Ratio Analysis

Ratio Analysis

It‘s a tool which enables the banker or lender to arrive at the following factors :

Liquidity position

Profitability

Solvency

Financial Stability

Quality of the Management

Safety & Security of the loans & advances to be or already been provided

Current Ratio : It is the relationship between the current assets and current liabilities of a concern.

Current Ratio = Current Assets/Current Liabilities

If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1

The ideal Current Ratio preferred by Banks is      1.33 : 1

Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses, alternatively it is the difference of Current Assets and Current Liabilities.

NWC  = Current Assets – Current Liabilities

ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities. The should be at least equal to 1.

Quick Current Assets    :       Cash/Bank Balances + Receivables upto  6 months + Quickly

realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

DEBT EQUITY RATIO  : It is the relationship between borrower‘s fund (Debt) and Owner‘s

Capital (Equity).

Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets

OPERATING PROFIT RATIO :

It is expressed as     =>     (Operating Profit / Net Sales ) x 100

Higher the ratio indicates operational efficiency

NET PROFIT RATIO :

It is expressed as      =>   ( Net Profit / Net Sales ) x 100

It measures overall profitability.