MANAGEMENT

ACCOUNTING
PRACHI
BBA-3SEM
120178010069
 RATIO
ANALYSI
S
 RATIO ANALYSIS
• Ratio Analysis is a process of determining a relationship
between accounting Figure of financial Statements and
Presenting this relationship for the purpose of interpretation,
• Is an important tool of financial analysis.
• Is used to interpret the financial statements so that the strengths
and weaknesses of a firm, its historical performance and current
financial condition can be determined.
 Classification of ratio analysis

Analysis on the basis of short term Financial position.

1. Liquidity ratio
2. Activity Ratio
Analysis on the long term Financial Position
1. Capital structure Ratio
2. Coverage Ratio

Analysis of Profitable
1 General Profitability Ratio
2. Overall Profitability Ratio
 Analysis of short term Financial
position

Liquidity ratio Activity Ratio

• Current Ratio • Inventory turnover ratio

• Quick Ratio • Debtor turnover ratio
• Absolute liquid Ratio • Creditor turnover ratio
• Working capital turnover
ratio
 1. Liquidity ratio
The liquidity ratio are used to test the short term solvency or
liquidity position of the business.
Liquidity is the ease with which assets may be converted into cash.
Liquidity Ratio include:-
• Current ratio.
• TheLiquidity ratio or Quick ratio or acid test ratio
• Absolute liquid Ratio
Current Ratio: it is the ratio is the relationship between
current assets and current liabilities of the business.

It calculated by dividing current assets by current liabilities.

Current ratio= Current assets
Current liabilities

Conventionally a current ratio of 2:1 is

considered satisfactory
 Quick Ratio Or Acid Test Ratio:

This ratio show the relationship between liquid assets and liquid
liabilities. It indicates weather the firm is in a position to pay its
current liabilities within a month or immediately.
Quick ratio= quick assets. ,Where
Current liabilities(quick liabilities)
Conventionally a quick ratio of 1:1 is considered satisfactory.
 Absolute liquid Ratio
• This ratio establishes a relationship between absolute liquid assets and
quick liabilities.
It is calculated by Dividing absolute liquid assets by quick
liabilities.
Absolute liquid Ratio= Absolute liquid Asset
Quick Liabilities
 2.ACTIVITY RATIO
Ratio used to measure the effectiveness of the use of capital/assets are termed
as Activity Ratio or Turnover Ratio.
Activity Ratio include:-
1. Inventory Turnover Ratio.
2. Debtors Turnover Ratio.
3. Creditors Turnover Ratio.
4. Working Turnover Ratio.
 Inventory turnover ratio
This ratio indicates the relationship between the cost of revenue from operation ( cost
of goods sold ) during the year and average inventory kept during that year.
Inventory turnover ratio= Cost of goods sold
Average inventory
1.) Cost of goods sold= sales – Gross profit (OR) opening stock+purchase-
closing stock
2.) Average stock/inventory= opening inventory+closing inventory
2
 Debtor turnover ratio
• This ratio explains the relationship between credit revenue from
operations and average trade receivable during the year.
debtor turnover ratio= Credit revenue from operation (credit sales)
Average debtor
Average debtors = opening balance+closing inventory
2
 Creditors turnover ratio
• This ratio indicates the relationship between credit purchase and average
creditors during the year.
• Creditors turnover ratio= net credit purchase
average creditors
Average payment period= No.of working days
Creditors turnover ratio
 Working capital turnover ratio
It established relationship between cost of sales and working Capital.
Working capital turnover ratio= cost of sales
Average working capital
Average working capital=. Opening working capital + closed in working
capital
2
(OR)
= Current assets - current liabilities
Analysis of long term financial position

Capital
structure ratio Coverage ratio

Debt equity Proprietor Interest Total Assets to

ratio equity ratio coverage ratio Debts ratio
1. CAPITAL STRUCTURE

These ratios indicate the long term solvency of a firm and indicate
the ability of the firm to meet its long-term commitment with
respect to
(i) repayment of principal on maturity or in predetermined
instalments at due dates an
(ii) periodic payment of interest during the period of the loan.
 Debt equity ratio
This ratio express the relationship between long term debt and shareholders
fund.
Debt equity ratio= Debt OR Long term debts
Equity shareholders fund

Ideal ratio:- 2:1

 Proprietary ratio
• This ratio indicates the proportion of total fund by owner or shareholders.

Proprietary ratio= Equity OR Proprietor’s funds

Total Assets Non current assets+current assets
Ideal Ratio:- 0.5:1
2.COVERAGE
RATIO
 Interest Coverage ratio
The interest coverage ratio is a debt and profitability ratio used to determine
how easily a company can pay interest on its outstanding debt.

Interest coverage Ratio= Earnings Before Interest And Taxes (EBIT)

Fixed Interest Charge
 Total asset to debt ratio
The debt-to-total-assets ratio shows how much of a business is owned by
creditors (people it has borrowed money from) compared with how much of
the company’s assets are owned by shareholders.

Total Assets to Debts ratio= Total Assets (Fixed& Current)

Long term loan
 General Overall
Profitability Profitability
Ratio Ratio

1. Gross Profit 1. Return on

Ratio Analysis of Equity
2. Net Profit Capital
Ratio Profitability 2. Earning per
3. Operating share
profit ratio 3. Dividend
4. Operating yield Ratio
Ratio
 Gross profit ratio

This ratio establish a relationship between gross profit and revenue from
operations i.e. Net Sale this ratio is computed and present in percentage.
Gross profit Ratio= Gross Profit × 100
Net Profit
Gross Profit= Revenue from operation – RFO
Cost of RFO = opening stock+Net purchase+Direct expenses-
closing Stock
 Operating Ratio
This ratio measures the proportion of an enterprise cost of revenue from
operation and operating expense in comparison to revenue from operation.

Operating Ratio=Cost of RFO+Operating Exp-operating income

Revenue from operation ×100
 Operating profit ratio
This ratio shows the relationship between operating profit and net revenue
from operation.
Operating Profit Ratio= operation Profit
Net sales
×100
Operating profit ratio= 100-Operating ratio
Operating profit= net sales-(cost of goods sold+administrative and
office expense+ selling and distribute expense.
 Net profit ratio
This issue shows the relationship between profit and net revenue from
operation.
Net Profit Ratio= Net Profit tax
×100
Revenue from operation
Net Profit= Gross profit – indirect exp & losses + other Income tax
Indirect exp &losses= office exp + Selling exp + Interest on long term
Borrowing +Accidental losses.
 Return on equity capital
This ratio established relationship between net profit available to equity
share holder at the amount of capital invested by then. It is used to compare
the performance of company equity capital with those of other companies.

Return on Equity capital= Net Profit – Preference dividend

Equity Share capital
 Dividend yield ratio
It Refers to the percentage or ratio of dividend paid per share to the market
price per share this ratio throws light on the effective rate of return on
investment which potential investors may hope to earn.

Dividend yield ratio= Dividend Paid Per Equity Share

Market price per equity share
 Earning per share
This ratio indicates the earning per equity share. it establish the relationship
between net profit available for equity share folder and the number of equity
shares

Equity per share= net profit available for equity shareholders.

Number of equity shares
For Your
Attention