deals academically with the ratio analysis, their benefits, demerits and the formulae for computation of various ratios

1. Ratio Analysis B.V.Raghunandan, SVS College, Bantwal-Karnataka India

2. Meaning of Ratio Analysis It is an analysis of strength and weakness of an organisation by establishing the quantitative relation among the items of Balance Sheet or Income Statement of such an organisation

3. Purpose/Importance/Advantages Analysis of financial Position Simplification of Accounting Figures Assessment of Operational Efficiency Determining Trends in the long-run Identification of Strength & Weakness Taking Remedial Measures Comparison of Performance

4. Limitations of Ratio Analysis Based on Historical Data Change in Real Value of Monetary Unit No Standard Interpretation Ignoring Qualitative Aspects Difference in Accounting Methods make comparison difficult Ambiguity in Terms Used

5. Classification of Ratios A. Liquidity Ratios B. Solvency Ratios C. Activity Ratios D. Profitability Ratios E. Shareholders' Ratios

6. A. Liquidity Ratios Used to study the ability of the organisation in meeting short-term payments or obligations Includes: 1) Current Ratio, 2) Acid Test Ratio and 3) Working Capital Turnover Ratio

7. 1) Current Ratio Relation between current assets and current liabilities Long Term Sources Financing the Current assets give a stable base for the liquidity of the organisation Normally , the ratio should not be less than 2 i.e., the current assets should be double the size of current liabilities

8. Measurement of Current Ratio Current Ratio =

9. 2) Acid Test Ratio/Quick Ratio It is the ratio between quick assets and quick liabilities Quick assets include current assets except inventory and pre-paid expenses Quick liabilities include current liabilities other than bank overdraft A 1:1 ratio is healthy Healthy indicator of cash management

10. Measurement of Acid Test Ratio Acid Test Ratio =

11. 3) Working Capital Turn-over Ratio Shows the efficiency of usage of working capital Relation between Sales and Working Capital Determination of number of times the working capital is turned over to achieve the maximum profit

12. Measurement of Working Capital Turnover Ratio

13. B. Solvency Ratios Measure long-term liquidity ratio Reflect the ability of the firm to pay interest and repayment of loans at due dates on the long-term loans taken Avoidance of over-borrowing (over-leverage) Avoidance of bankruptcy by maintaining healthy solvency ratios

14. Types of Solvency Ratios Interest Coverage Ratio Debt Ratio Debt-Equity Ratio Capital Gearing Ratio Proprietary Ratio

15. 1.Interest Coverage Ratio

16. 2. Debt Ratio (Debt to Total Funds ratio)

17. 3) Debt-Equity Ratio

18. 4) Capital Gearing Ratio

19. 5) Proprietary Ratio

20. C] Activity Ratios Inventory Turnover Ratio Debtors Turnover Ratio Average Collection Period Fixed Assets Turnover Ratio Total Assets Turnover Ratio Capital Turnover Ratio

21. 1) Inventory Turnover Ratio

22. 2) Debtor Turnover Ratio

23. 3) Average Collection Period

24. 4) Fixed Assets Turnover Ratio

25. 5) Total Assets Turnover Ratio

26. 6) Capital Turnover Ratio

27. D] Profitability Ratios 1) Net Profit Ratio 2) Gross Profit Ratio 3) Return on Total Assets 4) Return on Equity

28. 1) Net Profit Ratio

29. 2) Gross Profit Ratio

30. 3) Return on Total Assets

31. 4) Return on Equity

32. E) Shareholders‘ Ratio 1) Earning per Share (EPS) 2) Price-Earning Ratio (PE Ratio) 3) Dividend Yield Ratio 4) Dividend Pay-out Ratio

33. 1) Earning per Share

34. 2) PE Ratio

35. 3) Dividend Yield Ratio

36. 4) Dividend Pay-out Ratio

37. THANK YOU