The document discusses various types of financial ratios used in ratio analysis. It defines 4 main categories of ratios: liquidity ratios like current and quick ratios, profitability ratios like earnings per share and return on equity, solvency ratios like debt to equity ratio, and efficiency ratios like inventory turnover. Specific formulas and calculations are provided for key ratios within each category like current ratio, return on equity, debt to equity, and days sales outstanding. The ratios are tools for managers to evaluate a company's financial strength and performance.

1. Presentation BY:
Bishow Sejuwal

2. RATIO ANALYSIS
Prepared By:
Bishow Sejuwal

3. .
Mr. A → Business → Profit → Nrs.50
Mr. B → Business → Profit → Nrs.70

4. .
Mr. A → Business → Profit → Nrs.50
→Sales→ Nrs.200
Mr. B → Business → Profit → Nrs.70
→ Sales →Nrs.1000

5. .
Mr. A → Business → Profit → Nrs.50
→Sales→ Nrs.200
■ Net Profit = 50/200 *100 = 25%
Mr. B → Business → Profit → Nrs.70
→ Sales →Nrs.1000
■ Net Profit = 70/1000 *100 = 7%

6. Ratio Analysis
Tool used by manager for analysis of
Financial Statement.
Used to find exact financial strength of any
company

8. .
#1 LIQUIDITY RATIO
-Current Ratio
-Quick Ratio
-Cash Ratio

9. .
#2 PROFITABILITY RATIO
-Earning Per Share
-Return on Equity
-Gross Profit Margin

10. .
#3 SOLVENCY RATIO
-Debt to Equity Ratio
-Debt Ratio

11. .
#4 EFFICIENCY RATIO
-Inventory Turnover Ratio
-Asset Turnover Ratio
-Days Sales Outstanding
-TIE Ratio

12. #1 LIQUIDITY RATIO
Used to ascertain the company’s liquidity position.
Used to determine its paying capacity towards its short-
term liabilities(such as loans, staff wages, bills and
taxes.)
A high liquidity ratio indicates that the company’s cash
position is good.
In business analysis, liquidity measures how much cash
a company can quickly generate. This provides insight
into how well the business might fare in unexpected
circumstances. A company with a lot of liquidity will be
able to quickly come up with the cash they need to keep
operations running through turbulent times.

13. Current Ratio
 This is the most common liquidity ratio used by analysts and
measures a firm's capability to meet its short-term debt that
is due in less than a year.
It is calculated as follows:
Current assets = cash, inventory, accounts receivable or
debtors, interest receivable etc.
Current liabilities = accounts payable or creditors, income tax
payable and any other current liabilities

14. Quick Ratio
 This ratio measures a company's ability to meet its short-term debt
with its most liquid instruments.
Quick assets excludes assets such as inventory and prepaid
expenses which are difficult to liquidate quickly.

15. Cash Ratio
 This ratio measures a company's ability to cover its debt
obligations using only its cash holdings.

16. #2 PROFITABILITY RATIO
 Profitability ratios are tools that are used to evaluate a
company’s ability to create earnings over time
 In relation to its revenue, operational costs, assets, or
shareholders’ equity
 Higher ratio outcomes are often more beneficial.
However, such a ratio outcome must be compared to
• The results of similar companies
• The company’s own previous performance
• Industry average

17. Earning Per Share
 This ratio measures a company's profits on a per share basis.
 It calculates the earnings accruing to each shareholder in the company based on the
number of shares that it has floated in the markets.
 It is widely reported by publicly-listed companies during earnings season and is
calculated as follows:

18. Return on Equity
 This ratio is similar to earnings per share and calculates
a business's profitability from stockholder investments.

19. Gross Profit Margin
 The Gross Profit Margin compares a company’s gross profit
to its sales revenue.
 This margin shows how much money a company makes
after all of the costs of producing goods and services have
been deducted.
 Where, Gross Profit = Sales − Cost of Goods Sold(COGS)

20. #3 SOLVENCY RATIO
A solvency ratio is a measure of a company’s
financial health that determines if its cash flow is
sufficient to cover its long-term liabilities.

21. Debt to Equity Ratio
 It shows how debt is used to fund a company.
 The higher the ratio, the more debt a business has on its
books, and the greater the risk of default.

22. Debt Ratio
 It measures the company’s ability to repay debt with
available assets.
 A higher ratio, particularly one above 1.0, suggests that a
corporation is heavily reliant on debt and may struggle to
satisfy its obligations

23. #4 EFFICIENCY RATIO
An efficiency ratio is a metric that enables
business leaders to measure how well a
company uses its resources.
Managers may use these ratios to gain insights
into where they can improve operational, asset
management and other business practices.

24. Inventory Turnover Ratio
 The inventory turnover ratio determines how frequently the
inventory balance is sold over the course of a financial year.
 It shows how fast the stock moves in and out of the
company.
 where; Average stock = (Opening stock + Closing stock) /
2

25. Asset Turnover Ratio
 It assesses how effectively a company utilizes its assets
to make a sale.

26. Time Interest Earned(TIE) Ratio
 It measures how easily a company can pay its debts with
its current income.

27. Days Sales Outstanding
 Days Sales Outstanding (DSO) represents the average
number of days it takes credit sales to be converted into cash
or how long it takes a company to collect its account
receivables.