Accounting 2.pdf

ACCOUNTING ASSIGNMENT II

RONY P RAJAN 17MBA0050 VITBS

1. RATIOS: LIQUIDITY CURRENT RATIO Current ratio is the most widely used ratio. It is the ratio to current asset to current liability. It shows a firm’s ability to cover liabilities with its current assets. CURRENT RATIO= CURRENT ASSET CURRENT LIABILITY Company-A =2.4 Company-B=2.8 For the above analysis both the company have their standard norm of current ratio is 2:1,but company B short term financial position is more strong that of A.

Quick ratio This the ratio of liquid assets to liquid liabilities. It shows a firm’s ability to meet current liabilities with its most liquid assets . 1:1 is the standard norm of this ratio. Quick ratio= liquid assets Current liability Company-A =0.9 Company-B=0.3 For the above analysis both the company have their ratios less than the ideal norms which suggests that the liquidity positions of the company for two the years are not up to the company’s benchmarks.

2. PROFITABILITY RATIOS GROSS PROFIT RATIO: The ratio tells gross margin on trading and is calculated as under: Gross profit ratio = Gross profit/net sales*100 Higher the ratio the better it is. A low ratio indicates unfavourable trend in the form of reduction in selling prices not accompanied by proportionate decrease in cost of goods or increase in cost of production

Company-A =25% Company-B=15% Here the companyA RATIO is better when the ratio is compared with company B.

NET PROFIT RATIO This ratio explains per rupee profit generating capacity of sales. If the cost of sales is lower, then the net profit will be higher and then we divide it with the net sales, the result is the sales efficiency. If lower is the net profit per rupee of sales, lower will be the sales efficiency. Net profit ratio = net profit/net sales*100 Company-A =4% Company-B =4% The higher ratio the better is the profitability or performance of the company.In this case both the profit of the company is not up to the benchmark.

Return on Total Investment Return on total investment is a ratio that measures a company’s earnings before interest and taxes against its total net assets.The ratio is considered to be an indicator of how effectively a company is being using its assets to generate earnings before contractual obligations must be paid. Return on Total Investment=(PBIT/CAPITAL EMPLOYED)*100

Company-A =18% Company-B =8% From the above analysis and return on investment of company A is much higher than company B.Company A is using their assets effectively.

3.SOLVENCY RATIOS Capital gearing ratio Capital gearing ratio is a useful tool to analyze the capital structure of a company and is computed by dividing the common stockholders’ equity by fixed interest or dividend bearing funds. Capital gearing ratio= fixed bearing securities/ Equity share holders funds

Company-A =2.0 Company-B =0.5

4.TURN OVER RATIOS Investment turnover ratio The term investment turnover ratio describes a calculation analysts can use to determine how efficiently a company's debt and equity produces revenues. Higher investment turnover ratios equate to more efficient companies. Investment Turnover Ratio = Revenues / (Stockholders' Equity + Debt) Company-A =4% Company-B =4%

The investment turnover ratio tells the investor-analyst how effectively a company uses its resources to generate revenues.In this case company A & B turn over ratio is less