User talk:Naresh guduri

RATIO ANALYSIS

Ratio analysis is a very important of financial. It is the process of establishing a significant relationship between the items of financial statement to provide a meaningful understanding of the performance and financial position of a firm.

A ratio is a simple mathematical expression. It is a number expressed in terms of another number expressing the quantitative relationship between the two ratio analysis is the technique of inter petition of financial statements with the help of various meaningful ratio’s.

Ratios do not add to any information that is already available but they show the relationship between two items in a more meaningful way, which help us to draw certain conclusions. Comparison with

•	Comparison of past data •	Comparison of one firm with another firm •	Comparison of one firm with the industry •	Comparison of an achieved performance with pre-determined standards. •	Comparison of one department of a concern with other departments.

“The ratios can be expressed as percentage or properties or times based on the nature of ratio.”

ADVANTAGES: •	Ratio analysis simplifies the understanding of financial statements. •	Ratios serve as effective control tools. •	Ratio facilitate inter firm and intra firm comparisons. •	Ratio contributes significantly towards effective planning and forecasting. •	Ratio brings out the inter-relationship among various financial figures and brings to light their financial significance and it is a device to analyses and interprets the financial health of the enterprise. •	Useful in locating the weak spots of the business. •	Useful in comparison of performance. •	Useful in simplifying accounting figures.

LIMITATIONS: Ratio analysis is very important in reveling the financial position and soundness of the business. But in spite of its advantages it has some limitations, which restrict its use these limitations should be kept in mind making use of ratio analysis for inter prêt.

•	False results it based on incorrect accounting data. •	No idea of probable happenings in future. •	Ratio analysis suffers from lack of consistency. •	Ratio is volatile and can be influenced by a single transaction with extreme value. •	Ratio is based on past data and hence cannot be reliable guide to future performance. •	Ratio is only indicators they need a proper analysis by a capable management. They are only the means. And not an end in the inter-petition of financial statements. •	Ratio can be calculated only on the basis on the data. If the original data is not reliable then ratio will be misleading. •	Ratios fail to reflect the impact of price level change and hence can be misleading.

TYPES OF RATIOS

UNDER LIQUIDITY (OR) SHORT TERM RATIO:

•	CURRENT RATIO (OR) WORKING CAPITAL RATIO:

Current ratio is the ratio of current assets and current liabilities current assets are assets, which can be converted in to cash with in one year and include cash in hand and at bank bills R/B. Net sundry debtors stock of raw materials, finished goods etc. Current liabilities are liabilities, which are repaid with in a period of one year and include bills payable sundry creditors’ band over draft. Etc.

Current ratio = current assets /current liabilities.

QUICK RATIO:

Quick ratio is the ratio of quick assets to quick liabilities. Quick assets are assets, which can be converted into cash very quickly with out much loss. Quick liabilities are liabilities, which have to be necessarily paid with in one year.

Quick ratio = Quick assets. Quick liabilities. Quick assets = current assets- (stock + prepaid exp) Quick liabilities = current liabilities-Bank overdraft.

UNDER CAPITAL STRUCTURE RATIO (OR) LEVERAGE:

Leverage ratios indicate the relative interests of owners and creditors in a business.

DEBT AND EQUITY RATIO: Debt usually refers to long term liabilities equity includes equity and preference share capital and reserves.

Debt and equity ratio = long term liabilities/share holders funds. Long-term liabilities (debentures, bands, and loans.)

Interest coverage ratio or debt service ratio:

This ratio indicates whether a business is earning sufficient profits to pay the interest charges. Interest coverage ratio = PBIT/fixed interest charges. PBIT = profit before interest and taxation.

UNDER ACTIVITY RATIO (OR) TURNOVER RATIOS: Activity ratio measures the efficiency or effectiveness with which a firm manages its resources or assets.

Inventory turnover ratio: Stock turnovers ratio indicates the number of times the stock has turned over into sales in a year.

Inventory Turnover Ratio = Cost of goods sold/Average stock. Cost of goods sold = sales – Gross Profit. Average stock = opening stock (OR) C.S/2.

Debtor’s turnover ratio: Debtor turnover ratio expresses the relationship between debtors and sales.

Debtors Turnover Ratio = Net credit sales/Average debtors

Profitability ratio:

Profitability ratios measure the profitability of a concern generally they are calculated either in relation to sales or in relation to investment.

Gross profit ratio: It reveals the result of trading operations of the business.

Gross profit ratio = Gross Profit/Net Sales. Gross profits = Net sales – Cost of goods sold. Net sales     = Total sales – Sales returns.

Net profit ratio:

It indicates the results of over all operations of the firm.

Net profit ratio = Profit after Tax/Net Sales. Operating ratio:

It expresses the relationship between expenses incurred for punning the business and the resultant net sales.

Operating ratio = Operating cost/Net sales.

Operating cost= Cost of goods sold + Office all exp.

Earnings per share(EPS)

Earnings per share are the net profit after tax and preference dividend, which is earned on the capital reprehensive of one equity share.

E P S = Profit After Tax – Preference Dividend/No. Of Equity shares.

Price Earnings Ratio:

It expresses the relationship between market price of share of a company and the earnings per share of that company.

Price Earnings Ratio = Market price of equity share/Earnings Per Share.