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Learning Objectives
Liquidity Ratio
Solvency Ratio
Activity Ratio
Profitability Ratio
Shareholder¶s Ratio
Liquidity Ratio
1. Current Ratio : It is the relationship between the current assets
and current liabilities of a concern.
ë
Õ Y Õ Y
Õ Y Y
Y
Ôcontd.)
? ?
?
Ideal Ratio = 1
Normally it is less than 1.
Ôcontd.)
Ñ
It is the ratio of the cash
flow from operations to current liabilities.
w
w
Solvency Ratios
This is the ratio
between earnings before interest and taxes
ÔEBIT) and interest expense.
ë
ë ë
£
This is the ratio of total liabilities to
total assets.
Ôcontd.)
.
This ratio measures
the proportion of
long term debt to
equity.
Activity Ratios
It is the
ratio of cost of goods sold to inventory.
ë
!
ë
!
£ !
This is the
ratio of net sales to average debtors.
" !
Ôcontd.)
"
#
$
It is the ratio
of net profit to sales.
"$ "$
%
#
$
It is the
ratio of gross profit to net sales.
$ $"
Ôcontd.)
& This is the measure of
return of assets invested in business.
w "ë
Ñ
''
w "$
6
6
6
Shareholder¶s Ratio
(
This ratio reflects
the earnings per share for the equity share
holders.
$ %" &$!
'"(
£ #
'
)
))
'*
ñ ñ
ñ
Ôcontd.)
))
#
)))
''
''
$ !
Ñ
)
"ë
Ratios Predicting Financial
Failure
Altman Multivariate Model
Fruhan Model
ROE=Net Profit x Capital Intensity x Financial
Leverage
Model is consistent with wealth maximization
Considers financial decision along with operating
decision
Considers the Liabilities along with the Return on
Assets
??? Any
Questions??