Examining the advantages of ratio analysis

The term “ ratios ” is usage to explicate relationship linking figures on a balance sheet, in net income and loss history, budgetary control system or any other portion of accounting organisation. Accounting ratios as a consequence shows the relationship between fiscal informations.

The analysis is really of import function in mensurating the public presentation of the concern. These ratios are carried out from the Income statement and balance sheet. Several parties including direction, investors and Government are involved in these ratios. The map of analysis is to mensurate the public presentation of the company and fiscal wellness of the organisation.

Advantages

Ratio is an of import function and old technique of the fiscal analysis. There are the undermentioned advantages

Simplify the fiscal statements:

It is simplifies the construct of fiscal statements. Ratio Lashkar-e-Taiba cognize the complete narrative of altering in the fiscal state of affairs of the concern

Facilitate inter-firm comparing:

It is supplying informations for inter the house estimation. Ratios highlight the factors of related with successful and unsuccessful house. They have besides told strong houses and weak houses, overrated and undervalue houses.

Helps in planning:

It is help in planning and prediction. Ratio can be support direction in it basic map of calculating for planning, forming, commanding and communicating.

Brands inter-firm comparing possible:

Analysiss can besides the possible relationship to the public presentation varied division of the house. Ratio is helpful in decide about their efficiency or else in the past and apt public presentation in the hereafter.

Restrictions of Ratios Analysis

The ratio analysis is the tools of fiscal direction. Ratios are easy to cipher and easy to understand, they bear from serious restrictions.

Ratio is based merely the information which have been recorded in the statements. Fiscal statements are capable to several restrictions. These ratio derived, there from, are besides capable to individuals restrictions.

Comparative survey required:

Ratios are utile in judging the efficiency of the concern merely when they are compared with past consequences of the concern. However, such a comparing merely supply glance of the past public presentation and prognosiss for hereafter may non turn out right since several other factors like market conditions, direction policies, etc. may impact the future operations.

Ratios entirely are non equal. Ratios are lone indexs ; they can non be taken as concluding sing good or bad fiscal place of the concern. Other things have besides to be seen.

Problems of monetary value degree alterations: A alteration in monetary value degree can impact the cogency of ratios are calculated for different clip periods. In such a instance the ratio analysis may non clearly indicate the tendency in solvency and profitableness of the company. The fiscal statements, hence, be adjusted maintaining in position the monetary value degree alterations if a meaningful comparing is to be made through accounting ratios.

Lack of equal criterion: No fixed criterion can be laid down for ideal ratios. There are no good recognized criterions or regulation of pollex for all ratios which can be accepted as norm. It renders reading of the ratios hard.

Limited usage of individual ratios: A individual ratio, normally, does non convey much of a sense. To do a better reading, a figure of ratios have to be calculated which is likely to confound the analyst than aid him in doing any good determination. Personal prejudice: Ratios are merely agencies of fiscal analysis and non an terminal in itself.

Ratios have to construe and different people may construe the same ratio in different manner. Incomparable: Not merely industries differ in their nature, but besides the houses of the similar concern widely differ in their size and accounting processs etc. It makes comparing of ratios hard and deceptive.

Current ratio

Current Ratio is an index of the capableness of the houses to pay their current liability by change overing current assets. It is besides known as “ liquidness ratio ” or “ hard currency plus ratio ” and besides the “ hard currency ratio. It is calculated by spliting current assets with current liabilities.

High figures mean that fabric Millss have the capacity to pay its current liability. Acceptable figures vary, depending upon the type of business.A Generally, more than one is acceptable. Smaller value shows that company has non plenty current assets to dispatch its current liabilities.

The current ratio of one agency shows that the current assets are equal to current liabilities. Less than one means that company has more current liabilities and less current assets, which is a mark of concern in some instances.

We have compiled the current ratio of Nisht fabric Millss of Pakistan and found the mean of current ratio is more than 1.00 in three old ages in 2005 to 2007 but in 2008 and 2009 current ratio mean is less so 1 It is dismaying that the Nishat Mill has more hazardous in 2008 and 2009. However, Kohinoor factory besides found the mean of ratio is more so 1 in 2005 to 2008 but in 2009 downward tendency 0.75 in 2009.A Current ratio of Gull Ahmed shows downward tendency 1.05 in 2005 and 0.9 in 2008, in 2009 shows some betterment.05 as comparison to 2008.Fazal and fakes besides decrease tendency 1.14, 1.49 in 2005 and 0.82, 0.73 in 2009

.

Ratio table depicts that there is no betterment in 2009 and if it continues, there is a chance that in approaching twelvemonth ‘s state of affairs of the fabric factory will non be improve. However, mells can look into their place by comparing with the norm of the other fabric factory. For illustration, this tabular array shows that 25 % Millss have current ratio more than 1.00. It reflects that there are certain Millss which have more current assets than current liabilities.A

Current Ratio= Current assets

A A A A A A A A A A A A A A A A A A A A A A A A A A A Current liabilities

Fabric Millss

Old ages

2005

2006

2007

2008

2009

Nishat Mill

1.24

1.38

1.74

0.73

0.86

Kohinoor Mill

1.02

1.02

1.07

1.06

0.75

Gul Ahmed Mill

1.05

1

0.95

0.9

0.95

Fazal Mill

1.14

1.17

1.03

1.1

0.82

Shams Mill

1.49

0.92

1.06

0.84

0.73

Tax return on assets

Tax return on Assetss ( ROA ) is an index which tells about the efficiency of house in utilizing the assets. It is calculated by spliting the one-year earning of the company with entire assets, shown as per centum.

Tax return on assets =A Net gaining Ten 100

A A A A A A A A A A A A A A A A A A A A A Total assets

Fabric Millss

Old ages

2005

2006

2007

2008

2009

Nishat Mill

8.51 %

3.05 %

4.25 %

14.54 %

4.02 %

Kohinoor Mill

1 %

2.62 %

-0.27 %

-0.02 %

-3.72 %

Gul Ahmed Mill

1.73 %

-0.77 %

3.62 %

1.96 %

1.37 %

Fazal Mill

0.02 %

0.03 %

-0.01 %

0 %

0.01 %

Shams Mill

6.38 %

2.47 %

10.06 %

-2.33 %

-5.09 %

This ratio is besides an index of money earned by a fabric Millss against each dollar invested. There is an understood fluctuation in the figure, since it is extremely related to capital investing. Textile Millss are capital intensive sectors and these figures should be compared with another capital intensive sector. Ratio tabular array shows that mean of the return on plus is Nishat fabric factory -8.5 in 2005 and -4.02 % , in 2009 which is rather alarming. And the other Kohinoor fabric Millss is the retorn on plus 1.00 in 2005 and -3.72 lessening in 2009.

Gross net income border

Net income maximization is one of the nucleus maps of commercial houses. Gross net income is a difference of net sale and COGS. It shows how good the operation is bring forthing gross.

Gross net income border =Gross net income Ten 100

A A A A A A A A A A A A A A A A A A A A Net sale

Fabric Millss

Old ages

2005

2006

2007

2008

2009

Nishat Mill

18.77 %

17.76 %

16.56 %

14.35 %

18.23 %

Kohinoor Mill

14.26 %

14.8 %

14.64 %

15.36 %

14.89 %

Gul Ahmed Mill

16.39 %

15.64 %

14.98 %

15.14 %

16.81 %

Fazal Mill

9.88 %

8.66 %

5.35 %

5.72 %

7.82 %

Shams Mill

13.42 %

9.56 %

5.09 %

5.63 %

5.08 %

Ratio tabular array shows that Nishat fabric Millss of Pakistan could hold merely 18.77 % and 18.23 % gross net income border in 2005 and 2009 severally. Although Nishat fabric factory earned loss, the per centum was excessively little, and net incomes earned were minimum. However, bulk of the Millss did non describe any loss in operations.

Ratio tabular array shows that Kohinoor fabric Millss of Pakistan could hold merely 14.26 % and 14.89 % gross net income border in 2005 and 2009 severally. Although Kohinoor fabric factory earned net income, the per centum was excessively little they will be earned a net income is mini Dendranthema grandifloruom in 2009. The gross net income ratio is show in the gul ahmed textile Millss of Pakistan is the rat6io of 16.39 % in 2005 and they will be a net income is minimal in 16.81 % in 2009 and they earned a net income is to short in the fiscal twelvemonth 2009 could hold minimal gross net income in 2005 to 2009. Then the other to Millss of Fazal and Shams is the ratio of gross net income is in 9.88 % , 13.42 % in 2005and they will be a loss in 2009. In 2009 is the ratio of Millss is7.82 % , 5.08 % is a loss in an operation and they will be really edicts in 2009

Operating net income border

Operating Net income Margin ( OPM ) is besides called operating border, runing income border or return on gross revenues ( ROS ) . It is calculated by spliting operating net income with net sale normally presented in per centum. It shows the efficiency of the house in bring forthing net incomes from its operations. Difference between gross net income and operating net income provides information about the complete caput disbursals in entire cost.

Operating net income border = Operating net income Ten 100

A A A A A A A A A A A A A A A A A A A A A A A A A A A A Net sale

Fabric Millss

Old ages

2005

2006

2007

2008

2009

Nishat Mill

17.58 %

12.1 %

12.03 %

36.08 %

12.6 %

Kohinoor Mill

6.83 %

11.63 %

8.06 %

13.4 %

8.55 %

Gul Ahmed Mill

6.63 %

7.27 %

7.56 %

7.98 %

8.69 %

Fazal Mill

7.28 %

6.19 %

3.41 %

3.94 %

5.99 %

Shams Mill

9.65 %

6.47 %

1.96 %

1.16 %

0.2 %

Operating net income ratio of Nishat millis 17.58 % in 2005and edicts 12.03 % in 2007 so the Ratio is really higher in 36.08 % in 2008 and they will be profit border but in 2009 the ratio is non stable in 2009 and they will be really low ( edicts ) in 12.6 % in 2009. It show the tabular array has besides be a net income is really low which equal in 2008/ depicts that 25 % houses have -3 % loss, nevertheless, more than 50 % houses have Positive. However the Kohinoor factory is runing net income is 6.83 % in 2005 they will be increase in the 11.63 % in 2006.then 2007 is the net income is edicts in 8.06 % is really low which comer5 to 2006. And 13.4 % in addition the net income ratio in which combination of 2007.kohinoor factory in 2009 is to short a loss in 8.55 % , which is campier in 2008 is really high the ratio. , ktml Millss of Pakistan have earned the net income in 2008 and bear the loss in 2009 fiscal period.

Gull ahmed fabric factory Ratio 6.63 % in 2005, and they will be increase twelvemonth by twelvemonth in lower limit and the net income in 8.69 % in 2009.the operating net income and net sale is h higher than the 2005 period twelvemonth. Fazal and Shams fabric Millss are the 7.28 % , 9.65 % in 2005 the operating net income is decrees by the 5.99 % , 0.2 % is really low in the combination of twelvemonth 2005

Net Net income Margin

.

Net Net income Margin=A Net Profit X 100

A A A A A A A A A A A A A A A A A A Net sale

Fabric Millss

Old ages

2005

2006

2007

2008

2009

Nishat Mill

16.41 %

9.8 %

7.05 %

29.9 %

5.31 %

Kohinoor Mill

1.89 %

4.32 %

-0.56 %

-0.05 %

-5.2 %

Gul Ahmed Mill

1.29 %

-0.42 %

1.67 %

0.88 %

0.58 %

Fazal Mill

2.48 %

2.39 %

-0.9 %

0.41 %

0.89 %

Shams Mill

7.2 %

2.66 %

8.64 %

-1.75 %

-3.09 %

In 2005, Nishat fabric Millss of Pakistan reported 16.41 % and in 2009 operating net income border became 5.31 % .that ratio is to the bear loss in for the period of fiscal twelvemonth.

Tax return on equity

Equity is the money invested by the stockholders for net income. This ratio indicates the house ‘s ability to gain against the investing. It is besides called return on mean common equity, return on net worth, and return on ordinary stockholders ‘ financess.

Tax return on Equity=A Net Income after revenue enhancement A X 100

A A A A A A A A A A A A A A A A A A A A A A Net equityA

Fabric Millss

Old ages

2005

2006

2007

2008

2009

Nishat Mill

14.58 %

7.92 %

5.58 %

22.11 %

6.55 %

Kohinoor Mill

2.33 %

6.33 %

-0.66 %

-0.09 %

-15.33 %

Gul Ahmed Mill

3.4 %

-1.51 %

6.62 %

3.79 %

2.73 %

Fazal Mill

0.06 %

0.07 %

-0.03 %

0.01 %

0.03 %

Shams Mill

19.6 %

7.69 %

27.86 %

-6.99 %

-19.5 %

Nishat fabric Millss of Pakistan have merely 14.58 % ROE in 2005 than will be edicts in 7.92 % , 5.58 % in 2006 and 2007 other 22.11 % in 2008 the equity ratio is increase in 2008 and 6.55 % edicts in 2009. Kohinoor factory is the equity of 2.33 % in 2005 and increase in the portion holders equity 6.33 % in 2006 but following twelvemonth is portion holder equity is less than 1.00 financess of -.66 % , -.09 % , -15.33 % ins edicts in 2007 to 2009. Company founds is really low in last twelvemonth. Ktm factory is equity 2.33 % in 2005 and increase in 6.33 % 2006 but the ROE is less 1.00 of portion holder equity -0.66 % , -0.09 % , -15.33 % in decrees the portion holder equity in 2007 to 2009.

Gul ahmed fabric factory ROE is 3.4 % in 2005 and edicts in portion holder equity -1.51 % in 2006. And 6.62 % addition the equity of 2007 but 3.79 % , 2.73 % edicts in 2008 to 2009. Fazal factory ROE is.06 % , .07 % in 2005 to 2006 but edicts in equity -0.03 % in 2007. Fazal mill addition in 0.01 % , 0.03 % 2008 and 2009 the equity ratio is growing the portion holder financess. Shams factory is the ROE 19.6 % in 2005 but 2006 growing of ROE is decrees 7.69 % and the following twelvemonth in 2007 equity is more high addition in 27.86 % for higher than the old twelvemonth. 2008 and 2009 ratio of equity is less than 1 per centum in -6.99 % -19.5 % is net income of portion holder equity. This tells us that net loss of the houses will take them to a serious place and this place may non let them to last and finally there are more opportunities that many houses will be belly-up

Gaining per portion

Gaining per Share ( EPS ) is an index of the steadfast public presentation. It depends upon the profitableness of the houses. It is calculated after shuting the old twelvemonth ‘s books.

It is the part of the house ‘s net income which is allocated to each outstanding portion of investors. In other words, it is a valid and dependable tool to mensurate the profitableness of the companies. It is calculated as:

EPS=A Net income-dividends on preferable stocks X 100

A A A A A Average outstanding portions

Fabric Millss

Old ages

2005

2006

2007

2008

2009

Nishat Mill

12.86 %

10.22 %

7.58 %

36.86 %

6.81 %

Kohinoor Mill

0.92 %

2.82 %

-0.32 %

-0.02 %

-3.02 %

Gul Ahmed Mill

1.53 %

-0.68 %

3.11 %

1.86 %

1.45 %

Fazal Mill

6.61 %

7.86 %

-3.31 %

1.62 %

4.09 %

Shams Mill

8.12 %

4.76 %

21.83 %

-4.69 %

-9.65 %

EPS is considered as the individual most important variable in finding a portion ‘s monetary value in stock exchange. This variable besides tells price-to-earnings rating ratio. The tabular array tells about the EPS state of affairs of Nishat fabric factory of Pakistan. It is obvious that in 2005, the average value of EPS is 12.86 % , whereas, it has diminution to 10.22 % in 2006, about they will be less than the old twelvemonth 2006 and 2007 value of EPS is more lessening in 2007 of 7.58 % than the other manus 2008 is value of portion is increase four times greater than old old ages 36.86 % . is much higher in 2007the ratio of EPS. And will be net income on the portion holder in 2008. EPS 6.81 % in 2009 they will be decrease by the old twelvemonth. The portion holder net income is minim. Kohinoor textile the monetary value in stock exchange 0.92 % in 2005 and greater than the 2.82 % in 2006. Other wise the company portion monetary value is decrease in-0.32 in 2007 and company repute was really hapless. EPS was -0.02, -3.02 cut down by the 2008 and 2009. The company net income is under the old twelvemonth.

Gul ahmed factory in Pakistan earring per portion in 2005 was 1.53 % and -.68 % in 2006 was the portion monetary value is under the 2005but 2007 the company was work done decently in 3.11 % to increase earring monetary value. 2008 and 2009 EPS is decrease in 1.86 % , 1.45 % which comparison to 2007. Fazal fabric factory is dependable net income in 6.61 % for the period of 2005. The company was most important variable in finding a portion monetary value stock exchange. The monetary value is gaining in 7.86 % 2006. The house net income which allocate by portion monetary value. The company public presentation is better so the old twelvemonth. 2007 company performs non the work and they will be a lessening in portion monetary value -3.31 % in 2007.share monetary value will be increase in 1.62 % 4.09 % of 2008 and 2009 the public presentation of the company is better period of 2009.

Shams mill Pakistan It is the part of the house ‘s net income which is allocated to each outstanding portion of investors. Other words, it is a valid and dependable tool to mensurate the profitableness of the companies. The company portion monetary value in 8.12 % in 2005 and the company execute the work and net income allocate the outstanding of portion of investor in 21.83 % step the profitableness in 2007 but in 2008 the Fazal factory is decrease the portion monetary value -4.69 % -9.65 % in 2008 and 2009. Company are taken the loss in the twelvemonth. They will non accomplish the mark of step the net income but did the company to run the loss.

Debit ratio

Debt ratio is one the cardinal ratios used to find the fiscal wellness of the houses. It tells that what is the degree of entire liabilities and assets of the houses.

Debit ratio= Total liabilities X 100

A A A A A A A Total assets

Fabric Millss

Old ages

2005

2006

2007

2008

2009

Nishat Mill

48.83 %

3.33 %

31.45 %

52.03 %

63 %

Kohinoor Mill

132.05 %

140.89 %

119.23 %

171.08 %

312.05 %

Gul Ahmed Mill

0.93 %

1.06 %

0.85 %

1.07 %

0.98 %

Fazal Mill

1.38 %

1.51 %

1.57 %

2.23 %

1.56 %

Shams Mill

0.4 %

1.04 %

1.92 %

2.39 %

3.1 %

Nishat fabric factory of Pakistan have 48.83 % debt ratio in 2005 and 3.33 % in 2006 severally.it means that the liabilities are more than the plus. Debt ratio 31.45 % in 2007 that the company is the asst is more than the liabilities. The ratio is 52.03 % , 63.00 % and the debt ratio is increase by the 2008 and 2009 the fiscal of house wellness in entire asst and entire liabilities. Kohinoor fabric factory 132.05 % debt ratio in 2005 and 2006 is the debt ratio 140.89 % will be increase the liability. 2007 debt ratio is decrease in 119.23 % and the plus are addition and the liabilities are decrease but in 2008 the company public presentation is better ratio is 171.08 % . And is higher the net income of Kohinoor factory company fiscal wealth in the degree of plus and liabilities are increase by the 312.05 % in 2009 and company public presentation is good better in 2009.

Gul ahmed fabric factory have 0.93 % debt ratio in 2005 and 2006 which is 1.06 % severally it means that liabilities are under the plus and the plus addition in 2006but in 2007 to 2009 is in the ratio of 0.85 % , 0.98 % which was the liabilities are addition in the ratio. Fazal fabric factory 1.38 % , 1.51 % , 1.57 % and 2.23 % in 2005 to 2008 and liabilities are decrease twelvemonth by twelvemonth, otherwise 2008 are plus and liabilities are addition factory wealth is strong but in 2009 ratio is 1.56 % which compares by 2008 ratio is decrease in 2009. Shams factory have 0.4 % debt ratio in 2005 and ratio rise by 3.1 % in 2009. Mill execute the work is so good ratio has declined which means that whit the transition of clip the difference between liabilities and plus is increasing.

Entire plus turnover

Entire Asset Turnover ( TAT ) is a ratio that deals with net gross revenues and entire assets. This ratio measures how good a house is utilizing its assets to bring forth gross.

Entire plus turnover ( TAT ) = Net gross revenues

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A Average entire assets

Fabric Millss

Old ages

2005

2006

2007

2008

2009

Nishat Mill

48.83

3.33

31.45

52.03

63

Kohinoor Mill

132.05

140.89

119.23

171.08

312.05

Gul Ahmed Mill

0.93

1.06

0.85

1.07

0.98

Fazal Mill

1.38

1.51

1.57

2.23

1.56

Shams Mill

0.4

1.04

1.92

2.39

3.1

Nishat fabric factory Table shows that in entire plus turnover, asst turnover mean the values 48.83 in2005 and 2006 is 3.33.both figures tells about the industries generate gross is non equal to the entire plus. In 2007 to 2009 entire plus turnover value of 31.45, 63.00 is generate the gross means to be the entire plus. Kohinoor fabric factory 132.05 entire plus turnover values in 2005 and 140.89 plus turnover value addition in 2006 but 2007 value of the plus turnover will be lessening. 2008 in the plus value of 171.08 which is greater than the old. In 2009 the entire plus turnover is increase 312.05 in the twelvemonth. The house utilizing and bring forth the gross of net sale.

Gul ahmed fabric factory entire plus turnover 0.93 in 2005 and generate gross of net sale divided by norm of entire plus but 2006 plus turnover is increase in1.06 that twelvemonth. 2007 to 2009 fabric factory was bring forthing the gross in entire plus 0.85, 0.98 is increasing which equal to2007. Fazal fabric factory is entire plus of turnover value 1.38, 1.51, 1.57 in three twelvemonth value addition by usually of Millss plus in 2005 to 2007. But 2008 was bring forthing the gross of entire plus turnover 2.23 which is greater than the old twelvemonth. And 2009 ratio 1.56 is under 2008.

Shams fabric factory 0.4 in 2005 entire plus turnover Total Asset Turnover ( TAT ) is a ratio is increase by the decently in four twelvemonth 1.04, 1.92, 2.39,3.1 the plus generate that deals with net gross revenues and entire assets for 2006 to 2009. This ratio measures how good a house is utilizing its assets to bring forth gross in the 2009

Fixed plus turnover

Fabric Millss have to put in fixed assets to bring forth gross. It may be in form of land, machinery etc. Ratio of fixed and capital assets depends upon the type of industry.

Fixed Asset Turnover ( FAT ) =A A A Net salesA A A A A A X 100

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A Average fixed assets

Fabric Millss

Old ages

2005

2006

2007

2008

2009

Nishat Mill

0.88 %

0.77 %

0.73 %

0.68 %

0.87 %

Kohinoor Mill

0.83 %

0.17 %

0.82 %

0.85 %

1.17 %

Gul Ahmed Mill

1.46 %

1.85 %

2.08 %

2 % %

2.28 %

Fazal Mill

1.52 %

1.61 %

1.29 %

1.06 %

Shams Mill

1.91 %

1.83 %

2 %

2.25 %

2.84 %

Nish at fabric factory in Pakistan demand for more fixed plus. Table show that in 2005 this ratio is 0.88 % , whereas, in 2006 it was 0.77 % . It show that the fabric factory as a whole generates less gross by utilizing fixed plus in 2006 as compared to old twelvemonth. Is that ratio in 2007 to 2009 was 0.73 % , 0.68 % , 0.87 % . nishat fabric factory as a whole generates less gross by utilizing fixed plus in 2007 to 2009 which compared to old twelvemonth. The factory was earned the growing in the 2009 and they will set up better work in 2009. Kohinoor fabric factory for fixed plus in 2005 and ratio is 0.83 % . They will be a gross lessening in 0.17 % in 2006. Ktm is fixed plus turnover is higher in the old twelvemonth. The ratio addition in 2007 to 2009 fixed plus ratio is 0.82 % , 1.17 % in the generate gross in earned by the twelvemonth 2009.

Gul ahmed fabric factory demand for more fixed plus tabular array that show in 2005 ratio is 1.46 % whereas, in 2009 it was 2.28 % ratio was show in the tabular array. That ratio is increase in annual footing and the fixed plus turns over would be higher in old twelvemonth. Fazal factory was the fixed plus ratio in 2006 is 1.52 % and 2007 was 1.61 % they will be additions the plus but in 2008 the ratio will diminish 1.29 % and more lessening in 2009 in ratio 1.06 % . Entire plus turnover was in diminution the plus for fazal factory. Shams fabric factory demand for more fixed plus tabular array that show in 2005 ratio is 1.19 % whereas, in 2009 it was 2.84 % ratio was show in the tabular array. That ratio is increase in annual footing and the fixed plus turns over would be higher in old twelvemonth.