Ratio Analysis Prof.

Nomita Agrawal
A ratio shows the relationship between 2 numbers
An Accounting ratio shows the relationship between 2 accounting figures
Ratio Analysis is the process of computing and presenting the relationship between the items in
the financial statements
It is an important tool of financial analysis, because it helps us to study the financial performance
and position of a concern
There are 3 different forms in which an accounting ratio can be epressed
!. Pure ratio
2. Percentage
3. Rate
A pure ratio is a simple di"ision of one number by another. The relation between current assets and
current liabilities is epressed in this way
#g. If $urrent Assets are Rs. 2%%%%% and $urrent &iabilities are Rs. !%%%%%
then $urrent Ratio ' $urrent Assets ' 2%%%%% ' 2(!
$urrent &iabilities !%%%%%
$ertain Accounting Ratios become more meaningful if epressed as a percentage li)e *ross Profit
Ratio, Net Profit Ratio etc
#g. If sales are Rs. +%%%%% and *ross Profit is Rs. 2%%%%% then
*ross Profit Ratio ' *P , !%%
-ales
' 2%%%%% , !%%
+%%%%%
' .% / of sales.
-ometimes ratios are epressed as Rates ie. Number of times or Turno"er o"er a certain period
#g. Relationship between stoc) and sales, or debtors and credit sales, or creditors and credit
purchases etc.
If stoc) turno"er rate is say 0 times in a year, it means that the stoc) is con"erted into sales 0 times in
!2 months.
1alance -heet Ratios
!. $urrent Ratio ' $urrent Assets
$urrent &iabilities
2. 2uic) or &i3uid Ratio ' 2uic) Assets
2uic) &iabilities
3. -toc) wor)ing capital ' $l -toc) , !%%
4or)ing $apital
+. Proprietory Ratio ' proprietors or shareholders funds , !%%
Total Assets or Total &iabilities
.. 5ebt6#3uity Ratio ' 1orrowed 7unds
Proprietors 7unds
8. $apital *earing Ratio ' $ap entitled to fied rate of Interest or 5i"idend
$ap not so entitled to such fied rate of Int 95i"i
' Preference $apital : 1orrowed 7unds
#3uity -hare;olders 7und
Re"enue or Income -tatement Ratios
!. *ross Profit Ratio ' *P , !%%
-ales
2. Net Profit Ratio ' NP1T , !%%
-ales
3. <perating Ratio ' $<*- : <# , !%%
-ales
+. #pense Ratio ' A#9 -#9 7# , !%%
-ales
.. <perating Profit Ratio ' <P , !%%
-ales
8. -toc) Turno"er Ratio ' $<*- or ' Net -ales
A".-t A".-t
A"erage -toc) ' <pening -toc) : $losing -toc)
2
In absence of info, use $losing -toc) instead of A"erage -toc)
$omposite Ratios
!. Return on In"estment or Return on $apital #mployed ' P1IT , !%%
$#
2. Return on Proprietors 7und ' NPAT , !%%
P7
3. Return on #3uity $apital ' PA#- , !%%
#7
+. 5i"idend Pay <ut Ratio ' #5 , !%%
PA#-
.. 5ebt -er"ice or Interest $o"erage Ratio
' P1IT
Int on &T&
8. 5ebtors Turno"er Ratio ' $r -ales
5rs : 1R
5ebtors =elocity or 5ebt $ollection Period
' !2 months or 38. days
5TR
>. $reditors Turno"er Ratio ' $r Purchases
$rs : 1P
$reditors =elocity or 5ebt Payment Period ' !2 months or 38. days
$TR
0. Asset Turno"er Ratio ' Total -ales
Total Assets