Ratio Analysis Model Of Financial Analysis

After above consultation with mentor, I decided to select ratio analysis model for my research project. Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm's financial performance in several key areas. The ratios are categorized as Short-term Solvency Ratios, Debt Management Ratios, Asset Management Ratios, Profitability Ratios, and Market Value Ratios. (Mark A. Lane, 2002 - 2017).
Profitability Analysis:
Profitability ratios are financial metrics used by businesses to measure and evaluate their ability to generate income relative to sales, assets, costs, and equity during a specific period of time. They show how well a company utilizes its assets to produce profit and value to shareholders.

It is a popular tool used for evaluation of operational performance of the company / business entity. The ratio is computed by dividing the gross profit amount by net sales. It can be calculated in terms of percentage as well which is called gross profit margin.
• Net profit (NP) ratio measures the net of tax profit earned against net sales. This ratio indicates that how much portion of the revenue is left to be distributed among the owners of business after all expenses have been accounted for.
• Return on capital employed (ROCE) is a profitability ratio to measures the efficiency of company to generate profits from its capital employed (Total Assets less current liabilities). This is a long-term profitability ratio as it indicates how effectively the assets of entity are utilized to perform while taking long-term liabilities into consideration.
Liquidity

Average payment period is the average amount of time it takes a company to pay off credit accounts payable. (My Accounting Course, 2017).
Solvency Analysis:
Solvency ratio measures the ability of a firm to pay its long term debt against the equity invested. (The Balance, 2017) I used the following ratios to assess the solvency of Engro Foods:
• Debt/equity ratio has been used to measure the relationship between capital contributed by creditors and owners. (Investing Answers, n.d.).
• The interest cover ratio is basically used to assess the relationship between the profits and interest. The ratio is calculated in times. (Investing Answers, n.d.).
Investor Ratios:
Investor ratios are used to measure the ability of the firm to generate returns for the investors. I have used following two commonly used ratios in this project:
• EPS has been used because it is the most important ratio for investors to assess whether company’s earnings are sufficient to generate impressive returns. This ratio is calculated by dividing the profits for ordinary shareholders to number of ordinary