Abstract :
Making profits is the cornerstone motive for most of the corporations. As rewarding as it can be, it comes
only with a military like discipline and a strict execution of daily operations. Ratio analysis is a tool
which can be used to gain crucial insights into the financial health of corporations and its daily.
This paper deals with the impact of activity ratios of a firm on market coverage. A detailed analysis has
been conducted in respect to the following:
 observing the top companies’ trends
 calculating both the sets of ratios i.e activity ratios and market coverage ratios
 Regression analysis
Introduction:
Any business or firm is in it for the reason that they wish to earn money. While doing this, however,
various decisions have to be made at every step of the way. These decisions, these “crossroads” must be
navigated carefully. In a very competitive market out there, businesses must arm themselves to the teeth
to be able to move through these murky waters without capsizing.
One of these tools spoken above is analysis of financial statements using ratios. Ratio analysis is a
quantitative method of gaining insight into the liquidity, operational efficiency and profitability of a
company, by looking into and comparing the information that is present in its financial statements.
Whenever there is a requirement of financial statement analysis in a fundamental level, ratio analysis is
the first thing that is done. And thus we can say that, ratio analysis is a cornerstone of fundamental
analysis. The employees working in a company, the corporate insiders rely less on ratio analysis because
they have access to highly detailed operational data about a company. However, as an outsider, access to
such data is not possible. An outsider has to rely on the financial statements released by the company and
the public news, to be able to understand the position that the company is in. Thus, analysts on the outside
use different types of ratios to assess companies - be it their liquidity, profitability etc – to help make
investment decisions.
When investors and analysts talk about fundamental analysis of a company or quantitative analysis of a
company, they usually are referring to the tool of ratio analysis. The process of ratio analysis requires
going through the current and historical financial statements of the company, thus allowing to evaluate its
performance and financial health. This evaluation would then be used to make various decisions on
investment, valuation, financing etc.
Basically, the data received from these statements is used to compare a company’s performance over
time, to assess and understand whether the company is trudging down the right path.
It is used to: Get an understanding on the improvement and deterioration (either) of a company
 To compare the financial standing of the company, that is, to make a comparison between the
current status of the company and the industry average
 To compare the company to its competitors (one or more) to see how it stacks up
This comparison must be done between the said company and other companies of the same
sector, barring which a ratio analysis wouldn’t make any sense, as two companies in two
different sectors have completely different approaches to business
Ratio analysis can be used to establish a trend line of one company’s results over a large number of
financial reporting periods. This trend line could then showcase changes in the company that wouldn’t be
evident if one were to be using the same data and ratio that were represented at just one point in time.
Comparing a company to its peers or its industry averages is another useful application for ratio analysis.
Calculating one ratio for competitors in a given industry and comparing across the set of companies can
reveal both positive and negative information. Since companies in the same industry have the same
approach to business, they usually have similar capital structures (debt or equity financing), or
investments (equipment, property and other fixed assets). With this safe assumption, it is also safe to say
that the ratios should then substantially be similar across the industry. If the results of the ratio were to be
drastically different, it would usually mean that one company or firm is potentially harboring an issue
which is resulting in it underperforming the competition. However, it could also mean that a specific
company is much better in gearing out profits than the other companies or firms that are on the same
plate.
Categories of Ratios
Most investors (or even potential investors) are familiar with the key ratios, mainly the ones that are
pretty easy to calculate and interpret. Some of these ratios (easy to calculate and interpret) include the
liquidity ratios, the return on equity (ROE), the debt-equity (D/E) ratio etc. There are a lot of ratios that
can be used to process out a fundamental analysis, however, they are broadly divided into six main heads,
based on the type of information and data that they provide to the investor or analyst. However, for our
report, we need to know two types of ratios briefly.

Activity Ratios (Brief)
Activity ratios are a category of financial ratios that measure the firm’s operational processes and
its ability to generate cash or sales, by converting different accounts. They measure the relative
efficiency of the firm, based on how well they use the resources that own, i.e their assets, their
leverage etc. These ratios are crucial in understanding how well the company management is
doing, in converting its resources to revenues and cash.
Typically, any company would want to turn their production into cash or into sales as quickly as
possible. That is the entire point of business - to be generating revenues - and faster sales would
mean higher revenues. Activity ratios measure the amount of resources that the company has, or
that has been invested into the company. Any business (usually) works with materials, inventory,
leverage etc, activity ratios determine can help provide an investor the data to understand how
well the said organization is managing the said areas.
While activity ratios help in gauging an organization’s operational efficiency and profitability,
these ratios are best used as a comparison to a competitor or industry to establish whether an
entity’s processes are favorable or not. These ratios can form a basis of comparison, across
financial reporting periods to help determine changes that will have occurred over time.
Literature review:
Profitability is estimated by Return on assets (ROA). Financing structure is estimated by D/E proportion.
Portfolio quality is marked by discount proportion. Past research inferred that, working cost proportion,
cost per borrower proportion and D/E proportion are measurably noteworthy indicator factors in deciding
profit for resource proportion. Besides, discount proportion is additionally another critical indicator
variable in deciding ROA as per the noteworthiness.
The examination between the return on asset (ROA), return on value (ROE) and return on investment
(ROI) proportions together and independently in protection open organizations share costs which was
explored by Kabajeh M., et al. (2012) ,demonstrated a positive connection between ROA, ROE, and ROI
proportions together with protection open organizations share costs. The outcomes additionally showed a
positive however low connection between ROA proportion independently and quantifiable profit (ROI)
proportion.
The effect of inventory turnover on the presentation of the retail part was explored by Aghazadeh S.
(2009) study which in its theory attempted to support that stock turnovers are straightforwardly related to
the performance of the organization. The outcomes indicated that the fluctuation of yearly inventory
turnovers of an organization can clarify varieties in organization execution in the retail business. The
movements in the yearly inventory proportions of organizations are utilized as markers to conjecture
future stock performance. The capacity of an organization to deal with its annual inventory turnovers
fluctuation is a decent marker with regards to the nature of that administration in different territories of
the retail firm.
Thesis statement:
Activity ratios and market coverage ratios are two broad ratio categories. Activity ratios have an impact
on the market coverage.
Main Points (Variables or assumptions)
- Activity or efficiency ratios
- Market coverage ratios
- Assuming that financial statements are perfectly accurate and reflect the health of the firm accurately
Methodological Approach:
This research paper will require a quantitative approach. This is because of the requirement to analyse the
impact of one type of ratio on the value of other ratios. This involves data collection and basic statistical
analysis.
This research paper will require
- Basic graph plotting
- Trend analysis
- Statistical tools (regression analysis)