Presentation

on
Ratio Analysis:
A case study on RS Education solutions pvt.Ltd.

Submitted to: Mrs. Geetika Submitted by: ERA CHAUDHARY

(35221303918)
RATIO ANALYSIS
Ratio analysis is the process of determining and
interpreting numerical relationship based on
financial statements. It is the technique of
interpretation of financial statements with the help
of accounting ratios derived from the balance
sheet and profit and loss account
Basis Of Comparision
Comparison with standards or industry average
Interfirm Comparison involves comparing the ratios of a
firm with those of others in the same lines of business or
for the industry as a whole. It reflects the firm’s
performance in relation to its competitors.
Trend Analysis involves comparison of a firm over a
period of time, that is, present ratios are compared with
past ratios for the same firm. It indicates the direction of
change in the performance – improvement,
deterioration
or constancy – over the years
Ways To Interpret Accounting
Ratios
Single absolute ratio.
Group ratio.
Historical comparision.
Inter-firm comparision.
Projected ratios

Classification Of Ratios
Analysis of Short Term Financial Position
or Test of Liquidity.
Analysis of Long Term Financial Position
or Test of Solvency.
Activity Ratios.
Profitability Ratios.
I. Test Of Liquidity
The liquidity ratios are used to test the short term
solvency or liquidity position of the business.
It enables to know whether short term liabilities can be
paid out of short term assets.
It indicates whether a firm has adequate working
capital to carry out routine business activity.
It is a valuable aid to management in checking the
efficiency with which working capital is being
employed.
It is also of importance to shareholders and long term
creditors in determining to some extent the prospects
of dividend and interest payment.
  Important Ratios In Test Of
 Liquidity
 Current ratio.
 Quick ratio.
.
 Absolute liquid ratio.

Current Ratio
Ideal ratio: 2:1
High ratio indicates under trading and over
capitalization.
Low ratio indicates over trading and under capitalization.
Current assets
Current ratio=
Current liabilities
It is the most widely used of all analytical devices based
on the balance sheet. It establishes relationship between
total current assets and current liabilities.
Quick Ratio or Acid Test Ratio
Ideal ratio: 1:1
Usually, a high acid test ratio is an indication that the
firm is liquid and has ability to meet its current or liquid
liabilities in time and on the other hand a low quick ratio
represents that the firm’s liquidity position is not good.
Quick assets
Quick ratio=
Current liabilities
It establishes relationship between liquid assets and
liquid liabilities. It is a refinement to current ratio and
second testing device for working capital.
Absolute Liquidity Ratio
Ideal ratio: 1:2
It means that if the ratio is 1:2 or more than this the
concern can be taken as liquid. If the ratio is less than
the standard of 1:2, it means the concern is not liquid.
Absolute liquid assets
Absolute liquid ratio=
Quick liabilities
This ratio establishes a relationship between absolute
liquid assets to quick liabilities.

II. Test Of Solvency

Long term solvency ratios denote the
ability of the organisation to repay the loan
and interest.
When an organization's assets are more
than its liabilities is known as solvent
organisation.
Solvency indicates that position of an
enterprise where it is capable of meeting
long term obligations.
Important Ratios In Test Of
Solvency
Debt-equity ratio.
Proprietary ratio.
Solvency ratio.
Fixed assets to net worth ratio.
Current assets to net worth ratio.
Current liabilities to net worth ratio.
Capital gearing ratio.
Fixed assets ratio
Debt servicing ratio.
Dividend coverage ratio
Fixed Assets To Net Worth

This ratio shows the extent to which ownership

funds are sunk into assets with relatively low
turnover. When the amount of proprietor's
funds exceed the value of fixed assets, apart of
the net working capital is provided by the
shareholders, provided there are no other noncurrent
assets, and when proprietor’s funds are
less than the fixed assets, creditors obligation
have been used to finance a part of fixed
assets. The Yardstick for this measure is 65%
for industrial undertakings
Current Assets To Net Worth Ratio

A higher proportion of current assets to proprietor’s fund,

as compared with the proportion of fixed assets to
proprietor’s funds is advocated, as it is an indicator of
the financial strength of the business, depending on the
nature of the business there may be different ratios for
different firms. This ratio must be read along with the
results of fixed assets to proprietor’s funds ratio.
Current assets
Current assets to net worth ratio=
Proprietor’s fund
It is obtained by dividing the value of current assets by
the amount of proprietor’s funds. The purpose of this
ratio is to show the percentage of proprietor’s fund
investment in current assets.
IV. Profitability
Profitability ratios indicate theRatio
profit earning
capacity of a business.
Profitability ratios are calculated either in
relation to sales or in relation to investments.
Profitability ratios can be classified into two
categories.
a) General Profitability Ratios.
b) Overall Profitability Ratios

General Profitability Ratios

Gross profit ratio.
Net profit ratio.
Operating ratio.
Operating profit ratio.
Expense ratio.