ratio analysis final
TRANSCRIPT
What is a ratio?
A ratio:- It is the mathematical relationship between two
quantities in the form of a fraction or percentage.
A ratio on its own has little or no meaning at all.
Significance of using ratios:
1. It is compared with other ratios in the same set of financial statements.
2. It is compared with the same ratio in previous financial statements (trend analysis).
3. It is compared with a standard of performance (industry average).
WHAT IS RATIO ANALYSIS?
DEFINITION:-
It refers to an analysis of the relationships of items in financial statements & thereby an investigation into the financial performance of an entity using a series of ratios.
Classification of ratios:-Generally ratios are divided into four areas which provide different
kinds of information:-
1. Leverage Ratios
2. Liquidity Ratios
3. Profitability Ratios
4. Other ratios
LIQUIDITY RATIOS
MEANING:-
It measures the ability of a firm to meet its short term obligations & reflects the short term financial solvency of firm.
Classification:-
1. Current ratio
2. Acid-test ratio
LIQUIDITY RATIOS
Current ratio:-
It is the ratio of total current assets to total current liabilities.
Formula:-
current assets
current liabilitiesCurrent ratio =
LIQUIDITY RATIOS
Acid-test ratio:- It measures the firm’s ability to
convert its current assets quickly into cash in order to meet its current liabilities. Hence also known as Quick ratio.
Formula: Quick assets current liabilities
Acid-test ratio =
Leverage ratios
Meaning:-
It is defined as financial ratio which throws light on long term solvency of a firm with regards to the following two aspects:-
ability to repay the principal & regular payment of interest
Leverage ratios
Classification:-
1. Debt-equity ratio
2. Capital gearing ratio
3. Interest coverage ratio
4. Debt service coverage ratio
Leverage ratios
Debt-equity ratio:-
It indicates the relationship between borrowed funds and owners capital.
Formula:-
Total debt
Shareholders equity D/E ratio =
Leverage ratios
Capital gearing ratio:-
It indicates the relationship between equity funds and fixed income bearing funds.
Formula:-
Equity funds
Fixed income bearing fundsCGR =
Leverage ratios
Interest coverage ratio:-
It measures the debt servicing capacity of the firm. It is determined by dividing the EBIT by the fixed interest charges.
Formula:-
EBIT
Interest Interest coverage ratio =
Leverage ratios
Debt service coverage ratio:-
It computes the debt service capacity of a business firm. In general 2:1 is considered as satisfactory ratio.
Formula:-
EAT+Interest+Depreciation+OA
Installment
DSCR =
Profitability ratios
Meaning:-These ratios tell us whether a business is
making profits - and if so whether at an acceptable rate.
It uses margin analysis and show the return on
sales and capital employed.
Profitability ratios
Classification:-
The key profitability ratios are:
1. Gross profit ratio
1. Operating profit ratio
2. Return on Capital employed ratio
Profitability ratios
Operating profit ratio:-
It refers to a company's ability to control its other operating costs or overheads.
Formula:-
EBIT
Net SalesOperating profit ratio =
Profitability ratios
Gross profit ratio:-
It refers to ability of the business to consistently control its production costs or to manage the margins its makes on products its buys and sells.
Formula:-
Gross Profit
Sales
Gross profit margin =
Profitability ratios
Return on capital employed:-
It measures the profits related to return on capital employed. The term capital employed refers to long term funds supplied by lenders and owners of the firm.
Formula:-
EBIT
Average total capital employedROCE =
Other Ratios
Earning per share:- It measures the profit available to the equity
shareholders on a share. It is calculated by dividing the profits available to the equity shareholders by the number of outstanding shares.
Formula:- Net profit available to equity-holders
Number of ordinary shares outstanding
EPS =
Other Ratios
Price-earnings ratio:-
It measures investors’ expectations and the market appraisal of the performance of a firm.
Formula:-
Market price of share
EPSP/E ratio =
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