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Ratio Analysis
Ratio Analysis
Ratio Analysis Purpose: To identify aspects of a businesss performance to aid decision making Quantitative process may need to be supplemented by qualitative factors to get a complete picture 5 main areas:
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Ratio Analysis
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Liquidity the ability of the firm to pay its way Investment/shareholders information to enable decisions to be made on the extent of the risk and the earning potential of a business investment Gearing information on the relationship between the exposure of the business to loans as opposed to share capital Profitability how effective the firm is at generating profits given sales and or its capital assets Financial the rate at which the company sells its stock and the efficiency with which it uses its assets
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Classification of ratios Financial position Ratios ( Balance sheet Ratio ) Operating /profitability ratio (Revenue statement ratio) Overall Efficiency of Business(combined Ratio)
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CURRENT RATIO
Objectives of analysis Short term liquidity Formula CA CL Std 2:1 Point for comments Higher than Std. 1.Very good Short term liquidity/solvency. Liquidity/Solvency. 2.Excess stock, Book debt, Idle cash. 3.Under Trading. Lower than Std. 1.Unsatisfactory short term liquidity/solvency. 2.Shortage of stock, cash, credit sale. 3.Over trading.
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PROPRIETARY RATIO
Objectives of analysis Long term solvency & Stability Formula Prop. Fund Tot. Asst * 100 Std 65% To 75% Point for comments Higher than Std. 1.Very good Solvency position. 2. No trading on Equity Lower than Std. 1. Unsatisfactory solvency position. 2.Trading on Equity.
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Long term Bow. Fund 2:1 solvency Prop. & Stability. Fund
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Expenses Ratio
Cost of goods sold Ratio = cogs *100 net sales Office &Admin Ratio = off & Ad *100 net sales Selling & Distribution Exp Ratio = S&D *100 net sales Finance expense Ratio = Finance Exp * 100 Net sales This ratio brings out the relationship between various element of operating cost and net sales.
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Combined Ratios
Return on Capital Employed Ratio Return on proprietors fund Ratio Return on equity capital ratio Dividend payout Ratio Earning per share(Eps) Debtors turnover ratio Creditors turnover Ratio Debt service Ratio
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Solve numerical
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