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Ratio Analysis

It is process of identifying strength and weakness in various area of an organization with the help of ratios of relevant accounting figures. Ratio is the mathematical expression of relationship between two figures and the expression may b either in the form of pure ratio or percentage

Ratio Analysis involves four steps


Selection of relevant accounting data from financial statement Constructing ratios of related accounting figures Comparing the ratio thus constructed with standard ratio which may b the corresponding past ratio of the firm Interpretation of ratio

Classification of accounting Ratio


according to source

Balance sheet ratio Profit& loss account ratio Mixed ratio

According to different aspects of firms operation Liquidity Long-term solvency Efficiency or turnover ratio Profitability ratio

Importance of Ratio analysis


Forecasting and planning Budgeting Evaluation of departmental activity Communication Measurement of efficiency in utilization of assets Inter-firm comparison Indication of liquidity position, long term solvency position Signal of corporate sickness

Balance sheet Ratios


Current ratio Quick ratio Cash ratio Cash to current liability Debt-equity ratio Proprietary ratio

Profit &loss account ratio


Gross profit ratio

Operating ratio Operating profit ratio Net profit ratio Interest coverage ratio

Current Ratio/working capital ratio

Current ratio =Current Assets/current liabilities

Factor affecting short term liquidity position

Type of business Type of products Reputation of the concern Seasonal influence Type of asset available

Quick ratio/Acid Test Ratio

Quick ratio= quick assets/quick liabilities

Quick asset=current asset-(inventory+prepaid exp) Quick liability=current liabilities- bank O/D Ideally quick ratio should be 1:1.

Cash ratio

Cash ratio=( cash+ marketable securities)/CL

Ideally cash ratio should be 1:2.

Turnover ratio

Fixed asset turnover ratio= sales/FA Current asset turnover ratio=sales/CA

Working capital turnover ratio=net sales/working capital


Inventory turnover ratio Cost of good sold /average inventory

a.

b. Net sales/ average inventory

Debtor turnover ratio= credit sales/average debtor


debtors collection period=365/ Creditors turnover ratio=credit purchase/ average creditors Capital turnover ratio= sales/capital employed

Profitability Ratio

Gross profit ratio= gross profit/sales =(sales-cost of good sold)/sales. Operating ratio= (operating cost+ cogs)/sales Operating profit ratio=operating profit/sales = (sales-operating cost-cogs)/sales Net profit ratio=Net profit after tax/sales ROCE=EBIT/capital employed Return on equity capital=( net profit after tax-preference dividend)/(equity capital+ reserve & surplus)

Profitability ratio

Earning per share= (net profit after tax- preference dividend)/ no. of equity shares Dividend Yield ratio=dividend per share/market value per share Price Earning ratio=market price per share/EPS Dividend pay-out ratio=dividend per share/earning per share.

Long-term financial position


Debt-equity ratio Proprietary ratio=shareholders wealth/total asset Interest coverage ratio(debt service)=EBIT/fixed interest charges
Debt service coverage ratio= (NPAT+ depreciation+ interest on long-term loan)/(interest on Long Term Loan+instalments of long term loan)

Valuation Ratio

EV/EBIDTA

EV=Enterprise Value= Market capitalization+Debt- Cash Market capitalization= CMP* no. of share EV/sales Book value= Net worth /no. Of share PEG=PE/earning growth

DuPont Analysis
DuPont Analysis integrates the important ratios to analyse a firm's profitability. PBIT Sales PBIT RONA= Net Assets Net Assets Sales PAT Sales PBIT PAT Net Assets ROE Net Worth Net Assets Sales PBIT Net Worth ROE Assets turnover Margin Leverage

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Du Pont Analysis

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