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See all Premium member Presentation Transcript Ratio Analysis : -Ratio Analysis is a very powerful tool useful for measuring performance of the organisation. -The ratio analysis helps the management to analyse the past performance of the firm and to make further projection -Ratio Analysis is extremely helpful in providing valuable insight into Company’s Financial Picture Ratio Analysis 1 Shiba Prasad Parhi Types of ratio : Types of ratio Liquidity Ratio Financial Leverage(Debt) Ratio Coverage ratio Activity Ratio ( Efficiency or Turnover ratios) Profitability ratios 2 Shiba Prasad Parhi Liquidity Ratio : Liquidity Ratio Firm’s ability to measure short term obligation They compare short term obligation to short term resources available to meet the obligation From these much insight can be obtained into the present cash solvency of the firm and firm’s ability to remain solvent in the event of adversity 3 Shiba Prasad Parhi Current Ratio=Current Asset/Current Liabilities(Which measure the short- term solvency) As per Industry standard 2:1 for highly solvent co and 1.33:1 is good : Current Ratio=Current Asset/Current Liabilities(Which measure the short- term solvency) As per Industry standard 2:1 for highly solvent co and 1.33:1 is good Current Assets Current Liabilities Cash Cash in Bank Debtors Inventories Loans and advances Prepaid-expenses Loans, secured or unsecured loans that are due in next twelve months Current liabilities and provision Creditors Bills Payable Accrued expenses Income tax liability Long term debt maturing in the current year 4 Shiba Prasad Parhi Quick Ratio=current asset-Inventories/Current Liabilities, As per industry standard 1 to 1 : Quick Ratio=current asset-Inventories/Current Liabilities, As per industry standard 1 to 1 An asset is liquid if it can be converted into cash immediately or reasonably soon without losing its value Cash Ratio= Cash + Marketable Securities/ Current Liabilities 5 Shiba Prasad Parhi Activity RatiosInventory Ratio=Cost of goods sold/average inventory(It measures how fast the inventory is moving through the firm and generating sales) : Activity RatiosInventory Ratio=Cost of goods sold/average inventory(It measures how fast the inventory is moving through the firm and generating sales) Cost of Goods Sold=Direct labor+ Direct Material+ Manufacturing overhead( Factory Overhead) less closing stock Average Inventory =Opening stock + Closing Stock/2 Average of inventory at the beginning and end of the year Implications: Higher turnover ratio means low stock of inventory frequent stock out, may be loss of customer and customer goodwill 6 Shiba Prasad Parhi Debtor’s Turnover= Net credit Sales/Average Account Receivable This shows how many times accounts receivable turnover during the years : Debtor’s Turnover= Net credit Sales/Average Account Receivable This shows how many times accounts receivable turnover during the years Net Credit sales Average account Receivable If net credit sales is not available then net sales should be taken Debtor’s Turnover= Net credit Sales/Average Account Receivable Average Collection Period= 365/ Debtors turnover =Average Debtor/Average daily Credit sales (Average daily credit sales= Total sales on credit/ 365 days) 7 Shiba Prasad Parhi Average Account payable ration denotes the payment period on credit purchases : Average Account payable ration denotes the payment period on credit purchases Credit Purchase Average account payable If total credit purchase is not available purchases should be taken into account Account payable Payble turnover ratio=Credit Purchase/ Average account payableAverage payment Period=365/ Payable turnover ratio 8 Shiba Prasad Parhi Cash Cycle= Operating Cycle- Payable turnover : Cash Cycle= Operating Cycle- Payable turnover Operating Cycle Payable turnover Inventory Turnover + Receivable Turnover Operating Cycle is the length of the time from the commitment of cash for purchases until collection of receivable resulting from the sales of goods and services Total Credit Purchase/Average payable 9 Shiba Prasad Parhi Working Capital Turnover ratio=Sales/ Net Current Assets : Working Capital Turnover ratio=Sales/ Net Current Assets Total sales Net Current Asset or Net working Capital Net working Capital=Current Asset- Current Liabilities 10 Shiba Prasad Parhi Fixed Asset Turnover ratio=Net Sales/ Average net fixed assetsTotal asset Turnover ratio=Net sales/ Average Total Asset : Fixed Asset Turnover ratio=Net Sales/ Average net fixed assetsTotal asset Turnover ratio=Net sales/ Average Total Asset It measure how efficiently assets are employed. 11 Shiba Prasad Parhi Profitability ratios : Profitability ratios Gross Profit margin Net Profit Margin Ratio Return on Total Asset Earning power Return on Equity 12 Shiba Prasad Parhi Gross Profit Margin ratio=Gross Profit/ Net sales : Gross Profit Margin ratio=Gross Profit/ Net sales Gross Profit Implications Net Sales – Cost of Goods Sold Cost of Goods Sold= Labor + Materials + manufacturing overhead It measures the efficiency of production and pricing policy 13 Shiba Prasad Parhi Net Profit Margin= Net Profit/ Net sales : Net Profit Margin= Net Profit/ Net sales Implications: The ratio shows the earning left for the share holders ( Equity Shareholders+ Preference Share holder) It measures the overall efficiency of production, administration, selling, financing, pricing and tax management 14 Shiba Prasad Parhi Return on Total Asset=Net Income/Average Total Assets : Return on Total Asset=Net Income/Average Total Assets It measures how efficiently is capital is employed Total Asset= Shareholder fun + creditor Funding 15 Shiba Prasad Parhi Return on Equity=Net profit after taxes/Shareholder’s equity : Return on Equity=Net profit after taxes/Shareholder’s equity 16 Shiba Prasad Parhi Coverage ratios: Interest Coverage Ratio= EBIT/ Interest Expenses : Coverage ratios: Interest Coverage Ratio= EBIT/ Interest Expenses EBIT= Earning Before Interest and Taxes Implications: Ability to cover interest Charges, tell the number of time interest is earned 17 Shiba Prasad Parhi Shareholders Fund : Shareholders Fund Shareholders Fund=Equity and Preference capital + Reserve and Surplus- Losses Net Worth= Equity Share Capital + Preference Share Capital + Reserve- Fictitious Asset Equity Shareholder’s Fund=Equity Share capital +Reserve and surplus Total Asset= Fixed Asset + Current Asset 18 Shiba Prasad Parhi Ratio relating to Share : Ratio relating to Share Earning per share(EPS)= Profit after Tax/ No of Outstanding shares Dividend per Share(DPS)= Earning paid to the share holders( Dividend)/Number of Equity Shares Dividend Payout Ratio= DPS/ EPS P/E ratio= Market Value per share/ Earning Per Share 19 Shiba Prasad Parhi Financial Leverage ratios : Financial Leverage ratios Shiba Prasad Parhi 20 Debt /Equity Ratio Debt / Total Asset Ratio Capital Gearing Ratio= Fixed Interest Bearing Funds/ Equity Shareholder’s Fund (Fixed Interest Bearing fund include both Debt and Preference Shares) Capital Gearing ratio indicate the vulnerability of earning available for equity share holders Long term debt/ Total Capitalization Ratio Shareholders Fund=Equity and Preference capital + Reserve and Surplus- Losses Net Worth= Equity Share Capital + Preference Share Capital + Reserve and Surplus- Fictitious Asset Equity Shareholder’s Fund=Equity Share capital +Reserve and surplus Total Asset= Fixed Asset + Current Asset Total Capitalization = Long term debt + Shareholder’s equity Slide 21: 21 Shiba Prasad Parhi You do not have the permission to view this presentation. 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Financial Ratios bkshibprasad Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 3308 Category: Business & Fin.. License: All Rights Reserved Like it (1) Dislike it (0) Added: February 09, 2010 This Presentation is Public Favorites: 6 Presentation Description No description available. Comments Posting comment... By: nikhilkolhe43 (8 month(s) ago) CAN I DOWNLOAD THIS PL Saving..... Post Reply Close Saving..... Edit Comment Close By: archdegz (15 month(s) ago) can i download this please thanks Saving..... Post Reply Close Saving..... Edit Comment Close By: Ibians (15 month(s) ago) i want to download Saving..... Post Reply Close Saving..... Edit Comment Close By: aparna.sawant (22 month(s) ago) i want to download this Saving..... Post Reply Close Saving..... Edit Comment Close By: kesugvc (24 month(s) ago) nice ppt Saving..... Post Reply Close Saving..... Edit Comment Close loading.... See all Premium member Presentation Transcript Ratio Analysis : -Ratio Analysis is a very powerful tool useful for measuring performance of the organisation. -The ratio analysis helps the management to analyse the past performance of the firm and to make further projection -Ratio Analysis is extremely helpful in providing valuable insight into Company’s Financial Picture Ratio Analysis 1 Shiba Prasad Parhi Types of ratio : Types of ratio Liquidity Ratio Financial Leverage(Debt) Ratio Coverage ratio Activity Ratio ( Efficiency or Turnover ratios) Profitability ratios 2 Shiba Prasad Parhi Liquidity Ratio : Liquidity Ratio Firm’s ability to measure short term obligation They compare short term obligation to short term resources available to meet the obligation From these much insight can be obtained into the present cash solvency of the firm and firm’s ability to remain solvent in the event of adversity 3 Shiba Prasad Parhi Current Ratio=Current Asset/Current Liabilities(Which measure the short- term solvency) As per Industry standard 2:1 for highly solvent co and 1.33:1 is good : Current Ratio=Current Asset/Current Liabilities(Which measure the short- term solvency) As per Industry standard 2:1 for highly solvent co and 1.33:1 is good Current Assets Current Liabilities Cash Cash in Bank Debtors Inventories Loans and advances Prepaid-expenses Loans, secured or unsecured loans that are due in next twelve months Current liabilities and provision Creditors Bills Payable Accrued expenses Income tax liability Long term debt maturing in the current year 4 Shiba Prasad Parhi Quick Ratio=current asset-Inventories/Current Liabilities, As per industry standard 1 to 1 : Quick Ratio=current asset-Inventories/Current Liabilities, As per industry standard 1 to 1 An asset is liquid if it can be converted into cash immediately or reasonably soon without losing its value Cash Ratio= Cash + Marketable Securities/ Current Liabilities 5 Shiba Prasad Parhi Activity RatiosInventory Ratio=Cost of goods sold/average inventory(It measures how fast the inventory is moving through the firm and generating sales) : Activity RatiosInventory Ratio=Cost of goods sold/average inventory(It measures how fast the inventory is moving through the firm and generating sales) Cost of Goods Sold=Direct labor+ Direct Material+ Manufacturing overhead( Factory Overhead) less closing stock Average Inventory =Opening stock + Closing Stock/2 Average of inventory at the beginning and end of the year Implications: Higher turnover ratio means low stock of inventory frequent stock out, may be loss of customer and customer goodwill 6 Shiba Prasad Parhi Debtor’s Turnover= Net credit Sales/Average Account Receivable This shows how many times accounts receivable turnover during the years : Debtor’s Turnover= Net credit Sales/Average Account Receivable This shows how many times accounts receivable turnover during the years Net Credit sales Average account Receivable If net credit sales is not available then net sales should be taken Debtor’s Turnover= Net credit Sales/Average Account Receivable Average Collection Period= 365/ Debtors turnover =Average Debtor/Average daily Credit sales (Average daily credit sales= Total sales on credit/ 365 days) 7 Shiba Prasad Parhi Average Account payable ration denotes the payment period on credit purchases : Average Account payable ration denotes the payment period on credit purchases Credit Purchase Average account payable If total credit purchase is not available purchases should be taken into account Account payable Payble turnover ratio=Credit Purchase/ Average account payableAverage payment Period=365/ Payable turnover ratio 8 Shiba Prasad Parhi Cash Cycle= Operating Cycle- Payable turnover : Cash Cycle= Operating Cycle- Payable turnover Operating Cycle Payable turnover Inventory Turnover + Receivable Turnover Operating Cycle is the length of the time from the commitment of cash for purchases until collection of receivable resulting from the sales of goods and services Total Credit Purchase/Average payable 9 Shiba Prasad Parhi Working Capital Turnover ratio=Sales/ Net Current Assets : Working Capital Turnover ratio=Sales/ Net Current Assets Total sales Net Current Asset or Net working Capital Net working Capital=Current Asset- Current Liabilities 10 Shiba Prasad Parhi Fixed Asset Turnover ratio=Net Sales/ Average net fixed assetsTotal asset Turnover ratio=Net sales/ Average Total Asset : Fixed Asset Turnover ratio=Net Sales/ Average net fixed assetsTotal asset Turnover ratio=Net sales/ Average Total Asset It measure how efficiently assets are employed. 11 Shiba Prasad Parhi Profitability ratios : Profitability ratios Gross Profit margin Net Profit Margin Ratio Return on Total Asset Earning power Return on Equity 12 Shiba Prasad Parhi Gross Profit Margin ratio=Gross Profit/ Net sales : Gross Profit Margin ratio=Gross Profit/ Net sales Gross Profit Implications Net Sales – Cost of Goods Sold Cost of Goods Sold= Labor + Materials + manufacturing overhead It measures the efficiency of production and pricing policy 13 Shiba Prasad Parhi Net Profit Margin= Net Profit/ Net sales : Net Profit Margin= Net Profit/ Net sales Implications: The ratio shows the earning left for the share holders ( Equity Shareholders+ Preference Share holder) It measures the overall efficiency of production, administration, selling, financing, pricing and tax management 14 Shiba Prasad Parhi Return on Total Asset=Net Income/Average Total Assets : Return on Total Asset=Net Income/Average Total Assets It measures how efficiently is capital is employed Total Asset= Shareholder fun + creditor Funding 15 Shiba Prasad Parhi Return on Equity=Net profit after taxes/Shareholder’s equity : Return on Equity=Net profit after taxes/Shareholder’s equity 16 Shiba Prasad Parhi Coverage ratios: Interest Coverage Ratio= EBIT/ Interest Expenses : Coverage ratios: Interest Coverage Ratio= EBIT/ Interest Expenses EBIT= Earning Before Interest and Taxes Implications: Ability to cover interest Charges, tell the number of time interest is earned 17 Shiba Prasad Parhi Shareholders Fund : Shareholders Fund Shareholders Fund=Equity and Preference capital + Reserve and Surplus- Losses Net Worth= Equity Share Capital + Preference Share Capital + Reserve- Fictitious Asset Equity Shareholder’s Fund=Equity Share capital +Reserve and surplus Total Asset= Fixed Asset + Current Asset 18 Shiba Prasad Parhi Ratio relating to Share : Ratio relating to Share Earning per share(EPS)= Profit after Tax/ No of Outstanding shares Dividend per Share(DPS)= Earning paid to the share holders( Dividend)/Number of Equity Shares Dividend Payout Ratio= DPS/ EPS P/E ratio= Market Value per share/ Earning Per Share 19 Shiba Prasad Parhi Financial Leverage ratios : Financial Leverage ratios Shiba Prasad Parhi 20 Debt /Equity Ratio Debt / Total Asset Ratio Capital Gearing Ratio= Fixed Interest Bearing Funds/ Equity Shareholder’s Fund (Fixed Interest Bearing fund include both Debt and Preference Shares) Capital Gearing ratio indicate the vulnerability of earning available for equity share holders Long term debt/ Total Capitalization Ratio Shareholders Fund=Equity and Preference capital + Reserve and Surplus- Losses Net Worth= Equity Share Capital + Preference Share Capital + Reserve and Surplus- Fictitious Asset Equity Shareholder’s Fund=Equity Share capital +Reserve and surplus Total Asset= Fixed Asset + Current Asset Total Capitalization = Long term debt + Shareholder’s equity Slide 21: 21 Shiba Prasad Parhi