atio analysis is a study of relationship among various financial factors in a business
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Transcript of atio analysis is a study of relationship among various financial factors in a business
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The following limitations of the ratio analysis are:
False result: ratio are calculated from the financial statement; so , the
reliability of ratio and its analysis is dependent upon the correctness of
the financial statement. If the figures are not true and fair, the analysis
gives a false picture of the affairs.
Not comparable if different firm follow different accounting policies:
when result of two enterprises are compared, it should be kept in mind
that the enterprise may follow different accounting policies. In such case
comparison is not possible.
Personal bias: personal judgement play an important role in preparing
financial statements and therefore, the accounting ratios are also not freefrom this limitation.
Affect of price level changes: changes in price level affects the
comparability of ratio.
Ratio as a tools for establishing true profitability and financial
position of a company, may be classified as :
1.Liquidity Ratios
2.Solvency Ratios3.Activity Ratios
4.Profitability Ratios
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Liquidity Ratio measures the short term solvency, i.e., the firms ability to pay
its current dues. They compromise of current ratio and liquidity ratio.
CurrentRatio
This ratio shows short term financial soundness of the business. Higher ratio
means better capacity to meet its current obligation. The ideal current ratio is
2:1.
Current Ratio = Current Assets/Current Liabilities
Current Assets = Inventories +Sundry Debtors + Cash And Bank Balances +
OtherCurrent Assets + Loans And Advances
=Rs.38819.03
Current Liabilities = Current Liabilities + Provisions
=Rs.38173.85
Current Ratio = Rs.38819.03/Rs.38173.85
=1.02:1
ANALYSIS
The current ratio of Idea CellularLtd. is 1.02:1. It indicates that the current
assets are 1.02 times the current liability.
Although the current ratio of 2:1 is considered to be the satisfactory. In
comparison to it the current ratio of idea cellular ltd. is fair which indicate that
short-term financial soundness of the business is not so good but fair. The idea
cellular ltd may not be able to meet its current liabilities on time and inadequate
working capital.
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Quick ratio
This quick ratio is fairly stringent measures of liquidity. It is based on those
current assets which are highly liquid. Quick ratio of 1:1is considered as ideal.
Quick Ratio = QuickAssets/Current Liabilities
QuickAssets OrLiquid Assets = Current Assets-Stock
=Rs. (38819.03-466.99)
=Rs.38819.03
Current Liabilities = Current Liabilities + Provisions
Current Liabilities = Current Liabilities + Provisions
Rs.38173.85
Quick Ratio=Rs.38352.04/Rs.38173.85
=1.005:1
ANALYSIS
The quick ratio of an Idea cellular ltd is 1.005:1.A
quick ratio of 1:1 is usuallyconsidered favourable, since for every rupee of current liabilities, there is a
rupee of quick assets. It indicates that the firm is better placed to meet it
current liabilities at a short notice.
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The term solvency implies ability of an enterprise to meet its long-term in
debtness and thus, solvency ratios convey an enterprises ability to meet its
long to Debt Ratio and proprietary Ratio.
Debt-Equity RatioThis position judges the long term financial position and soundness of the long
term financial policies of the firm. lower the ratio higher the protection enjoyed
by the lenders.
It can be calculated as:
Debt-Equity Ratio =
= 65264.13118536.09
= 0.5505844
ANALYSIS
The Debt-Equity ratio of a Idea Cellular Ltd is0.5505844. It indicates that the
Equity of a firm is more than the debt of a firm which means the lower debt-
equity ratio. Thus the firm is lesser dependent upon the outsiders for its
existence. A firm has the larger safety margin for creditors since owners equity
is considered as a margin of safety by creditors. But it cant be considered
satisfactory.
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Total assets to debt ratio
This ratio measures the safety margin available to the suppliers of long term
debts. It measures the extent to which the debt is being covered by assets.
It can be calculated as:
Total assets to debt ratio =
Total assets to debt ratio = 192715.43
65264.13 = 2.9528537
ANALYSIS
The Total assets to debt equity ratio of idea cellular ltd are 2.9528537 which
means that the total assets are more than the debt. The total asset is fair
enough of a firm to pay the debt. It represents the higher security to lenders
for extending long term loans to business. At last the ratio is very good and
acceptable.
Proprietary ratio
This ratio shows the extent to which the proprietor has financed the total
assets. Higher the ratio, greater the satisfaction for lenders and creditors.
It can be calculated as:
Proprietary ratio =
= 118536.09
192715.43
= 0.6150835
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ANALYSIS
The proprietary ratio is 0.6150835, which shows the extent to which the total
assets have been financed by the proprieto r. It shows that the assets of the
enterprise have been partly financed by borrowed funds.
It is also termed as a turnover ratio. The ratios are usually calculated on the
basis of sales or cost of sales. The important activity ratios are:
Inventory turnover ratioThis ratio measures how fast the stock is moving through the firm and
generating sales. Higher the ratio, the more efficient management of
inventories and vice-versa.
Inventory Turnover Ratio = Cost Of Goods Sold/Average Stock
Cost Of Goods Sold = Opening Stock + Purchases - Closing Stock
=Rs. 0.22
Average Stock = (Opening Stock +Closing Stock)/2
=Rs. (427.29+466.99)/2
=Rs.447.14
Inventory Turnover Ratio = Rs.0.22/Rs.447.14
=0.00049times
ANALYSIS
The inventory turnover ratio is 0.00049 times. The ratio is not so good; it is
very low which indicates that the investment in stock is not judicious. It means
that the stock holding period is not normal.
Debtors turnover ratio:
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Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivable
**************Here Credit Sales Are Not Give, So Formula Is Not Calculated
Creditors turnover ratio:
Creditors Turnover Ratio = Net Credit Purchase/Average Payables
*********** No Credit Purchase. So it cannot be calculated.
Working Capital turnover ratio:
Working Capital Turnover Ratio = Net Sales/Working Capital
Net Sales=Service Revenue + Sales Of Trading Goods
=Rs. (118502.21+0.22)
=Rs.118502.43
Working Capital = Current Assets-Current Liabilities
=Rs.(38819.03-38173.85)
=-Rs.645.18
Working Capital Turnover Ratio=Rs.118502.43/Rs.645.18 = 183.67 times.
ANALYSIS
The working capital turnover ratio of an Id ea Cellular ltd. is so good. It indicates
that the working capital has been efficiently employed in the process of
carrying on of business.
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Fixed assets turnover ratio:
Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets
Net Sales=Service Revenue + Sales Of Trading Goods
=Rs. (118502.21+0.22)
=Rs.118502.43
Net Fixed Assets = Fixed Assets Depreciation
=Rs.153896.4
Fixed Assets Turnover Ratio=Rs.118502.43/Rs.153896.4
=0.77 Times
ANALYSIS
The fixed assets turnover ratio of an Idea Cellular Ltd. is 0.77 times. The ratio is
not so good which indicate that the fixed assets are not so much efficiently
utilised in the firm to earn revenue.
In general terms, efficiency in business is measured by profitability. Thus the
profitability is of utmost importance for a concern.
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Gross profit ratio:
It can be calculated as;
Gross profit ratio =
100
Gross profit ratio 0f 2010 = X 100
118502.43
= 24.42%
Gross profit ratio 0f 2009 = 27804.44/98570.8
= 28.20%
ANALYSIS
The Gross profit ratio of an Idea Cellular ltd in 2009 is 28.20 % and in 2010 is
24.42%. It indicates that the business profit have gone a decrease from 28.20%
to 24.42%. This may be due to the disposal of stock at the reduced selling
price.
OPERATING RATIO =
Operating ratio of 2009 = 71171.77/ 98570.8
= 72.20371%
Operating ratio of 2010 = 90358.54/118502.33
= 76.24368%
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ANALYSIS
The operating ratio of an enterprise in 2009 is 72.203% and in 2010 is 76.24%
which indicate that the operational efficiency of the enterprise has gone an
increase which is not a good indicator as the profit margin has reduced.
NET PROFIT RATIO =
Net profit ratio of 2010 = 10536.55/118502.33
= 0.088%
Net profit ratio of 2009 = 10012.11/ 98570.8 =0.10 %
ANALYSIS
The net profit has decrease from 0.10% to 0.088%. It means that the firm is not
so much efficient . It might be because there is not effective control on different
expenses. The operating expenses has gone a huge increase from 70,982.3 to
90,358.32.
Return on investment =
X 100
Return on investment in 2010 =
= 7.562%
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Return on investment in 2009 =
= 7.71508 %
ANALYSIS
The return on investment in 2009 is 7.71508% and in 2010 is 7.562% which
shows the trend that the return on investment has gone a slightly decrease from
previous year. The ratio is not so satisfactory.
EARNING PER SHARE
Earnings per share =
Earnings per share in 2010 =
= 3.19305089
Earnings per share in 2009 = 10012110000/3100095209
= 3.229613713
ANALYSIS
As the profit of the idea cellular has gone a decrease, it has a effect on a EPS .
It has also reduced from 3.22 to 3.19, but it has not such effect.
PRICE EARNING RATIO
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PRICE EARNING RATIO =
Price Earnings ratio in 2010 = 65.50 / 3.39 = 9.32153392
Price earning ratio in 2009 = 58.05/3.42 = 16.97368421
ANALYSIS
The net profit of a idea cellular limited has decrease from 0.10% to 0.08%. Thereason for this may be:
y An increase in the operating ratio from 72.2% to 76.2%. The resources
have not been used efficiently.
y The focus of the firm is to increase its net sales not to earn profit.
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