# Ratio Analysis

**Topics:**Generally Accepted Accounting Principles, Balance sheet, Asset

**Pages:**6 (1183 words)

**Published:**September 22, 2012

Ratio analysis is one of the techniques of financial analysis where ratios are used as a yardstick for evaluating the financial condition and performance of a firm. Analysis and interpretation of various accounting ratios gives skilled and experienced analyst a better understanding of the financial condition and performance of the firm than what he could have obtained only through a perusal of financial statements.

Types of ratio’s

1.Profitability ratio

2.Leverage ratio / Capital structure ratio

3.Turn over ratio

4.Liquidity or Short term solvency ratio’s

Profitability ratio : Profitability ratio measures profitability of a concern firm or company

Net profit ratio: Net profit ratio is the ratio between net profits after taxes and net sales it indicates what portion of sales is left to the owners after operation expenses.

Net profit ratio = (Net profit after taxes / Net sales) x 100

Operating ratio: Operating ratio is the ratio between cost of goods sold plus operating expenses and the net sales

Operation ratio = {(operating expenses + cost of goods sold)/ net sales)} x 100 Cost of goods sold = sales – gross profit

Leverage ratio: Leverage ratio indicates the relative interest of owner and creditors in a business.

Debt equity ratio: Debt equity ratio is the ratio is reflect the relative claim of creditors and share holders against the assets of the business.

Debt equity ratio = Long term liabilities / share holders funds Long term liabilities = long term loan + Debentures + Other long term loans

Shares holders funds = equity share capital + Preference share capital + Reserves and Surplus + Undistributed profits – fictitious assets

Turnover ratio (activity ratio): Turnover ratio measures the efficiency or effectiveness with which a firm manages with its resources or assets.

Inventory turnover ratio: Inventory turnover ratio is the ratio measures numbers of times on an average stock is sold during the year.

Inventory turn over ratio = Cost of goods sold /Average inventory Cost of goods sold = sales – gross profit

Average inventory = (Opening stock + Closing stock) / 2

Working capital turnover ratio: Working capital turnover ratio is the ratio is express the relation between cost of goods sold and working capital.

Working capital turn over ratio = Cost of goods sold / working capital Working capital = Current assets – Current liabilities Cost of goods sold = sales – gross profit

Liquidity ratio : liquidity ratio measures the short time solvency of the firm.

Current ratio : Current ratio is the ratio is a relationship between current assets and current liabilities.

Current ratio = Current assets / Current liabilities

Quick ratio : Quick ratio is the ratio is the relations between quick assets and current liabilities. Quick ratio = Quick assets / Current liabilities. Quick assets = Current assets – Stock + Loans and Advances 1. Calculate Financial Ratios of HLL using the Balance Sheet & Income Statement INCOME STATEMENT

31-Mar-10(12)31-Mar-09(15)

Profit / Loss A/CRs mnRs mn

Net Sales (OI)175238202393.3

Material Cost67122.385071

Increase Decrease Inventories22690.224235.1

Personnel Expenses936311521.2

Manufacturing Expenses5133.46225.7

Gross Profit70929.175340.3

Administration Selling and Distribution Expenses45444.748780.1 EBITDA25484.426560.2

Depreciation Depletion & Amortization1840.31953

EBIT23644.124607.2

Interest Expense69.8253.2

Other Income3496.45897.2

Pretax Income27070.730251.2

Provision for Tax6043.95244.1

Extra Ordinary & Prior Period Items Net993.5-42.6

Net Profit...

Please join StudyMode to read the full document