1. RATIO ANALYSIS
Ratios are simply a means of highlighting in arithmetical terms the relationship between figures drawn from financial statements.

2. FORMS OF EXPRESSING RATIOS
Proportion
Percentage
Quotient

3. OBJECTIVES AND SIGNIFICANCE OF RATIO ANALYSIS.
Helpful in Simplifying Financial data.
Helpful in Determining Trends.
Helpful in Controlling.
Benefits to Other Parties Interested in the Business.
Helpful in locating Weak Spots.
Helpful in Comparative Study.
Helpful in Measuring Operating efficiency.
Overall Profitability

4. LIMITATION OF RATIO ANALYSIS
Limited use of Single Ratio.
Wrong Ratios Based on Wrong Data.
Incorrect Comparison.
Different Meaning.
Difficulty in Forecasting.
Lack of Qualitative Analysis.
Difficulty of Price Level Changes.
Lack of Proper Standards.
Window Dressing.

5. INTERPRETATION OF RATIOS
Interpretation of Individual Ratio.
Interpretation by referring to a group of Ratios.
Interpretation of Ratios by Trend.
Interpretation by Inter-firm Comparison.

6. CLASSIFICATION OF RATIOS
Classification According to Accounting Statement.
Classification on the Basis of Time.
Classification According to Importance.
Classification According to the Purpose.

7. CLASSIFICATION ACCORDING TO ACCOUNTING STATEMENT.
Profit and Loss Account Ratios.
Balance Sheet Ratios.
Profit and Loss Account and Balance Sheet Ratios.

8. CLASSIFICATION ON THE BASIS OF TIME.
Structural Ratios.
Trend Ratio

9. CLASSIFICATION ACCORDING TO IMPORTANCE
Primary Ratios.
Secondary Ratios.

10. LIQUIDITY RATIOS CURRENT RATIO Current Assets
Current Liabilities

11. LIQUIDITY RATIO OR ACID TEST RATIO OR QUICK RATIO.
Liquid Assets
Liquidity Ratio =
Current Liabilities. Or
Liquid Liabilities.

12. ABSOLUTE LIQUIDITY RATIO Cash+Bank+
Marketable Securities
Absolute Liquidity Ratio =
Current Liabilities.

13. INVENTORY TURNOVER RATIO
Cost of Goods Sold
Inventory Turnover =
Ratio Average Inventory

14. DEBTORS TURNOVER RATIO
Net Credit Sales
Debtors Turnover =
Ratio Average Debtors.

15. CREDITORS TURNOVER RATIO
Net Credit Purchases
Creditors Turnover =
Ratio Average Creditors.
Net Credit Purchases=Gross Credit Purchases-
Purchase Return

16. DEFENSIVE INTERVAL RATIO
Quick Assets
Defensive Interval=
Ratio Projected Daily Cash Req.
Projected Cash
Operating Expenditure
Projected Daily Cash=
Requirement No. of Days in a year (365)

17. PROFITABILITY RATIOS Profitability Ratios Related to Sales :
a. Gross Profit Ratio
Gross Profit
Gross Profit Ratio = x 100
Net Sales
Net Sales = Gross Sales – Sales Return
Gross Profit = Net Sales – Cost of Goods sold

18. Net Profit Ratio.
Net Profit
Net Profit Ratio = x 100
Net Sales

19. Operating Ratio.
Operating Costs.
Operating Ratio = x 100
Net Sales

20. EXPENSE RATIOS Direct Raw Material to Sales Ratio =
Direct Material Cost
x 100
Net Sales
b. Cost of Goods sold to Sales Ratio =
Cost of Goods Sold

21. Direct Labour Cost of Sales Ratio.
= x 100
Net Sales
d. Factory Expenses to Sales Ratio = x 100

22. e. Office and Administration Expenses to
Sales Ratio
Office and Administration Expenses
= x 100
Net Sales
f. Selling Expenses to Sales Ratio = x 100

23. PROFITABILITY RATIOS BASED ON INVESTMENT.
RETURN ON TOTAL ASSETS :
Profit before Interest and Tax
= x 100
Total Assets.
Net Profit after Tax
= x 100
Total Assets
Net Profit after Tax + Interest =

24. a. From Asset Side of Balance Sheet.
RETURN ON NET CAPITAL EMPLOYED OR CAPITAL EMPLOYED:
a. From Asset Side of Balance Sheet.
Capital Employed=Fixed Assets+Net Working Capital OR
Total Assets-Current Liabilities. OR
b. From Liability Side of Balance Sheet
Capital Employed=long-term Liabilities+Issue Share Capital (Equity & Preference) + Reserve and Surplus (Capital and Revenue)
Return on Capital Profit before Interest and Tax
Employed = x 100
Capital Employed.

25. Advantage of the Concept of Return on Capital Employed
Helps the management in finding out with how much efficiency capital emplyed in business is being used.
Compared with that of other firms of similar nature.
A comparative study of the profitability of various departments.
Proper decisions regarding capital expenditure can be.
Facilities necessary changes in financial policies.
Reasonable and regular devidend.

26. Return on Shareholders Funds
a. Return on Total Shareholders Funds
Net Profit after Tax
= x 100
Total Shareholder’s Equity
Total Shareholder’s Equity=Preference Share Capital+Ordinary Share Capital+Share Premium+ Reserves and Surplus – Accumulated Losses.

27. b. Return on Equity Shareholder’s Funds.
Net Profit after tax and Preference Dividend
= x 100
Equity Shareholder’s Funds
Earnings Per Share of EPS
Net Profit after Tax and Preference Dividend
EPS=
Number of Equity Shares

28. d. Dividend Per Share or DPS
Profit distributed to Equity Shareholders
DPS =
Number of Equity Shares.
Dividend-Payout Ratio or D/P Ratio:
Total Dividend paid to Equity Shareholder
D/P Ratio=
Total Net Profit belonging to Equity Shareholders OR
DPS
D/P = x 100
EPS

29. f. Dividend and Earning Yield :
DPS
Dividend Yield =
Market Value per Share
EPS
Earning Yield =
g. Price Earning Ratio :
Market Price of the share
P/E Ratio =

30. TURNOVER RATIOS INVENTORY TURNOVER RATIO. Net Sales
Average Inventory
Cost to Raw Materials Consumed
Raw Material Turnover=
Ratio Average Stock of Raw Materials
Cost of Goods Manufactured
Work in Progress =
Turnover Ratio Average Work-in-Progress Inventory

31. Debtors Turnover Ratio and Average Collection Period.