a. Investments in Govt. or Trust securities. b. Investments in shares, debentures or bonds. c.

Investment in Capital of Partnership firm

 Raw materials, work-in-progress, finished goods, spares and consumables Sundry debtors and receivables < 6 mths Advances paid to suppliers of raw materials Cash and bank balances Interest receivables Other current assets such as Government securities, Bank deposits ..etc

Tax disputes Legal litigations Bills and cheques discounted with banks Claims against the company not acknowledged

Ratio analysis is one of the powerful tools of financial analysis. It indicates a quantitative relationship between the figures and group of figures which are used for

Evaluation And Decision Making.

Ratio is a simple mathematical expression of

relationship between two related items in quantitative

form. It may be a number expressed in terms of another number. The relationship between two figures may be expressed as Quotient A Rate Percentage

In assessing the financial stability of a firm, a management should, apart from profitability, be interested in relative figures rather than in absolute figures.

Ratios can be directly helpful as a basis for making predictions.

A ratio is a mathematical relationship between two quantities. To evaluate financial condition and the purposes of a firm, the financial analyst needs certain yardsticks. Such yardsticks frequently used is a ratio. The ratios are not only helpful to those who manage company but also its shareholders and creditors to know about financial position and the earning capacity of that concern.

A) ON THE BASIS OF STATEMENTS PREPARED

The Classification is based on financial statements prepared i.e. Profit and Loss
and Balance Sheet, where from the information is obtained for calculation ratios. The ratios under this classification are grouped into three categories, namely :

1. Balance Sheet Ratios:

Those ratios which are calculated to establish relationship between two balance sheet items. They area) Current Ratio c)) Proprietary Ratio e) Capital Gearing Ratio b) Liquid Ratio d) Debt-Equity Ratio

Current Assets Current Ratio = ----------------------------Current Liabilities

2. Income Statement Ratios:

Those ratios calculated to establish relationship between two P&L a/c items.
They are: a) Gross Profit Ratio b) Operating Ratio

c) Operating Profit Ratio

e) Interest Coverage Ratio

d) Net Profit Ratio

Gross Profit Gross Profit Ratio = --------------------------- X 100 Net Sales

3. Composite or Mixed Ratios

Those ratios are calculated to establish relationship between a P&L a/c item and Balance Sheet item. They are

a) Inventory Turn-Over Ratio

c) Creditors Turn-Over Ratio Ratio

b) Debtors Turn-Over Ratio

d) Working Capital Turn-Over

e) Fixed Assets Turn-Over Ratio f) Return on Equity g) Return on Capital Employed

Net Sales Total Asset Turnover Ratio = -------------------------Total Assets

a) Liquidity Ratios:
i) Current Ratio iii) Absolute Liquid Ratio ii) Liquid Ratio

b) Deficiency or Activity Ratios : a) Inventory Turn-Over Ratio b) Debtors Turn-Over Ratio c) Creditors Turn-Over Ratio d) Working Capital Turn-Over Ratio e) Fixed Assets Turn-Over Ratio

c) Profitability Ratios: a) Gross Profit Ratio c) Operating Profit Ratio

d) Solvency Ratios: a) Debt-Equity Ratio

b) Operating Ratio d) Net Profit Ratio

b) Proprietary Ratio c) Solvency Ratio

e) Current Assets to NetWorth Ratio g) Capital Gearing Ratio

d) Fixed assets to Net-Worth Ratio f) Interest Coverage Ratio

 Trade Creditors -- Focus on the liquidity of the firm. Bondholders -- Focus on the long-term cash flow of the firm. Shareholders -- Focus on the profitability and long-term health of the firm.

 Plan -- Focus on assessing the current financial position and evaluating potential firm opportunities. Control -- Focus on return on investment for various assets and asset efficiency. Understand -- Focus on understanding how suppliers of funds analyze the firm.

Balance Sheet
A summary of a firms financial position on a given date that shows total assets = total liabilities + owners equity.

Income Statement
A summary of a firms revenues and expenses over a specified period, ending with net income or loss for the period.

Reynolds Balance Sheet (Asset Side)

Reynolds Balance Sheet (thousands) Dec. 31, 2007

Cash and C.E. $ Acct. Rec. Inventories Prepaid Exp Accum Tax Prepay Current Assets $ Fixed Assets (@Cost) Less: Acc. Depr. Net Fix. Assets $ Investment, LT Other Assets, LT Total Assets $

90 394 696 5 10 1,195 1030 (329) 701 50 223 2,169

a. How the firm stands on a specific date. b. What Renolds owned. c. Amounts owed by customers. d. Future expense items already paid. e. Cash/likely convertible to cash within 1 year. f. Original amount paid. g. Acc. deductions for wear and tear.

Reynolds Balance Sheet (Liability Slide)

Reynolds Balance Sheet (thousands) Dec. 31, 2007

Notes Payable $ Acct. Payable Accrued Taxes Other Accrued Liab. Current Liab. $ Long-Term Debt Shareholders Equity Com. Stock ($1 par) Add Pd in Capital Retained Earnings Total Equity $ Total Liab/Equity $

290 94 16 100 500 530 200 729 210 1,139 2,169

a. Note, Assets = Liabilities + Equity. b. What Renolds owed and ownership position. c. Owed to suppliers for goods and services. d. Unpaid wages, salaries, etc. e. Debts payable < 1 year. f. Debts payable > 1 year. g. Original investment. h. Earnings reinvested.

Reynolds Income Statement

Reynolds Statement of Earnings (in thousands) for Year Ending December 31, 2007

Net Sales $ Cost of Goods Sold Gross Profit $ SG&A Expenses EBIT $ Interest Expense EBT $ Income Taxes EAT $ Cash Dividends Increase in RE $

2,211 1,599 612 402 210 59 151 60 91 38 53

a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders.

Use of Financial Ratios Types of Comparisons

Internal Comparisons External Comparisons A Financial Ratio is an index that relates two accounting numbers and is obtained by dividing one number by the other.