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# Ratio analysis measures company financial position from past data. Ratio analysis is based on company balance sheet and income statement. There are various types in ratio analysis.

Extracts from this document...

Introduction

RATIO ANALYSIS: A ratio is numeric or arithmetic relation between two numbers. It is simply one number expressed in terms of another. The two numbers used in the ratio can both be taken from income statement or position statement or one number from income statement and one number from position statement. Ratio analysis measures company financial position from past data. Ratio analysis is based on company balance sheet and income statement. There are various types in ratio analysis. 1. Profitability Ratio: Profitability Ratio can measure the profitability of organization. It also measure firm ability of making profit. A high profitability ratio is good for the firm. a) Gross Profit Ratio: Gross profit ratio describe gross profit margin of the firm over sales. Sales minus cost of goods sold are equal to the gross profit. Gross Profit Ratio = In 2008 Gross Profit Ratio = = = 20% In 2009 Gross Profit Ratio = = = 16.67% In 2010 Gross Profit Ratio = = = 14.94% Profitability has gone down from 20% to 14.94%. Total sales have increased by 57.50% in 2009 cost of goods sales also increased high proportion by 64.06% in 2009. ...read more.

Middle

Firms account receivable has increasing more than 50% each year. That is not good for the firm. It should try to reduce account receivable and try to recover those account receivable. (iii) Net Working Capital is also known as working capital. If we deduct total current assets from total current liability, we will get firm net working capital. Net Working Capital (Net Working Capital) = Current Assets - Current Liability In 2008 NWC = Current Assets - Current Liability = 23971 + 47943 - 53696 - 6791 =71914-60487 = 11427 In 2009 NWC = Current Assets - Current Liability = 47943 + 100679 - 107391 - 34108 = 148622-141499 = 7123 In 2010 NWC = Current Assets - Current Liability = 95885 + 230,124 - 159,169-77,155 = 326,009 - 236,324 = 89685 Net working capital has decreased from 2008 to 2009. From 2009 to 2010 NWC has increased more. In 2010 Current asset has increased to more than double from 2009. 3. Gearing Ratio Gearing ratio will shows percentage of long term debt in total capital employed in the business (a) Gearing Ratio = x 100 In 2010 Gearing Ratio = x 100 = X 100 = X 100 = 51 % Before 2010 there is no loan for the firm. ...read more.

Conclusion

Cost of Goods Sold + Closing Stock - Opening Stock = 288413+47943-23971 = 312385 Creditor Turnover Ratio =x 365 days = x 365 days = 176 days Firm credit turnover ratio has been increased over the year. That is good for the business. Firm try to maintain higher ratio. Limitation of Ratio Analysis * Past Data Ratio analysis is based on past years balance sheet and income statement. It is not future oriented. * Financial statement Errors If there is error in balance sheet or income statement, then ratio analysis result will be incorrect. * No Ideal Definition There is no standard definition or formula for ratio analysis. So result of ratio analysis will not same. Decision on based ratio will not be vary. * Difference Currency In the real world each country has own currency. If two companies operating different country have different currency in balance sheet or income statement, by ratio analysis we can compare them. * Comparison of performance over time Ratio analysis we compare performance over years. Each year company faces new challenges, new technological changes, price changes, which have no consideration in ratio analysis. Other Methods There are many other method by which we can analyse financial statement. * Balance Scorecard * Trend Analysis * Common Size Ratio ...read more.

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