Ratio Analysis

Ratio Analysis

Gagandeep (A)-20

Introduction:

A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis.

One is interesting in knowing the position of an enterprise. This can be done with the help of Ratio Analysis being a significant tool of analysis.

Neeru Thakur (B)-84

Discussion:

In simple words, Accounting Ratio is an arithmetical relationship between two numerical. It is expressed as a proportion, or a fraction, or in percentage or in terms.

Importance of Ratio Analysis:

1. Simplification of Accounting Data

2. Helpful in Inter Firm Comparative Study

3. Makes Intra Firm Comparison possible

4. Helps in Planning

5. Facilitates co-ordination, control, and communication

Ratios are just one number divided by another and as such really don't mean much. The trick is in the way ratios are analyzed and used by the decision maker. A good strategy is to compare ratios to some sort of benchmark, such as industry averages, or to what a company has done in the past or both.

Ratio Analysis is a form of Financial Statement Analysis that is calculated to obtain a quick indication of a firm's financial performance in several key areas. It is a technique of:

(1) Establishing meaningful relationship between significant variables of financial statement.

(2) Interpreting the relationship to form judgment regarding the financial affairs of the unit.

Reference: investopedia.com; Accounting for management by C.Juneja

Nitish Gupta (c)-148

Description Of Ratios	Formula
A. Liquidity Ratios 1. Working Capital Ratio: 2. Quick Ratio:	(Fraction) Current Assets Current Liabilities Cash + Accounts Receivable Current Liabilities
B. Turnover Ratios 1. Capital Turnover Ratio: 2. Fixed asset Turnover Ratio: 3. Working Capital Turnover Ratio: 4. Stock Turnover Ratio: 5. Debtor Turnover Ratio: 6. Debt collection period:	(Times) Net sales/ COGS Capital Employed Net sales/ COGS Net Fixed assets Net sales/ COGS Net Working Capital COGS_____ Average stock Net credit sales_____ Average A/c receivable 365 days____ Debtor Turnover
C. Solvency Ratio 1. Debt Equity ratio: 2. Debt to total Fund ratio: 3. Proprietary ratio:	(Fraction) Long term Debt Shareholder’s equity Long term Debt Debt + Shareholder’s equity Proprietor’s fund Total asset
D. Profitability ratio 1. Gross Profit Ratio: 2. Net Profit Ratio:	(%) Gross Profit X 100 Net Sales Net Profit X 100 Net Sales
3. Return On Investment (ROI): 4. Return On Equity (ROE): 5. Operating Ratio:	Net Profit before Interest & Tax X 100 Capital Employed Net Profit after Interest & Tax but before preference Dividend X 100 Capital Employed COGS + Operating Expenses X 100 Net Sales

Conclusion:

To sum up, we can say besides of having so many functions and advantages Ratio analysis having limitations too.

· Not free from bias

· Historical analysis

· Window dressing

· Qualitative factors ignored

· Absence of universal acceptance

But its significance covers such drawbacks comfortably.

Submitted By:

Gagandeep MB 20 (A)

Neeru Thakur MB 84 (B)

Nitish Gupta MB 148 (C)