ratio analysis (r)

8/7/2019 ratio analysis (R)

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Ratio AnalysisRatio Analysis


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Meaning of Ratio AnalysisMeaning of Ratio Analysis

It is a:It is a:

Technique of analysis and interpretationTechnique of analysis and interpretation

Only a means to better understand theOnly a means to better understand the

financial strength and weakness.financial strength and weakness.


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Steps for Ratio AnalysisSteps for Ratio Analysis

Selection of relevant data based on the objective of analysisSelection of relevant data based on the objective of analysis

Calculation of appropriate ratiosCalculation of appropriate ratios

Compare the RatiosCompare the Ratios

Interpr

etation of th

eRatiosInt

erpr

etation of th

eRatios


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Types of RatiosTypes of Ratios

RatiosRatios

LiquidityLiquidity

RatioRatio

CapitalCapital

structurestructure

RatioRatio

Activity/Activity/

TurnoverTurnover

RatioRatio

ProfitabilityProfitability

RatioRatio

Based onBased on

SalesSales

Based onBased on

Invst.Invst.


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Liquidity RatioLiquidity Ratio

Acid test Ratio = Quick AssetsAcid test Ratio = Quick Assets

Current LiabilitiesCurrent LiabilitiesWhereWhere

Quick Assets = Current AssetsQuick Assets = Current Assets S

tockS

tock Prepaid ExpPrepaid Exp

OROR

Cash (in hand)+ Cash (at Bank) + Debtors + B/RCash (in hand)+ Cash (at Bank) + Debtors + B/R

+ Short term invst.+ Short term invst.


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Capital Structure RatioCapital Structure Ratio

DebtDebt--Equity Ratio = DebtEquity Ratio = Debt

EquityEquity

OROR

Long term LoanLong term Loan

Sh. Holders FundSh. Holders FundWhere,Where,

Debt/Debt/ LongLong termterm LoanLoan == DebenturesDebentures ++ MortgageMortgage LoanLoan ++LoanLoan forfor moremore thanthan 55 yearsyears


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Proprietor Ratio = Share Holders FundProprietor Ratio = Share Holders Fund

Total FundTotal FundWhere,Where,

Shareholders Fund = Equity share Capital + PreferenceShareShareholders Fund = Equity share Capital + PreferenceSharecapital + Reserve and Surplus + P &L.capital + Reserve and Surplus + P &L.

Total Fund = Total Debt + Shareholders FundTotal Fund = Total Debt + Shareholders Fund



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Debt to total fund Ratio = Share Holders FundDebt to total fund Ratio = Share Holders Fund

Total FundTotal FundWhere,Where,

Debt/Debt/ LongLong termterm LoanLoan == DebenturesDebentures ++ MortgageMortgage LoanLoan ++ LoanLoan forfor moremore

thanthan 55 yearsyears

Total Fund = Total Debt + Shareholders FundTotal Fund = Total Debt + Shareholders Fund



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Activity RatioActivity Ratio

Stock Turnover Ratio= COGSStock Turnover Ratio= COGS

Avg. StockAvg. StockWhere,Where,

COGS = Cost of goods sold = Opening stock + PurchasesCOGS = Cost of goods sold = Opening stock + Purchases ClosingClosingStockStock

Avg. Stock = Opening Stock + Closing StockAvg. Stock = Opening Stock + Closing Stock

22


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Debtors Turnover Ratio= Net credit SalesDebtors Turnover Ratio= Net credit Sales

Avg. DebtorsAvg. DebtorsWhere,Where,

Net Credit Sales = Total SalesNet Credit Sales = Total Sales Cash SalesCash Sales Sales returnSales return

Average Debtors = Opening Debtors + Closing DebtorsAverage Debtors = Opening Debtors + Closing Debtors

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Debt Collection Period = 12 or 365Debt Collection Period = 12 or 365

DTRDTR

(in months or days respectively)(in months or days respectively)



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Creditors Turnover Ratio= Net credit PurchasesCreditors Turnover Ratio= Net credit Purchases

Avg. CreditorsAvg. Creditors

where,where,

Net Credit Purchases = Total PurchasesNet Credit Purchases = Total Purchases Cash PurchasesCash Purchases

Purchase returnPurchase return

Average Creditors = Opening Creditors + Closing creditorsAverage Creditors = Opening Creditors + Closing creditors

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Debt Payment Period = 12 or 365Debt Payment Period = 12 or 365CTRCTR

(in months or days respectively)(in months or days respectively)


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Profitability RatioProfitability Ratio (Based on Sales)(Based on Sales)

Gross Profit Ratio = Gross ProfitGross Profit Ratio = Gross Profit

Net SalesNet SalesWhere,Where,

Gross Profit = Net SalesGross Profit = Net Sales COGSCOGS

Net Profit Ratio = Net ProfitNet Profit Ratio = Net Profit

Net SalesNet Sales

where,where,Net Profit = Gross ProfitNet Profit = Gross Profit NonNon--operating Expensesoperating Expenses


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Return on Capital Employed =EBITReturn on Capital Employed =EBIT

Avg. Cap EmployedAvg. Cap EmployedWhereWhere

Avg. Cap. Employed= Opening + ClosingAvg. Cap. Employed= Opening + Closing

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OROR

= Closing= Closing C. Yr Profits after tax C. Yr Profits after tax

= Opening + C. Yr. Profit after tax= Opening + C. Yr. Profit after tax

Capital Employed= Equity share capital +Capital Employed= Equity share capital +

Preference share capital + all reserves + P&L +Preference share capital + all reserves + P&L +

Long term LoanLong term Loan Fictitious AssetsFictitious Assets

Profitability RatioProfitability Ratio (Based on Investment)(Based on Investment)


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Return on Shareholders Fund:Return on Shareholders Fund:

Return on total shareholders fund =Return on total shareholders fund =

N.P after interest and tax * 100N.P after interest and tax * 100Total shareholders FundTotal shareholders Fund

Return on Equity shareholders Fund=Return on Equity shareholders Fund=

Net profit after interest and tax * 100Net profit after interest and tax * 100

Equity shareholders FundEquity shareholders Fund



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Earning per share (EPS) =Earning per share (EPS) =

Net profitNet profit-- Div. on preference shareDiv. on preference share

Number of Equity sharesNumber of Equity shares

Dividend per share =Dividend per share =

Div paid to equity shareholderDiv paid to equity shareholder

Number of Equity sharesNumber of Equity shares



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Dividend pay out ratio =Dividend pay out ratio =

Dividend per shareDividend per share

Earning Per ShareEarning Per Share



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QUESTIONQUESTION

ratio analysis (r)

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