Financial ratio analysis
Ratio analysis is a principle technique so far knows to judge the condition portrayed by the financial statement. It is a multifarious tool for analysis the capital structure. Ratios are useful as they can be used to summarize briefly relationship and result which are significant to an appreciation of critical business indicator of performance. Ratios are also useful for the purpose of comparing performance from year to year. A) Liquidity ratio: Liquidity or short term solvency ratios measure the company’s ability to meet the short term obligation as and when they fall due. These ratios revels the short term solvency of a concern.
(1) Current ratio:
Meaning – Those ratios reveals the relationship between current asset and current liabilities. Objectives- The main object is to measure the ability of concern to meet its short term obligation and to depict the short term financial soundness of a concern. Current assets
The current ratios for last 4 years are as follows:
Year ended on 31 March
Year| Current Assets| Current liabilities| CurrentRatio| 2006| 948989569| 1819551834| 0.52|
2007| 1169317014| 2191984717| 0.53|
2008| 1450772388| 2349045636| 0.62|
2009| 1608037000| 2806358000| 0.57|
2010| 544509000| 1892749000| 0.28|
Current Ratio Chart
(ii) Quick ratio or Acid Test ratio
Meaning- The ratio reveals the relationship between quick assets and liabilities. Objectives- The main objective of computing this ratio is to measure the ability of the firm to meet its short term obligation when due without relying upon the realization of stock. Computation- quick ratio/quick liabilities
The quick ratios for the last 4 years are as follows:
year| Quick Asset (Rs)| Quick liability (Rs)| Quick Ratio| 2007| 817546357| 1816207332| 0.45|
2008| 795972443| 1922804439| 0.41|
2009| 1330681000| 2349045636| 0.56|
2010| 1263982000| 28006358000| 0.45|
Quick ratio graph
This ratio shows the liquidity position of a firm. Generally a quick ratio is to be 1:1. A concern having a quick ratio of less than 1 may not be meeting its short term obligation in time if it is greater than 1 may be able to meet its short term obligation in term obligation in time it’s very effective in inventory management.
(ii) Cash ratio- cash ratio shows the cash position of the business. Cash is the most liquid asset. Cash reservoir is constituted at of cash at bank. Cash ratio is found by dividing cash reservoir by current liabilities.
Cash ratio = cash reservoirs/current liabilities
The cash ratios for the last 4 years are as follows-
year| Cash Rs (in lacs)| Current liabilities Rs(in lacs)| Cash ratio| 2007| 473.51| 1819.55| .26|
2008| 454.57| 2119.98| .21|
2009| 748.46| 2349.04| .32|
2010| 573.25| 2806.35| .20|
Cash ratio chart
Since cash is the most liquid asset a financial analyst may examine the ratio of cash and its equivalent to current liabilities.
Here, in RFC this ratio has a decreasing trend and only in year 2008 it is more than 10. And in remaining year it is less than 10 which indicates that the cash held by RFC is not increasing in same proportion as its current liabilities.
In general, it is not good to have a very high cash position. That may keep cash reservoir either idle or low yield. On the other hand, cash reservoir should not be too low. Too low cash position may create cash crises and effect day to day operations. The cash position is maintained according to the requirement by finance department.
(B) Capital Structure or Leverage Ratio
Leverage or capital structure ratios are calculated to judge the long term financial position of the firm....