operating profit by net sales. It
helps in judging the managerial efficiency which may not be
reflected in net profit ratio. For example, a firm may have a large
amount of non- operating income in the form of dividend and
interest which represents the major proportion of the net profit.
Hence, the operating profit provides the actual efficiency, since the
non-operating income has no relation with operating efficiency of
the management.

Formula :- Operating Profit
Net sales
Operating Profit = Revenue – (cost of goods
sold+ labor + other day to day expenses)
3. Net Profit Ratio :It is calculated by dividing the net profit with net sales. Higher
ratio indicated a higher efficiency of the business and better
utilization of the resources. A low ratio would mean a poor
financial position of the company.
Formula :Net Profit
Net Sales

Profitability as related to investment :1.

Return on capital employed :- This is computed by dividing net
profit with capital employed. Net profit in this case means net
profit before taxes but less interest on short-term borrowings.
Capital employed is found out by subtracting current liabilities
from the total investment. Higher ratio indicates better
utilization of funds.
Formula :- Net Profit
Capital Employed
2. RETURN ON NET WORTH :This ratio is obtained by dividing net profit after taxes by the total
net worth. This measures the productivity of shareholders’ funds.
A higher ratio indicates better utilization of owners’ funds and
higher productivity.
3. RETURN ON ORDINARY SHAREHOLDERS’ EQUITY :- This
ratio helps us to judge whether the firm has earned a satisfactory
return for its equity holders or not. It is computed with the help
of the following formula :Formula :- Net profit after tax and preference dividend
Ordinary Shareholder’s funds
5. OTHER PROFITABILITIY RATIO :- It includes

1. Earning Per Share :- This ratio indicates
availability of the profit to the equity shareholders on
per share basis. The following formula is employed to
determine EPS :EPS = Net profit available for equity shareholders
Number of equity shareholders outstanding
Or EBIT
no. of shares
Where, EBIT = Earnings before interest and tax.
2. DIVIDEND PAYOUT RATIO :This ratio attempts to establish relationship between earnings
belonging to the ordinary shareholders and the dividends paid to
them. This ratio shows what portions of net profits after taxes and
preferences dividend is disbursed among equity shareholders.
Thus,
D/P = Total Dividend to equity shareholders
Total net profits belonging to equity-shareholders
3. YIELD :- There are two types of yield, namely earning yield and
dividend yield. The earning yield can be calculated by dividing
EPS by market value per share. This ratio helps the investors to
know the real worth of the firm.

Dividend yield ratio is measures relationship between
dividends per share and the market price per share.
Formula :-

DPS
Market value of shares
OTHER IMPORTANT RATIOS:1.

INVNENTORY TURNOVER RATIO :- It is the ratio of cost of
goods sold to average inventory. It is an activity/efficiency ratio
and it measures how many times per period a business sales and
replaces its inventory again.
Formula :Cost of goods sold
Avg. Inventory
For eg : During the year ended 31st Dec’2010, Loud Corporation sold
goods costing Rs. 324000 Its inventory at the beginning and at
the ending of the year was. Rs. 9865 and Rs. 11650 respectively.
Calculate the inventory turnover ratio of the business from the
given information :
Sol: avg. inventory = (Rs.9865+Rs. 11650)/2 = Rs. 10757.5
Inventory turnover = Cost of goods sold / Average Inventory
=(Rs. 84270/10757.5) = 7.83 times
2. DEBTOR’S TURNOVER RATIO :It is the ratio of net credit sales to average account receivables. It
is an activity that measures average no. of times a business collect
its receivables during a period usually a year.
Formula :Net Credit Sales
Average Accounts Receivables
For eg : Net credit sales of a Co. A during the year ended 30 th
June’2010 were Rs. 644790. Its accounts receivables at 1 st
July’2009 and 30th June’2010 were Rs. 43300 and Rs. 51730
respectively . Calculate Debtor’s Turnover Ratio.
Sol.: Average accounts receivables =(Rs. 43300+Rs. 5173)
=Rs. 47515
Receivable Turnover ratio = 644790/47515 = 13.57 times
3. CREDITOR’S TURNOVER RATIO :It is the ratio of net credit purchase of a business to its
average accounts payable during the period. It
measures short-term liquidity of the business, since it
shows how many during a period an amount equal to
average accounts payable is paid to supplier by a
business.
Formula :- Net Credit Purchase
Avg. Accounts payable

Weitere ähnliche Inhalte

Was ist angesagt?

Financial Statements and Credit Analysis
Financial Statements and Credit AnalysisFinancial Statements and Credit Analysis
Financial Statements and Credit AnalysisUttam Satapathy
 
Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch,...
Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch,...Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch,...
Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch,...Md. Erfanul Hoque
 
The 10 Most Important Banking Metrics
The 10 Most Important Banking MetricsThe 10 Most Important Banking Metrics
The 10 Most Important Banking MetricsJohn J. Maxfield
 
Managing balance sheet liquidity & long term funding
Managing balance sheet liquidity & long term funding Managing balance sheet liquidity & long term funding
Managing balance sheet liquidity & long term funding Dr Rajeev Jain
 
Mba iii-advanced financial management [10 mbafm321]-notes
Mba iii-advanced financial management [10 mbafm321]-notesMba iii-advanced financial management [10 mbafm321]-notes
Mba iii-advanced financial management [10 mbafm321]-notesAnita Nadagouda
 
Cost of capital1
Cost of capital1Cost of capital1
Cost of capital1Avik Das
 
Impact of aggressive working capital
Impact of aggressive working capitalImpact of aggressive working capital
Impact of aggressive working capitalDeepa Jacob
 
Overview of Working Capital Management
Overview of Working Capital Management Overview of Working Capital Management
Overview of Working Capital Management Jasimuddin Rony
 
Slbc100 assignment 1 ratio analysis - collaborate session - tp1 2014 (1)
Slbc100 assignment 1   ratio analysis - collaborate session - tp1 2014 (1)Slbc100 assignment 1   ratio analysis - collaborate session - tp1 2014 (1)
Slbc100 assignment 1 ratio analysis - collaborate session - tp1 2014 (1)Eddie Zhong
 
Development Banks & Commercial Banks
Development Banks & Commercial BanksDevelopment Banks & Commercial Banks
Development Banks & Commercial BanksYuti Nandu
 
Financial analysis on recession period conducted at mahindra & mahindra tractors
Financial analysis on recession period conducted at mahindra & mahindra tractorsFinancial analysis on recession period conducted at mahindra & mahindra tractors
Financial analysis on recession period conducted at mahindra & mahindra tractorsProjects Kart
 
The need for and importance of financial analysis and control for company val...
The need for and importance of financial analysis and control for company val...The need for and importance of financial analysis and control for company val...
The need for and importance of financial analysis and control for company val...FahimNeloy47
 
CAPITAL BUDGETING - Meaning, Definition, Needs, Significance, Process & Appra...
CAPITAL BUDGETING - Meaning, Definition, Needs, Significance, Process & Appra...CAPITAL BUDGETING - Meaning, Definition, Needs, Significance, Process & Appra...
CAPITAL BUDGETING - Meaning, Definition, Needs, Significance, Process & Appra...Sundar B N
 
Financing of Current Asset
Financing of Current AssetFinancing of Current Asset
Financing of Current Assetsheetalverma38
 

Was ist angesagt? (17)

Financial Statements and Credit Analysis
Financial Statements and Credit AnalysisFinancial Statements and Credit Analysis
Financial Statements and Credit Analysis
 
Ratio download
Ratio downloadRatio download
Ratio download
 
Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch,...
Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch,...Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch,...
Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch,...
 
The 10 Most Important Banking Metrics
The 10 Most Important Banking MetricsThe 10 Most Important Banking Metrics
The 10 Most Important Banking Metrics
 
Managing balance sheet liquidity & long term funding
Managing balance sheet liquidity & long term funding Managing balance sheet liquidity & long term funding
Managing balance sheet liquidity & long term funding
 
Mba iii-advanced financial management [10 mbafm321]-notes
Mba iii-advanced financial management [10 mbafm321]-notesMba iii-advanced financial management [10 mbafm321]-notes
Mba iii-advanced financial management [10 mbafm321]-notes
 
Cost of capital1
Cost of capital1Cost of capital1
Cost of capital1
 
Impact of aggressive working capital
Impact of aggressive working capitalImpact of aggressive working capital
Impact of aggressive working capital
 
Overview of Working Capital Management
Overview of Working Capital Management Overview of Working Capital Management
Overview of Working Capital Management
 
Slbc100 assignment 1 ratio analysis - collaborate session - tp1 2014 (1)
Slbc100 assignment 1   ratio analysis - collaborate session - tp1 2014 (1)Slbc100 assignment 1   ratio analysis - collaborate session - tp1 2014 (1)
Slbc100 assignment 1 ratio analysis - collaborate session - tp1 2014 (1)
 
Development Banks & Commercial Banks
Development Banks & Commercial BanksDevelopment Banks & Commercial Banks
Development Banks & Commercial Banks
 
Financial analysis on recession period conducted at mahindra & mahindra tractors
Financial analysis on recession period conducted at mahindra & mahindra tractorsFinancial analysis on recession period conducted at mahindra & mahindra tractors
Financial analysis on recession period conducted at mahindra & mahindra tractors
 
The need for and importance of financial analysis and control for company val...
The need for and importance of financial analysis and control for company val...The need for and importance of financial analysis and control for company val...
The need for and importance of financial analysis and control for company val...
 
CAPITAL BUDGETING - Meaning, Definition, Needs, Significance, Process & Appra...
CAPITAL BUDGETING - Meaning, Definition, Needs, Significance, Process & Appra...CAPITAL BUDGETING - Meaning, Definition, Needs, Significance, Process & Appra...
CAPITAL BUDGETING - Meaning, Definition, Needs, Significance, Process & Appra...
 
22244718 ratio-analysis-ppt
22244718 ratio-analysis-ppt22244718 ratio-analysis-ppt
22244718 ratio-analysis-ppt
 
Ratio by mudassar
Ratio by mudassarRatio by mudassar
Ratio by mudassar
 
Financing of Current Asset
Financing of Current AssetFinancing of Current Asset
Financing of Current Asset
 

Ähnlich wie Ratio Analysis By- Ravi Thakur From CMD

Ratio analysis
Ratio analysisRatio analysis
Ratio analysisSagar Shah
 
Ratio analysis ppt @ bec doms bagalkot
Ratio analysis ppt @ bec doms bagalkotRatio analysis ppt @ bec doms bagalkot
Ratio analysis ppt @ bec doms bagalkotBabasab Patil
 
18 ratio analysis_theory
18 ratio analysis_theory18 ratio analysis_theory
18 ratio analysis_theoryrushank1
 
Financial ratios
Financial ratiosFinancial ratios
Financial ratiosFaltu Focat
 
R C F,Prashant V V
R C F,Prashant V VR C F,Prashant V V
R C F,Prashant V Vpachhya
 
Cost and management accounting
Cost and management accountingCost and management accounting
Cost and management accountingAnuj Bhatia
 
Steps to basic_company_financial_analysis
Steps to basic_company_financial_analysisSteps to basic_company_financial_analysis
Steps to basic_company_financial_analysisIbrahim Hussain
 
RATIO ANALYSIS.ppt
RATIO ANALYSIS.pptRATIO ANALYSIS.ppt
RATIO ANALYSIS.pptssuser3b7eab
 
Ratio Analysis and financial performance
Ratio Analysis and financial performanceRatio Analysis and financial performance
Ratio Analysis and financial performanceYaarbailee1
 
Financial ratios for bilingual classes
Financial ratios for bilingual classesFinancial ratios for bilingual classes
Financial ratios for bilingual classesLuz Valera
 
Ratio analysis theory-prime
Ratio analysis  theory-primeRatio analysis  theory-prime
Ratio analysis theory-primeSahil Shaikh
 

Ähnlich wie Ratio Analysis By- Ravi Thakur From CMD (20)

Ratio analysis
Ratio analysisRatio analysis
Ratio analysis
 
Ratio analysis ppt @ bec doms bagalkot
Ratio analysis ppt @ bec doms bagalkotRatio analysis ppt @ bec doms bagalkot
Ratio analysis ppt @ bec doms bagalkot
 
Ratio analysis
Ratio analysisRatio analysis
Ratio analysis
 
18 ratio analysis_theory
18 ratio analysis_theory18 ratio analysis_theory
18 ratio analysis_theory
 
Financial ratios
Financial ratiosFinancial ratios
Financial ratios
 
frsa_MINI PROJECT.ppt
frsa_MINI PROJECT.pptfrsa_MINI PROJECT.ppt
frsa_MINI PROJECT.ppt
 
Financial management
Financial managementFinancial management
Financial management
 
R C F,Prashant V V
R C F,Prashant V VR C F,Prashant V V
R C F,Prashant V V
 
Ratio analysis
Ratio analysisRatio analysis
Ratio analysis
 
Cost and management accounting
Cost and management accountingCost and management accounting
Cost and management accounting
 
Steps to basic_company_financial_analysis
Steps to basic_company_financial_analysisSteps to basic_company_financial_analysis
Steps to basic_company_financial_analysis
 
RATIO ANALYSIS.ppt
RATIO ANALYSIS.pptRATIO ANALYSIS.ppt
RATIO ANALYSIS.ppt
 
Ratio analysis
Ratio analysisRatio analysis
Ratio analysis
 
Ratio Analysis and financial performance
Ratio Analysis and financial performanceRatio Analysis and financial performance
Ratio Analysis and financial performance
 
Financial ratios for bilingual classes
Financial ratios for bilingual classesFinancial ratios for bilingual classes
Financial ratios for bilingual classes
 
Ratio0
Ratio0Ratio0
Ratio0
 
Ratio analysis theory-prime
Ratio analysis  theory-primeRatio analysis  theory-prime
Ratio analysis theory-prime
 
Ratio
RatioRatio
Ratio
 
Ratio formulas.pptx
Ratio formulas.pptxRatio formulas.pptx
Ratio formulas.pptx
 
Ratio analysis1
Ratio analysis1Ratio analysis1
Ratio analysis1
 

Kürzlich hochgeladen

Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Guillaume Ⓥ Sarlat
 
Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...mwangimwangi222
 
Work and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingWork and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingHenry Tapper
 
Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Commonwealth
 
Buy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptxBuy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptxPrecize Formely Leadoff
 
The CBR Covered Bond Investor Roundtable 2024
The CBR Covered Bond Investor Roundtable 2024The CBR Covered Bond Investor Roundtable 2024
The CBR Covered Bond Investor Roundtable 2024Neil Day
 
Contracts with Interdependent Preferences
Contracts with Interdependent PreferencesContracts with Interdependent Preferences
Contracts with Interdependent PreferencesGRAPE
 
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an EntrepreneurIntroduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an Entrepreneurabcisahunter
 
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESKumarJayaraman3
 
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdfLundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdfAdnet Communications
 
CLMV-Outlook-March-2024-ENG-20240327.pdf
CLMV-Outlook-March-2024-ENG-20240327.pdfCLMV-Outlook-March-2024-ENG-20240327.pdf
CLMV-Outlook-March-2024-ENG-20240327.pdfSCBEICSCB
 
MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.Arifa Saeed
 
ACADEMIC BANK OF CREDIT: A WORLDWIDE VIEWPOINT
ACADEMIC BANK OF CREDIT: A WORLDWIDE VIEWPOINTACADEMIC BANK OF CREDIT: A WORLDWIDE VIEWPOINT
ACADEMIC BANK OF CREDIT: A WORLDWIDE VIEWPOINTindexPub
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismBrian Lin
 
Stock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfStock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfMichael Silva
 
Stock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfStock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfMichael Silva
 

Kürzlich hochgeladen (20)

Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024
 
Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...
 
Work and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingWork and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB funding
 
Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]
 
Buy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptxBuy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptx
 
The CBR Covered Bond Investor Roundtable 2024
The CBR Covered Bond Investor Roundtable 2024The CBR Covered Bond Investor Roundtable 2024
The CBR Covered Bond Investor Roundtable 2024
 
Contracts with Interdependent Preferences
Contracts with Interdependent PreferencesContracts with Interdependent Preferences
Contracts with Interdependent Preferences
 
Digital Financial Services Taxation in Africa
Digital Financial Services Taxation in AfricaDigital Financial Services Taxation in Africa
Digital Financial Services Taxation in Africa
 
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an EntrepreneurIntroduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
 
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
 
Mobile Money Taxes: Knowledge, Perceptions and Politics: The Case of Ghana
Mobile Money Taxes: Knowledge, Perceptions and Politics: The Case of GhanaMobile Money Taxes: Knowledge, Perceptions and Politics: The Case of Ghana
Mobile Money Taxes: Knowledge, Perceptions and Politics: The Case of Ghana
 
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdfLundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
 
Commercial Bank Economic Capsule - March 2024
Commercial Bank Economic Capsule - March 2024Commercial Bank Economic Capsule - March 2024
Commercial Bank Economic Capsule - March 2024
 
CLMV-Outlook-March-2024-ENG-20240327.pdf
CLMV-Outlook-March-2024-ENG-20240327.pdfCLMV-Outlook-March-2024-ENG-20240327.pdf
CLMV-Outlook-March-2024-ENG-20240327.pdf
 
E-levy and Merchant Payment Exemption in Ghana
E-levy and Merchant Payment Exemption in GhanaE-levy and Merchant Payment Exemption in Ghana
E-levy and Merchant Payment Exemption in Ghana
 
MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.
 
ACADEMIC BANK OF CREDIT: A WORLDWIDE VIEWPOINT
ACADEMIC BANK OF CREDIT: A WORLDWIDE VIEWPOINTACADEMIC BANK OF CREDIT: A WORLDWIDE VIEWPOINT
ACADEMIC BANK OF CREDIT: A WORLDWIDE VIEWPOINT
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
 
Stock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfStock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdf
 
Stock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfStock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdf
 

Ratio Analysis By- Ravi Thakur From CMD

  • 1. Presented By :- Ravi Pratap Singh
  • 2. RATIO ANALYSIS Ratio-analysis is a concept or technique which is as old as accounting concept. Financial analysis is a scientific tool. It has assumed important role as a tool for appraising the real worth of an enterprise, its performance during a period of time and its pit falls. Financial analysis is a vital apparatus for the interpretation of financial statements. It also helps to find out any crosssectional and time series linkages between various ratios.
  • 3. RATIO ANALYSIS Unlike in the past when security was considered to be sufficient consideration for banks and financial institutions to grant loans and advances, nowadays the entire lending is need-based and the emphasis is on the financial viability of a proposal and not only on security alone. Further all business decision contains an element of risk. The risk is more in the case of decisions relating to credits. Ratio analysis and other quantitative techniques facilitate assessment of this risk.
  • 4. RATIO ANALYSIS Ratio-analysis means the process of computing, determining and presenting the relationship of related items and groups of items of the financial statements. They provide in a summarized and concise form of fairly good idea about the financial position of a unit. They are important tools for financial analysis.
  • 5. WHY FINANCIAL ANALYSIS Lenders’ need it for carrying out the following  Technical Appraisal  Commercial Appraisal  Financial Appraisal  Economic Appraisal  Management Appraisal
  • 6. Ratio Analysis It’s a tool which enables the banker or lender to arrive at the following factors :  Liquidity position  Profitability  Solvency  Financial Stability  Quality of the Management  Safety & Security of the loans & advances to be or already been provided
  • 7. Before looking at the ratios there are a number of cautionary points concerning their use that need to be identified : a.The dates and duration of the financial statements being compared should be the same. If not, the effects of seasonality may cause erroneous conclusions to be drawn. b.The accounts to be compared should have been prepared on the same bases. Different treatment of stocks or depreciations or asset valuations will distort the results. c.In order to judge the overall performance of the firm a group of ratios, as opposed to just one or two should be used. In order to identify trends at least three years of ratios are normally required.
  • 8. The utility of ratio analysis will get further enhanced if following comparison is possible. 1.Between the borrower and its competitor 2.Between the borrower and the best enterprise in the industry 3.Between the borrower and the average performance in the industry 4.Between the borrower and the global average
  • 9. How a Ratio is expressed? As Percentage - such as 25% or 50% . For example if net profit is Rs.25,000/- and the sales is Rs.1,00,000/- then the net profit can be said to be 25% of the sales. As Proportion - The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4. As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4th of the sales.
  • 10. Classification of Ratios Balance Sheet Ratio P&L Ratio or Income/Revenue Statement Ratio Balance Sheet and Profit & Loss Ratio Financial Ratio Operating Ratio Composite Ratio Current Ratio Quick Asset Ratio Proprietary Ratio Debt Equity Ratio Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors’ Turnover Ratio,
  • 11. Format of balance sheet for ratio analysis LIABILITIES ASSETS NET WORTH/EQUITY/OWNED FUNDS Share Capital/Partner’s Capital/Paid up Capital/ Owners Funds Reserves ( General, Capital, Revaluation & Other Reserves) Credit Balance in P&L A/c FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIES Original Value Less Depreciation Net Value or Book Value or Written down value LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions) Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. assets which are not current or fixed in nature CURRENT LIABILTIES Bank Working Capital Limits such as CC/OD/Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or deposits Expenses payable & provisions against various items CURRENT ASSETS : Cash & Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks & inventory (RM,SIP,FG) Stores & Spares, Advance Payment of Taxes, Prepaid expenses, Loans and Advances recoverable within 12 months INTANGIBLE ASSETS Patent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses
  • 12. Some important notes        Liabilities have Credit balance and Assets have Debit balance Current Liabilities are those which have either become due for payment or shall fall due for payment within 12 months from the date of Balance Sheet Current Assets are those which undergo change in their shape/form within 12 months. These are also called Working Capital or Gross Working Capital Net Worth & Long Term Liabilities are also called Long Term Sources of Funds Current Liabilities are known as Short Term Sources of Funds Long Term Liabilities & Short Term Liabilities are also called Outside Liabilities Current Assets are Short Term Use of Funds
  • 13. Some important notes      Assets other than Current Assets are Long Term Use of Funds Installments of Term Loan Payable in 12 months are to be taken as Current Liability only for Calculation of Current Ratio & Quick Ratio. If there is profit it shall become part of Net Worth under the head Reserves and if there is loss it will become part of Intangible Assets Investments in Govt. Securities to be treated current only if these are marketable and due. Investments in other securities are to be treated Current if they are quoted. Investments in allied/associate/sister units or firms to be treated as Non-current. Bonus Shares as issued by capitalization of General reserves and as such do not affect the Net Worth. With Rights Issue, change takes place in Net Worth and Current Ratio.
  • 14. I. LIQUIDITY RATIO:- 1. CURRENT RATIO :A) It is the relationship between the current assets and current liabilities of a concern. Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 =2:1 The ideal Current Ratio preferred is 2:1 The Current Ratio expresses the relationship between current assets ( cash, marketable securities, accounts receivable and inventories) and the current liabilities (accounts payable, short-term loans, current maturities of long-term debt, accrued income tax and other accrued expenses especially wages ). B) The current ratio determines the short term liquidity of the enterprise in order to pay off its short term obligations. C) A higher current ratio is a clue that the company will be able to pay its debts maturing within a year and vice-versa. D) A lower current ratio would reflect an inadequacy of working capital which may deter smooth functioning of the enterprise.
  • 15. Current Ratio measures short term liquidity of the concern and its ability to meet its short term obligations within a time span of a year.  It shows the liquidity position of the enterprise and its ability to meet current obligations in time. Higher ratio may be good from the point of view of creditors. In the long run very high current ratio may affect the profitability ( e.g. high inventory carrying cost)  The current ratio changes from time to time, so it is to be analyzed over the year for various periods.  Current Ratio is to be studied with the changes of NWC. It is also necessary to look at this ratio along with the Debt-Equity ratio.  However, an excess of current assets does not necessarily mean that the debts can be paid promptly. If current assets contain a high proportion of uncollectible accounts receivables or inventories, there will be slow down in the intake of cash. Hence the composition of current assets is to be looked after while computing the current ratio. NET WORKING CAPITAL : This is worked out as surplus of Long Term Sources over Long Tern Uses, alternatively it is the difference of Current Assets and Current Liabilities. NWC = Current Assets – Current Liabilities
  • 16. 2. ACID TEST or QUICK RATIO : It is a measure of judging the immediate ability of the firm to pay off its current liabilities. It is the ratio between Quick Current Assets and Current Liabilities. Ideally it should be 1:1 Quick Current Assets : Quick current assets include those assets which can be liquidated immediately and at minimum loss in order to meet the financial obligations. For eg:- Cash/Bank Balances, Receivables upto 6 months, Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities Example : Current Liabilities 1,00,000 Cash 50,000 Debtors Inventories 1,00,000 1,50,000 T. Current Assets Current Ratio = > Quick Ratio => 3,00,000/1,00,000 1,50,000/1,00,000 3,00,000 = 3:1 = 1.5 : 1
  • 17. 3. Cash Position Ratio:- It is calculated by relating cash and cash equivalents to current liabilities. The formula to calculate this ratio is :  Cash Position Ratio = Cash and cash equivalents Current Liabilities The standard for this ratio is 1:1 
  • 18. II. LEVERAGE RATIO :1. DEBT EQUITY RATIO : It is the relationship between borrower’s fund (Debt) and Owner’s Capital (Equity). Long Term Outside Liabilities / Tangible Net Worth Liabilities of Long Term Nature Total of Capital and Reserves & Surplus Less Intangible Assets For instance, if the Firm is having the following : Capital = Rs. 200 Lacs Free Reserves & Surplus = Rs. 300 Lacs Long Term Loans/Liabilities = Rs. 800 Lacs Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1
  • 19. 2. Debt to Total Assets Ratio : It is calculated as the proportion of total debts and the total assets.  Total Debts Total Assets Total Debts include :- Accounts payable , miscellaneous payable, mortgage and bonds Total Assets include :- Fixed Assets + Current Assets+ Intangible Assets 3. Long-term Debt to Total Capitalization :Mortgage+Bonds Equity
  • 20. III.ACTIVITY RATIO :1. Inventory Turnover Ratio :- It is computed by dividing the cost of goods sold by the average inventory for the period. This ratio gives the number of times the inventory is replaced during a given period, usually a year. Higher the ratio, better is the performance of the firm, for it has managed to operate with a relatively small average locking up of funds. 2. Average Collection Period:- It is a measure of receivable turnover. It consists of two steps. In the first step, the annual sales is divided by 365 to get the average daily sales. In the second step, daily sales are divided into accounts receivable to find the number of days sales it tied up in receivables. This gives the average collection period because it represents the length of time that the firm must wait after making a
  • 21. 3. TOTAL ASSETS TURNOVER RATIO:This ratio expresses relationship between the amount invested in the assets and the results accruing in terms of sales. This is calculated by dividing the net sales by total assets. 4. FIXED ASSETS TURNOVER RATIO :- This ratio is expressed by dividing sales into fixed assets. It is used to highlight the extent of utilization of the existing plant capacity.
  • 22. IV. PROFITABILITY RATIOS:These ratios are, as a matter of fact, best indicators of overall financial health and efficiency of a business concern because they compare return of value over and above the values put into a business with sale or service carried on by the firm with the help of assets employed. Profitability as related to sales :1. Gross Profit Ratio:- This ratio establishes relationship between gross profit and sales to measure the relative operating efficiency of the firm and to reflect its pricing policies. GP Ratio = Sales – Cost of goods sold Net Sales Here, (Sales – cost of goods sold) refers to the Gross Profit & Net sales refers to the (Total sales – Sales return)
  • 23. 2. OPERATING PROFIT RATIO :This ratio expresses the relationship between operating profit and sales. It is worked out by dividing operating profit by net sales. It helps in judging the managerial efficiency which may not be reflected in net profit ratio. For example, a firm may have a large amount of non- operating income in the form of dividend and interest which represents the major proportion of the net profit. Hence, the operating profit provides the actual efficiency, since the non-operating income has no relation with operating efficiency of the management. Formula :- Operating Profit Net sales Operating Profit = Revenue – (cost of goods sold+ labor + other day to day expenses)
  • 24. 3. Net Profit Ratio :It is calculated by dividing the net profit with net sales. Higher ratio indicated a higher efficiency of the business and better utilization of the resources. A low ratio would mean a poor financial position of the company. Formula :Net Profit Net Sales Profitability as related to investment :1. Return on capital employed :- This is computed by dividing net profit with capital employed. Net profit in this case means net profit before taxes but less interest on short-term borrowings. Capital employed is found out by subtracting current liabilities from the total investment. Higher ratio indicates better utilization of funds. Formula :- Net Profit Capital Employed
  • 25. 2. RETURN ON NET WORTH :This ratio is obtained by dividing net profit after taxes by the total net worth. This measures the productivity of shareholders’ funds. A higher ratio indicates better utilization of owners’ funds and higher productivity. 3. RETURN ON ORDINARY SHAREHOLDERS’ EQUITY :- This ratio helps us to judge whether the firm has earned a satisfactory return for its equity holders or not. It is computed with the help of the following formula :Formula :- Net profit after tax and preference dividend Ordinary Shareholder’s funds
  • 26. 5. OTHER PROFITABILITIY RATIO :- It includes 1. Earning Per Share :- This ratio indicates availability of the profit to the equity shareholders on per share basis. The following formula is employed to determine EPS :EPS = Net profit available for equity shareholders Number of equity shareholders outstanding Or EBIT no. of shares Where, EBIT = Earnings before interest and tax.
  • 27. 2. DIVIDEND PAYOUT RATIO :This ratio attempts to establish relationship between earnings belonging to the ordinary shareholders and the dividends paid to them. This ratio shows what portions of net profits after taxes and preferences dividend is disbursed among equity shareholders. Thus, D/P = Total Dividend to equity shareholders Total net profits belonging to equity-shareholders 3. YIELD :- There are two types of yield, namely earning yield and dividend yield. The earning yield can be calculated by dividing EPS by market value per share. This ratio helps the investors to know the real worth of the firm. Dividend yield ratio is measures relationship between dividends per share and the market price per share. Formula :- DPS Market value of shares
  • 28. OTHER IMPORTANT RATIOS:1. INVNENTORY TURNOVER RATIO :- It is the ratio of cost of goods sold to average inventory. It is an activity/efficiency ratio and it measures how many times per period a business sales and replaces its inventory again. Formula :Cost of goods sold Avg. Inventory For eg : During the year ended 31st Dec’2010, Loud Corporation sold goods costing Rs. 324000 Its inventory at the beginning and at the ending of the year was. Rs. 9865 and Rs. 11650 respectively. Calculate the inventory turnover ratio of the business from the given information : Sol: avg. inventory = (Rs.9865+Rs. 11650)/2 = Rs. 10757.5 Inventory turnover = Cost of goods sold / Average Inventory =(Rs. 84270/10757.5) = 7.83 times
  • 29. 2. DEBTOR’S TURNOVER RATIO :It is the ratio of net credit sales to average account receivables. It is an activity that measures average no. of times a business collect its receivables during a period usually a year. Formula :Net Credit Sales Average Accounts Receivables For eg : Net credit sales of a Co. A during the year ended 30 th June’2010 were Rs. 644790. Its accounts receivables at 1 st July’2009 and 30th June’2010 were Rs. 43300 and Rs. 51730 respectively . Calculate Debtor’s Turnover Ratio. Sol.: Average accounts receivables =(Rs. 43300+Rs. 5173) =Rs. 47515 Receivable Turnover ratio = 644790/47515 = 13.57 times
  • 30. 3. CREDITOR’S TURNOVER RATIO :It is the ratio of net credit purchase of a business to its average accounts payable during the period. It measures short-term liquidity of the business, since it shows how many during a period an amount equal to average accounts payable is paid to supplier by a business. Formula :- Net Credit Purchase Avg. Accounts payable