Financial Management

Semester 2 Symbiosis University

Financial Management

Contents
Interpretation of financial statement
Ratio analysis Formulae Role & classification

Ratio Analysis
Ratio Analysis as technique for interpretation of financial statement deals with computation of various ratio by !roupin! or re!roupin! the various fi!ures and"or information appearin! on the financial statements with the intention to draw the fruitful conclusion thereon# Comparison

Intra or!ani$ation Inter or!ani$ation Industry standards

Classification of Ratios
%iquidity ratio &urnover ratio Solvency ratio 'rofitability ratio (verall profitability ratio )iscellaneous ratio

Liquidity Group

Current Ratio*
Current Assets"Current liabilities Indicates the bac+in! capacity to meet current liabilities Ideal 2*,

%iquid"Acid test Ratio*

%iquid Assets"%iquid liabilities Indicates ability to repay immediate liabilities Ideal ,*,

Turnover Group

Fi-ed Assets turnover ratio*

.et Sales"Fi-ed Assets Indicates capacity of or!ani$ation to achieve !reater sales over investment in fi-ed assets /i!her the ratio hi!her the favorable for company

Current Assets turnover ratio*

.et Sales"Current Assets Indicates capacity of or!ani$ation to achieve !reater sales over investment in current assets /i!her the ratio hi!her the favorable for company

Turnover Group

0or+in! Capital turnover ratio*

.et Sales"0or+in! capital 0or+in! capital1Current Assets2Current %iabilities Indicates capacity of or!ani$ation to achieve !reater sales over investment in wor+in! capital /i!her the ratio hi!her the favorable for company

Inventory"Stoc+ turnover ratio*

C(3S"Avera!e Inventory .et Sales"Avera!e Inventory C(3S"Closin! Inventory .et Sales"Closin! Inventory /i!her inventory turnover ratio indicates that ma-imum sales turnover is achieved with the minimum of investment# /i!her the ratio hi!her the favorable for company

Turnover Group

4ebtor turnover ratio

.et credit sales"Closin! Sundry debtors If the avera!e collection period is more than normal credit period allowed other customer it may indicate over investment in debtors

Capital turnover ratio*

Sales"Capital 5mployed Capital 5mployed1Fi-ed assets 6 Current assets 7 Current liabilities1Share capital 6 reserves and surplus 6 lon! term liabilities Indicates the efficiency of the or!ani$ation with which the capital employed is bein! utili$ed /i!her the capital turnover ratio better the situation will be#

Solvency Group

4ebt equity ratio

4ebts"5quity Indicates sta+e of shareholders that of creditors /i!h debt ratio may ma+e the proportion in the or!ani$ation a ris+y one# 0hile lower ratio may mean borrowin!s capacity is bein! under utili$ed

'roprietary ratio
&otal Assets"(wners fund Fi-ed Assets"(wners fund Current Assets"(wners fund Indicates the e-tent to which owner fund are sun+ In different +ind of assets /i!h ratio indicates !ood si!ns

Solvency Group

Fi-ed assets"capital employed ratio

Fi-ed assets"capital employed 8 ,99 Indicates to which e-tent the lon! term funds are sun+ in fi-ed assets A very hi!h ratio indicates an ur!ent need of lon! term financin! in current assets

Interest covera!e ratio

'rofit before interest and ta-"Interest char!es 'rotection available to lenders of lon! term capital in the form funds available to pay interest char!es /i!h ratio is desirable but too hi!h ration may indicate under utili$ation of borrowin! capacity of or!ani$ation

Profitability Group

3ross 'rofit ratio

3ross profit"Sales 8 ,99

.et profit ratio

.et profit"Sales 8 ,99

(peratin! ratio
:C(3S 6 (peratin! 5-p;".et Sales 8 ,99