Ratio Analysis
Financial statements: The statement which provides us the financial position of a
Balance Sheet are called “Finance Statements”, which includes – Trading Account (in
case of Manufacturing concerns), Profit & Loss Account, Balance Sheet, Cash Flow
Statement and Funds Flow Statement. The analysis of Balance Sheet is a process of
bringing down the difficult matter into a simple and easily understandable one. To
have a clear understanding of the financial position of the Business concern, at least
three years financial statements are to be ascertained. They provide us treasure of
information. Balance Sheet of a business concern shows the strength of the concern
on a given date but not reveal the current state of affairs of the concerns. Balance
Sheet is having certain limitations, because it does not disclose the critical factors,
such as Managerial Efficiency, Technical competence, Marketing capabilities and
Competition in the market.
Ratio means a comparison of two items which are having cause and relationship.
Ratios can be expressed in percentage or in number of times. Depending upon the
nature, the ratios are broadly classified in to four categories viz., Liquidity Ratios,
Leverage Or Solvency Ratios, Activity Ratios and Profitability Ratios.
1. LIQUIDITY RATIOS: These Ratios helps to find out the ability of the business
concern to pay the short term liability of its liquidity. Any adverse position in liquidity
leads to sudden fall of the unit.
i) Current Ratio: Current Ratio denotes the capacity of the business concern to
meet its current obligation out of the total value of the Current Assets. Current Ratio
= Current Assets / Current Liabilities. Term Loan installments falling due for payment
in next 12 months are to be taken as Term Liability for the purpose of calculation of
Current Ratio /MPBF. Inter-corporate deposits are to be treated as Non-Current
Assets. Ideal Current Ratio is 2:1. Acceptable Ratio as per our Loan Policy
guidelines is 1.33:1 for the limits enjoying above `6.00 crores and 1.15:1 for the
business concerns availing limits of below `6.00 crores. Any deviation below the
required ratio requires ratification of Higher Authority.
ii) Quick Ratio Or Acid Test Ratio: This ratio is a comparison of Quick Assets to
Current Liabilities. Quick Assets mean the assets which have instant liquidity of the
business concern. Though the Inventory and Prepaid expenses are part of Current
Assets, it may be difficult to sell and realize the inventory. Hence, Inventory and
Prepaid expenses are to be excluded for arriving the Quick Asset Ratio.
Current Assets – (Inventory+Prepaid Exp) Quick
Ratio or Acid Test Ratio = ----------------------------------------------
Current Liabilities
Ideal Quick Ratio is 1:1. Current Ratio is always to be read along with Quick Ratio. A
fall in the Quick Ratio in comparison to the Current Ratio indicates high inventory
holdings.
Financial statements: The statement which provides us the financial position of a
Balance Sheet are called “Finance Statements”, which includes – Trading Account (in
case of Manufacturing concerns), Profit & Loss Account, Balance Sheet, Cash Flow
Statement and Funds Flow Statement. The analysis of Balance Sheet is a process of
bringing down the difficult matter into a simple and easily understandable one. To
have a clear understanding of the financial position of the Business concern, at least
three years financial statements are to be ascertained. They provide us treasure of
information. Balance Sheet of a business concern shows the strength of the concern
on a given date but not reveal the current state of affairs of the concerns. Balance
Sheet is having certain limitations, because it does not disclose the critical factors,
such as Managerial Efficiency, Technical competence, Marketing capabilities and
Competition in the market.
Ratio means a comparison of two items which are having cause and relationship.
Ratios can be expressed in percentage or in number of times. Depending upon the
nature, the ratios are broadly classified in to four categories viz., Liquidity Ratios,
Leverage Or Solvency Ratios, Activity Ratios and Profitability Ratios.
1. LIQUIDITY RATIOS: These Ratios helps to find out the ability of the business
concern to pay the short term liability of its liquidity. Any adverse position in liquidity
leads to sudden fall of the unit.
i) Current Ratio: Current Ratio denotes the capacity of the business concern to
meet its current obligation out of the total value of the Current Assets. Current Ratio
= Current Assets / Current Liabilities. Term Loan installments falling due for payment
in next 12 months are to be taken as Term Liability for the purpose of calculation of
Current Ratio /MPBF. Inter-corporate deposits are to be treated as Non-Current
Assets. Ideal Current Ratio is 2:1. Acceptable Ratio as per our Loan Policy
guidelines is 1.33:1 for the limits enjoying above `6.00 crores and 1.15:1 for the
business concerns availing limits of below `6.00 crores. Any deviation below the
required ratio requires ratification of Higher Authority.
ii) Quick Ratio Or Acid Test Ratio: This ratio is a comparison of Quick Assets to
Current Liabilities. Quick Assets mean the assets which have instant liquidity of the
business concern. Though the Inventory and Prepaid expenses are part of Current
Assets, it may be difficult to sell and realize the inventory. Hence, Inventory and
Prepaid expenses are to be excluded for arriving the Quick Asset Ratio.
Current Assets – (Inventory+Prepaid Exp) Quick
Ratio or Acid Test Ratio = ----------------------------------------------
Current Liabilities
Ideal Quick Ratio is 1:1. Current Ratio is always to be read along with Quick Ratio. A
fall in the Quick Ratio in comparison to the Current Ratio indicates high inventory
holdings.
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