FINANCIAL RATIO ANALYSIS
RATIO - MEANING
• Relationship or Proportion that one amount
bears to another, the first number being the
‘Numerator’ & the later ‘Denominator’
OR
• Relationship b/w two figures expressed
Mathematically
Advantages/Importance/Significance
- Ratio Analysis
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Analytical Tool for measuring performance.
Ratios makes Comparison Easy.
Inter firm Comparison possible.
Ascertainment of Short term Liquidity & Long
term Solvency position possible.
• Analysis about the STRENGTHS & WEAKNESSES
of the firm’s operations.
• Analyze Past Performance & make further
projections.
TYPES OF RATIOS
 LIQUIDITY
 CAPITAL STRUCTURE OR LEVERAGE
 TURNOVER/ACTIVITY/PERFORMANCE
 PROFITABILITY
 MARKET INDICATORS
LIQUIDITY
 CURRENT RATIO
 QUICK/ ACID TEST RATIO
 ABSOLUTE LIQUID/SUPER QUICK RATIO
 STOCK TO WORKING CAPITAL RATIO
 INVENTORY TURNOVER RATIO
 ACCOUNTS RECEIVABLE TURNOVER RATIO
 CURRENT RATIO
CURRENT ASSETS, LOANS & ADVANCES
CURRENT LIABILTIES & PROVISIONS
QUICK/ACID TEST RATIO
CURRENT ASSETS, LOANS & ADVANCES- INVENTORIES
CURRENT LIABILTIES & PROVISIONS- BANK O/D
ABSOLUTE LIQUID/SUPER QUICK RATIO
ABSOLUTE LIQUID ASSETS*
CURRENT LIABILTIES
* Cash in hand + Cash at Bank + Short term
Investments
 STOCK TO WORKING CAPITAL RATIO
Inventory or Stock** x 100
Working Capital
** (opening stock + closing stock)
2
From the given Balance Sheet calculate Current , Liquid,
Absolute Liquid & Stock to Working Capital ratios.
Balance Sheet
LIABILTY
Share Capital
Reserves
Rs.
ASSETS
2,00,000 Fixed Assets
Rs.
1,60,000
80,000 Current Assets:
CURRENT LIABILITIES:
Stock
1,20,000
Creditors
80,000 Debtors
60,000
Bills Payable
40,000 Short term Investments
40,000
Cash
4,00,000
20,000
4,00,000
• Current Ratio= 2,40,000 = 2: 1
1,20,000
• Quick Ratio = 2,40,000 – 1,20,000 = 1: 1
1,20,000
• Absolute Ratio = 20,000 = 0.167
1,20,000
• Stock to Working Capital
= 1,20,000 x 100 = 100%
1,20,000
CAPITAL STRUCTURE OR LEVERAGE
• Shareholders Equity Ratio
• Long Term Debt to Shareholders Net Worth
Ratio
• Capital Gearing Ratio
• Debt-Equity Ratio
• Fixed Assets to Long term Funds Ratio
• Proprietary or Net Worth Ratio
• Current Assets to Net Worth
• Shareholders Equity Ratio
= Shareholders Equity*
Total Assets( tangible)
*(Equity Share Capital + Preference Share Capital + Reserves &
Surplus) – (Accumulated losses like preliminary expenses, discount
on issue of shares, debentures, etc. appearing on the Assets side of
Balance Sheet).
• Long Term Debt to Shareholders Net Worth Ratio
= Long Term Debt
Shareholders Net Worth*
* Capital + free Reserves – Intangible Assets
• Capital Gearing Ratio
= Fixed Interest Bearing Securities*
Equity Shareholder's Funds**
*Debentures + Long Term Loans + Preference Share Capital
** Equity Share Capital + Reserves & Surplus
• Debt- Equity Ratio
= Debt*
Equity**
*All external Long term loans
**Share Capital and all Reserves & Surplus
• Fixed Assets to Long Term Funds Ratio
= Fixed Assets
Long Term Funds*
*Share Capital, Reserves & Surplus & Long Term Loans
• Proprietary or Net Worth Ratio
= Shareholders Net Worth*
Total Assets**
*(Equity Share Capital + Preference Share Capital +
Reserves & Surplus) – (Accumulated losses or Fictitious
Assets like preliminary expenses, discount on issue of
shares, debentures, etc. appearing on the Assets side of
Balance Sheet).
** Fixed Assets + Current Assets – Fictitious Assets
• Current Assets to Net Worth
= Current Assets
Net Worth
TURNOVER/ACTIVITY/PERFORMANCE
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Inventory Turnover Ratio
Inventory Ratio
Debtors Turnover Ratio
Debtors Collection Period or Debtors Velocity
Bad debts to Sales Ratio
Creditors Turnover Ratio
Creditors Payment Period or Creditors Velocity
Fixed Assets Turnover Ratio
Total Assets Turnover Ratio
Working Capital Turnover Ratio
Sales to Capital Employed
 INVENTORY TURNOVER RATIO
COST OF GOODS SOLD
AVERAGE INVENTORY
 INVENTORY RATIO
Inventory/ Current Assets
 DEBTORS OR ACCOUNTS RECEIVABLE TURNOVER RATIO
NET CREDIT SALES/AVG. ACCOUNTS RECEIVABLE
 DEBTORS COLLECTION PERIOD OR DEBTORS VELOCITY
Average Debtors x 365 (in days)
Net Credit Sales
 Bad debts to Sales Ratio
Bad Debts x 100
Sales
 Creditors Turnover Ratio
Net Credit Purchase
Average A/c’s Payable
 Creditors Payment Period or Creditors Velocity
Average A/c’s Payable x 365 (in days)
Credit Purchases
 Fixed Assets Turnover Ratio
Sales/ Fixed Assets
 Total Assets Turnover Ratio
Sales/ Total Assets
 Working Capital Turnover Ratio
Sales/ Working Capital
 Sales to Capital Employed
Sales/ Capital Employed
PROFITABILITY
 Gross Profit Margin= Gross Profit x 100
Net Sales
 Net Profit Ratio
= Net Profit before Interest & Tax x 100
Sales
 Net Profit Margin= NetProfit x 100
Net Sales
 Cash Profit Ratio = Cash Profit* x 100
Sales
* Net Profit + Depreciation
 Return on Total Assets = Net Profit After tax x 100
Total Assets
 Return on Shareholders Funds or Return on Net
Worth
= Net Profit after Interest & Tax x 100
Net Worth*
* Equity Capital + Reserves & Surplus
 Return on Equity
= Profit after tax x Net Sales x Total Assets
Net Sales
Total Assets Net Worth
ROE= Net Profit Margin x Total Assets Turnover Ratio
x Total Assets to Net Worth
 Operating Ratio or Operating Cost Ratio
= Operating Cost* x 100
Net Sales
*Cost of Goods sold + Operating Expenses
 Interest Cover Ratio
= Profit Before Interest, Depreciation & Tax
Interest Expense
 Dividend Cover Ratio
(i) Equity Dividend Cover
= Net Profit after Tax- Preference Dividend
Equity Dividend
(ii) Preference Dividend Cover
= Net Profit after Tax
Preference Dividend
 Debt Service Coverage Ratio (DSCR)
= Profit After tax+ Depreciation+ Interest on Loan
Interest on Loan+ Loan Repayment in a year
MARKET INDICATORS OR MARKET BASED RATIOS
 Earnings per Share (EPS)
= Net Profit after Tax- Preference Dividend
No. of Equity Shares
 Price Earnings Ratio (P/E Ratio)
= Current Market Price of Equity Share
Earnings per Share
 Market Price to Book Value Ratio (P/BV Ratio)
= Market Price Per Share
Book Value Per Share
 Cash Earnings Per Share Ratio
= Net Profit after tax+ Depreciation
No. of Equity Shares
 Dividend Payout Ratio (D/P Ratio)
= Dividend Per Share
Earnings Per Share
 Book Value Ratio
= Equity Share Capital+ Reserves- P&L A/c Debit Balance
Total no. of Equity Shares
 Dividend Yield Ratio
= Dividend Per Share x 100
Market Price
DUPONT ANALYSIS
• DUPONT Company of USA introduced a system of
Financial Analysis
• Analyses Net Profit Margin in terms of Asset
Turnover
• Extension of ROI measuring the overall profitability &
operational efficiency of the firm
Advantages/ Uses of Dupont Analysis
• Measuring the managerial performance by linking
the Net Profit Margin to Total Assets Turnover.
• Segregation and Identification of factors that affect
the OVERALL PERFORMANCE of the company.
• Considers INTERRELATIONSHIP of Accounting
Information given in the Financial Statements.
• Comparative Analysis can be done