Accounting ratios are relationships expressed in mathematical terms between the figures which are connected with each other in some manner. Obviously‚ no purpose is served by comparing two sets of figures which are not at all connected with each other. Moreover‚ absolute figures are also unfit for comparison. The following are the different classification of ratios: 1. Traditional classification: The traditional classification has been on the basis of the financial statement to which the determinants
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Liquidity Ratio Analysis What It Measures Liquidity ratios are a set of ratios or figures that measure a company’s ability to pay off its short-term debt obligations. This is done by measuring a company’s liquid assets (including those that might easily be converted into cash) against its short-term liabilities. There are a number of different liquidity ratios‚ which each measure slightly different types of assets when calculating the ratio. More conservative measures will exclude assets that
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Financial Ratios: What They MeanIn assessing the significance of various financial data‚ managers often engage in ratio analysis‚ the process of determining and evaluating financial ratios. A financial ratio is a relationship that indicates something about a company’s activities‚ such as the ratio between the company’s current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the company’s financial statements that contain
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RATIO ANALYSIS (ALL VALUES IN Rs. MILLION) 1. GROSS PROFIT MARGIN (%): GROSS PROFIT = NET SALES – COGS = TOTAL REVENUE – (Employee Benefit Expense + Operating and Other Expenses + Finance Costs) = 53107 – (22510+21598+1025) = 7974 GROSS PROFIT MARGIN = (NET SALES – COGS)/NET SALES = (7974/ 53107)*100 = 15.01497% 2. RETURN ON ASSET(RoA) RETURN ON ASSET = (PAT/TOTAL ASSET)*100 = (4606/63454)*100 = 7.258% This indicates that around 7.3% of all assets have been utilized
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Profitability Ratios Profitability ratios measure two aspects of a corporation’s profits: (1) those elements of operations that contribute to profit and (2) the relationship of profit to total investment and investment by stockholders. The first group of profitability ratios [gross profit (or gross margin) percentage‚ operating margin percentage‚ and net profit margin percentage] expresses income statement elements as percentages of net sales. The second group of profitability ratios (return on assets
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Ratio | Industry benchmark ratio | Woolworths’ ratio | Brief Comment | Current Ratio | 1.2:1 | 0.80:1 | The current ratio ofWoolworth is considerablybelow industry average themovement from it is 33.33% (1.2-0.8)/1.2*100) Which is not really good for business | Liquid ratio | 0.7:1 | 0.34:1 | The Liquid ratio of Woolworth is considerably below industry average. The movement is 51.43 %. It is showed that the business may have problem in paying their debt.(0.7-0.34/0.7*100) | Gross Profit ratio
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Ratio and Proportion • If 2 numbers are in ratio a: b then consider them as ax and bx (where x is the proportionality constant) and apply ax and bx in the given condition of the problem to proceed for answer • Ratio can be applied between 2 units if and only if the same physical quantity is compared • Length : length is correct • Length : density is wrong • Ratio can be made only after the units are compared in the same unit • If two lengths are 1 mile and 1 km respectively then ratio
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Financial ratio analysis A reading prepared by Pamela Peterson Drake OUTLINE 1. 2. 3. 4. 5. 1. Introduction Liquidity ratios Profitability ratios and activity ratios Financial leverage ratios Shareholder ratios Introduction As a manager‚ you may want to reward employees based on their performance. How do you know how well they have done? How can you determine what departments or divisions have performed well? As a lender‚ how do decide the borrower will be able to pay back as promised? As a
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Financial Reporting II Review of Ratio Analysis Ratio analysis is a useful tool for analyzing financial statements. Calculating ratios will aid in understanding the company’s strategy and in understanding its strengths and weaknesses relative to other companies and over time. They can sometimes be useful in identifying earnings management and in understanding the effect of accounting choices on the firm’s reported profitability and growth. Finally‚ the ratios help in obtaining a better understanding
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FINANCIAL RATIOS Gross Profit to Sales (Gross Profit Ratio): profitability ratio that shows the relationship between gross profit and total net sales revenue. Gross margin/Net sales The gross margin is not an exact estimate of the company’s pricing strategy but it does give a good indication of financial health. Without an adequate gross margin‚ a company will be unable to pay its operating and other expenses and build for the future. In general‚ a company’s gross profit margin should be stable
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