1. RATIO ANALYSIS
PROF. B.D.PANDA

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
cross-sectional 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. 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

6. CLASSIFICATIONS OF RATIOS
 Liquidity Ratio
 Solvency Ratio
 Activity Ratio
 Profitability Ratio

7. LIQUIDITY RATIO
 Current Ratio: It is defined as the relationship
between the current assets and current liabilities.
This ratio is also known as working capital ratio.
Current Ratio = Current Assets/Current Liabilities
The ideal Current Ratio preferred by Banks is
1.33 : 1
 Quick ratio or Liquid ratio: It is the more rigorous
test of liquidity than Current Ratio. Quick ratio is
defined as the relationship between quick asset
and current liability.
Quick Ratio = Quick assets/ Current Liabilities
The ideal quick ratio should be 1.

8. LIQUIDITY RATIO
Absolutely Liquid Ratio: This ratio speaks about the
relationship between the absolute liquid assets and
current liability. Absolute liquid assets include Cash
in hand, Cash at bank and marketable Securities or
temporary investments.
Absolute Liquid Ratio = Absolute liquid
asset/Current Liability
The acceptability norm for this ratio is 50% or 0.5:1.

9. SOLVENCY RATIO
 The term ‘solvency’ refers to the ability of a concern to meet
its long term obligations. The following ratios serve the
purpose of determining the solvency of the concern:
 Debt-Equity Ratio
 Proprietory Ratio
 Solvency Ratio
 Interest Coverage Ratio

10. SOLVENCY RATIOS
 Debt-Equity Ratio: This ratio is calculated to measure the
relative claims of outsiders and the owners against the firm’s
assets. This ratio indicates the relationship between the
external debt and internal equities.
Debt-Equity Ratio= Outsiders Funds/Shareholders fund
The outsiders’ funds include all debts, liability to outsiders.
Shareholders’ fund include equity capital, preference
capital, capital reserve, revenue reserve, other reserve and
surplus.
A ratio of 1:1 may be usually considered as satisfactory or
standard and sometimes 2:1 is also satisfactory.

11. SOLVENCY RATIOS
 Proprietory Ratio: This ratio establishes relationship
between the shareholders’ funds to the total assets
of the firm. The more the ratio, the more it is the
better.
Proprietory ratio = Shareholders' funds/Total
assets
 Solvency Ratio: This ratio is a small variant of
equity ratio and can be simply calculated 100-
proprietory ratio.
Solvency ratio = Total liabilities to
outsiders/total assets

12. SOLVENCY RATIOS
 Interest Coverage ratio: Net income to debt service
ratio is used to test the debt servicing capacity of a
firm. The ratio is also called interest coverage ratio.
This ratio is calculated by dividing the net profit
before interest and taxes by fixed interest charges.
Interest coverage ratio = EBIT/Fixed Interest
charges
Interest coverage ratio indicates that the number of
times interest is covered by the profits available to
pay the interest charges.