Premium Essay

Submitted By 1steps

Words 12924

Pages 52

Words 12924

Pages 52

OBJECTIVE:

To understand the information contained in financial statements with a view to know the strength or weaknesses of the firm and to make forecast about the future prospects of the firm and thereby enabling the financial analyst to take different decisions regarding the operations of the firm.

RATIO ANALYSIS:

Fundamental Analysis has a very broad scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future.

MEANING OF RATIO:

A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the other related figure. Thus a ratio is an expression relating one number to another. It is simply the quotient of two numbers. It can be expressed as a fraction or as a decimal or as a pure ratio or in absolute figures as “ so many times”. As accounting ratio is an expression relating two figures or accounts or two sets of account heads or group contain in the financial statements.

MEANING OF RATIO ANALYSIS:

Ratio analysis is the method or process by which the relationship of items or...

Premium Essay

...Gearing Ratio: The ratio measures the level of indebtedness of the company against the company’s equity.PG is highly geared having slided by 37% to 79% in year 2012 compared to 42% in year 2011. Debenture holders finance 79% of the company’s equity leaving the shareholders with only 21%. The implications of high gearing at Mazuru Company is that it is increasing the cost of borrowing ( Finance charges) thereby affecting profitability. If the trend continues and the company fails to pay up the debt, the debenture holders may end up taking over the ownership of the company. Return on Investment: The ratio measures the capacity of the investment to generate profit. The company has been making net losses since 2011 of $1,2 million and $0,9 Million in 2012 hence there was no return on shareholders’ investment. There is a threat of that the company may fail to continue to operating as a going concern if the trend continues. Liquidity Ratio: This ratio measures the entity’s ability to cover its current liabilities from available current assets. A current ratio of 1:1 is considered fair. MC has liquidity challenges as its current liabilities exceed its current assets .The situation has not improved since year 2011 (0:0.58) to current year under review -2012 (0:0.48) Of the total current liability, only 48% can be covered and the rest will not be paid. The company is unable to pay its short-term obligations and may fail to procure trading stock .The......

Words: 271 - Pages: 2

Premium Essay

...[pic] ANALYSIS OF FINANCIAL STATEMENTS OF HOTEL LEELA VENTURES TABLE OF CONTENTS :: 1) INTRODUCTION TO HOTEL INDUSTRY 2) PROFILE OF HOTEL LEELA VENTURES LTD. 3) OBJECTIVE OF ANALYSIS AND METHODOLOGY 4) FINANCIAL ANALYSIS USING RATIO ANALYSIS 5) INTERPRETATIONS OF THE RATIOS 6) RECOMMENDATIONS 7) REFERENCES INTRODUCTION TO HOTEL INDUSTRY Over the last decade and half the mad rush to India for business opportunities has intensified and elevated room rates and occupancy levels in India. Even budget hotels are charging USD 250 per day. The successful growth story of 'Hotel Industry in India' seconds only to China in Asia Pacific. 'Hotels in India' have supply of 110,000 rooms. According to the tourism ministry, 4.4 million tourists visited India last year and at current trend, demand will soar to 10 million in 2010 – to accommodate 350 million domestic travelers. 'Hotels in India' has a shortage of 150,000 rooms fueling hotel room rates across India. With tremendous pull of opportunity, India is a destination for hotel chains looking for growth. The World Travel and Tourism Council, India, data says, India ranks 18th in business travel and will be among the top 5 in this decade. Sources estimate, demand is going to exceed supply by at least 100% over the next 2 years. Five-star hotels in metro cities allot same room, more than once a day to different guests, receiving......

Words: 20390 - Pages: 82

Premium Essay

...A Summary of Key Financial Ratios How They Are Calculated and What They Show Profitability Ratios 1. Gross profit margin Sales - Cost of goods sold Sales An indication of the total margin available to cover operating expenses and yield a profit. 2. Operating profit margin (or Return on Sales) Profits before taxes and interest Sales An indication of the firm's profitability from current operations without regard to the interest charges accruing from the capital structure 3. Net profit margin (or net Return on sales) Profits after taxes Sales Shows after tax profits per dollar of sales. Subpar profit margins indicate that the firm's sales prices are relatively low or that costs are relatively high, or both. 4. Return on total Assets Profits after taxes Total assets or Profits after taxes + interest Total assets A measure of the return on total investment the enterprise. It is sometimes desirable to add interest to after tax profits to form the numerator of the ratio since total assets are financed by creditors as well as by stockholders; hence, it is accurate to measure the productivity of assets by the returns provided to both classes of investors. 5. Return on stockholder's equity (or return on net worth) Profits after taxes Total stockholders' equity A measure of the rate of return on stockholders' investment in the enterprise. 6. Return on common equity (Profits after taxes -Preferred stock dividends) (Total stockholders" equity - Par value of preferred......

Words: 913 - Pages: 4

Premium Essay

...Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return Gross margin, Gross profit margin or Gross Profit Rate[7][8] [pic] OR [pic] Operating margin, Operating Income Margin, Operating profit margin or Return on sales (ROS)[8][9] [pic] Note: Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.[10] This is true if the firm has no non-operating income. (Earnings before interest and taxes / Sales[11][12]) Profit margin, net margin or net profit margin[13] [pic] Return on equity (ROE)[13] [pic] Return on investment (ROI ratio or Du Pont Ratio)[6] [pic] Return on assets (ROA)[14] [pic] Return on assets Du Pont (ROA Du Pont)[15] [pic] Return on Equity Du Pont (ROE Du Pont) [pic] Return on net assets (RONA) [pic] Return on capital (ROC) [pic] Risk adjusted return on capital (RAROC) [pic] OR [pic] Return on capital employed (ROCE) [pic] Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity Cash flow return on investment (CFROI) [pic] Efficiency ratio [pic] Net gearing [pic] Basic Earnings Power Ratio[16] ......

Words: 587 - Pages: 3

Premium Essay

...The Use of Ratio Analysis Ratio analysis is a tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis to judge the performance of the company. Analyzing ratios is used to evaluate a company's present performance and its possible future performance. In a fact, interpretation of different accounting ratio lets the researcher fully understand the financial condition and performance of a business concern. Ratio itself is the comparison of one figure to another relevant figure. (http://www.investopedia.com/terms/r/ratioanalysis.asp) There are many ratios that you can use to analyze the financial health of a business. In this paper I will discuss four financial performance areas that I think are worth analyzing: Liquidity, profitability, solvency, and efficiency. I will discuss the strengths and weaknesses of using these ratios. First of all, Liquidity is the ability of the firm to convert assets into cash. It is also called marketability or short-term solvency. The liquidity of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors. Several financial ratios measure the......

Words: 798 - Pages: 4

Premium Essay

...Ratios and Formulas in Customer Financial Analysis Financial statement analysis is a judgmental process. One of the primary objectives is identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. The judgment process can be improved by experience and the use of analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the analysis of relationships between two or more line items on the financial statement. Financial ratios are usually expressed in percentage or times. Generally, financial ratios are calculated for the purpose of evaluating aspects of a company's operations and fall into the following categories: * liquidity ratios measure a firm's ability to meet its current obligations. * profitability ratios measure management's ability to control expenses and to earn a return on the resources committed to the business. * leverage ratios measure the degree of protection of suppliers of long-term funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time. * efficiency, activity or turnover ratios provide information about management's ability to control expenses and to earn a return on the resources committed to the business. A ratio can be computed from any pair of numbers. Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be......

Words: 2431 - Pages: 10

Premium Essay

...Oracle Microsoft Notes: Comparison between the two companies' ratios Earning per share As given in the income statement $1.69 $2.73 Cannot compare due to a different amount of shares outstanding. Current ratio Current assets $39,174 = 2.76 $74,918.00 = 2.60 Current liabilities $14,192 $28,774.00 Gross Profit Ratio Gross profit amount $442 = 1.2% $1,637 = 2.3% Microsoft Sales (13940) - cost of revenue (15,577) Net Sales $35,622 $69,943 "Oracles Sales(24,031) -Operating Expenses (23,589) " Profit margin ratio Net income $8,457 = 23.7% $23,150 = 33.1% Profit ratio Net Sales $35,622 $69,943 Inventory Turnover Cost of goods sold $442 = 1.6 $1,637 1.6 Oracle 303+259/2 Average Inventory $281 $1,056 Microsoft 1372+740/2 Days in Inventory 365 days 365 = 232 365 = 235 Inventory turnover 1.6 days 1.6 days Receivable Turnover Ratio Net credit sales $6,579 = 0.99 $13,940 = 0.93 Average Net Receivables $6,628 $14,987 Average Collection Period 365 365 = 72 days 365 = 74 days Receivable Turnover Ratio 0.99 0.93 Assets Turnover Ratio Net Sales $6,579 = 0.10 $13,940 = 0.14 Average Total Assets $67,556 $97,408 Microsoft 108,704+ 86,113 /2 Oracle $ 73,535 + ...

Words: 459 - Pages: 2

Premium Essay

...Ratio Analysis Memo Principles of Accounting II ACC/291 Ratio Analysis Memo For the first ratio of solvency debt to total assets one must take the total debt Kroger owns 20,440.7 and divide it by the total assets 24,651.5. Once this is done Kroger has a debt to total assets ratio of .83, which means that 83% of Kroger's assets are financed by creditors. This is a not a good debt to assets ratio because Kroger only owns 17% of its assets out right. Kroger has a high debt to asset ratio which can be negative, but could also be less expensive then obtaining funds with equity. Carrying a high debt to assets ratio comes with risk, because the company must pay on its obligations or risk creditors seizing assets. Companies with low debt to assets ratios tend to have many shareholders that they must share profits with. The key to running a quality company is balancing that with assets to build a balanced financial backing planned for future acquisitions. Kroger's times interest earned calculation is done by taking the net income 1,496.5 plus interest expense -462 plus tax expense 793.8 which gives 1827.8 for a total. Then after this calculation is done one must divide it by the interest expense 462 which gives 3.9 for a times interest earned. The times interest earned ratio shows Kroger's ability to pay interest payments on loans when they come due. Kroger's 3.9 times interest earned ratio shows that Kroger can pay its interest 3.9 times with its income. This high number helps...

Words: 328 - Pages: 2

Premium Essay

...A Report on Ratio Analysis of BRAC Bank 1.0 Introduction 1.1 Origin of the Report To be an efficient business executive, a student of business study must have practical knowledge about the financial activities of any business organization. Financial Management (FIN 301) course is giving the theoretical knowledge of financial management activities but only theoretical knowledge cannot make students efficient. Ms. Nasreen Sultana, course instructor for this course gave an assignment on 28 November, to write a business report on ratio analysis of BRAC bank as a part of the study of this course. 1.2 Purpose of the Report Purpose of the report is to know financial performance of BRAC bank. This report will help to gather knowledge about financial performance of the bank and the improvement and decline in performance compared to the previous year. 1.3 Scope of the Report This report has been prepared only covering financial area of the bank with giving emphasize on ratio analysis taking data from annual report of the bank. 1.4 Methodology: For preparing this report, information has been mainly collected from the annual report of the BRAC bank and the bank's website. The various ratio analysis are used in the report, which were collected from the annual reports, and financial statements and the ratios that are not found in the annual report directly are calculated from the information provided in the annual reports. Ten ratios have been selected to judge the......

Words: 2709 - Pages: 11

Premium Essay

... | |Working Capital is more a measure of cash flow than a ratio. The result of this calculation must be a positive number. It is calculated | |as shown below: | |Working Capital = Total Current Assets - Total Current Liabilities | |Bankers look at Net Working Capital over time to determine a company's ability to weather financial crises. Loans are often tied to | |minimum working capital requirements. | |Accounting Ratios and its utility | |A relationship between various accounting figures, which are connected with each other, expressed in mathematical terms, is called | |accounting ratios. | |According to Kennedy and Macmillan, "The relationship of one item to another expressed in simple mathematical form is known as ratio." | |Robert Anthony defines a ratio as – "simply one number expressed in terms of another." | |Accounting ratios are very useful as they briefly summarise the result of......

Words: 3169 - Pages: 13

Premium Essay

...|FINAL PROJECT RATIOS | LIQUIDITY AND ACTIVIY Current Ratio measures the ability of a firm to pay its short-term debts. The formula is: |Current Ratio |= |Current Assets | | | |Current Liabilities | Quick (Acid-Test) Ratio measures the immediate ability of a firm to pay its short-term debts. The formula is: |Current Ratio |= |Cash + Marketable Securities + Current Receivables | | | |Current Liabilities | Accruals ratio measures the amount of accounts receivables to cover the accounts payable. The formula is: |Accruals Ratio |= |Accounts Receivables | | | |Accounts Payables | Cash Flow Yield measures ability to generate operating cash flows in relation to NI (the most important liquidity ratio). The formula is: |Cash Flow Yield |= |Net cash provided by | | ...

Words: 1226 - Pages: 5

Premium Essay

...financial ratios can be beneficial in helping a company regain its financial standing while pointing out its strengths and weaknesses. These ratios offer a summarized analysis of a company’s financial progress in its respective industry. There are a number of financial ratios that can be used to help measure a company’s progress, such as current ratio, debt ratio, profit margin, and return on assets. Riordan Manufacturing and Kudler Fine Foods are two businesses that appear to be doing well. Still, comparing the two by using the aforementioned financial ratios give a better examination of how each is fairing in their industries. Current ratio Current ratios show the relationship between a company’s current assets and it current liabilities. Ideally, a 2 to 1 ratio is deemed as the standard for companies to be in good financial standing. The formula used to calculate current ratios are current assets divided by current liabilities. The current ratio for Riordan Manufacturing is 4.71 while the industry average is 1.24, which indicates that the company is lagging behind in relation to what other companies in the industry are doing. For Kudler Fine Foods, its current ratio is 16.9. Its industry average is 1.52, which shows a much lower rate of growth than what Kudler Fine Foods is accomplishing. Calculations for the current ratios of both companies are below: Riordan Manufacturing: $17,377,957 / $3,685,152 = 4.71 Kudler Fine Foods: $1,971,000 / $116,290 = 16.9 Debt ratio Whereas......

Words: 772 - Pages: 4

Premium Essay

... 2010 | Dec 31, 2009 | Dec 31, 2008 | Turnover Ratios | | | | | | Inventory turnover | 8.35 | 8.68 | 8.07 | 4.03 | 11.02 | Receivables turnover | 4.77 | 4.95 | 4.64 | 3.41 | 5.39 | Payables turnover | 13.83 | 17.58 | 16.84 | 11.44 | 27.58 | Working capital turnover | 3.89 | 3.84 | 3.57 | 2.21 | 4.17 | Average No. of Days | | | | | | Average inventory processing period | 44 | 42 | 45 | 91 | 33 | Add: Average receivable collection period | 77 | 74 | 79 | 107 | 68 | Operating cycle | 120 | 116 | 124 | 197 | 101 | Less: Average payables payment period | 26 | 21 | 22 | 32 | 13 | Cash conversion cycle | 94 | 95 | 102 | 166 | 88 | Pfizer Inc., short-term (operating) activity ratios Ratio | Description | The company | Inventory turnover | An activity ratio calculated as revenue divided by inventory. | Pfizer Inc.'s inventory turnover improved from 2010 to 2011 but then slightly deteriorated from 2011 to 2012 not reaching 2010 level. | Receivables turnover | An activity ratio equal to revenue divided by receivables. | Pfizer Inc.'s receivables turnover improved from 2010 to 2011 but then slightly deteriorated from 2011 to 2012 not reaching 2010 level. | Payables turnover | An activity ratio calculated as revenue divided by payables. | Pfizer Inc.'s payables turnover increased from 2010 to 2011 but then declined significantly from 2011 to 2012. | Working capital turnover | An activity ratio calculated as revenue divided by working capital...

Words: 1608 - Pages: 7

Premium Essay

...Activity ratio 1.Total asset turnover : Total sales or revenue/Total assets Year 2006 2007 2008 2009 2010 Total sales/revenue 7,760 8,615 10,225 12,317 12,323 Total assets 35,974 46,864 62,269 76,139 82,729 Total asset turnover 0.22 0.18 0.16 0.16 0.15 Year 2006 2007 2008 2009 2010 Total sales/revenue 7,760 8,615 10,225 12,317 12,323 Total assets 3,382 4,637 7,205 8,741 12,356 Total asset turnover 2.29 1.86 1.42 1.41 1.00 2.Debt to equity ratio Year 2006 2007 2008 2009 2010 Total liabilities 30,233 40,099 52,543 64,212 69,146 Shareholders equity 5,741 6,765 9,726 11,927 13,583 Debt equity ratio 5.27 5.93 5.40 5.38 5.09 3.Debt to asset ratio Year 2006 2007 2008 2009 2010 Total liablities 30,233 40,099 52,543 64,212 69,146 Total assets 35,974 46,864 62,269 76,139 82,729 Debt ratio 0.84 0.86 0.84 0.84 0.84 1.Profitability ratio: a.Operating income to sales Year 2006 2007 2008 2009 2010 Earnings Before Interest and Tax 3,993 4,337 5,343 6,751 6,258 Sales/income 7,760 5,544 10,225 12,317 8,088 Operating to sales/income ratio 0.51 0.78 0.52 0.55 0.77 b.Return on equity ratio Year 2006 2007 2008 2009 2010 Net Income 2,008 2,392 3,121 3,823 3,472 Average shareholder equity 5,559 6,253 8,246 10,827 12,755 Return......

Words: 632 - Pages: 3

Premium Essay

...Examples of Questions on Ratio Analysis A: Multiple Choice Questions 1. Which of the following is considered a profitability measure? a. Days sales in inventory b. Fixed asset turnover c. Price-earnings ratio d. Cash coverage ratio e. Return on Assets 2. Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has an asset turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4. From this we know that a. Firm A has a higher profit margin than firm B b. Firm B has a higher profit margin than firm A c. Firm A and B have the same profit margin d. Firm A has a higher equity multiplier than firm B e. You need more information to say anything about the firm's profit margin 3. If a firm has $100 in inventories, a current ratio equal to 1.2, and a quick ratio equal to 1.1, what is the firm's Net Working Capital? a. $0 b. $100 c. $200 d. $1,000 e. $1,200 4. To measure a firm's solvency as completely as possible, we need to consider a. The firm's relative proportion of debt and equity in its capital structure b. The firm's capital structure and the liquidity of its current assets c. The firm's ability to use Net Working Capital to pay off its current liabilities d. The firms leverage and its ability to make interest payments on its long-term debt e. The firm leverage and its ability to turn its assets over into...

Words: 1126 - Pages: 5