This Slide is an excellent mean to understand Ratios, Types of Ratios and their Interpretation.

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201-Financial MANAGEMENT
Unit No.2. Analysis of Financial
Statements
2.1 Meaning and Type
of Ratios
Presented By:
Dr. V. M. Tidake
Ph. D (Financial Management), MBA(FM), MBA(HRM) BE(Chem)
Dean EDP & Associate Professor MBA
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Sanjivani College of Engineering, Kopargaon
Department of MBA
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Unit 2: Financial Management
 At the End of the Session Student will be able to
understand-
A. Meaning and Type of Ratios

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Meaning of “RATIO”
 RATIO: It is a division of two nos.
 For example-
 If in a class there are 45 boys & 15 girls
then ratio between boys & girls is-
45/15 or
45:15 or
(45/15)*100 i.e. 300%

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RATIO ANALYSIS
 Ratio analysis is a language of business
through which business talks about-
A) Profitability position,
B) Liquidity position,
C) Solvency position,
D) Turnover position etc.
with its stakeholders as they are interested
in various aspects of the business.

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TYPES OF RATIOS
 Ratios can be classified as -
I) Liquidity Ratio,
II) Turnover Ratio,
III)Solvency Ratio,
IV)Profitability Ratio &
V) Miscellaneous Ratio.

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I) LIQUIDITY RATIO
a) Current ratio=
(current asset/current liability)
b) Liquid/acid test/quick ratio=
(liquid asset/liquid liability)

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II)TURNOVER RATIO
a) Fixed asset turnover ratio=
(Net sales/Fixed asset)
b) Current asset turnover Ratio=
(Net sales/Current asset)
c) Working capital turnover Ratio=
(Net sales/ Working capital)
d) Inventory/ stock Turnover ratio=
(Cost of goods sold/Average Inventory)

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II)TURNOVER RATIO
e) Debtors turnover ratio=
(Net credit sales/Closing or Avg. Debtors)
f) Creditors turnover ratio=
(Net credit purchases/Closing or Avg. Creditors)
g) Capital Turnover Ratio=
(Net sales/Capital employed)

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III)SOLVENCY RATIO
a) Debt equity ratio=
(Long term debts/ shareholders equity)
b) Proprietary Ratio=
(Total asset/Proprietors funds) or
(Fixed asset/Proprietors funds) or
(Current asset/Proprietors funds)

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III)SOLVENCY RATIO
c) Fixed asset/ capital employed ratio=
(Fixed asset/ Capital employed )*100
d) Interest coverage ratio=
(EBIT/Interest charges)

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IV) PROFITABILITY RATIO
a) Gross profit ratio=
(Gross profit/net sales)*100
b) Net profit ratio=
(Net profit/net sales)*100
c) Operating Ratio=
[(COGS+ Operating expenses)/Net sales]*100

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IV) PROFITABILITY RATIO
d) Return on asset=
(Net profit/total asset)*100
e) Return on capital employed=
(Net profit after tax but before interest/
Capital Employed)*100
f) Return on Shareholders Fund=
(Net PAT/Total shareholders fund)*100

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V)MISCELLANEOUS RATIO
a) Capital gearing ratio=
(Fixed income bearing securities/Equity capital)
b) EPS=
(E.A.E.S.H./No. of Equity shares)
c) Price Earning ratio=
(Market price per share/EPS)*100
d) Dividend payout Ratio=
(DPS/EPS)*100

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Importance of Ratio Analysis
a) Helpful in Financial Analysis
b) Helpful in Explaining Financial Health
c) Helpful in Identifying Weaknesses.
d) Helpful in Future Forecasting
e) Helpful in Inter-firm & Intra-firm Comparison.
f) Helpful in finding Liquidity position.
g) Helpful in finding Solvency position.
h) Helpful in finding Profitability position.
i) Helpful in finding Turnover position.

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Limitations of Ratio Analysis
a) False Results
b) Limited use of Single Ratio
c) Absence of standard Universally accepted
terminology.
d) Absence of Qualitative Analysis.
e) Ignores Price level Changes
f) Misleading Results in Absolute data (GPR 5%)
g) Window Dressing
h) Personal Biases
i) Historic Analysis.

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EXERCISE
 State and Explain the concept of Finance and Explain
Business Finance in detail?

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For More Details Contact
Dr. V M Tidake
tidkevishal@gmail.com
tidkevishalmba@sanjivani.org.in

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Thank You