Ratio Analysis

• ANALYTICAL REVIEW POPULARLY KNOWN AS RATIO ANALYSIS IS STUDY OF STATISTICS. • IT IS CAN BE DONE ONLY WITH THE REFERENCE TO OTHER VARIABLE WHICH ALREADY EXISTS. • IT TAKES A VARIOUS BASES FOR COMPARISON.

DEFINATION Analytical review is the study of significant ratios, trends and statistics. ratio analysis is the systematic use of ratios for interpretation of financial statements in regard to operating results and financial position of a business.

VARIOUS BASES • TREND ANALYSIS • INTER FIRM COMPARISON • INDUSTRY ANALYSIS • STANDARD ANALYSIS • GROUP ANALYSIS

TREND ANALYSIS This analysis is made on the basis of performance of the past years compared with performance of current year. This exactly shows in which direction the performance of the organization is going. It deflects with the change in ratio in preceding years.

INTER FIRM COMPARISON This comparison is made on the basis of ratio between two or more firms carrying on the same business. It shows the financial position & performance of business of a individual firm. This type of comparison is generally seen in the competitive market. Only same type of business can be compared.

INDUSTRY ANALYSIS In this type of analysis ratios of a firm with the relating industry is being made. This gives the personal standing of a firm in an organization. This analysis is generally made by outsiders to know the efficiency of a individual firm with the industry. Such a firm gets a better scope in the industry.

STANDARD ANALYSIS In this type of analysis there is a standard already set by the firm itself. This kind of analysis is effective in the case of a going concern business. It may not hold good with a new comer of the market. This may also lay down the enthusiasm of new comers of the market.

GROUP ANALYSIS This type of analysis is different from other analysis we have studied earlier. Here a group of ratios is studied together to form an opinion regarding a particular activity like profit, solvency, etc.

SIGNIFICANCE It is the significant tool of financial analysis. This makes the user to draw a relevant information from the comparisons. This kind of analysis gives a consumer (particularly share holders) a great deal of work done for them in guiding them to invest their money. As a financial tool it provides financial analysis using various methods.

FINANCIAL ANALYSIS METHODS   

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SHORT TERM SOLVENCY ANALYSIS LONG TERM SOLVENCY ANALYSIS OPERATING EFFICIENCY AND PERFORMANCE TREND INFORMATION

INTER FIRM COMPARISON

SHORT TERM ANALYSIS This type of analysis shows the liquidity of a firm. If a firm has capacity to meet short term solvency then it is considered that it's liquid position is satisfactory. This kind of ratios are generally used by bankers, creditors, suppliers, investors (for a public ltd. Co.)

LONG TERM ANALYSIS This kind of ratios are calculated for long term basis i.e.5 yrs or more. This kind of ratios are generally taken by long term creditors, securities, etc. Even the owners of the firm are interested with such ratios by which they can expand or get sufficient loans from debt market.

OPERATING EFFICIENCY This kind of ratios are calculated to know the consistent performance of firm. Most of the interested people in this ratios are the experts of firm, investors of firm, outsiders, etc. This shows the proper utilisation of assets of business. Even management is interested in such ratios to attract more number of people.

TREND INFORMATION Ratio analysis helps the users to know the trend information which is either favorable or not. This reveals the financial position of the firm. Thus many of the users and new comers can get the required information. It also helps the management to take decision whether to continue with the business or not.

INTER FIRM COMPARISON This ratios are calculated for interpretation of working efficiency of each firm. It not only provides the position of the firm but also provides position of competitors. This also provides the firm an idea to take various steps to overcome it’s difficulties over other competitors.

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when ratios are compared with standard it gives meaningful information. But it is difficult to set standard for ratios. different accounting periods of each firm could also be a major problem in finding ratio analysis In industry analysis it is difficult to find the average of such a big country.

4. Ratio analysis also depends on the accounting methods used by the various firms in the industry. 5. Ratio analysis is not made on taking considerations like inflation, price level changes, deflation, etc. 6. Ratios of preceding years cannot predict the work of firm in current or coming years. 7. Ratio without preceding years ratio is of no use.

USES TO AUDITING As a Auditor it is important for him to get a ratio analysis to suggest his client to whether to continue with business or not. As a Auditor it is also important for him to check returns on investment, net profit, stocks, debtors, fixed assets, creditors, debt-equity, etc. Auditor calculates this ratios to find the firm’s position as per the balance sheet.