Studying The Different Types Of Ratio Analysis Finance Essay

Ratio Analysis is a technique used for fiscal analysis in which the figures are converted harmonizing to the ratios allotted for some utile appraisal in comparing with the ratios of the past old ages and puting a bench-mark for the future old ages. This technique is really utile so as to set up the tendencies and convey in visible radiation, the strengths and failings of the house.

The ratio analysis includes ratios that which are made up from the fiscal statements of the house and includes cardinal factors like profitableness ratios, return on capital employed, liquidness ratios, working capital direction ratios and capital construction ratios along with the stock market ratios.

The wellness of any company is clearly seeable in the ratio analysis and gives the translator a clear image when it is compared with the public presentations of old old ages and other similar industry rivals. ( Droms W.G. , 2003 )

RELEVANCE OF RATIO ANALYSIS:

Helps in measuring the house ‘s public presentation:

This technique is extremely good in measuring the fiscal wellness, profitableness and operational efficiency of the house. It ensures that the failings of any house will non travel unnoticed as each and every all right item is mentioned in the statements which will once more be reflected in the ratios found out.

Easiness of comparing within industry rivals:

This technique is indispensable so as to compare the returns of the concerned house with the industry criterions and other leaders of the industry.

Determination of fiscal wellness:

This technique is used by the house so as to cognize about the fiscal wellness of the house in respects with the betterment or impairment. It helps in puting out the way of a company ‘s action as the end product is right out in forepart.

Beneficial for budgeting and prediction:

The technique is used by the house so as to cognize about the fiscal wellness of the house in respects with the betterment or impairment. It helps in puting out the way of a company ‘s action as the end product is right out in forepart.

Long Term Solvency:

This technique is besides widely used for its relevancy in finding the fiscal wellness of the company down the line after few old ages due to assorted ratios like purchase ratios and capital construction ratios.

( Steffy W. , Zearley T. , Strunk J. , 2007 )

Weakness of ratio analysis:

Many large companies operate in different concern sections, therefore it is hard for them to compare against industry norm.

Inflation has played a cardinal function in falsifying the balance sheets as the written value is sometimes non even near to the original value, since the depreciation charges and cost of stock list is well affected by it.

Different accounting patterns being followed in the industry makes it more hard for them to compare with other rivals.

( Brigham E.F. , Houston J.F. , 2007 )

Profitability ratios:

This ratio fundamentally tells the analyst whether the concern is doing net income or is at some loss. It besides lets the direction know whether their scheme has been successful, if any related to the addition of net income border.

Gross Profit ratio: ( Gross profit/sales ) *100 %

For 2008 = ( 62784.73/313923.68 ) *100

= 19.99 %

For 2009 = ( 82404.96/494429.8 ) *100

= 16.66 %

For 2010 = ( 102025.19/682784.01 ) *100

= 14.94 %

Net Net income ratio: ( Net profit/sales ) *100 %

For 2008 = ( 31392.36/313923.68 ) *100

= 9.99 %

For 2009 = ( 43164.5/494429.8 ) *100

= 8.73 %

For 2010 = ( 53454.35/682784.01 ) *100

= 7.83 %

These ratios indicate the capacity of the company to bring forth net income or to command its concern. The house has seen the gross net income ratio and net net income ratio diminution from 2008 to 2010. This has been chiefly due to the fact that the house has seen the gross revenues figure increasing and non so great increase in net income portion in it which might be possible due to the hapless direction of the financess or assets of the company.

Share-holder ‘s ROCE: ( Profit/Shareholder ‘s fund ) *100 %

For 2008 = ( 31392.36/46215.25 ) *100

= 67.92 %

For 2009 = ( 43164.5/92640.79 ) *100

= 46.59 %

For 2010 = ( 53454.35/150838.46 ) *100

= 35.44 %

Overall ROCE: ( Profit/ ( Shareholder ‘s fund + Borrowed Capital ) ) *100 %

For 2008 = ( 31392.36/46215.25 ) *100

= 67.92 %

For 2009 = ( 43164.5/92640.79 ) *100

= 46.59 %

For 2010 = ( 53454.35/ ( 150838.46 + 14822.87 ) ) *100

= 32.26 %

The house has been sing a drastic bead in the return on capital employed. This has happened chiefly due to drop in the increasing rate of net income and immense increases in gross revenues go oning.

Liquidity ratios:

Liquidity imitates any house ‘s ability to run into the short term duties against the assets owned by the company which are readily exchangeable into hard currency. Current assets are mentioned as working capital as this is the capital which is used in twenty-four hours to twenty-four hours outgo of the company.

Current ratio: ( Current assets/ Current liability )

For 2008 = ( 44584.73/11561.84 )

= 3.86

For 2009 = ( 100200.45/21344.94 )

= 4.69

For 2010 = ( 180632.43/29942.21 )

= 6.03

This ratio indicates the capacity of the house to pay off its debts within the clip frame of a twelvemonth with current assets in manus. The industry criterion is considered to be 2:1. In our instance, the company has been sing a crisp addition in this ratio. This has happened due to the fact that the company is maintaining most of the money from the net incomes or gross revenues in Bankss and are non puting it into the concern.

Quick ratio: ( ( Current assets – stocks ) / Current liability )

For 2008 = ( 40879.01/11561.84 )

= 3.53

For 2009 = ( 92789.01/21344.94 )

= 4.35

For 2010 = ( 165809.56/29942.21 )

= 5.54

This ratio emphasizes on the fact that non all assets are easy and immediately exchangeable into hard currency including the likes of stocks. In our house, it has increase a crisp addition in the ratio from 2008 to 2010. This is besides due to the same ground for maintaining most of the hard currency in the bank and non puting it into concern.

Working Capital Management:

This ratio fundamentally emphasizes on how good the assets or services of the company are being utilised. This would estimate a house ‘s capableness to utilize the recognition it receives from the market and in bend receive the investing from the debitors every bit rapidly as possible.

Stock Holding Period: ( Average stocks/cost of gross revenues ) *365

For 2008 = ( 3705.72/251138.95 ) *365

= ~ 6 yearss

For 2009 = ( 7411.44/412024.84 ) *365

= ~ 7 yearss

For 2010 = ( 14822.87/580758.82 ) *365

= ~ 10 yearss

This ratio tells the analyst about the clip frame that the house has to maintain the stocks with them before they are sold into the market. This ratio is increasing from 6 to 10 yearss in the terminal which is non a affair of concern.

Debtors Collection period: ( Debtors/ Total Gross saless ) *365

For 2008 = ( 7411.44/313923.68 ) *365

= ~ 9 yearss

For 2009 = ( 15564.02/494429.8 ) *365

= ~ 12 yearss

For 2010 = ( 35574.9/682784.01 ) *365

= ~ 20 yearss

This ratio tells us the capableness of the house to roll up money from its debitors as non all concern minutess are done in hard currency. Here we see that the clip frame has increased more than double for aggregation which is non a good mark and the company should follow up closely with the clients and set a spot of force per unit area on them in the allowable bound.

Creditor ‘s payment period: ( Creditors/cost of gross revenues ) *365

For 2008 = ( 8300.81/251138.95 ) *365

= ~ 13 yearss

For 2009 = ( 16601.62/412024.84 ) *365

= ~ 15 yearss

For 2010 = ( 24605.97/580758.82 ) *365

= ~ 16 yearss

This ratio tells us the clip frame that the company takes before passing out the payments back to the creditors. The clip frame has been increasing from 2008 to 2010. This is a good mark as this means that the money which is handed out late to the client can assist the house in any investing for that period or to gain involvement on it.

Capital Structure ratios:

Financing of a company is done either by equity or debt. Equity allows the manager ‘s of the company to make up one’s mind at their ain discretional. But, debt funding involves an component of greater hazard and an duty to pay off the investing along with the involvement to the concerned establishment or investor.

Gearing ratio: ( Borrowed Capital/ ( Shareholder ‘s fund + Borrowed capital ) ) *100

For 2010 = ( 14822.87 ( 14822.87 + 150838.46 ) )

= 8.95 %

This ratio is non applicable for 2008 and 2009 as the company was all financed by equity capital and was non utilizing any borrowed capital or long term loan. But, in 2010, the house borrowed capital from the market which is a good mark as it helps the company in cut downing the revenue enhancements as the involvement paid for loan is included after tax write-off of involvement.

Interest screen: ( Net Profit/ Interest )

For 2010 = ( 53454.35/ 1482.29 )

= 36 times

Since the company had no borrowed money in 2008 and 2009, therefore it was non entitled to pay any involvement. But, after borrowing money in 2010, it was clearly seeable that the company had more than adequate financess to cover the involvement to be given to the concerned establishment or investor investment in the house.

Dividend Cover: ( Net Profit/ Dividends )

For 2008 = ( 31392.36/3261.03 )

= 9.62 times

For 2009 = ( 43164.5/4743.32 )

= 9.1 times

For 2010 = ( 53454.35/5336.24 )

= 10.02 times

The company is in a strong place to pay out the dividends to its portion holder ‘s which would farther instil assurance in the investors to put more.

Decision:

After analyzing through the studies of the company and peeking through the ratios, we come to the decision that the company is in despairing demand of proper direction which can take suited actions. These actions include chiefly increasing the pitching ratio of the house which look ‘s really low. This would in-turn solve most of the jobs by salvaging the money from traveling into the revenue enhancement and deviating it as involvement.

Another cardinal suggestion might be to diminish the money in the bank and put it into the company, so that the company can see greater growing rates and an increased chance for the investors every bit good.

The house should besides maintain a close oculus on the debitor ‘s aggregation period ratio as the clip has more than double within 3 old ages which is non a good mark.