(a) Ratio analysis implies the systematic use of ratios to interpret the financial

statements so that the strength and weaknesses of a firm as well as its historical
performance and current financial position can be determined. With the help of ratio
analysis conclusion can be drawn regarding several aspects such as financial health,
profitability and operational efficiency of the undertaking. Ratio analysis is very
useful in making inter-firm comparison as it helps to draw a comparison between
the entities within the same industry or otherwise following the same accounting
procedure. It provides the relevant financial information for the comparative firms
with a view to improving their productivity & profitability .Ratio analysis helps in
intra firm comparison by providing necessary data. An inter firm comparison
indicates relative position. It provides the relevant data for the comparison of the
performance of different departments. If comparison shows a variance, the possible
reasons of variations may be identified and if results are negative, the action may
be initiated immediately to bring them in line. However, in spite of being such a
useful tool, it is not free from its limitations. A single ratio is of a limited use and it is
essential to have a comparative study. The base used for ratio analysis viz: financial
statements have their own limitations. Also, they consider only the quantitative
aspects of business transactions where as there are various other non-quantitative
aspects such as quality of work force which considerably affect profitability and
productivity. Also, ratio analysis as a tool is also limited by changes in accounting
procedures/policies.
(b) Pay-out Ratio means the amount of earnings paid out in
dividendsto shareholders. Investors can use the payout ratio to determine whatcom
panies are doing with their earnings. It can be calculated as:A very low payout ratio
indicates that a company is primarily focused on retaining its earnings rather than
paying out dividends.
A very low payout ratio indicates that a company is primarily focused on retaining
its earnings rather than paying out dividends.
The pay-out ratio also indicates how well earnings support the dividend payment.
The lower the ratio, the more secure the dividend because smaller dividends are
easier to payout than larger dividends. The major factor to be considered in
determining the payout ratio is the dividend policy of the company. Young, fastgrowing companies are typically focused on reinvesting earnings in order to grow
the business. As such, they generally sport low (or even zero) dividend payout
ratios. At the same time ,larger, more-established companies can usually afford to
return a larger percentage of earnings to stockholders. Also, another factor to be
considered is the type of industry in which the company is operating. For example,
the banking sector usually pays out a large amount of its profits. Certain other
sectors like real estate investment trusts are required by law to distribute a certain
percentage of their earnings. Funds requirement of the company and its available
liquidity is another factor which is considered while determining the pay-out. Some
companies prefer to follow a fixed pay-out ratio policy irrespective of the earnings

made. This is a welcome policy from the point of view of the investors. But, the
company should take into account various important factors such as its need for
future investment and growth, cash requirements and debt obligations.