UNIT - VIII

FINANCIAL ANALYSIS THROUGH RATIOS

Introduction to Ratio

A Ratio is only a comparison of the numerator with the denominator. The term ratio refers to the numerical or quantitative relationship b/w two

figures. A ratio is relationship b/w two figures and obtained by dividing the former by

the latter.

Classification of Ratios

Classification by Statements Classification by Users Classification by Importance Classification by Purpose

Classification of Ratios (contd..)

CLASSIFICATION BY STATEMENT

Balance sheet ratios

1. Liquidity Ratio

2. Current Ratio

3. Stock Ratio

4. Proprietary Ratio

5. Dept-Equity Ratio

6. Capital Gearing Ratio

P & L Ratios

1. Grass profit Ratio

2. Net profit Ratio

3. Operating profit ratio

Inter-statement Ratios

1. Return on capital employed

2. Return on shareholders fund turnover of wc

3. Debtors turnover

Classification of Ratios (contd..)

CLASSIFICATION BY USERS

Ratios for Mngt

1. Operating Ratio

2. Debtors Turnover

3. Stock Turnover

4. Solvency Ratio

5. Return on cap.

Ratios for Creditors

1. Current ratio

2. Solvency ratio

3. Fixed Assets ratio

4. Creditors turnover

Inter-statement Ratios

1. Yield Rate

2. Proprietary Ratio

3. Dividend rate Ratio

4. Capital Gearing ratio

Classification of Ratios (contd..)

CLASSIFICATION BY IMPORTANCE

Primary Ratios

1. Asset Turnover

2. Profit Ratio

3. Operating profit

4. Return on Capital fund

Secondary Ratios

1. Working capital Ratio

2. Stocks to Current Assets

3. Stocks to Fixed Assets

4. Fixed Assets to Total Assets

5. Expenses Ratio

Classification of Ratios (contd..)

CLASSIFICATION BY PURPOSE

SOLVENCY

(Stability)

PROFITABILITY ACTIVITY

(Performance)

EARNINGS

Unit 6Ratio Analysis

RATIO is a simple mathematical expression, which explains Quantitative Relationship between the two.

RATIO ANALYSIS is a technique of interpretation of financial statements.

Classification of Ratios

1. Liquidity Ratios (short term solvency)

2. Leverage Ratios (long term solvency)

3. Turnover Ratios (performance)

4. Profitability Ratios

Liquidity Ratios (short term solvency)

Current Ratio

Quick ratio

Leverage Ratios (long term solvency)

Debt Equity Ratio

Proprietary Ratio

Fixed Assets Ratio

Interest Coverage Ratio

Dividend Coverage Ratio

Turnover Ratios (performance)

Inventory Turn over ratio

Debtors Turn over ratio

Creditors Turn over ratio

Working Capital Turn over ratio

Profitability Ratios

Gross Profit RatioNet Profit RatioOperating Profit RatioReturn on Capital EmployedReturn on Net WorthEarning Per Share (EPS)Dividends Per Share (DPS)Price Earning Ratio (P/E Ratio)