Ratio Analysis No. 2 CMD

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Ratio Analysis No. 2 Higher/Int 2 Business Management 2009-2010

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It is a type of financial ratio used to measure the efficiency of business in generating profit by utilizing assets The larger the turnover ratio, the better as it shows that the company is optimally utilizing its assets as resources to earn revenue Turnover ratios are calculated by dividing the revenues from average asset balance It is also termed as efficiency ratio because it shows the company’s efficiency in conversion of assets into sales which in turn reflects the ROI Inventory Turnover ratio measures how efficiently the stocks are being converted into finished goods to generate sales It is calculated as – Inventory Turnover Ratio = (Cost of Goods Sold)/(Average Inventory) Debtors Turnover Ratio signifies the efficiency of business in converting its debtors or credit sales into cash It is calculated as – Debtors Turnover Ratio = (Net Credit Sales or Revenue)/(Average Trade Receivables) Fixed assets turnover ratio measures how efficiently a company uses its fixed assets to generate revenue Fixed Assets Turnover Ratio = (Revenue from sales)/(Average Fixed Assets) Total assets turnover ratio takes into account both fixed as well as current asset to measure the overall efficiency in generation of revenue with assets utilization It is calculated as – Total Assets Turnover Ratio = (Revenue from sales)/(Average Total Assets) Working capital ratio measures the company’s efficiency in using its working capital to generate revenue for the business It also indicates the relation between liquidity and profitability of the business It is calculated as – Working Capital Turnover Ratio = (Revenue from sales)/(Average Working Capital) Thank you for Watching Subscribe to DevTech Finance

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This PPT covers all the important ratios which are necessary in financial analysis of a business enterprise. Whether you are starting your career i commerce and business or you a working profession these ratios will always help you to properly analsyse a company and draw relevant conclusions The main ratios covered are: Liquidity Ratios Leverage Ratios Efficiency Ratios Profitability Ratios Market Value Ratios

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Profitability Ratio A profitability ratio is a measure of financial ratio defining the profit percent and return percent from the business using data from financial statements at a specific point of time It assess business’s ability to generate gross profit, operating profit and net profit from the sales using data from profit& loss statement It even takes into consideration various return generating ability of business in terms of return on assets, return on capital employed, return on equity, return on investment using data from balance sheet Types of profitability ratio Gross Profit Ratio, Net Profit Ratio, Operating Profit Ratio, Return on Assets, Return on Equity, Return on Investment, Return on Capital Employed Gross Profit Ratio Gross Profit Ratio(GPR) is a profitability ratio that shows the relationship between gross profit and the revenue from net sales GPR = (퐆퐫퐨퐬퐬 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬) Net Profit Ratio The net profit ratio is equal to how much net profit is generated as a ratio of revenue earned through sales Net Profit Ratio = (퐍퐞퐭 푷풓풐풇풊풕)/(퐍퐞퐭 푺풂풍풆풔) Operating Profit Margin is a profitability ratio used to calculate the percentage of operating profit a company produces from its operations, prior to deduction of taxes and interest charges Operating Profit Ratio Operating Profit Ratio = (퐎퐩퐞퐫퐚퐭퐢퐧퐠 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬) Return on assets (ROA) is a kind of profitability measure used to determine returns on assets relevant when compared across the companies or previous performance of the company Return On Asset = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐀퐬퐬퐞퐭퐬) Return on equity (ROE) is a measure of financial performance calculated by dividing net profit by average shareholders' equity ROE = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐄퐪퐮퐢퐭퐲) Return on capital employed is a profitability ratio used in valuation of company’s financial position depicting the return out of capital employed ROCE = 퐄퐁퐈퐓/(퐂퐚퐩퐢퐭퐚퐥 퐄퐦퐩퐥퐨퐲퐞퐝) Return on investment is a profitability measure used by businesses to identify the efficiency of business in generating return out of an investment ROI = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐂퐨퐬퐭 퐨퐟 퐈퐧퐯퐞퐬퐭퐦퐞퐧퐭) Ratio analysis refers to the analysis and interpretation of the data collected from the financial statements (i.e., Profit and Loss Statement, Balance Sheet and Fund/Cash Flow statement etc.) Thank You for Watching DevTech Finance

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Prepare a witten financial analysis. .This should include calculations and discussion related to the Chapter 5 appendix (Appendix 5A). See illustration 5A-1 for a summary of financial ratios. Be sure to include (1) these ratios, (2) what they mean and (3) how you interpret them: o Current ratio o Accounts receivable turnover o Inventory turnover o Profit margin on sales o Return on assets o Return on stockholders\' equity o Debt to assets ratio Submit a WORD document via D2L- Assessments - Assignments Solution Ans ) The ratios are not meant for a particular person or firm.People in various fields of life are interested in ratio analysis from their own angles.The parties attached with business or firm are creditors i.e. mony lenders, shareholders.Management uses the toolof Ratio analysisto interpretate the information from their own angles.For example creditors are interested in liquidity and solvency for which they will make use of current ratio , liquidity ratio, proprietaryRatio, debt equity Ratio,capital gearing Ratio.Shareholders are interested in profitability and long term solvency.They want to know the rate of return on their capital employed for which they willmake use of Gross Profit Ratio, Operating Ratio, Dividend ratio and Price Earning Ratio.Management is interested in overall efficiency of business which can be better jud ged through Ratios like turnover to fixed assets, turnover to capital employed, stock turnover ratio etc.So, from the above discussion it is clear that different prties uses the tool of Ratio analysis for taking their own decisions The particular purpose of a user is determining the particular Ratios that might be used ofr financial analysis.Here we will discuss and calculate various ratios to do fianacial analysis. Current Ratio = Current Assests/Current Liabilities Current Assests= Cash + Bank+ Prepaid Insurance+Inventory+ Accounts Recievables Current Assests=44746.5 +510+500+5000+29000=79756.5 Current Laibilites =Accounts payable Current Laibilites= 30064.83 Current Ratio = 79756.5/30064.83= 2.7 Interpretation : Generally a current ratio of 2 times or 2:1 is cosidered to be satisfactory.Here the current ratio of greater than 2 denotes the good liquidity position but it also indicates assest liabilty mis match.But current ratio greater than 2 is generally preferred as compared to less than 2. 2.Account receivables turnover :It represents the number of times the cash is collected from debtors.Lower turnover denotes poor collection and means that funds are blocked ofr longer period of tiem and vice-versa.It also measure the liquidity of the firm.It shows how quickly debtors (receivables) are converted into sales.The Account receivables turnover shows the relationship between sales and debtors of the firm. Account receivables turnover= Net Credit Annual Sales/Average trade debtors 3. Inventory turnover :This ratio indicates the number of times inventory or stock is replaced during the year.The turnover of invent.

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Ratios and Formulas in Customer Financial Analysis Financial statement analysis is a judgmental process. One of the primary objectives is identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. The judgment process can be improved by experience and the use of analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the analysis of relationships between two or more line items on the financial statement. Financial ratios are usually expressed in percentage or times. Generally, financial ratios are calculated for the purpose of evaluating aspects of a company's operations and fall into the following categories: · Liquidity ratios measure a firm's ability to meet its current obligations. · Profitability ratios measure management's ability to control expenses and to earn a return on the resources committed to the business. · Leverage ratios measure the degree of protection of suppliers of long-term funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time. · Efficiency, activity or turnover ratios provide information about management's ability to control expenses and to earn a return on the resources committed to the business. A ratio can be computed from any pair of numbers. Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be derived. A standard list of ratios or standard computation of them does not exist. The following ratio presentation includes ratios that are most often used when evaluating the credit worthiness of a customer. Ratio analysis becomes a very personal or company driven procedure. Analysts are drawn to and use the ones they are comfortable with and understand. 1. Liquidity Ratios Working Capital Working capital compares current assets to current liabilities, and serves as the liquid reserve available to satisfy contingencies and uncertainties. A high working capital balance is mandated if the entity is unable to borrow on short notice. The ratio indicates the short-term solvency of a business and in determining if a firm can pay its current liabilities when due.  Formula Current Assets - Current Liabilities Acid Test or Quick Ratio A measurement of the liquidity position of the business. The quick ratio compares the cash plus cash equivalents and accounts receivable to the current liabilities. The primary difference between the current ratio and the quick ratio is the quick ratio does not include inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio will be lower than its current ratio. It is a stringent test of liquidity.  Formula Cash + Marketable Securities + Accounts Receivable Current Liabilities Current Ratio provides an indication of the liquidity of the business by comparing the amount of current assets to current liabilities. A business's curren ...

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All accounting instructions Week 2/SEC 10K Assignment The Balance Sheet and Credit Risk Analysis Credit risk encompasses a company’s ability to meet its obligations as they arise as well as a long-run ability to pay its debt. A company may be profitable but yet face bankruptcy if it is unable to pay its liabilities on time. Companies with large amounts of debt have greater credit risk because of an increased vulnerability to increases in interest rates and declines in profitability. In this assignment, you will answer questions about your company’s classified balance sheet and conduct a ratio analysis to evaluate the company’s liquidity and solvency. A financial ratio expresses the relationship of one amount to another and enables analysts to quickly assess a company’s financial strength, profitability, or other aspects of its financial activities. Requirements In the first section, define liabilities and describe how liabilities are classified as current and long-term (give examples). Also define liquidity and solvency as it relates to the company’s debt-paying ability. What does your company call its ‘Balance Sheet’? In the second section, define working capital, the current ratio, and the debt ratio, three frequently used ratios to assess credit risk (described in LEO’s online text or any principles of accounting text). Identify which are a measure of liquidity and which are a measure of solvency. Indicate how the ratio is interpreted. Is an increasing or decreasing ratio a favorable trend? Conduct online research to provide a ratio level (or range) that is considered acceptable for the current and debt ratio (technically, working capital is not a ratio so an average isn’t meaningful). If you can find information on acceptable ranges for the current ratio and debt ratio for your company’s industry, include that in your discussion. Numbers and ratios are more meaningful when considered relative to a benchmark. Benchmarks can be the company’s past performance, a similar company’s performance, an industry average, or a rule-of- thumb. For instance, for decades, a current ratio of 2 to 1 was considered satisfactory. In the third section, prepare a table giving the dollar amount of current and long-term liabilities for the most recent year and the previous year. Either in the same table or a new table report the results of a ratio analysis. Calculate working capital, current ratio, and the debt ratio for the current year and the past year (show your calculations). Indicate whether the ratios are improving or deteriorating. If you find a relevant benchmark (industry average or rule-of-thumb), comment on your company’s performance relative to the benchmark. Finally, in the fourth section briefly summarize results of any or all of the following: 1) an internet search for articles on recent events that may affect your company’s debt paying ability, 2) an internet search for financial analysts’ assessment of the company’s credit risk and or.

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