MARG ACADEMY

• The relationship between two accounting figures expressed mathematically is known as financial ratio.This comparison can be
• same firm over time.
• selected firms in the same industry.
• standards or plans.

IMPORTANCE OF RATIO ANALYSIS:
• It presents facts on a comparative basis and enables the drawing of inferences regarding the performance of the firm.
• It is relevant in assessing the performance of a firm in respect of:
– Liquidity position.
– Long term solvency.
– Operating efficiency.
– Overall profitability.
– Inter-firm comparison.
– Trend analysis.

CURRENT RATIO= CURRENT ASSETS : CURRENT LIABILITIES
QUICK RATIO= CURRENT RATIO : CURRENT LIABILITIES – BANK OVERDRAFT
GROSS PROFIT RATIO = GROSS PROFIT : NET SALES
NET PROFIT RATIO = NET PROFIT : NET SALES
OPERATING COST RATIO = OPERATING PROFIT : NET SALES
WORKING CAPITAL TURNOVER= WORKING CAPITAL : SALES
WORKING CAPITAL=CURRENT ASSET – CURRENT LIABILITY
WORKING CAPITAL TURNOVER RATIO= NET PROFIT : WORKING CAPITAL
DEBTORS TURNOVER RATIO: NET CREDIT SALES : AVERAGE DEBTORS
DEBTORS COLLECTION PERIOD: 360 DAYS/12 MONTHS :DEBTORS TURNOVER RATIO
CREDITORS TURNOVER RATIO: NET CREDIT PURCHASES : AVERAGE CREDITORS
CREDITORS COLLECTION PERIOD: 360 DAYS/12 MONTHS : CREDITORS TURNOVER RATIO

TO VIEW RATIO ANALYSIS ,THE SAME STEPS WILL BE FOLLOWED AS DISCUSSED ABOVE