Ratio Analysis SRK
Ratio Analysis SRK
What is RATIO..??
An Arithmetical Expression of relationship between two
related or Inter-Dependent items.
Current ratio
Quick or acid test or liquid ratio
Cash ratio
Net working capital ratio
CURRENT RATIO
The current ratio is calculated by dividing current assets by current liabilities:
Debt-Equity Ratio,
Interest Coverage Ratio,
Debt to Total Funds Ratio,
Fixed Asset Ratio,
Debt Equity Ratio.
The debt-equity ratio is worked out to ascertain soundness of the long-
term financial policies of the firm.
Solution ;
Dept-equity Ratio = Dept
Equity
The operating profit of Exe. Ltd. After charging interesr on debentures and tax is
Rs 1,00,000. The amount of interest is Rs 20,000 and the provision for tax
has been made at Rs 40,000. Calculate the interest coverage ratio.
Solution:
= 1,60,000
20,000
DEBT TO TOTAL FUNDS RATIO
The Debt to Total Funds Ratio is a measure for long term financial
soundness.
Interpretation:
A higher ratio means efficient utilization of capital
employed & vice versa.
A very high capital turnover ratio would indicate
overtrading or under capitalization.
EXAMPLE :
From the following Balance sheet of S Ltd. For the year ended 31st
December, 2007, calculate Capital Turnover Ratio:
=40,000+90,000+86,000+7,000-76,000
=Rs. 1,47,000
Capital Turnover Ratio = Net sales
Capital employed
= 3,50,000
1,47,000
= 2.38 Times
SALES TO FIXED ASSETS
OR
FIXED ASSETS TURNOVER
RATIO
This ratio indicates the extent to which
investment in fixed assets contribute towards
sales.
Formula: NET SALES
NET FIXED ASSETS
NET FIXED ASSETS = Fixed Assets –
Depreciation
Objective:
Fixed Asset Turnover Ratio indicates how
efficiently fixed assets are used.
Interpretation:
If there is increase in the ratio it will indicate that
there is improvement in the utilization of fixed
asset & a decline in ratio will indicate that fixed
assets have not been used efficiently by the firm.
EXAMPLE:
From the following data, calculate the Fixed
Assets Turnover Ratio:
Gross Fixed Assets = Rs. 3,00,000
Accumulated Depreciation = Rs. 1,00,000
Total Sales = Rs. 8,50,000
Sales Returns = Rs. 50,000.
SOLUTION:
NET SALES = TOTAL SALES – SALES RETURNS
= RS. 8,50,000 – RS. 50,000
= RS. 8,00,000
Interpretation:
A high working capital turnover ratio shows the
efficient utilization of working capital & vice
versa.
EXAMPLE:
OR
OR
Sales 3,00,0000
Gross profit 120,000
Administration expenses 35000
Selling & distribution expenses 25000
Income on investment 15000
Loss by fire 9000
Cost of sale included direct cost of good sold & as well as other operating
expenses administration, selling & distribution expenses
= 80%
RETURN ON EQUITY
Common shareholders are entittled to the residual profit.The
rate of divident is not fixed and earning may be distributed to
shareholders or retained in the business.
A ROE is calculated to se the profitability of owner’s
investment.
ROE indicates how well the firm has used the resources of
owners.
It is a most important relationship in financial analysis.
Formula:
ROE= PAI .
Net Worth Equity
EARNING PER SHARE
It is a measure for calculating the profitability of
shareholder’s investment.
EPS is calculated as;EPS=PAT/NO. OF
OUTSTANDING SHARES
EPS shows the profitability of the firm on share basis,it
does’t reflect how much is paid as dividend and how
much is retained in the business? But as profitability
index as it is valuable.
The higher the EPS,the more attractive will be the
investment plan or vice-versa
RETURN ON INVESTMENT
The term investment refer to total asset or net asset.
the conventional approach of calculating ROI is to divide PAT by
investment,investment represents pool of funds,supplied by shareholders
and lenders,
while pat represents residue income of shareholders.
The formulae for calculating ROI is;
ROI=ROTA=EBIT(1-T)/ TA OR NA
Calculate:
1. interest cover
Calculate: