Financial Analysis Of Financial Ratio

a. Financial Ratio
Ratio is a method to of analysing an organisation`s financial statements. Financial statements provide the investor with details about an organisation`s expense and income, capital, assets, liabilities etc but it does not provide a comparative picture of the organisation`s financial health at a glance. It is a powerful tool for analysing strength and weakness of the company`s. It helps in evaluating the organisation performance. To analyse the financial position of the company the Balance sheet ratio to be used. Such Current ratio, Liquid ratio, Debt Equity ratio, Proprietory ratio.
Current ratio tells us about the current assets and current liabilities of the company. The current ratio of 2:1 or higher is considered

The quick assets is also referred as acid test ratio.

Liquid ratio = Cash in hand + Cash at bank + Receivables + Marketable Securities ______________________________________________________ Current liabilities

Debt Equity ratio is used to compare the organisation`s total debt against its total equity. It tells us about the relationship between external-internal equity ratio. For example, if the debt-equity is 50%, it implies that half of the organisation`s assets are financed using debt and other half are financed using equity. The debt equity ratio measures the ratio of long term or total debt to shareholder`s equity.

Debt Equity Ratio= Long – term debt __________________

Shareholders equity

Proprietary Ratio also called as capital ratio or net worth to total assets ratio. This ratio is used to establish the relationship between shareholder`s fund and total assets of an organisation. It also indicates the proportion of total assets financed by the owners of a

ROE = Net Income / Shareholder`s Equity

• Return on Assets : measures profitability of an organisations is relative to its total assets.
ROA = Net Income / Total Assets

• Activity Ratio : Also called operating or management ratio are used to measure an organisation efficiency to use its assets such as inventories, account receivable, working capital and fixed assets.
Average Collection period = 365 / Average receivable turnover ratio

• Investor turnover Ratio : Ratio of cost of goods sold by the organisation to its average inventory during a given accounting period.
Inventory Turnover Ratio : Cost of goods sold / Average Inventory

• Debtors Turnover Ratio: It measures the ratio number of times average debtors turned during a financial year.
Debtors Turnover ratio: Net credit sales / Average Accounts receivable

• Creditors Turnover Ratio: It is the ratio between net credit purchase and the average amount of creditors outstanding during a financial year.
Creditor Turnover Ratio = Net Credit Purchase / Average Accounts