2. It is an analysis of strength and
weakness of an organization by
establishing the quantitative
relation among the items of
Balance Sheet or Income
Statement of such an
organization
3. 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. 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. Liquidity Ratios – Ability to Pay
Solvency Ratios – Loans to Capital
Activity Ratios – Conversion of Stock to cash
Profitability Ratios – Profit to sales
Shareholders' Ratios - Enable decision making
6. Used for
Study the ability of the organization in
meeting short-term payments or
obligations
Includes:
1) Current Ratio
2) Acid Test Ratio
3) Working Capital Turnover Ratio
7. Current Assets
Current Ratio = -------------------------------
Current Liabilities
Current Assets – Recoverable within 12
months from reporting date
Current Liabilities – Payable within 12
months from reporting date
8. 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
9. Particulars ABC Ltd XYZ Ltd
Fixed Assets 10.00 20.00
Inventory 20.00 25.00
Sundry Debtors 35.00 60.00
Cash and Bank 15.00 25.00
Deferred Revenue Expenditure 50.00 0.00
ASSETS TOTAL 130.00 130.00
Share Capital 70.00 60.00
Long Term Loans 40.00 30.00
Current Liabilities 20.00 40.00
LIABILITIES TOTAL 130.00 130.00
10. 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
11. Quick Assets
Acid Test Ratio = ----------------------
Quick Liabilities
A 1:1 ratio is healthy
Healthy indicator of cash management
12. Particulars ABC Ltd XYZ Ltd
Fixed Assets 20.00 20.00
Inventory 30.00 25.00
Sundry Debtors 55.00 60.00
Cash and Bank 15.00 25.00
Deferred Revenue Expenditure 10.00 0.00
ASSETS TOTAL 130.00 130.00
Share Capital 50.00 60.00
Long Term Loans 20.00 30.00
Current Liabilities 60.00 40.00
LIABILITIES TOTAL 130.00 130.00
13. 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
15. 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
16. 1) Interest Coverage Ratio
2) Debt Ratio
3) Debt-Equity Ratio
4) Proprietary Ratio
17. EBIT
Interest Coverage = ------------------
Interest
Acts as a cushion to the lenders with
regard to the availability of profit to
serve the interest.
Ideal Ratio is 1.5
18. Total Debt
Debt to total fund = ------------------
Debt + Equity
AND
Total Debt
Debt Equity Ratio = ------------------
Total Equity
19. Equity
Proprietary Ratio = ------------------
Total Assets
High Ratio = Comfort for creditors /
Highlights under utilization of capital
Low Ratio = Over Leveraged / High
utilization of capital
20. Particulars ABC Ltd XYZ Ltd
Earning Before Interest and Tax 45.00 40.00
Interest 8.00 8.00
Tax 18.00 17.00
Net Profit 19.00 15.00
Balance Sheet Liabilities side
Share Capital 50.00 60.00
Long Term Loans 20.00 30.00
Current Liabilities 60.00 40.00
LIABILITIES TOTAL 130.00 130.00
Industry Average Debt Equity 0.60 0.60
21. 1) Inventory Turnover Ratio
2) Debtors Turnover Ratio
3) Average Collection Period
4) Fixed Assets Turnover Ratio
5) Total Assets Turnover Ratio
22. Sales
Inventory Turnover = ------------------
Inventory
Low turnover = bad products
Extreme High Turnover = Cases of
fraudulent sales possible
23. Sales
Debtors Turnover = -----------------------
Average Debtors
High turnover = Better realization
Low Turnover = Cases of fraudulent sales
24. 365 days
ACP = -----------------------
Debtors Turnover
Approximate time for a business to receive
payments from debtors
High turnover = Better realization
Low Turnover = Slow realization
25. Particulars ABC Ltd XYZ Ltd
Sales 150.00 200.00
Expenses 100.00 140.00
Net Profit 35.00 40.00
Balance Sheet Assets side
Fixed Assets 200.00 300.00
Cash and Bank Balances 50.00 60.00
Inventories 80.00 100.00
Sundry Debtors 75.00 120.00
Assets TOTAL 405.00 580.00
Industry Avg Inventory turnover 2.00 2.00
Industry Avg Debtors recovery 150 days 150 days
26. 1) Net Profit Ratio
2) Gross Profit Ratio
3) Return on Total Assets
4) Return on Equity
27. NP after tax
Net Profit Ratio = -----------------------
Net Turnover
Interpretation
Against Industry average
Against previous years
28. Gross Profit
Gross Profit Ratio = -----------------------
Net Turnover
Interpretation
Against Industry average
Against previous years