RATIO ANALYSIS PDF FILE
I have made this report file on the topic Ratio Analysis; I have tried my best to elucidate all the relevant detail to the topic to be included in the report. While in the. Use ratio analysis in the working capital management. Balance Sheet Model of a Firm. Business firms require money to run their operations. This money, or. Ratio analysis in the simplest terms is the comparison of two figures, nu- cussed two basic types of ratio analysis in Chapter 2—comparative horizontal.
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Classification of Ratio Analysis. Traditional Classification. Functional Classification. Profitability Ratio. Turnover Ratio. Liquidity Ratio. Ownership/ Solvency Ratio. RATIO ANALYSIS. PURPOSE. FORMULA. RATIO. Current Ratio. This measures the extend to which current assets are available to meet current liabilities. Financial ratios, a reading prepared by Pamela Peterson Drake. 1 financial ratio analysis we select the relevant information -- primarily the financial statement.
Why a built-up of cash? Receivables has decreased from Does this mean a stricter credit policy terms? Inventories has decreased too from It shows a stead increase from 3. What is included in other assets? On the liabilities side, there can be many observations we can highlight.
Non controlling interests has also increased over the period of 9 years and is now at 2. It provides an analytical link between accounts calculated at different dates using currency with different purchasing powers. In effect, this analysis indexes the accounts and compares the evolution of these over time. As with the vertical analysis methodology, issues will surface that need to be investigated and complemented with other financial analysis techniques. The focus is to look for symptoms of problems that can be diagnosed using additional techniques.
In , Colgate saw a de-growth of Why is this so? Trend Analysis Trend Analysis compare the overall growth of key financial statement line item over the years from the base case.
We note that Sales has increased by only We also note that the overall net profit has decreased by In effect, this analysis indexes the accounts and compares the evolution of these over time. As with the vertical analysis methodology, issues will surface that need to be investigated and complemented with other financial analysis techniques. The focus is to look for symptoms of problems that can be diagnosed using additional techniques.
In , Colgate saw a de-growth of Why is this so? Trend Analysis Trend Analysis compare the overall growth of key financial statement line item over the years from the base case. We note that Sales has increased by only We also note that the overall net profit has decreased by A single ratio is not sufficient to adequately judge the financial situation of the company.
Several ratios must be analyzed together and compared with prior-year ratios, or even with other companies in the same industry.
This comparative aspect of ratio analysis is extremely important in financial analysis. It is important to note that ratios are parameters and not precise or absolute measurements. Thus, ratios must be interpreted cautiously to avoid erroneous conclusions. They are further sub-divided into 10 ratios as seen in the diagram below. We will discuss each sub category one by one. Current Ratio analysis in itself does not provide us with full details of the quality of current assets and whether they are fully realizable.
If current assets consists of large Inventories, then we should be mindful of the fact that inventories will take longer to convert into cash as they cannot be readily sold.
A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern. A complete liquidity ratio analysis can help uncover weaknesses in the financial position of the business.
Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
The higher the current ratio, the more capable the company is of paying its obligations. A ratio in each year suggests that the company would be able to pay off its obligations if they came due at that point, but the company has shown constant decreasing trend in its financial health in subsequent years, Since low current ratio does not necessarily mean that the firm will go bankrupt, but it is definitely is not a good sign.
Short term creditors prefer a high current ratio since it reduce their risk. Quick or Acid-Test Ratio The essence of this ratio is a test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory.
So it is the backing available to liabilities that must be paid almost immediately. There are two terms of liquid asset and liquid liabilities in this formula, Liquid asset is all current assets except the inventories and prepaid expenses, because prepaid expenses cannot be converted to cash. The liquid liabilities include all current liabilities except bank overdraft and cash credit since they are not required to be paid off immediately. The acid-test ratio is far more forceful than the current ratio, primarily because the current ratio includes inventory assets which might not be able to turn to cash immediately.
Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the current ratio, it means current assets are highly dependent on inventory. Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. Such ratios are frequently used when performing fundamental analysis on different companies.
It shows how the company uses its fixed assets to achieve sales. The formula is as follows: A High fixed asset turnover ratio indicates the capability of the firm to earn maximum sales with the minimum investing in fixed assets.
So it shows that the company is using its assets more efficiently. As it is shown in above the Company is using its assets specially fixed assets more efficiently each year although it had a light decrease in efficiency in and compared to It is almost like the fixed asset turnover ratio, it calculates the capability of organization to earn sales with usage of current assets.
So it indicates with what ratio current assets are turned over in the form of sales. This ratio is calculated as: In this formula current assets are balance sheet accounts that represent the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business.
A higher current assets turnover ratio is more desirable since it shows the better financial position of company and better usage of these current assets. It can be seen from above figure that the company has shown high ratio in , , , and , never mind the slight decrease in It means the company is using its current assets more efficiently. As its name suggests it is the relationship between turnover and working capital.
It is a measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales. A company uses working capital to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations.
The formula related is: The term working capital is a measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as: Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets.
In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales..
Capital Employed Turnover Ratio The capital employed turnover ratio tells us the state of the relationship between the shareholders' investment in the business and the sales that the management of the business has been able to generate from it. Capital employed can be expressed in different terms, all generally refer to the investment required for a business to function. By "employing capital" you are making an investment.
So, capital employed indicated the long term funds supplied by creditors and owners of the firms. So it can be computed as: Gearing is concerned with the relationship between the long terms liabilities that a business has and its capital employed.
The idea is that this relationship ought to be in balance. It is a general term describing a financial ratio that compares some form of owner's equity or capital to borrowed funds. The shareholders and lenders of long term loans may be interested in this ratio. Debt Equity ratio: This ratio reflects the relative claims of creditors and share holders against the assets of the firm, debt equity 39 ratios establishment relationship between borrowed funds and owner capital to measure the long term financial solvency of the firm.
The ratio indicates the relative proportions of debt and equity in financing the assets of the firm. The lower the debt equity ratio the higher the degree of protection enjoyed by the creditors.
The general norm for this ratio is 2: In case of high debt equity it would be obvious that the investment of creditors is more than owners. And if it is so high then it brings the firm in a risky position.
Or if it is too low it might indicate that the organization has not utilized its capacity of borrowing which must be utilized and that is because the borrowing from outsiders is a good source of fund for business with lower returns in compare to equity.
The UltraTech Cement Ltd. So it wants to improve its position since, a relatively lower ratio is favorable. Proprietary ratio: It indicates the relationship between owners fund and total assets. A high ratio will indicate high financial strength but a very high ratio will indicate that the firm is not using external funds adequately. The basic objective of almost every business is to earn profit which is essential for survival of the business.
A business needs profits not only for its existence but also for its expansion and diversification. The investors want an adequate return on their investments, workers want higher wages, creditors want higher security for interest and loan and the list could continue.
Turnover Ratio Analysis of financial statement
It is a class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.
The gross profit margin ratio tells us the profit a business makes on its cost of sales. It is a very simple idea and it tells us how much gross profit our business is earning. Gross profit is the profit we earn before we take off any administration costs, selling costs and so on.
So we should have a much higher gross profit margin than net profit margin. High ratios are favorable in this, since it indicates the business is earning a good return on the sale of its merchandise. This ratio indicates the relation between production cost and sales and the efficiency with which goods are produced or purchased.
If it has a very high gross profit ratio it may indicate that the organization is able to produce or purchase at a relatively lower cost. Here company has achieved very good efficiency in compared to other financial years. This shows the portion of sales available to owners after all expenses. A high profit ratio is higher profitability of the firm. This ratio shows the earning left for shareholder as percentage of Net sales.
Net Margin Ratio measures the overall efficiency of production, Administration selling, financing, pricing and Taste Management. It is depicted from the above diagram that company has been trying to improve its profitability year by year except for because of environmental instability which includes the economic meltdown in the country and whole world. This ratio establishes the relation between the net sales and the operating net profit.
The concept of operating net profit is different from the concept of net profit operating net profit is the profit arising out of business operations only. This is calculated as follows: Alternatively, this profit can also be calculated by deducting only operating expenses from the gross profit. This ratio is calculated with help of the following formula. Operating Net Profit operating n. The ROI is perhaps the most important ratio of all.
It is the percentage of return on funds invested in the business by its owners. In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile.
If the ROI is less than the rate of return on an alternative, the owner may be wiser to sell the company, put the money in risk-free investment such as a bank savings account, , and avoid the daily struggles of small business management. These Liquidity, Leverage, Profitability, and Management Ratios allow the business owner to identify trends in a business and to compare its progress with the performance of others through data published by various sources.
The owner may thus determine the business's relative strengths and weaknesses. This ratio actually measures the profitability of the investments in the firm. And the related formula is: Because this ratio shows the profitability of investment in the firm so higher the ratio, the better is the return to the owners of the company.
This Ratio is considered to be very important. It indicates the percentage of net profits before interest and tax to total capital employed. It reflects the overall efficiency with which capital is used. The ratio of a particular business should be compared with other business firms in the same industry to find out the exact position of the business. A measure of the return that a company is realizing from its capital employed. The ratio can also be seen as representing the efficiency with which capital is being utilized to generate revenue.
It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital. Of course the higher the ratio, the better will be the profitability of the company. It is calculated as: This ratio indicates the productivity of the owned funds employed in the firm.
However, in judging the profitability of a firm, it should not be overlooked that during inflationary periods, the ratio may show an upward trend because the numerator of the ratio represents current values whereas denominator represents historical values. EPS measures the profit earned per share.
The higher EPS will attract more investors to acquire shares in the company as it indicates that the business is more profitable enough to pay the dividends in time. So it is of utmost importance to investors in order to decide the prospects. As mentioned above, EPS is one of the important criteria for measuring the performance of a company. If EPS increases, the possibility of a higher dividend per share also increases.
However, the dividend payment depends on the policy of the company. Market price of shares of a company may also show an upward trend if the EPS is showing a rising trend. Dividend Payout Ratio indicates the percentage of profit distributed as dividends to the shareholders. It measures the relationship between the earning belonging to the equity shareholders and the amount finally paid to them: This ratio indicates the policy of management to pay cash dividend. A higher ratio indicates that the organization is following the liberal dividend policy regarding the dividend while a lower ratio indicates a conservative approach of the management towards the dividend.
Ratio 9. Ratio 0. Ratio The overall efficiency of the company to use its assets, capital or the working capital had increased from to However in the later years, it is declining and falling to a lower level of efficiency, for which we can blame the environmental conditions of the country, and that involves the economical and political challenges of India and the world.
It is a means for judging the financial health of a business enterprise. It determines and interprets the liquidity,solvency,profitability,etc. Financial ratios simplify, sumarise, and systemise the accounting figures presented in financial statements. Similarly comparision of current year figures can also be made with those of previous years with the help of ratio analysis and if some weak points are located, remidial masures are taken to correct them. Such trends are useful for planning.
The rate of profit of each year is compared with this standard and the actual performance of the business can be judged easily. It discloses the position of business with liquidity viewpoint, solvency view point, profitability viewpoint, etc. The following are some of the advantages of ratio analysis: Simplifies financial statements: It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business.
Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting.
Planning, co-ordination, control and communications. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.
Help in investment decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations. Limitations of financial statements: Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations.
Thus ratios derived, there from, are also subject to those limitations. For example, non- financial changes though important for the business are not relevant by the financial statements.
Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business.
However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company.
The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm.
It renders interpretation of the ratios difficult. Limited use of single ratios: A single ratio, usually, does not convey much of a sense.
To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision. Personal bias: Ratios are only means of financial analysis and not an end in itself.This experience was an emphasis on the importance of these Ratios which could be the roots of decisions made by management that can make or break the company.
Lack of adequate standard: For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. The nearest railway station is Rajula station and the nearest airport is Bhavnagar. If it has a very high gross profit ratio it may indicate that the organization is able to produce or purchase at a relatively lower cost.
Why is this so? It is one of the 3 biggest producers of primary aluminium in Asia, with the largest single location copper smelter. This money, or.
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