# RATIO ANALYSIS of masood textile mills

**Topics:**Financial ratios, Financial ratio, Balance sheet

**Pages:**12 (1385 words)

**Published:**May 23, 2015

RATIO ANALYSIS

Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. In some cases, ratio analysis can predict future bankruptcy. Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used: 1. Liquidity ratios

2. Capital Structure and Solvency

3. Return On Investment

4. Operating Performance

5. Asset Utilization

6. Market Measures

The ratios measure the short term ability of the company to pay its current short-term liabilities. 1. Liquidity Ratio

Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio. i. Current ratio:

The current ratio is the ratio of current assets to current liabilities

The company have decreasing trend in current ratio in 2013 as compared to 2012 due to increase in short term liabilities. ii. Quick ratio or Acid-test ratio:

The current assets used in the quick ratio are cash, accounts receivable, and notes receivable. These assets essentially are current assets less inventory. The quick ratio often is referred to as the acid test. Finally, the cash ratio is the most conservative liquidity ratio. It excludes all current assets except the most liquid: cash and cash equivalents.

The quick ratios of the company decreased in 2013 as compared to 2012 due to increase in stock trade with an unfavorable trend. iii. Collection period:

The average collection period is the number of days, on average, that it takes a company to collect its credit accounts or its accounts receivables. In other words, this financial ratio is the average number of days required to convert receivables into cash. In 2013 company has taken less time than 2012.

iv. Days to sell inventory:

The company’s trend of days to sell inventory has fallen in 2013 as compared to 2012.

2. Capital Structure and Solvency

Financial leverage ratios provide an indication of the long-term solvency of the firm. Unlike liquidity ratios that are concerned with short-term assets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt. i. Total debt to equity:

The debt-to-equity ratio is total debt divided by total equity:

In 2013, debts of MOST have increased than 2012.

ii. Long- term debt to equity:

There is a decline in long-term debts in 2013 as compared to 2012. iii. Times interest earned:

The times interest earned ratio indicates how well the firm's earnings can cover the interest payments on its debt.

In 2013 MOST has done very well for covering the interest payments on its debts. 3. Return on investment

The profitability ratios measure the income and operation success or overall performance of the company for a particular period of time. i. Return on assets:

Return on assets is a measure of how effectively the firm's assets are being used to generate profits.

In 2013 company has a little bit more return on its assets.

ii. Return on common equity:

Return on equity is the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm's stock. As compared to 2012, shareholders wealth increased in 2013.

4. Operating Performance

i. Gross profit margin:

The gross profit margin is a measure of the gross profit earned on sales. Firm has earned more gross profit in 2013 as compared to 2012.

ii. Operating profit margin:

Firm’s operating activities reduced in 2013 as compared to 2012. iii. Net profit margin:

Profitability analysis shows that company...

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