MD NASIR IQBAL

SHIFA BANO
ALANKAR ARJARIYA
KAJAL RASTOGI
AKASH
NITISH KUMAR GUPTA
TEAM

MD NASIR IQBAL AKASH ALANKAR ARJARIYA NITISH KUMAR GUPTA

KAJAL RASTOGI SHIFA BANO

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WHAT IS RATIO ANALYSIS?

Ratio analysis is a very important part of financial analysis, It is used to

interpret the financial statements so that the strength and weaknesses
of a firm as well as its historical performance and current financial
condition can be determined. The term ratio refers to the numerical or
quantitative relationship between two variables
It is based on a fundamental analysis of the company. It helps the
investor understand the company’s performance through its financial
statements.

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SIGNIFICANCE OR IMPORTANCE OF RATIO
ANALYSIS

It helps in evaluating the firms performance

It helps in inter-firm comparison

It helps in determining the financial

position of the concern

It is helpful in budgeting and forecasting

Identifying Risk and Taking Corrective Actions

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 CLASSIFICATION OF RATIOS

Liquidity Ratios Profitability Ratios Solvency Ratios Activity Ratios

• Current Ratio • Gross Profit Ratio • Debt Equity Ratio • Stock Turnover
• Quick Ratio or • Net Profit Ratio • Total Assets to Ratio
Liquid Ratio • Return on Assets Debt Ratio • Debtors Turnover
• Cash Ratio • Return on • Proprietary Ratio Ratio
Investment(ROCE) • Working Capital
• Operating Profit Turnover Ratio
Ratio • Creditors Turnover
• Return on Equity Ratio

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LIQUIDITY RATIOS:

Liquidity ratio measures the firms ability to meet its current obligations i.e.
ability to pay its obligations and when they become due.
Current Ratio:
 Current ratio is the ratio, which express relationship between
current assets and current liabilities.
 Current asset are those which can be converted into cash
within a short period of time, normally not exceeding one year.
 The current liabilities which are short-term maturing to be met.

Current Assets
Current Ratio =
Current Liabilities
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OBJECTIVE & SIGNIFICANCE
This ratio is used to access the firm’s ability to meet its short-term liabilities on
time.
According to accounting principles, a current ratio of 2:1 is supposed to be an
ideal ratio.
(Current assets of a business should at least, be twice of its current liabilities.)
Investors and business owners would tend to consider a ratio between 1.2:1
and 2:1 to be the sign of a financially healthy company.
 If the current ratio is less than 2:1, it indicates lack of liquidity and shortage of
working capital.
Although, a much higher current ratio than 2:1 may indicate:
Inventory might be piling up because of poor sales.
Large amount is locked up in trade receivables due to inefficient collection policy.
Cash or bank balances might be lying idle because of no proper investment.
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Quick Ratio or Liquid Ratio:
 It is the ratio, which express relationship between Liquid assets and
current liabilities.
 Liquid assets are those assets which will be converted into cash and
cash equivalents very shortly.
 All current assets except stocks and prepaid expenses are included
in liquid assets.
 The current liabilities which are short-term maturing to be met.

Current Assets – Stocks – Prepaid Expenses

Quick Ratio or Liquid Ratio =
Current Liabilities

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OBJECTIVE & SIGNIFICANCE
This ratio is a measurement of firms ability to convert its liquid assets
within a month or immediately into cash in order to meet its current
liabilities.
According to accounting principles, a quick ratio of 1:1 is supposed to be
an ideal ratio.
(For every rupee of current liabilities, there should be one rupee of liquid assets. )
Quick ratio or liquid ratio is a more rigorous test of liquidity than current
ratio and, when used together with current ratio, it gives a better picture
of short-term financial position of the firm.

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Cash Ratio or Absolute Ratio:
 It is the ratio, which express relationship between cash and cash
equivalents with current liabilities.
 If the company is forced to pay all current liabilities immediately,
this metric shows the company's ability to do so without having to
sell or liquidate other assets.
Cash and Cash Equivalents
Cash Ratio or Absolute Ratio =
Current Liabilities

 If the result is equal to 1, the company has exactly the same amount of current
liabilities as it does cash and cash equivalents to pay off those debts.
 If a company's cash ratio is less than 1, there are more current liabilities than cash and
cash equivalents.
 If a company's cash ratio is greater than 1, the company has more cash and cash
equivalents than current liabilities.
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PROFITABILITY RATIOS:
Profitability ratio are the best indicators of overall efficiency of the
business concern, because they compare return of value over and
above the value put into business with sales or service carried on by
the firm with the help of assets employed.
Gross Profit Ratio:
 It is the ratio, which express relationship between Gross Profit and
Sales to measure the relative operating efficiency of the firm.
 Gross profit is the total profit a company makes after deducting the
cost of doing business

Sales – Cost of goods sold

Gross Profit Ratio = * 100
Sales
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Net Profit Ratio:
 It is the ratio, which express relationship between Net Profit and
Sales that measures the company’s profits to the total amount of
money brought into the business.

Net Profit 100

Net Profit Ratio = *
Sales

Operating Profit Ratio:

 Operating Profit Ratio is the ratio used to determine the percentage
of the profit the company generates from its operations before
deducting the taxes and the interest.
EBIT
Operating Profit Ratio = *100
Net Sales 12
Return on Investment(ROCE) :
 ROCE measures how efficiently a company can generate profits from
its capital employed by comparing operating profit to capital
employed.
EBIT
Return on Investment(ROCE) =
Total Capital Employed
 EBIT, or operating profit, measures the profit generated by a
company's operations.
 EBIT = Revenue − COGS − Operating Expenses
 EBIT = Net Income + Interest + Taxes
 Capital employed is the total amount of capital that businesses use
to generate profits.
 Capital employed = Equity + Non-current Liabilities
 Capital employed = Total Assets – Current Liabilities
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Return on Equity:
 ROE measures how much profit a company generates with the
money (capital) shareholders have invested.

Net Profit
Return on Equity = Shareholders' Equity *100

Return on Assets Ratio:

 It is the ratio, which express relationship between Net Profit and
Total Assets that shows how much profit a company generates from
its total assets.

Net Profit
Return on Assets Ratio = * 100
Total Assets 14
Balance Sheet of XYZ Ltd. & ABC Ltd.
XYZ ABC

P&L Statement of XYZ Ltd. & ABC Ltd.

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Liquidity Ratios Analysis:
1) Current Ratio

 ABC’s Current Ratio is better than XYZ, which shows ABC is

in a better position to repay its current obligations.
2) Quick or Liquid Ratio

 ABC is better positioned than XYZ to cover its

current obligations instantly.
Profitability Ratios Analysis:
1) Gross Profit Ratio

Gross Profit 1,00,000 1,50,000

Sales 2,00,000 3,00,000
Gross 50% 50%
 Both companies have a similar Gross Profit ratio.

2) Net Profit Ratio

 XYZ has better profitability compared to ABC.

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3) Operating Profit Ratio

 Both companies have a similar operating ratio.

4) Return on Investment Ratio(ROCE)

 Company XYZ has better return ratio than ABC to

be provided to all the owners of capital.
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5) Return on Equity Ratio(ROE)

 XYZ provides a better return to its shareholders

as compared to ABC.
6) Return on Asset Ratio(ROA)

Net Profit
Total Assets 4,50,000 7,25,000
Return on Asset 6.67% 5.8%
 XYZ is more efficient at generating profits as
compared to ABC.
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