FINANCIAL ANALYSIS  Refers to assessment of business to deal with the planning, budgeting, forecasting & Improving of all Financial details within an Organization.

RATIO ANALYSIS

RATIO Establishing relations between two variables deriving a meaningful conclusion

Ratio Analysis It’s a tool which enables the banker or lender to arrive at the following factors : Liquidity position Profitability Solvency Financial Stability Quality of the Management Safety & Security of the loans & advances to be or already been provided

How a Ratio is expressed? As Percentage - such as 25% or 50%. For example if net profit is Rs.25,000/- and the sales is Rs.1,00,000/- then the net profit can be said to be 25% of the sales. As Proportion - The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4. As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4 th of the sales.

Parties interested in Ratio Analysis Share holders Creditors Management

Classification of Ratios Liquidity Ratios Profitability Ratios Turn Over Ratios Leverage Ratios

Important Notes Liabilities have Credit balance and Assets have Debit balance Current Liabilities are those which have either become due for payment or shall fall due for payment within 12 months from the date of Balance Sheet Current Assets are those which undergo change in their shape/form within 12 months. These are also called Working Capital or Gross Working Capital and are Short Term Use of Funds Current Liabilities are known as Short Term Sources of Funds Long Term Liabilities & Short Term Liabilities are also called Outside Liabilities

Liquidity Ratios Liquidity refers to the solvency of the firm’s overall position, i.e. a “Liquid Firm” is one that can easily meet its Short-term obligations as they come due

Ratios to calculate Liquidity of Business 1. Current Ratio : It is the relationship between the current assets and current liabilities of a concern. Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1

2. Net Working Capital : This is worked out as surplus of Long Term Sources over Long Term Uses, alternatively it is the difference of Current Assets and Current Liabilities. NWC = Current Assets – Current Liabilities

3.ACID TEST or QUICK RATIO : It is the ratio between Quick Assets and Current Liabilities.  Quick Assets : Current Assets-Inventory  Quick Ratio=Quick Assets/Current Liabilities

Example :1 Calculate Current Ratio and Quick Ratio from following data- Capital Long-term loans Creditors Bills payable Short-term loans Outstanding exp Fixed Assets Cash Debtors Inventories Bills Receivable Prepaid Expenses 60000

Example:2 Calculate Current Assets and Current Liabilities when Working Capital of the Business is Rs and its Current Ratio is 2:1

Profitability Ratios It measures the profitability efficiency of the Business These Ratios reflect Final results of Business operation

1.From Owners point of view  Return on Equity  Earnings per Share  Dividends per Share  Price Earning Ratio

2.Based on Sales of firm  Gross Profit Ratio  Operating Profit Ratio  Net profit Ratio  Individual Exp Ratio

3.Based on Assets & Investments  Return on Asset  Return on Investment