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MA

Unit 4

Analysis and Intepretation of Financial Statements

 

 

Q1) The company's balance sheet for December 31 is as follows:

Liabilities

Rs

Assets

Rs

Share capital

2,00,000

Land and building

1.,40,000

Profit & loss account

30,000

Plant and machinery

3,50,000

General reserve

40,000

Stock

2,00,000

12% debenture

4,20,000

Sundry debtor

1,00,000

Sundry creditor

1,00,000

Bills receivable

10,000

Bills payable

50,000

Cash at bank

40,000

 

8,40,000

 

8,40,000

 

Calculate :-

  • Current ratio
  • Quick ratio
  • Inventory to working capital
  • Debt to equity ratio
  • Proprietary ratio
  • Capital gearing ratio
  • Current assets to fixed assets
  • A1)

  • Current ratio =
  • =2.33:1

    2.     Quick ratio =

    3.     Inventory to working capital =

    working capital= current assets – current liabilities

    Rs 3,50,000 - Rs 1,50,000= Rs 2,00,000

    4.     Debt to equity ratio=

     

    (or)

    5.     Proprietary ratio=

    6.     Capital gearing ratio =

    7.     Current assets to fixed assets =

    Q2) From the following items listed in the trading and profit and loss accounts of the corporation.Working out, business concerns occupancy rate:

    Trading account of a account LTD.

    For the period ending December 21

    Dr.                                                                                                                                               Cr.

    Expenses

    Rs

    Income

    Rs

    To opening stock

    1,400

    By net sales

    10,000

    To purchase

    6,400

    By closing stock.

    600

    To direct expenses

    300

     

     

    To gross profit

    2,500

     

     

     

    10,600

     

    10,600

     

    Profit and loss account of a company LTD.

    For the period ending December 31

    Dr.                                                                                                                                 Cr.

    Expenses

    Rs

    Income

    Rs

    To operating expenses

     

    By gross profit

    2,500

    1. Administrative expenses

    1,600

     

     

    b.    Selling and distribution expenses

    300

     

     

    To financial expenses

    100

     

     

    To net profit

    500

     

     

     

    2,500

     

    2,500

    A2)

    cost of good sold

    Rs

    Opening stock

    1,400

    purchases

    6,400

    Direct expenses

    300

     

    8,100

    Less closing stock

    600

    Cost of good sold

    7,500

    Operating expenses

    Rs

    1. Administrative expenses

    1,600

    b.     Selling and distribution expenses

    300

    c.      Financial expenses

    100

    Operating expenses

    2,000

    Q3) Below is a summary profit and loss account of Taj Products Ltd. Published January 31-4:

    Profit and loss account

     

    Rs

     

    Rs

    Opening stock of market

    99,500

    Sales

    8,50,0000

    Purchase of material

    3,20,000

    Stock of material (closing)

    89,000

    Direct wages

    2,25,000

    Stock of finished goods ( closing )

    60,0000

    Manufacturing expenses

    14,250

    Non- operating income interest

    3,0000

    Selling & distribution

     

    Profit on sale of shares

    6,000

    Expenses

    30,000

     

     

    Administrative expenses

    1,50,000

     

     

    Finance charges

    15,000

     

     

    Non- operating expenses

     

     

     

    Loss on scale of assets

    4,000

     

     

    Net profit

    1,50,000

     

     

     

    10,08,000

     

    10,08,000

    Work out following ratios:-

  • Gross profit ratio
  • Net profit ratio
  • Operating ratio
  • Cost ratios( to cost of production)
  • Material consumed ratio
  • Labour cost ratio
  • Production overhead cost ratio
  • A3)

    Gross sales (a)

     

    8,50,000

    Less: cost of good sold:

    Rs

     

    Opening stock of material

    99,500

     

    Add: material purchased

    3,20,000

     

     

    4,19,500

     

    Less: stock of material (closing)

    89,000

     

    Material consumed ; (b)

    3,30,500

     

    Direct wages

    2,25,000

     

    Manufacturing expenses

    14,250

     

    Cost of production

    5,70,000

     

    Less: closing stock of finished products

    60,000

     

    Cost of good sold

     

     

    Gross profit (e)

     

     

    Less: administrative expenses

    1,50,000

    5,10,000

    selling and distribution

    30,000

    1,80,000

    Net operating profit before interest and taxation

     

    1,60,000

    Add: non- operating income (g)

     

     

    Interest

    3,000

     

    Profit on sales of shares

    6,000

    9,000

     

     

    1,69,000

    Less: loss on sale of assets

    4,000

     

    Finance charges

    15,000

    19,000

    Income before taxation

     

    1,50,000

     

  • Gross profit ratio=
  • 2.     Net profit ratio=

    3.    

    4.     i. material consumed ratio=

  • productive overheard ratio=
  • Q4) You need to calculate from the following balance sheet and additional information:

    (i)Total Return on resources

    (ii)Return on employment capital

    (iii) Shareholder fund return

     

     

    Balance sheet as on 31stdec

     

    Rs

     

    Rs

    Share capital (Rs10)

    8,00,000

    Fixed assets

    10,00,000

    Reserve

    2,00,000

    Current assets

    3,60,000

    8% debenture

    2,00,000

     

     

    Creditors

    1,60,000

     

     

     

    13,60,000

     

    13,60,000

    Net operating profit before tax is Rs 2,80,000. Assume tax rate at 50% . dividend declared amount to Rs 1,20,000

    A4)

  • return on total resources =
  • ii.                 return on capital employed =

    iii.               return on shareholder’s fund=

     

    Q5) The company has Rs capital. 10, 00,000; its turnover is 3 times the capital, and the margin of turnover is 6%. What is the return on investment?  

    Solution :-

    Capital turnover ratio=

    rate of return on investment =

    Gross profit =6% of Rs 30,00,000

    Rs= 1,80,000

    Q6) From the following income statement,prepare a general size income statement for Jayant Ltd which ended 31st March, 2011.

    Particular

    Amount

    revenue from operations

    25,38,000

    (+) other income

        38,000

    Total income

    25,76,000

    Expenses

     

    Cost of revenue from operations

    14,00,000

    Operating expenses

     5, 00,000

    Total expenses

    19,00,000

    profit before tax

    6,76,000

    (-) income tax

    3,38,000

    profit after tax

     

     

    A6)

    Common size statement of profit and loss

    for the year ended 31st March, 2011

    Particular

     Amt

    Amt

    1. Revenue from operation (sales)

    25,38,000

    100.00

    II.                 Other income

         38,000

           1.50

    III.               Total revenue (I+II)

    25, 76, 000

    101.50

    IV.              Expenses

     

     

    (a). cost of revenue from operations.

    (b). operations expenses

    14,00,000

    5,00,000

    55.16

    19.70

    Total expenses

    19,00,000

    74.86

    V.                Profit before tax (III-IV)

    6,76,000

    26.64

    VI.              Tax

    3,38,000

    13.32

    VII.           Profit after tax ( V-VI)

    3,38,000

    13.32

     

     

    Q7) Below is Raj Ltd's income statement for the year ended 31st March, 2011.

    Particular

    Amount

    Revenue from operations

    2,00,000

    (+) other income

         15,000

    Total income

    2,15,000

    Expenses

     

    Cost of revenue from operations .

    1,10,000

    Operating expenses

           5,000

    Total expenses

    1,15000

    Profit before tax

    1,00,000

    (-) income tax

        40,000

    profit after tax

    60,000

     

    Preparing a statement of the general size of Raj Ltd's profit and loss for the year ended 31st March, 2011.(Delhi 2012, fix)

    A7)

    Common size income statement

    For the year ended 31st march, 2011

    Particular

    Amt.

    Percentage of sales

    1. Revenue from operations (sales)

    2,00,000

    100.00

    II.                 Other income

      15,000

     7.50

    III.               Total revenue (I+II)

    2,15,000

    107.50

    IV.              Expenses

    (a)  Cost of revenue from operations

    (b) Operating expenses

     

    1,10,000

          5,000

     

    55.00

    2.50

    Total expenses

    1,15,000

    57.50

    V.                profit before tax ( III-IV)

    1,00,,000

    50.00

    VI.              Tax

           40,000

    20.00

    VII.           Profit after tax (V-VI)

    60,000

    30.00

     

     

    Q8) Create a comparative statement of profit and loss from the following information.

    Particular

    31st march, 2009

    31st march 2010

    Revenue from operations

    40,000

    50,000

    Cost of revenue from operations

    30,000

    35,000

    Wage paid

    16,000

    14,000

    Operating expenses

       2,500

    3,000

    Other income

    2,000

    3,000

    Income tax

    4,750

    7,500

     

    A8)

    Comparative statement of profit and loss

    For the year ended 31stmarch , 2009 and 2010

    Particular

    31st march 2009

    31st march 2010

    Absolute change ( increase or decrease)

    Percentage  change ( increase or decrease )(%)

    1. Revenue from operations (sales)

    40,000

    50,000

    10,000

    25.00

    II.                 Other income

    2,000

    3,000

    1,000

    50.00

    III.               Total revenue (I+II)

    42,000

    53,000

    11,000

    26.19

    IV.              Expenses

    (a)  Cost of revenue from operations.

    (b) Operating expenses

    Total expenses

     

    30,000

    2,500

    32,500

     

    35,000

    3,000

    38,000

     

    5,000

    500

    5,500

     

    16.67

    20.00

    16.92

    V.                Profit before tax ( III-IV)

    9,500

    15,000

    5,500

    57.89

    VI.              Tax

    4,750

    7,500

    2,750

    57.89

    VII.           Profit after tax (V-VI)

    4,750

    7,500

    2,750

    57.89

     

    Note the paid wages are part of the direct costs and are included in the cost of goods already sold.

     

    Q9) Create a comparative statement of profit and loss from the following information.

    Particular

    2009

    2010

    Revenue from operations

    10,00,000

    12,50,000

    Cost of revenue from operations

    5,00,000

    6,50,000

    Carriage inwards

    30,000

    50,000

    Operating expenses

    50,000

    60,000

    Income tax

    50%

    50%

     

    A9)

    Comparative statement of profit and loss

    For the year ended 31st march, 2009 and 2010

    Particulars

    31st march 2009

    31st march 2010

    Absolute change(increases or decreases)

    Percentage change (increase or decrease)

    1. Revenue from operational (sales)

    10,00000

    12,50,000

    2,50,000

    25.0

    II.                 Other income

    -

    -

    -

    -

    III.               Total revenue (I+II)

    10,00000

    12,50,000

    2,50,000

    25.0

    IV.              Expenses

    (a)  Cost of revenue from operations

    (b) Operating expenses

    Total expense

     

    5,00,000

    50,000

    5,50,0000

     

    6,50,000

    60,000

    7,10,000

     

    1,50,000

    10,000

    1,60,000

     

    30.00

    20.00

    29.09

    V.                Profit before tax ( III-IV)

    4,50,000

    5,40,000

    90,000

    20.00

    VI.              Tax @ 50%

    2,25,000

    2,70,000

    45,000

    20.00

    VII.           Profit and tax (V-VI)

    2,25,000

     

    2,70,000

    45,000

    20.00

     

    Note: inward carriage is part of the direct cost and is included in the cost of goods already sold.

     

    Q10) Use the following information to create a comparative statement of profit and loss.

    Particular

    31st march, 2008

    31st march, 2009

    Revenue from operations

    2,00,000

    3,50,000

    Purchase

    1,00,000

    2,00,000

    Cost of revenue

    60% of revenue from operations

    70% of revenue from operations

    Administrative expenses

    5% on gross profit

    7% on gross profit

    Income tax

    45%

    45%

     

    A10)

    Comparative statement of profit and loss

    For the year ended 31st march, 2008 and 2009

    Particular

    31st march 2008

    31st march 2009

    Absolute change

    Percentage change

    1. Revenue from operational sales

    2,00,000

    3,50,000

    1,50,000

    75.00

    II.                 Other income

    -

    -

    -

    -

    III.               Total revenue (I+II)

    2,00,000

    3,50,000

    1,50,000

    75.00

    IV.              Expense

    1. Cost of revenue from operations.
    2. Administrative expenses
    3. Total expense

     

    1,20,000

    4,000

    1,24,000

     

    2,45,000

    7,350

    2,52,000

     

    1,25,000

    3,350

    1,28,350

     

    104.17

    83.75

    103.51

    V.                Profit before tax (III-IV)

    76,000

    97,650

    21,650

    28.49

    VI.              Tax @45%

    34,200

    43,943

    9,743

    28.49

    VII.           Profit after tax

    41,800

    53,707

    11,970

    28.49

     

     

    Note purchases are not indicated individually, as they are part of the cost of the goods sold.

    Working note

     

    2008

    2009

    Revenue from operational (sales)

    2,00,000

    3,50,000

    (-) cost of revenue from operations

    1,20,000

    2,45,000

    Gross profit

    80,000

    1,05,000

    administrative expenses

    5% on gross profit i.e 4,000

    7% on gross profit i.e 7,350

     

     

    Q11) Create a comparative income statement for profit and loss from the following information

    Particular

    31stmarch , 2008

    31st , march 2009

    revenue from operations

    3,00,000

    4,00,000

    Sales return

    1,00,000

    2,00,000

    Cost of revenue from operations

    60% of revenue operations

    50% of revenue from operations

    Administrative expense

    20% gross profit

    10% on gross profit

    Income tax

    40%

    40%

     

    A11)

    Comparative statement of profit and loss

    For the year ended 31st march, 2008 and 2009

    Particular

    31st march 2008

    31st march 2009

    Absolute change (increase or decrease)

    Percentage change( increase or decrease)

    1. Revenue from operations ( sales)

    2,00,000

    2,00,000

    -

    -

    II.                 Other income

    -

    -

    -

    -

    III.               Total revenue ( I+II)

    2,00,000

    2,00,000

    -

    -

    IV.              Expenses

    1. Cost of revenue from operations
    2. Administrative expenses

    Total expense

     

     

    1,20,000

    16,000

    1,36,000

     

     

    1,00,000

    10,000

    1,10,000

     

     

    (20,000)

    (6,000)

    (26,000)

     

     

    (16.67)

    (37.50)

    (19.12)

    V.                Profit before tax ( III-IV)

    64,000

    90,000

    26,000

    40.63

    VI.              Tax @40%

    25,600

    36,000

    10,400

    40.63

    VII.           Profit after tax (V-VI)

    38,400

    54,000

    15,600

    40.63

    Working note

     

    2008

    2009

    Revenue from operations

    3,00,000

    4,00,000

    (-) sales return

    1,00,000

    2,00,000

    Revenue from operations

    2,00,000

    2,00,000

    (-) cost of revenue from operations

    1,20,000

    1,00,000

    Gross profit

    80,000

    1,00,000

    Administrative expenses

    20% on gross profit i.e 16,000

    10% on gross profit i.e 10,000

     

     

    Q12) Create a comparative statement of profit and loss from the following

    Particular

    31st march 2008

    31st march , 2009

    Revenue from operations

    140% of cost of revenue from operations

    160% of cost of revenue from operations

    Purchases

    2,50,000

    4,50,000

    Cost of revenue from operations

    3,00,000

    5,00,000

    Administrative expenses

    10% of cost of revenue from operations

    8% of cost of revenue from operations

    Income tax

    40%

    50%

     

    A12)

    Comparative statement of profit and loss

    For the year ended 31st march, 2008 and 2009

    Particular

    31st march 2008

    31st march 2009

    Absolute change

    Percentage change

    1. Revenue from operations (sales)

    4,20,000

    8,00,000

    3,80,000

    90.48

    II.                 Other income

    -

    -

    -

    -

    III.               Total revenue (I+II)

    4,20,000

    8,00,000

    3,80,000

    90.48

    IV.              Expenses

    1. Cost of revenue from operations
    2. Administrative expenses

    Total expenses

     

     

    3,00,000

    30,000

    3,30,000

     

     

    5,00,000

    40,000

    5,40,000

     

     

    2,00,000

    10,000

    2,10,000

     

     

    66.67

    33.33

    63.64

    V.                Profit before tax ( III-IV)

    90,000

    2,60,000

    1,70,000

    188.89

    VI.              Tax @ 40% and 50%

    36,000

    1,30,000

    94,000

    261.11

    VII.           Profit after tax (V-VI)

    54,000

    1,30,000

    76,000

    140.74

     

    Note purchases are not indicated individually, as they are part of the cost of the goods sold.

     

    Q13) Create a comparative statement of profit and loss from the following

    Particular

    31st march, 2008

    31st march, 2009

    Revenue from operations

    140% of cost of revenue from operations

    150% of cost of revenue from operations

    Purchases

    1,50,000

    2,50,000

    Cost of revenue from operations

    2,00,000

    3,00,000

    Operating expenses

    10,000

    15,000

    Income tax

    40%

    40%

     

    A13)

    Particular

    31st march 2008

    31st march 2009

    Absolute change

    Percentage change

    1. Revenue from operations (sales)

    2,80,000

    4,50,000

    1,70,000

    60.71

    II.                 Other income

    -

    -

    -

    -

    III.               Total revenue (I+II)

    2,80,000

    4,50,000

    1,70,000

    60.71

    IV.              Expenses

    c.      Cost of revenue from operations

    d.     Administrative expenses

    Total expenses

     

     

    2,00,000

    10,000

    2,10,000

     

     

    3,00,000

    15,000

    3,15,000

     

     

    1,00,000

    5,000

    1,05,000

     

     

    50.00

    50.00

    50.00

    V.                Profit before tax ( III-IV)

    70,000

    1,35,000

    65,000

    92.86

    VI.              Tax @ 40% and 50%

    28,000

    54,000

    26,000

    92.86

    VII.           Profit after tax (V-VI)

    42,000

    81,000

    39,000

    92.86

     

     

    Note the purchase is part of the cost of the goods sold and therefore does not appear separately.

     

    Q14)  Explain Analysis and interpretation of Financial Statements.

    A14)

    What are financial statements?

    The term financial statement refers to a statement of change in financial condition, statement of retained earnings, balance sheet, income statement, and so on. But in general, financial statements contain only two statements; they are profit and loss accounts and balance sheets. It is observed that the mere presentation of these statements does not serve anyone's purpose anyway. The importance of these statements lies in their analysis and interpretation. Initially, the analysis was carried out only to extend credit, but now it is used as the most important function of management accountants to provideinformation.

    Hampton J.J. "A statement disclosing the status of an investment is known as a balance sheet and a statement indicating the result is known as a profit and loss account, “the statement said.

    Some of the schedules are prepared and submitted alongside financial statements for meaningful presentation. Such a schedule is based on the schedule of fixed assets, the schedule of debtors, the schedule of creditors, the schedule of investments.

    Meaning of analysis

    Analysis means the process of splitting or splitting the content of financial statements into many parts to obtain maximum meaningful information.

    Meaning of interpretation

     Explaining the meaning and significance of the rearrangement and/or modified data of the financial statements is called Interpretation

    F.Wood:Putting the meaning of a press release in simple words for the advantage of a person is called "Interpretation

    Procedures for analysis and interpretation

    In order to conduct an effective analysis and interpretation of financial statements, it is necessary to complete the following basics:

  • The purpose of the financial table analysis is the basis for the selection of analytical techniques. Therefore, the organization must determine the purpose of the financial table analysis.
  •  The scope of interpretation also decided to choose the right type of technique of analysis of financial statements.
  • Financial statements are prepared on the basis of certain assumptions, principles and practices that are confirmed to understand their importance.’
  • Additional information necessary for the work of interpretation should be properly collected.5. The collected data should be presented in logical order by rearrangement of the data.
  •  To analyse and interpret the collected facts, we take into account the general market situation and the economic situation
  •  The interpreted data and information must be presented in the appropriate reporting format.
  • Purpose of analysis and interpretation

    Many stakeholders of financial statements are analysed and interpreted according to their various purposes. Despite the variability of the purposes of analysis and interpretation by different classes of people, there are several common purposes of interpretation, which are given below.

    1. To find out the income capacity and efficiency of various business activities with the help of the income statement.

    2. Measure management efficiency under different business situations.

    3. Estimate the performance ratings of different departments over a period of time.

    4. With the help of the balance sheet, measure the short-and long-term solvency position of the business organization.

    5. To find out the source of Finance and how to utilize available finance.

    6. To determine the future prospects of earnings capacity and business concerns.

    7. Identify the role of fixed assets in maintaining revenue capacity for how they are utilized and business concerns.

    8. Investigate the future potential of business concerns.

    9. Compare the operational efficiency of similar concerns engaged in the same industry.

    10. Identify the growth trend of the business organization.

    The importance of analysis and interpretation

    All quantitative information i.e. financial accounting information is comprehensively analysed and interpreted so that important facts and relationships regarding various aspects of financial life of business concerns are known to everyone. Thus, various factors increase the importance of analysing and interpreting financial statements.

    1. Wrong and incomplete decisions are taken by the management team in the absence of analysis and interpretation.

    2. Sometimes, decisions are also taken by various responsible executives in haste.

    3. Everyone has limited experience in business activities. Therefore, the complexity of business activities can be easily understood through analysis and interpretation.

    4. If a decision is made based on intuition or conclusions, then the decision has no meaning, and no one understands the decision. In other words, if the decision is based on scientific analysis and interpretation, then everyone understands the decision very easily.

    5. Analysis and interpretation are necessary to verify and consider the correctness and correctness of selections already made on the idea of intuition.

     

    Q15) Explain ratio analysis.

    A15)

    Ratio analysis is used to evaluate relationships among financial statement items. It is used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency.

    Ratio analysis is concerned with the calculation of relationship to provide indicators of past performance in terms of critical success factors of a business. This is an accounting ratio. The accounting ratio offer quick ways to evaluate a business's financial condition.

    According to Accounting Scholar, ratios are the most frequently used accounting formulas in regard to business analysis. Analyzing your finances with these ratios helps you identify trends and other data that inform important business decisions.

    Different types of accounting ratio

  • Liquidity ratios
  • These ratios are used to evaluate the company ability in  paying its debts, usually by measuring current liabilities and liquid assets. This determines the ability of the company to pay off short-term debts. These are some common liquidity ratios:

  • Current Ratio = Current Assets/Current Liabilities:
  • It is also known as working capital ratio. The purpose of this ratio is to measure the company ability to pay off short-term debts by liquidating the assets. Current assets includes stock, debtors, cash and bank balances, bills receivable, etc. current liabilities includes creditors, bank overdrafts, outstanding expenses, etc. The ideal ratio is considered to be 2:1

     

  • Quick Ratio = Quick Assets/Current Liabilities:
  • This ratio is similar to the current ratio above, except that to measure "quick" assets, which includes Cash + Cash Equivalents + Short Term Investments + Accounts Receivables. The ideal ratio is 1:1.

     

  • Net Working Capital Ratio = (Current Assets - Current Liabilities)/Total Assets:
  • By calculating the net working capital ratio, the company is calculating the liquidity of the assets. An increasing net working capital ratio indicates that the business is investing more in liquid assets than fixed assets.

     

  • Cash Ratio = Cash/Current Liabilities:
  • This ratio tells the ability of business in covering its debts using only cash.

     

  • Cash Coverage Ratio = (Earnings Before Interest and Taxes + Depreciation)/Interest:
  • The cash coverage ratio is similar to the cash ratio, but it calculates the business ability to pay interest on its debts.

     

  • Operating Cash Flow Ratio = Operating Cash Flow /Current Liabilities: This ratio tells you how your current liabilities are covered by cash flow.
  • 2.     Profitability ratios

    This ratio is used by accountant to measure a business's earnings versus its expenses. Profitability is the ability of a business to earn profit over a period of time. The profitability ratios show the combined effects of liquidity, asset management and debt management on operating results. These are some common profitability ratios:

  • Gross profit margin = (Gross Profit/Net Sales)*100
  • This ratio determines the basic profitability of the firm. The ratio is represented as a percentage of sales. Higher the ratio, the higher is the profit earned on sales

     

  • Operating profit margin = (Operating Profit/Net Sales)*100
  • This ratio measures the equation between the cost of operating activities and the net sales, or revenue from operations. This ratio expresses the cost of goods sold as a percentage of the net sales. Lower the ratio, lower the expense related to the sales

     

  • Net profit margin = (Net Profit/Net Sales)*100
  • This ratio measures the ultimate profitability. Higher the ratio, the more profitable are the sales.

     

  • Return on Assets = Net Income/Average Total Assets:
  • The return on assets ratio indicates how much profit businesses make compared to their assets. Higher the return, the more efficient is the management in utilizing its asset base

     

  • Return on Equity = Net Income/Average Stockholder Equity:
  • It measures how much the shareholders earned for their investment in the company. Higher percentage indicates better return to investors.

     

  • Return on capital employes = profit before income and tax/capital employes:
  • This ratio measures the overall efficiency of the utilization of the firm’s funds. It indicates the productivity of capital employed.

     

  • Earnings Per Share = Net Income/Number of Common Shares Outstanding:
  • The earnings-per-share ratio is similar to the return-on-equity ratio, except that this ratio indicates the company profitability from the outstanding shares at the end of a given period.

     

    3.     Leverage ratios

    A leverage ratio is a important indicator of financial strength, it sees how much of the company's capital comes from debt and how the company can meet its financial obligations.

     

  • Debt-to-Equity Ratio = Total Debt/Total Equity:
  • This ratio compares the company’s total debt to its total assets. The higher the debt ratio the more difficult it becomes for the firm to raise debt.

     

  • Equity ratio = (Ordinary Shareholder’s Interest / Total assets)*100:
  • This ratio measures the strength of the financial structure of the company. A high equity ratio reflects a strong financial structure of the company.

     

  • Capitalization ratio = Long-Term Debt/(Long-Term Debt + Total Equity):
  • This ratio measures the debt component of a company’s capital structure. A low level of debt and a healthy proportion of equity in a company’s capital structure is an indication of financial strength.

     

    4.     Turnover ratios

    Turnover ratios are used to measure the company's income against its assets. There are many different types of turnover ratios. Here are some common turnover ratios: 

     

  • Inventory Turnover Ratio = Costs of Goods Sold/Average Inventories: The inventory turnover rate indicates how much inventory  sold in a year or other specified period.
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  • Assets Turnover Ratio = Sales/Average Total Assets: This ratio is a good indicator of how good the company uses its assets to produce revenue.
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  • Accounts Receivable Turnover Ratio = Sales/Average Accounts Receivable: this ratio evaluates how quickly the company is able to collect funds from its customers.
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  • Accounts Payable Turnover Ratio = Total Supplier Purchases/(Beginning Accounts Payable + Ending Accounts Payable)/2): This ratio measures the speed at which a company pays its suppliers.
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    5.     Market value ratios

    Market value ratios deal entirely with stocks and shares. Many investors use these ratios to determine if your stocks are overpriced or underpriced. These are a couple of common market value ratios:

  • Price-to-Earnings Ratio = Price Per Share/Earnings Per Share. Investors use the price-to-earnings ratio to see how many times a stock is trading (its price) per each rupee of EPS
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  • Market-to-Book Ratio = Market Value Per Share/Book Value Per Share. This ratio compares your company's historic accounting value to the value set by the stock market.
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