Scribd
Upload
17 views

Ratio Analysis

The document discusses ratio analysis and various types of ratios used to analyze financial statements. It covers profitability ratios, efficiency ratios, liquidity ratios, investors' ratios and other types of ratios like turnover ratios. It explains the importance, purposes and classification of ratios.

Uploaded by

Mahima Sheromi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
17 views

Ratio Analysis

The document discusses ratio analysis and various types of ratios used to analyze financial statements. It covers profitability ratios, efficiency ratios, liquidity ratios, investors' ratios and other types of ratios like turnover ratios. It explains the importance, purposes and classification of ratios.

Uploaded by

Mahima Sheromi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 17

INTERPRETATION OF

FINANCIAL
STATEMENTS
By S Ameelan
Senior Management Consultant
NIBM
Ratio Analysis
Ratios are defined to the analysis and
interpretation of financial statements. Ratios are
considered to be the best guides for the efficient
execution of basic managerial functions like
planning, forecasting control etc.

The most valuable way to use them is generally


to compare them with the corresponding ratios of
earlier accounting periods and study the trends
disclosed
Purposes of Ratio Analysis
oStandardize financial information for
comparisons.
oEvaluate current operations
oCompare performance with past performance
oCompare performance against other firms or
industry standards
oStudy the efficiency of operations
oStudy the risk of operations
Importance of Ratio
Analysis
Useful in financial position Analysis

Useful in Simplifying Accounting Figures

Useful in assessing the operational efficiency

Useful in forecasting purpose

Useful in locating the weak spots of the business

Useful in comparison of performance


Classification of Ratios

Profitability Ratios

Efficiency Ratios

Financial/Liquidity Ratios

Investors’ Ratios
Profitability Ratio
Gross Profit Ratio= Gross Profit x100
Net Sales

Net Profit Ratio = Net profit x 100


Net Sales
Profitability Ratio contd..
Return on Capital Employed = Net Profit after tax
(ROCE) Capital Employed

Return on Total Assets= Net profit after Tax x 100


Total Assets
Turnover/Performance/Ratio
 Total assets Turnover Ratio = Total Sales x 100
Total Assets

 Fixed Assets Turnover = Sales x 100


Net Fixed Assets

Stock Turnover Period = Average Stock x 365 days


Cost of Sales
Turnover/Performance Ratio
Contd…
Debtors Turn over Period =Average Debtors x 365 days
Net sales

Creditors Turn over period = Average Creditors x 36days


Net Purchases
Liquidity
• Liquidity is described the ability of a company to
convert assets into cash. It indicates the extent to
which a business can pay its debts as they fall due.
Assets have varying degrees of liquidity eg.

• Cash in hand and cash at bank are highly liquid


whereas plant and machinery, buildings are very
illiquid.
Insolvent
• A Company is said to be insolvent when its total
assets are insuffient to meet its liabilities. A
Company which is insolvent is unable to pay debts
and insolvency may lead to collapse of a company.
Investors are un willing to buy shares in or lend
money to a company which is insolvent.
Liquidity Ratios

Current Ratio = Current Assets


Current Liabilities

Quick Ratio = Current Assets -Stock


Current Liabilities
Shareholders’ Investment
Ratios
Debt Service Ratio =
Net Profit before Interest & Tax
Interest on Long Term Liabilities

Earnings per Share(EPS) =


Net Profit - Preference Dividend
Number of Equity Shares
Shareholders Investment Ratios
contd...
• Price Earning Ratio = Market Price per Equity share
Earning per share

• Dividend Cover = Net profit after Tax


Dividend

• Dividend Yield Ratio= Dividend per Share


Market price per share
Leverage & Solvency Ratios
Debt To Assets Ratio= Total Liabilities
Total Assets

Interest Cover Ratio = EBIT


Interest cost

Gearing Ratio = Long Term Loan


Capital Employed
What is Gearing
• A company is said to be “ geared” when it
borrows money from outside sources. Eg. If a
Company is not financed by capital injected by
debenture holders, long term loan holders and
preference shareholders then it is said to be
nil geared.
• The level of gearing is important factor to be
considered when assessing the risk in
investing in a company.
Class Room Activity

Thank you

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy