# RATIO ANALYSIS final

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Published on January 13, 2009

Author: chhabraankit1

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What is a ratio? : What is a ratio? A ratio:- It is the mathematical relationship between two quantities in the form of a fraction or percentage. A ratio on its own has little or no meaning at all. Significance of using ratios: : Significance of using ratios: It is compared with other ratios in the same set of financial statements. It is compared with the same ratio in previous financial statements (trend analysis). It is compared with a standard of performance (industry average). WHAT IS RATIO ANALYSIS? : WHAT IS RATIO ANALYSIS? DEFINITION:- It refers to an analysis of the relationships of items in financial statements & thereby an investigation into the financial performance of an entity using a series of ratios. Classification of ratios:- : Classification of ratios:- Generally ratios are divided into four areas which provide different kinds of information:- Leverage Ratios Liquidity Ratios Profitability Ratios 4. Other ratios LIQUIDITY RATIOS : LIQUIDITY RATIOS MEANING:- It measures the ability of a firm to meet its short term obligations & reflects the short term financial solvency of firm. Classification:- Current ratio Acid-test ratio LIQUIDITY RATIOS : LIQUIDITY RATIOS Current ratio:- It is the ratio of total current assets to total current liabilities. Formula:- current assets current liabilities Current ratio = LIQUIDITY RATIOS : LIQUIDITY RATIOS Acid-test ratio:- It measures the firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities. Hence also known as Quick ratio. Formula: Quick assets current liabilities Acid-test ratio = Leverage ratios : Leverage ratios Meaning:- It is defined as financial ratio which throws light on long term solvency of a firm with regards to the following two aspects:- ability to repay the principal & regular payment of interest Leverage ratios : Leverage ratios Classification:- Debt-equity ratio Capital gearing ratio Interest coverage ratio Debt service coverage ratio Leverage ratios : Leverage ratios Debt-equity ratio:- It indicates the relationship between borrowed funds and owners capital. Formula:- Total debt Shareholders equity D/E ratio = Leverage ratios : Leverage ratios Capital gearing ratio:- It indicates the relationship between equity funds and fixed income bearing funds. Formula:- Equity funds Fixed income bearing funds CGR = Leverage ratios : Leverage ratios Interest coverage ratio:- It measures the debt servicing capacity of the firm. It is determined by dividing the EBIT by the fixed interest charges. Formula:- EBIT Interest Interest coverage ratio = Leverage ratios : Leverage ratios Debt service coverage ratio:- It computes the debt service capacity of a business firm. In general 2:1 is considered as satisfactory ratio. Formula:- EAT+Interest+Depreciation+OA Installment DSCR = Profitability ratios : Profitability ratios Meaning:- These ratios tell us whether a business is making profits - and if so whether at an acceptable rate. It uses margin analysis and show the return on sales and capital employed. Profitability ratios : Profitability ratios Classification:- The key profitability ratios are: Gross profit ratio Operating profit ratio Return on Capital employed ratio Profitability ratios : Profitability ratios Operating profit ratio:- It refers to a company's ability to control its other operating costs or overheads. Formula:- EBIT Net Sales Operating profit ratio = Profitability ratios : Profitability ratios Gross profit ratio:- It refers to ability of the business to consistently control its production costs or to manage the margins its makes on products its buys and sells. Formula:- Gross Profit Sales Gross profit margin = Profitability ratios : Profitability ratios Return on capital employed:- It measures the profits related to return on capital employed. The term capital employed refers to long term funds supplied by lenders and owners of the firm. Formula:- EBIT Average total capital employed ROCE = Other Ratios : Other Ratios Earning per share:- It measures the profit available to the equity shareholders on a share. It is calculated by dividing the profits available to the equity shareholders by the number of outstanding shares. Formula:- Net profit available to equity-holders Number of ordinary shares outstanding EPS = Other Ratios : Other Ratios Price-earnings ratio:- It measures investors’ expectations and the market appraisal of the performance of a firm. Formula:- Market price of share EPS P/E ratio = THANK YOU : THANK YOU

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