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Ratio Analysis

Ratio Analysis. What is RA? Why RA? Classification of Ratios Profitability ratio Turnover ratio Financial ratio Limitations of accounting ratios. Detailed study of ratios. What is Ratio Analysis?. What is RA? Why RA? Classification of Ratios Profitability ratio Turnover ratio

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Ratio Analysis

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  1. Ratio Analysis

  2. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios Detailed study of ratios What is Ratio Analysis?

  3. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios • Simplifies Financial Terms • Inter-firm Comparison • Intra-firm Comparison • Planning And Forecasting Why Ratio Analysis?

  4. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios Traditional Classification • Profit and loss account ratios • Balance sheet ratios • Composite ratios Functional Classification • Profitability ratios • Turnover ratios • Financial ratios Classification Of Ratios

  5. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios These ratios measure the operating efficiency of the firm and its ability to ensure adequate returns to its shareholders Profitability Ratio

  6. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios • Overall Profitability Ratio or Return on investment = * 100 Operating profit : profit before interest tax Capital employed : sum total of the long term funds employed in the funds Profitability Ratio

  7. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios 2. Gross Profit Ratio Indicates the degree to which the selling price of goods per unit may decline without resulting in losses from operations to the firm It also helps in ascertaining whether the average percentage of markup on the goods is maintained Profitability Ratio

  8. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios 3. Net Profit Ratio An increase in the ratio over the previous period indicates improvement in the operational efficiency of the business, provided the gross profit ratio is constant. Profitability Ratio

  9. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios Turn over ratio indicates the number of times the capital has been rotated in the process of doing business. Higher the rate of rotation, greater will be the profitability = Turnover Ratio

  10. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios 1. Fixed assets turnover ratio This ratio indicates the extend to which the investment in fixed assets contributed towards sales If it is compared with previous period, it indicates whether the investment in fixed assets has been judicious or not Turnover Ratio

  11. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios 2. Working capital turnover ratio = Indicates whether or not the working capital has been effectively utilized in making sales Turnover Ratio

  12. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios It indicates the financial position of the company. Financial position of the company has to be judged from two angles: long-term as well as short-term. Long term requirements of funds should be met out of long term funds and short term requirements should be met out of short term funds. Financial Ratio

  13. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios 1. Fixed assets ratio The ratio should be more than 1 If it is less than 1, it shows that a part of the working capital has been financed through long term funds. Financial Ratio

  14. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios 2. Current ratio This ratio indicates the firm’s commitment to meet its short-term liabilities An ideal current ratio is 2. it is considered as a safe margin of solvency due to the fact that if the current assets are reduced to half then also the creditors will be able to get the payments in full Financial Ratio

  15. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios 3. Liquidity ratio Or Acid test ratio Or Quick ratio Conventionally a quick ratio of 1:1 is considered satisfactory Financial Ratio

  16. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios 4. Proprietary Ratio This ratio is particularly important to the creditors who can find out the proportion of shareholder’s funds in the total assets employed in the business. Higher the ratio, the better it is Financial Ratio

  17. What is RA? • Why RA? • Classification of Ratios • Profitability ratio • Turnover ratio • Financial ratio • Limitations of accounting ratios Comparative study required Ratio alone are adequate Window dressing Problem of price level changes No fixed standards Limitations Of Accounting Ratios

  18. Presented by Nidhin PV (pvnidhin@gmail.com) Thank You

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