Ratio Analysis

Ratio analysis
The r ratio analysis is made under six broad categories as follows:
1) Long term Solvency ratios

2) Short term solvency ratios
3) Profitability ratios
4) Activity ratios
5) Operating ratios
6) Market ratios
Long term Solvency Ratios
The long-term financial stability of the firm may be considered as independent upon its
ability to meet all its liability including including those not currently payable. The ratios
which are important in measuring the long-term solvency is as follows;
i) Debt -Equity Ratio
ii) Shareholders Equity Ratio
iii) Debt to net worth Ratio
iv) Capital gearing Ratio
v) Fixed Assets to Long Term fonds Ratio
vi) Propriety Ratio
vii)Dividend coverage Ratio
Viii) Interest Coverage Ratio
Short term Solvency Ratios
i) Current Ratio
ii) Quick Ratio or Liquid Ratio
iii) Absolute Liquid Ratio
Profitability Ratios
i) Return on Capital Employed or Return on Investment

ii) Earnings per share (EPS)
iii) Cash earning per share
iv) Gross Profit Margin
v) Net Profit Margin
vi) Cash Profit Ratio
vii) Return on Assets
viii) Return on Net Worth (Return on Shareholders’ Equity
Activity Ratios or Turnover Ratios
i) Inventory turn over Ratios

ii) Inventory Ratio
iii) Debtors Turnover Ratio
iv) Average Collection Period
v) Bad Debts to Sales Ratio
vi) Creditors Turnover Ratio
vii) Creditors Turnover Period
viii) Assets Turnover Ratio
ix) Fixed Assets Turnover Ratio
x) Total Assets Turnover Ration
xi) Working Capital Turnover Ratio
xii) Sales to Capital Employed Ratio
Operating Ratios
i) Material Cost Ratio

ii) Labour cost Ratio
iii) Factory overhead Ratio
iv) Administrative expenses Ratio
v) Selling and distribution expenses Ratio
Market Test Ratio
i) Dividend Payout Ratio

ii) Divined yield ratio
iii) Book Value Ratio
iv) Price/Earnings Ratio.
Exer. 1From the given Balance Sheets. Calculate:
(a) Debt- equity ratio

(b) Liquid ratio
(c) Fixed assets to current assets ratio
(d) Fixed assets to Net worth ratio.
Balance Sheet
Liabilities Rs. Assets Rs,

Share Capital 1,00,000 Goodwill 60,000
Reserve 20,000 Fixed assets (Cost) 1,40,000
Profit and loss a/c 30,000 Stock 30,000
Secured Loans 80,000 Debtors 30,000
Creditors 50,000 Advances 10,000
Provision for taxation 20,000 Cash 30,000
3,00,000 3,00,000
Exer.2 From the following data, Calculate:
(a) Current Ratio

(b) Quick Ratio
(c) Stock turnover Ratio
(d) Operating Ratio
(e) Rate of return on equity capital.
Balance Sheet as on Dec.31.2023
Liabilities Rs. Assets Rs.

Equity Share Capital (Rs.10.per 10,00,000 Plant and Machinery 6,40,000
share
Profit and Loss account 3,68,000 Land and buildings 80,000
Creditors 1,04,000 Cash 1,60,000
Bills Payable 2.00.000 Debtors 3,60,000 3,20,000
Less: Provision for bad debts
40.000
Other Current Liabilities 20,000 Stock 4,80,000
Prepaid Insurance 12,000
16.92.000 16,92,000
Income Statement for the year ending 31st Dec.2023
Sales 40,00,000
Less; Cost of goods sold 30,80,000
9,20,000
Less: Operating Expenses 6,80,000
Net Profit 2,40,000
Less: Income tax paid 50% 1,20,000
Net Profit after tax 1,20,000
Balances at the beginning of the year Debtors 3,00,000
Stock 4,00,000
Exer. 3 The Zurich Ltd financial statements contain the following information
Particulars 31st March,2023 31st March,2024

Cash 2,00,000 1,60,000
Sundry debtors 3.20,000 4,00,000
Temporary Investments 2,00,000 3,20,000
Stock 18,40,000 21,60,000
Prepaid expenses 28,000 12,000
Total current assets 25,88,000 30,52,000
Total Assets 56,00,000 64.00,000
Current liabilities 6,40,000 8,00,000
10% Debentures 16,00,000 16,00,000
Equity share capital 20,00,000 20,00,000
Retained earnings 4,68,000 8,12,000
Statement of profit for the year ended 31st March,2023
sales 40,00,000
Less: Cost of goods sold 28,00,000
Less: Interest 1,60,000 29,60,000
Net Profit for 2023 10,40,000
Less: Taxes @50% 5,20.000
Net Profit 5,20,000
Dividend declared on equity shares Rs. 2,20,000
From the above figures, appraise the financial position of the company from the points of view of (i)
liquidity (ii) Solvency (iii) profitability and activity.

Ratio Analysis

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Ratio analysis

The r ratio analysis is made under six broad categories as follows:

1) Long term Solvency ratios

vii)Dividend coverage Ratio

Viii) Interest Coverage Ratio

Short term Solvency Ratios

i) Return on Capital Employed or Return on Investment

Activity Ratios or Turnover Ratios

i) Inventory turn over Ratios

i) Material Cost Ratio

Market Test Ratio

i) Dividend Payout Ratio

Exer. 1From the given Balance Sheets. Calculate:

(a) Debt- equity ratio

Liabilities Rs. Assets Rs,

(a) Current Ratio

Balance Sheet as on Dec.31.2023

Liabilities Rs. Assets Rs.

Income Statement for the year ending 31st Dec.2023

Particulars 31st March,2023 31st March,2024

Statement of profit for the year ended 31st March,2023

Dividend declared on equity shares Rs. 2,20,000

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