Article on Ratio Analysis - by GAYATHRI.K (IPCC)

                                                                 

                                       Ratio analysis  

 

                        

Ratio analysis was pioneered by Alexander wall in 1909.A ratio is a mathematical relationship between two items expressed in quantitative form.

                       

CLASSIFICATION OF RATIOS:

 

                                                      Different approaches are used to classify ratios.

 

                                      CLASSIFICATION BY STATEMENTS      

 

BALANCE SHEET RATIOS               PROFIT &LOSS A/C RATIOS           B/S &P&L A/C RATIOS

 

Liquidity ratio                                                   gross profit ratio                                       return on investment

Current ratio                                                     operating ratio                                          return on shareholder funds

Proprietary ratio                                               operating profit ratio                               stock turnover

Debt equity ratio                                               expenses ratio                                           debtor turn over ratio

Fixed assets ratio                                                net profit ratio                                        creditor turnover ratio

Capital gearing ratio                                                                                                            fixed asset turnover

                                                                                                                                               Earnings per share

                                                CLASSIFICATION BY PURPOSE /FUNCTION

PROFITABILITY RATIO                     TURNOVER RATIO                                        SOLVENCY RATIO

Return on investment                                     stock turnover                                           short term solvency       long term solvency

Net profit                                                         debtor turn over ratio                                Liquidity ratio               Proprietary ratio

Gross profit                                                     creditor turnover ratio                              Current ratio                 fixed asset ratio                                                

Expenses ratio                                                 working capital turnover                          cash position ratio         capital gearing

Operating profit ratio                                    fixed asset turnover                                                                             ratio

                                              

 

SUMMARY OF FORMULAE FOR COMPUTING RATIOS

 

PROFITABILITY RATIOS

·          Return on investment                   =       operating profit/capital employed*100

·          return on shareholder funds         =       np after interest&tax/shareholder fund*100

·          return on total asset                      =       np ater tax+interest/total asset-fictitious asset

·          gross profit ratio                           =       gp/sales*100

·          operating ratio                              =       cost of goods sold+operating exp/net sales*100

·          operating profit ratio                    =       operating profit/sales*100

·          expenses ratio                              =       specific expenses/sales *100

·          net profit ratio                              =       np/sales*100

·          earnings per share                       =       np after tax and preference dividend/no. of equity shares

·          price earnings ratio                     =       market per equity share/earnings per equity share

·          pay out ratio                               =        dividend per equity share/earnings per equity share

·          interest cover ratio or

       fixed charges cover ratio             =       profit before interest and tax/fixed interest charges

 

TURNOVER RATIO  

·          Inventory turn over ratio or

        stock velocity                                     =      COGS/avg. inventory

·          Debtors turnover ratio                       =      net credit sales /avg. receivables

·          Creditor turn over ratio                     =      net credit purchase/avg. accounts payable

·          Working capital turnover ratio          =     cost of sales/net working capital

·          fixed asset turnover                           =     cost of sales/net fixed asset

·          capital turnover ratio                         =     cost of sales/capital employed

 

 SOLVENCY RATIO

   short term solvency      

·          Liquidity ratio  or

                  Quick ratio

         or acid test ratio                                   =   liquid asset/current liability                 

·          Current ratio                                        =   current asset/current liability

·          Cash position ratio or

         super quick ratio  or

         absolute liquidity ratio                         =   cash and bank balance+marketable securities/current liabilities

 

     long term solvency           

·          Proprietary ratio                            =       shareholders fund/total tangible asset                                             

·          fixed asset ratio                             =       fixed asset /long term fund                                        

·          capital gearing ratio                       =       long term loans + debentures+pref.capital/ equity shareholders fund

·          debt equity ratio                             =       long term debts/shareholders fund

                                                                                                                                                

 

 BY:     GAYATHRI.K

            IPCC Student