Basic Tools used in analyzing the

financial statements

Trend Analysis
Common Size Analysis
Ratio Analysis

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160
31.03.2022
140

120

100
Sales
80
Gross Profit
60 Net Profit

40

20

0
2018 2019 2020 2021
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 What does the ratio literally mean? Profitability Ratios
What does a change in ratio mean? Liquidity Ratios
What is the norm? WIC Management Ratios
Long-term Financial Stability Ratios
What are the advantage of
accounting ratios ? Investors Ratios

What are the limitations of the ratio

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1. Gross Profit Margin (GPM) This is the margin that company makes on its
sales, and would be expected to remains
2. Net Profit Margin (NPM) reasonably constant.
3. Return on Equity (ROE)
GPM = Gross Profit x 100%
4. Return on Assets (ROA) Sales Revenue

Sales Revenue = Sales = Revenue = Turnover

Gross Profit = Sales revenue Cost of Sales

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Net profit (after tax) is presented as a This ratio measures the return of equity share
percentage of sales. May be subject to holders entity for the total equity invested by
impact from nonrecurring items. them

NPM = Net Profit x 100% ROE = Net Profit x 100%

Sales Revenue Average .Total Equity

Equity = Share Capital ( Stated capital) + Reserves

Net profit = Profit after tax = Profit for the year
Average Total Equity = (Opening TE + Closing TE)
2
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This ratio measures the return of business 2022 2021 2020

holders entity for the total assets invested.

ROA = Net Profit + Interest ( 1-t) x 100%

Average. Total Assets

Average Total Assets = (Opening TA + Closing TA) 2021/22 and 2010/21

2
t = Income tax rate
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 5. Current Ratio (CR) This ratio measures the adequacy of the
6. Quick Asset Ratio(QAR)/ current assets to settle the current liabilities
Quick Ratio (QR) when they due.

CR = Current Assets
Current Liabilities

Traditionally CR of 2:1 is considered as

appropriate for most businesses.
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This ratio measures the adequacy of the quick 7. Inventory Turnover(IT)

assets to settle the current liabilities when they
due. This is also known as Acid Test Ratio. 8. Inventory Resident Period (IRP)

QR = Current Assets- inventories- prepayments

9. Debtors Turnover(DT)
Current Liabilities 10.Debtors Collection Period (DCP)
11.Creditors Turnover(PT)
Traditionally QR of 1:1 is considered as
12.Creditors Payments Period (CPP)
appropriate for most businesses.

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This ratio measures the numbers of time that This ratio measures the average numbers of days
the average inventories of the business was that inventories are held in the business before it
converted in to sales during the year. is sold.
IRP = Average Inventories x 365 days
IT = Cost of Sales Cost of Sales
Average Inventories
IRP = 365 days
Average Inventory= (Opening Inventory + Closing Inventory )
2 Inventory Turnover
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This ratio measures the numbers of time that This ratio measures the average numbers of days
the average debtors of the business are that takes to collect cash from the debtors.
represented by the credit sales of the business
during the year.
DCP = Average Debtors x 365 days
DT = Credit Sales Credit Sales
Average Debtors
DCP = 365 days
Average Debtors= (Opening Debtors + Closing Debtors )
2
Debtors Turnover
Debtors = Trade Receivables
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This ratio measures the numbers of time that This ratio measures the average numbers of days
the average creditors of the business are that business can takes to settle the creditors.
represented by the credit purchase of the
business during the year.
CPP = Average Creditors x 365 days
CT = Credit Purchase Credit Purchases
Average Creditors
CPP = 365 days
Average Creditors= (Opening Creditors + Closing Creditors )
Creditors = Trade Payables
2 Creditors Turnover
Purchase = Cost of sales + Closing stock Opening Stock
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2022 2021
13.Debt Ratio (DR)
14.Equity Ratio(ER)
2022 2021 2020
15.Interest Cover Ratio(ICR)

2021/22 and 2010/21

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This ratio measures debts as a percentage of This ratio measures equity as a percentage of
debts plus equity. debts plus equity.

DR = Debts x 100% ER = Equity x 100%

Debts + Equity Debts + Equity

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This ratio measures times of interest expenses 2022 2021

covered by EBIT.

ICR = EBIT 2022 2021

Interest Expense

EBIT = Earnings before Interest and Tax = PBT + Interest Exp

2021/22 and 2010/21

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16.Earnings Per Share (EPS ) This ratio measures averages profit earned by
17.Earnings Yield Ratio(EYR) the business per an ordinary share.
18.Dividends Per Share (DPS)
19.Dividends Yield Ratio(IRP) EPS = Net Profit
Weighted Average n0s. of ordinary shares
20.Dividend Payout Ratio (DPR)
21.Retention Ratio (RR)

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This ratio measures EPS as a percentage of the This ratio measures dividend paid per an
market price per an ordinary share. ordinary share.

EYR = EPS x 100% DPS = Ordinary share dividend

Market price per share Nos. of ordinary shares

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This ratio measures DPS as a percentage of This ratio measures DPS as a percentage of
the market price per an ordinary share. the EPS.

DYR = DPS x 100% DPR = DPS x 100%

Market price per share EPS

DPR = Ordinary share dividend x 100%

Net Profit
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This ratio measures profit retained by the 2022 2021

business entity as a percentage of the EPS.

RR = EPS - DPS x 100%

01.10.2021

2021/22 and 2010/21

EPS

RR = Net Profit OS Dividend x 100%

Net Profit
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Useful in assessing the profit earing ability of a All the accounting ratios are calculated based on
business historical information available in the FS.
Useful in assessing the ability of Accounting ratios affected by errors and
settling the short-term liabilities manipulations in the FS.
Useful in assessing the efficiency of managing Accounting ratios are subject to impact of different
WIC of a business accounting policies and estimates used by different
Useful of assessing the financial stability of a entities.
business Some accounting ratios becomes meaningless with
Useful for investors when taking investment the negative values of FS
decisions Accounting ratios ignores the qualitative factors
affecting to a business
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