Ratio Analysis
Ratio Analysis
Ratio analysis is one of the techniques of financial analysis where ratios are used as a yardstick for evaluating the financial condition and performance of a firm. Analysis and interpretation of various accounting ratios gives skilled and experienced analyst a better understanding of the financial condition and performance of the firm than what he could have obtained only through a perusal of financial statements.
Types of ratio’s 1. Profitability ratio
2. Leverage ratio / Capital structure ratio
3. Turn over ratio
4. Liquidity or Short term solvency ratio’s
Profitability ratio : Profitability ratio measures profitability of a concern firm or company
Net profit ratio: Net profit ratio is the ratio between net profits after taxes and net sales it indicates what portion of sales is left to the owners after operation expenses. Net profit ratio = (Net profit after taxes / Net sales) x 100
Operating ratio: Operating ratio is the ratio between cost of goods sold plus operating expenses and the net sales
Operation ratio = {(operating expenses + cost of goods sold)/ net sales)} x 100 Cost of goods sold = sales – gross profit
Leverage ratio: Leverage ratio indicates the relative interest of owner and creditors in a business.
Debt equity ratio: Debt equity ratio is the ratio is reflect the relative claim of creditors and share holders against the assets of the business.
Debt equity ratio = Long term liabilities / share holders funds Long term liabilities = long term loan + Debentures + Other long term loans
Shares holders funds = equity share capital + Preference share capital + Reserves and Surplus + Undistributed profits – fictitious assets
Turnover ratio (activity ratio): Turnover ratio measures the efficiency or effectiveness with which a firm manages with its resources or assets.
Inventory turnover ratio:
Ratio analysis is one of the techniques of financial analysis where ratios are used as a yardstick for evaluating the financial condition and performance of a firm. Analysis and interpretation of various accounting ratios gives skilled and experienced analyst a better understanding of the financial condition and performance of the firm than what he could have obtained only through a perusal of financial statements.
Types of ratio’s 1. Profitability ratio
2. Leverage ratio / Capital structure ratio
3. Turn over ratio
4. Liquidity or Short term solvency ratio’s
Profitability ratio : Profitability ratio measures profitability of a concern firm or company
Net profit ratio: Net profit ratio is the ratio between net profits after taxes and net sales it indicates what portion of sales is left to the owners after operation expenses. Net profit ratio = (Net profit after taxes / Net sales) x 100
Operating ratio: Operating ratio is the ratio between cost of goods sold plus operating expenses and the net sales
Operation ratio = {(operating expenses + cost of goods sold)/ net sales)} x 100 Cost of goods sold = sales – gross profit
Leverage ratio: Leverage ratio indicates the relative interest of owner and creditors in a business.
Debt equity ratio: Debt equity ratio is the ratio is reflect the relative claim of creditors and share holders against the assets of the business.
Debt equity ratio = Long term liabilities / share holders funds Long term liabilities = long term loan + Debentures + Other long term loans
Shares holders funds = equity share capital + Preference share capital + Reserves and Surplus + Undistributed profits – fictitious assets
Turnover ratio (activity ratio): Turnover ratio measures the efficiency or effectiveness with which a firm manages with its resources or assets.
Inventory turnover ratio: