Ratio Analysis

RATIO ANALYSIS • - IT IS THE MOST IMPORTANT AND FREQUENTLY USED TOOL FOR EVALUATION. -RATIO IS A RELATIVE NUMBER, WHERE ONE NUMBER IS EXPRESSED IN RELATION TO ANOTHER NUMBER. - THIS RELATIONSHIP BETWEEN THE TWO VARIABLES LENDS ITSELF TO SOME INTERPRETATIONS

TYPES OF RATIOES • - CAPITAL STRUCTURE / LEVERAGE RATIO. • - LIQUIDITY RATIOES • -PROFITABILITY RATIOES • -ACTIVITY/EFFICIENCY RATIOES • -OTHERS.

CAPITAL STRUCTURE RATIOES • 1- DEBT-EQUITY RATIO • =DEBENTURES+LONG TERM DEBTS DIVIDED BY SHAREHOLDER’S FUNDS - ALSO SHOWS MARGIN OF SAFTY AND LONG TERM SOLVENCY 2- COVERAGE RATIO =EBIT DIVIDED BY INTEREST

LIQUIDITY RATIOES • 1- CURRENT RATIO =CA DIVIDED BY CL -GAP SHOWS THE SAFETY MARGIN -GENERAL NORM IS 2:1. -SHOULD BE BLINDLY ADOPTED. 2- ACID TEST/QUICK RATIO =CA –INV DIVIDED BY CL

PROFITABILITY RATIOES • 1- GROSS PROFIT RATIO =GROSS PROFIT *100 DIVIDED BY NETSALES -SHOWS GROSS MARGIN 2- NET PROFIT RATIO =NET PROFIT *100 DIVIDED BY NET SALES -MOST IMPORTANT FOR SHAREHOLDERS 3- RETURN ON INVESTMENT –ROI

ROI • 1- RETURN ON ASSETS = NAT DIVIDED BY FA+CA 2- RETURN ON CAPITAL EMPLOYED = NAT DIVIDED BY FA+NET WC 3- RETURN ON EQUITY = NAT DIVIDED BY EQITY+RES. - OTHER TERMS USED ARE EPS, P/E RATIO,P/BV RATIO.

ACTIVITY RATIOES • -ALSO CALLED EFFICIENCY RATIOES 1- OPERATING RATIO =OPERATING REVENUE DIVIDED BY OPERATING EXPENSES -USED BY AIRLINES AND SEVICE INDUSTRIES. 2- TURNOVER RATIOES SEVERAL TYPES

CONTNUED….. • 1-INVENTORY TURNOVER RATIO =COST OF GOODS SOLD DIVIDED BY AVERAGE INVENTORY. - IN AVIATION IND. IT IS INVENTORY AS RATIO TO FLEET COST. 2- DEBTOR TURNOVER RATIO =CREDIT SALES DIVIDED BY SUNDRY DEBTORS+BR 3 – CAPITALTURNOVER RATIO =COST OF GOODS SOLD DIVIDED BY AVERAGE CAPITAL EMPLOYED

CAUTIOUS APPLICATION • THOUGH IMPORTANT,BUT MAY NOT BE CONCLUSIVE BECAUSE OF SOME LIMITATIONS, SUCH AS: - IGNORES INFLATION -VARIATIONS IN PRACTRICES. -CONCEPTUAL DIVERSITY -SITUATIONAL VARIATIONS