ASSIGNMENT OF

ACCOUNTING AND FINANCE

FOR OPERATION

Submitted By,

Sujith.S
2nd DC Bcom Model 1
MAR THOMA COLLEGE,KUTTAPUZHA,THIRUVALLA
 Analysis of ratio in financial
statements.
Whether you as a manager evaluate the performance of your company or Investor checks the financial
status of your investment and your company's financial statements contains a lot of useful information.
Data management tools such as ratio analysis help with exploration This information not only provides a
deeper understanding of a company's performance, but tips for creating strategies that improve them.

Have a clear understanding of why companies use financial ratio analysis and You won't mind different
types of analytics to help you evaluate your business performance ready to make better decisions and
business strategies that bring greater value to the process Optimization, growth, innovation and greater
competitiveness.
Ratio analysis is a very useful technique that investors can use to compare the financial performance of
various organizations. Ratio analysis can shed light on the relative financial health and prospects of several
companies. Data on profitability, liquidity, earnings, extended viability, and other topics can be obtained
from it. When choosing which companies to invest in, the outcomes of these comparisons may help make
decisions more powerfully.
Investors must realize that they cannot accurately gauge a company's performance in the present or
likelihood of future financial success based on a single ratio from a single business. To make investing
decisions, examine financial data from several companies that interest you using a range of ratios.

ESSENTIAL NOTES
A technique for examining a company's financial statements or individual line items within financial
statements is ratio analysis.
There are several ratios available, but some are more commonly utilized by analysts and investors than
others, such as the price-to-earnings ratio and the net profit margin.
A company's share price and earnings per share are compared using the price-to-earnings ratio.
Net income and revenues are compared using net profit margin.
Comparing different ratios of different companies throughout time is helpful.

What is ratio analysis of financial statement.

A company's financial statements are much more than just a record of its business activities activities
performed in a specific period. Financial information contained in a The balance sheet, income statement,
and cash flow statement are used by analysts. internally and externally to assess the overall situation of the
company in the various areas.

They rely on financial indicators or the comparison of various financial indicators. results from the budget.
These relationships are used to search for the company performances in six areas:
▪ Liquidity
▪ Solvency
▪ Performance
▪ Scope
▪ Profitability
▪ Market value
These comparisons can help internal and external stakeholders track performance over time. and make
changes to your policies and practices to improve them. We get used to it compare current results with
historical data, but are also used to compare business performance. points in one or more areas compared
to colleagues and competitors in the same industry, e.g The same coefficient applies to companies in other
industries or for a specific field of activity.

Additionally, ratio analysis can help identify consistent trend lines or financial patterns. can be used to
improve forecasts or identify and mitigate potential disruptions that may not occur. results from an analysis
conducted for a single reporting period.
Finally, ratio analysis is also useful for determining the efficiency of a company's operations.
operations.This analysis can measure efficient usage of both physical and financial assets and help identify
areas where the company is overextended financially or falling to use available resource effectively.

How financial ratio analysis works?

While you can glean a certain amount of information from examining a company’s financial statement,
deeper analysis is required to ger the big picture and develop strategies for growth and performance
improvement.
Ratio analyses are generally conducted quarterly and annually. Their utility and value lie not in any one
single ratio, but in the context and clarity provided by conducting a full range of analyses and comparing
them to:
 Historical financial information.
 Updated information for other companies in the same sector, cases.
 The same ratio is used in different industries or companies Sector .

It is in these comparisons that the true value of relationship analysis lies. internal and external stakeholders.
Think about the difference between watching a movie like this Put down a small part of the paper or put
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Type of ratio analysis.

Liquidity ratios.

Three important liquidity ratios are:

  The working capital ratio is calculated by deducting short-term liabilities current assets appear on
the company's balance sheet.Also known as , the working capital ratio is a simple measure
determines whether the company's current assets are able to cover its short-term liabilities.
 The quick ratio is also based on balance sheet data, but subtracted is the ratio of the company's
current inventories to its current liabilities and not the current liabilities themselves.
 The liquidity ratio provides a narrower, liquidity-based view of liquidity. It's divisive current assets
to current liabilities, but only includes cash and cash equivalents equivalents (e.g. those in the
money market, savings accounts, etc.) as assets.This relationship is is more conservative than the
other two liquidity ratios and is used to measure a the company's ability to repay all current
liabilities without liquidating additional liabilities active.

solvency ratios.

Also known as debt management ratios, serve to secure finances managers with a clear vision of how the
company finances its operations. It is very similar to the total ratio, but is calculated by dividing the sum
equity liabilities. This report provides a useful example Financial Health for Investors and Managers and
allows you to specify whether a 's capital structure focuses on debt or equity financing.
Two of the most important solvency ratios are;

 Total debt ratio calculated by dividing liabilities over total assets. It is expressed as percentages. It
is also used to determine how much the company’s current asset are in debt.
 Debt to equity ratio, one of the critical for any traded organisation. Total debt ratio is very similar to
it, but is calculated by dividing liabilities over shareholders equity. It provides thumbnail of
financial health for investors and governing bodies. It also helps to indicate whether a company
capital structure is focused on financing debt or equity

Performance ratios.

Stakeholders and analysts use these metrics to measure the extent to which a company uses both assets and
liabilities to increase sales and make profits.Also called activity rate, production on asset metrics or asset
management metrics are critical to defining and improving because finding ways to improve it is related to
direct improvement Sales and Profitability.
The four most commonly used efficiency factors are:

 The inventory turnover ratio compares sales to inventory to determine frequency Each year shares
are sold and replaced. This is useful to determine if The company leaves expensive inventory
unused for too long or runs out of expensive inventory in fact.
 The Days Outstanding Ratio is used to measure the performance of a company Collection of
unpaid debts. The calculation is done by dividing the debt for average daily sales.
 Fixed asset turnover ratio measures how a company uses its fixed assets. For example, production
facilities, production equipment, goods, etc. are calculated as sales/ net fixed assets.
 The total asset turnover ratio is calculated as sales/total assets.It's sort of repaired However, an
asset turnover ratio of is used to determine how well a company is utilizing its assets assets that
generate revenue and increase profitability.
Interest coverage ratios

These metrics are used to determine how well a company can cover its two outstanding debts and
associated debt assumption fees. Payment of interest, dividends and rent s are among the most common
debts evaluated using these measures. Overall one , a higher funded ratio is preferable to a lower funded
ratio because it indicates a better ability to meet financial obligations.

Three types of interest coverage ratios

 Time interest earned ratio divides earning before interest and tax to determine how well a
company can pay their total debt and the interest on that debt
 Debt service coverage ratio calculated by net asset/total asset service charge. A quick
reference on how the company can meet their debt should be provided by these ratios.

• The dividend yield ratio is expressed as dividend/stock price. Measure everything the amount
of dividend paid by the company in relation to the price of its shares. investors often
considers the dividend yield ratio as a measure of an organization's maturity because mature
companies often have a higher dividend yield than smaller companies or young companies in
the same industry.

Profitability ratios

Summary of the effects of liquidity, solvency, efficiency and coverage, profitability The metrics
provide the analyst and stakeholders with deeper context when evaluating financial data
Performance and status of the company.
Four of the most important and commonly used profitability indicators are:

• The net profit margin ratio is the ratio of net income to sales and measures the amount of
profit In , the company earned revenue for every dollar.
• Return on assets is net income/total assets. It is a measure of efficiency corporate assets
generate profits.
• The key indicator for profitability is EBIT/total assets. It's similar to ROA, but provides
important context by removing debt and taxes from the calculation
• Return on equity ratio is net income/common equity. Return earned by investors should be
calculated by these ratios.

Market value ratios

Three of most important market value ratios are;

• P/E ratio. The number indicates how much investors are willing to pay per dollar for a
company's stock. profits generated.
 • The price ratio is the share price/cash flow per share. A healthy cash flow is essential
manages and develops business activities, which is why investors pay special attention to this
indicator.
• The market ratio is share price/book value per share. It is used to compare companies share
price/market value, this ratio can be a reliable indicator of the value of a share The value of is
likely to increase over time.

The use of balance sheet analysis benefits

• Provide useful information on performance target parameters.

• Useful for evaluating performance over time and identifying trends.
• Useful for assessing and contextualizing performance relative to competitors, industry
standards and equivalents in other industries/companies.
• Ideal for small companies or individual departments/divisions of larger companies.
Organization .

Restrictions

• Large multinational companies must break down measures by department rather than by
department
• Some companies may “fudge” numbers to appear more attractive to investors. during
evaluation.
• Not useful for seasonal and cyclical businesses as peaks distort the indicators and valleys
over time.
• Inflation or economic instability can distort results and reduce the utility of both periods
specific indicators and comparison with historical results.

Grow, thrive and optimize by analyzing financial ratios.

In order to develop strategies that will help you, it is important to know how your company
is doing is even more efficient and represents a key element in retaining investors and other
external shareholders. reported on the success of your company and got involved.