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 Page 1


 
 
3.34 FINANCIAL MANAGEMENT  
3.8 SUMMARY OF RATIOS 
Another way of categorizing the ratios is being shown to you in a tabular form. A 
summary of the ratios has been tabulated as under: 
Ratio Formulae Interpretation 
Liquidity Ratio 
Current Ratio 
Current Assets
CurrentLiabilities
 
A simple measure that 
estimates whether the 
business can pay short term 
debts.  
Quick Ratio Quick Assets
CurrentLiabilities
It measures the ability to 
meet current debt 
immediately. Ideal ratio is 1 
Cash Ratio CashandBank balances +
 
Marketable Securities
Current Liabilities
??
??
??
 
It measures absolute 
liquidity of the business. 
Basic Defense 
Interval Ratio 
?
Cash and Bank balances + Net Receivables
+ Marketable Securities
? 
Opearing Expenses÷ No.of days
 
 
It measures the ability of 
the business to meet 
regular cash expenditures. 
Net Working 
Capital Ratio 
Current Assets – Current 
Liabilities 
It is a measure of cash 
flow to determine the 
ability of business to 
survive financial crisis. 
Capital Structure Ratio 
Equity Ratio 
Shareholders' Equity
Net Assets
 
It indicates owner’s fund in 
companies to total fund 
invested. 
Debt Ratio 
Total Debt
Net Assets
 
It is an indicator of use of 
outside funds. 
Debt to equity 
Ratio 
TotalOutsideLiabilities
Shareholders'Equity
 
It indicates the 
composition of capital 
structure in terms of debt 
and equity. 
Page 2


 
 
3.34 FINANCIAL MANAGEMENT  
3.8 SUMMARY OF RATIOS 
Another way of categorizing the ratios is being shown to you in a tabular form. A 
summary of the ratios has been tabulated as under: 
Ratio Formulae Interpretation 
Liquidity Ratio 
Current Ratio 
Current Assets
CurrentLiabilities
 
A simple measure that 
estimates whether the 
business can pay short term 
debts.  
Quick Ratio Quick Assets
CurrentLiabilities
It measures the ability to 
meet current debt 
immediately. Ideal ratio is 1 
Cash Ratio CashandBank balances +
 
Marketable Securities
Current Liabilities
??
??
??
 
It measures absolute 
liquidity of the business. 
Basic Defense 
Interval Ratio 
?
Cash and Bank balances + Net Receivables
+ Marketable Securities
? 
Opearing Expenses÷ No.of days
 
 
It measures the ability of 
the business to meet 
regular cash expenditures. 
Net Working 
Capital Ratio 
Current Assets – Current 
Liabilities 
It is a measure of cash 
flow to determine the 
ability of business to 
survive financial crisis. 
Capital Structure Ratio 
Equity Ratio 
Shareholders' Equity
Net Assets
 
It indicates owner’s fund in 
companies to total fund 
invested. 
Debt Ratio 
Total Debt
Net Assets
 
It is an indicator of use of 
outside funds. 
Debt to equity 
Ratio 
TotalOutsideLiabilities
Shareholders'Equity
 
It indicates the 
composition of capital 
structure in terms of debt 
and equity. 
 
 
 3.35 
 
FINANCIAL ANALYSIS AND PLANNING RATIO ANALYSIS 
Debt to Total 
Assets Ratio 
TotalOutsideLiabilities
TotalAssets
 
It measures how much of 
total assets is financed by 
the debt. 
Capital Gearing 
Ratio 
?
PreferenceShareCapital+Debentures
+Other?Borrowed?funds
?
?
EquityShareCapital+
Reserves&Surplus-Losses
?
 
It shows the proportion of 
fixed interest bearing 
capital to equity 
shareholders’ fund. It also 
signifies the advantage of 
financial leverage to the 
equity shareholder. 
Proprietary Ratio Proprietary  Fund
Total  Assets 
 
It measures the proportion 
of total assets financed by 
shareholders. 
Coverage Ratios 
Debt Service 
Coverage Ratio 
(DSCR) 
Earningsavailablefordebtservices
Interest+Instalments
 
It measures the ability to 
meet the commitment of 
various debt services like 
interest, instalment etc. 
Ideal ratio is 2. 
Interest 
Coverage Ratio 
EBIT
Interest
 
It measures the ability of 
the business to meet 
interest obligations. Ideal 
ratio is > 1. 
Preference 
Dividend 
Coverage Ratio 
NetProfit / Earning after taxes (EAT)
Preferencedividendliability
 
It measures the ability to 
pay the preference 
shareholders’ dividend. 
Ideal ratio is > 1. 
Fixed Charges 
Coverage Ratio 
EBIT + Depreciation
Interest + Repayment of loan 
 
This ratio shows how many 
times the cash flow before 
interest and taxes covers 
all fixed financing charges. 
The ideal ratio is > 1. 
Activity Ratio/ Efficiency Ratio/ Performance Ratio/ Turnover Ratio 
Total Asset 
Turnover Ratio 
Sales /Costof GoodsSold
AverageTotalAssets
 
A measure of total asset 
utilisation. It helps to answer 
Page 3


 
 
3.34 FINANCIAL MANAGEMENT  
3.8 SUMMARY OF RATIOS 
Another way of categorizing the ratios is being shown to you in a tabular form. A 
summary of the ratios has been tabulated as under: 
Ratio Formulae Interpretation 
Liquidity Ratio 
Current Ratio 
Current Assets
CurrentLiabilities
 
A simple measure that 
estimates whether the 
business can pay short term 
debts.  
Quick Ratio Quick Assets
CurrentLiabilities
It measures the ability to 
meet current debt 
immediately. Ideal ratio is 1 
Cash Ratio CashandBank balances +
 
Marketable Securities
Current Liabilities
??
??
??
 
It measures absolute 
liquidity of the business. 
Basic Defense 
Interval Ratio 
?
Cash and Bank balances + Net Receivables
+ Marketable Securities
? 
Opearing Expenses÷ No.of days
 
 
It measures the ability of 
the business to meet 
regular cash expenditures. 
Net Working 
Capital Ratio 
Current Assets – Current 
Liabilities 
It is a measure of cash 
flow to determine the 
ability of business to 
survive financial crisis. 
Capital Structure Ratio 
Equity Ratio 
Shareholders' Equity
Net Assets
 
It indicates owner’s fund in 
companies to total fund 
invested. 
Debt Ratio 
Total Debt
Net Assets
 
It is an indicator of use of 
outside funds. 
Debt to equity 
Ratio 
TotalOutsideLiabilities
Shareholders'Equity
 
It indicates the 
composition of capital 
structure in terms of debt 
and equity. 
 
 
 3.35 
 
FINANCIAL ANALYSIS AND PLANNING RATIO ANALYSIS 
Debt to Total 
Assets Ratio 
TotalOutsideLiabilities
TotalAssets
 
It measures how much of 
total assets is financed by 
the debt. 
Capital Gearing 
Ratio 
?
PreferenceShareCapital+Debentures
+Other?Borrowed?funds
?
?
EquityShareCapital+
Reserves&Surplus-Losses
?
 
It shows the proportion of 
fixed interest bearing 
capital to equity 
shareholders’ fund. It also 
signifies the advantage of 
financial leverage to the 
equity shareholder. 
Proprietary Ratio Proprietary  Fund
Total  Assets 
 
It measures the proportion 
of total assets financed by 
shareholders. 
Coverage Ratios 
Debt Service 
Coverage Ratio 
(DSCR) 
Earningsavailablefordebtservices
Interest+Instalments
 
It measures the ability to 
meet the commitment of 
various debt services like 
interest, instalment etc. 
Ideal ratio is 2. 
Interest 
Coverage Ratio 
EBIT
Interest
 
It measures the ability of 
the business to meet 
interest obligations. Ideal 
ratio is > 1. 
Preference 
Dividend 
Coverage Ratio 
NetProfit / Earning after taxes (EAT)
Preferencedividendliability
 
It measures the ability to 
pay the preference 
shareholders’ dividend. 
Ideal ratio is > 1. 
Fixed Charges 
Coverage Ratio 
EBIT + Depreciation
Interest + Repayment of loan 
 
This ratio shows how many 
times the cash flow before 
interest and taxes covers 
all fixed financing charges. 
The ideal ratio is > 1. 
Activity Ratio/ Efficiency Ratio/ Performance Ratio/ Turnover Ratio 
Total Asset 
Turnover Ratio 
Sales /Costof GoodsSold
AverageTotalAssets
 
A measure of total asset 
utilisation. It helps to answer 
  
 
3.36 FINANCIAL MANAGEMENT  
 the question - What sales are 
being generated by each 
rupee’s worth of assets 
invested in the business?  
Fixed Assets 
Turnover Ratio  
 
Sales /Costof GoodsSold
FixedAssets
 
This ratio is about fixed asset 
capacity. A reducing sales or 
profit being generated from 
each rupee invested in fixed 
assets may indicate 
overcapacity or poorer-
performing equipment. 
Capital Turnover 
Ratio  
 
Sales /Costof GoodsSold
Net Assets
 
This indicates the firm’s 
ability to generate sales per 
rupee of long term 
investment. 
Working Capital 
Turnover Ratio 
Sales /COGS
WorkingCapital
 
It measures the efficiency of 
the firm to use working 
capital. 
Inventory 
Turnover Ratio  
COGS / Sales
AverageInventory
 
It measures the efficiency of 
the firm to manage its 
inventory. 
Debtors Turnover 
Ratio 
CreditSales
Average Accounts Receivable
 
It measures the efficiency at 
which firm is managing its 
receivables. 
Receivables 
(Debtors’) 
Velocity 
Average Accounts Receivables
 
Average Daily Credit Sales
 
It measures the velocity of 
collection of receivables. 
Payables 
Turnover Ratio  
AnnualNetCreditPurchases
AverageAccountsPayables
 
It measures the velocity of 
payables payment. 
Profitability Ratios based on Sales 
Gross Profit Ratio  
 
GrossProfit
×100
Sales
 
This ratio tells us something 
about the business's ability 
consistently to control its 
production costs or to 
manage the margins it 
Page 4


 
 
3.34 FINANCIAL MANAGEMENT  
3.8 SUMMARY OF RATIOS 
Another way of categorizing the ratios is being shown to you in a tabular form. A 
summary of the ratios has been tabulated as under: 
Ratio Formulae Interpretation 
Liquidity Ratio 
Current Ratio 
Current Assets
CurrentLiabilities
 
A simple measure that 
estimates whether the 
business can pay short term 
debts.  
Quick Ratio Quick Assets
CurrentLiabilities
It measures the ability to 
meet current debt 
immediately. Ideal ratio is 1 
Cash Ratio CashandBank balances +
 
Marketable Securities
Current Liabilities
??
??
??
 
It measures absolute 
liquidity of the business. 
Basic Defense 
Interval Ratio 
?
Cash and Bank balances + Net Receivables
+ Marketable Securities
? 
Opearing Expenses÷ No.of days
 
 
It measures the ability of 
the business to meet 
regular cash expenditures. 
Net Working 
Capital Ratio 
Current Assets – Current 
Liabilities 
It is a measure of cash 
flow to determine the 
ability of business to 
survive financial crisis. 
Capital Structure Ratio 
Equity Ratio 
Shareholders' Equity
Net Assets
 
It indicates owner’s fund in 
companies to total fund 
invested. 
Debt Ratio 
Total Debt
Net Assets
 
It is an indicator of use of 
outside funds. 
Debt to equity 
Ratio 
TotalOutsideLiabilities
Shareholders'Equity
 
It indicates the 
composition of capital 
structure in terms of debt 
and equity. 
 
 
 3.35 
 
FINANCIAL ANALYSIS AND PLANNING RATIO ANALYSIS 
Debt to Total 
Assets Ratio 
TotalOutsideLiabilities
TotalAssets
 
It measures how much of 
total assets is financed by 
the debt. 
Capital Gearing 
Ratio 
?
PreferenceShareCapital+Debentures
+Other?Borrowed?funds
?
?
EquityShareCapital+
Reserves&Surplus-Losses
?
 
It shows the proportion of 
fixed interest bearing 
capital to equity 
shareholders’ fund. It also 
signifies the advantage of 
financial leverage to the 
equity shareholder. 
Proprietary Ratio Proprietary  Fund
Total  Assets 
 
It measures the proportion 
of total assets financed by 
shareholders. 
Coverage Ratios 
Debt Service 
Coverage Ratio 
(DSCR) 
Earningsavailablefordebtservices
Interest+Instalments
 
It measures the ability to 
meet the commitment of 
various debt services like 
interest, instalment etc. 
Ideal ratio is 2. 
Interest 
Coverage Ratio 
EBIT
Interest
 
It measures the ability of 
the business to meet 
interest obligations. Ideal 
ratio is > 1. 
Preference 
Dividend 
Coverage Ratio 
NetProfit / Earning after taxes (EAT)
Preferencedividendliability
 
It measures the ability to 
pay the preference 
shareholders’ dividend. 
Ideal ratio is > 1. 
Fixed Charges 
Coverage Ratio 
EBIT + Depreciation
Interest + Repayment of loan 
 
This ratio shows how many 
times the cash flow before 
interest and taxes covers 
all fixed financing charges. 
The ideal ratio is > 1. 
Activity Ratio/ Efficiency Ratio/ Performance Ratio/ Turnover Ratio 
Total Asset 
Turnover Ratio 
Sales /Costof GoodsSold
AverageTotalAssets
 
A measure of total asset 
utilisation. It helps to answer 
  
 
3.36 FINANCIAL MANAGEMENT  
 the question - What sales are 
being generated by each 
rupee’s worth of assets 
invested in the business?  
Fixed Assets 
Turnover Ratio  
 
Sales /Costof GoodsSold
FixedAssets
 
This ratio is about fixed asset 
capacity. A reducing sales or 
profit being generated from 
each rupee invested in fixed 
assets may indicate 
overcapacity or poorer-
performing equipment. 
Capital Turnover 
Ratio  
 
Sales /Costof GoodsSold
Net Assets
 
This indicates the firm’s 
ability to generate sales per 
rupee of long term 
investment. 
Working Capital 
Turnover Ratio 
Sales /COGS
WorkingCapital
 
It measures the efficiency of 
the firm to use working 
capital. 
Inventory 
Turnover Ratio  
COGS / Sales
AverageInventory
 
It measures the efficiency of 
the firm to manage its 
inventory. 
Debtors Turnover 
Ratio 
CreditSales
Average Accounts Receivable
 
It measures the efficiency at 
which firm is managing its 
receivables. 
Receivables 
(Debtors’) 
Velocity 
Average Accounts Receivables
 
Average Daily Credit Sales
 
It measures the velocity of 
collection of receivables. 
Payables 
Turnover Ratio  
AnnualNetCreditPurchases
AverageAccountsPayables
 
It measures the velocity of 
payables payment. 
Profitability Ratios based on Sales 
Gross Profit Ratio  
 
GrossProfit
×100
Sales
 
This ratio tells us something 
about the business's ability 
consistently to control its 
production costs or to 
manage the margins it 
 
 
 3.37 
 
FINANCIAL ANALYSIS AND PLANNING RATIO ANALYSIS 
makes on products it buys 
and sells.  
Net Profit Ratio  NetProfit
×100
Sales
 
It measures the relationship 
between net profit and 
sales of the business. 
Operating Profit 
Ratio  
Operating Profit
×100
Sales
 
It measures operating 
performance of business. 
Expenses Ratio 
Cost of Goods 
Sold (COGS) 
Ratio 
COGS
×100
Sales
 
It measures portion of a 
particular expenses in 
comparison to sales. 
Operating 
Expenses Ratio  
?
?
?
?
?
?
?
?
?
?
?
?
?
? +
Sales
.
Overhead on Distributi &  Selling
 exp. tive Administra
x100 
Operating Ratio  COGS+Operatingexpenses
×100
Sales
 
Financial 
Expenses Ratio  
Financialexpenses
×100
Sales
 
Profitability Ratios related to Overall Return on Assets/ Investments 
Return on 
Investment (ROI) 
Return /Profit /Earnings
×100
Investments
 
It measures overall return of 
the business on investment/ 
equity funds/capital 
employed/ assets. 
Return on Assets 
(ROA)  
Net Profitaftertaxes
Averagetotal assets
 
It measures net profit per 
rupee of average total 
assets/ average tangible 
assets/ average fixed assets. 
Return on Capital 
Employed ROCE 
(Pre-tax)  
EBIT
×100
CapitalEmployed
 
It measures overall earnings 
(either pre-tax or post tax) 
on total capital employed. 
 
Return on Capital 
Employed ROCE 
(Post-tax) 
EBIT(1- t)
×100
CapitalEmployed
 
It indicates earnings 
available to equity 
shareholders in comparison 
Page 5


 
 
3.34 FINANCIAL MANAGEMENT  
3.8 SUMMARY OF RATIOS 
Another way of categorizing the ratios is being shown to you in a tabular form. A 
summary of the ratios has been tabulated as under: 
Ratio Formulae Interpretation 
Liquidity Ratio 
Current Ratio 
Current Assets
CurrentLiabilities
 
A simple measure that 
estimates whether the 
business can pay short term 
debts.  
Quick Ratio Quick Assets
CurrentLiabilities
It measures the ability to 
meet current debt 
immediately. Ideal ratio is 1 
Cash Ratio CashandBank balances +
 
Marketable Securities
Current Liabilities
??
??
??
 
It measures absolute 
liquidity of the business. 
Basic Defense 
Interval Ratio 
?
Cash and Bank balances + Net Receivables
+ Marketable Securities
? 
Opearing Expenses÷ No.of days
 
 
It measures the ability of 
the business to meet 
regular cash expenditures. 
Net Working 
Capital Ratio 
Current Assets – Current 
Liabilities 
It is a measure of cash 
flow to determine the 
ability of business to 
survive financial crisis. 
Capital Structure Ratio 
Equity Ratio 
Shareholders' Equity
Net Assets
 
It indicates owner’s fund in 
companies to total fund 
invested. 
Debt Ratio 
Total Debt
Net Assets
 
It is an indicator of use of 
outside funds. 
Debt to equity 
Ratio 
TotalOutsideLiabilities
Shareholders'Equity
 
It indicates the 
composition of capital 
structure in terms of debt 
and equity. 
 
 
 3.35 
 
FINANCIAL ANALYSIS AND PLANNING RATIO ANALYSIS 
Debt to Total 
Assets Ratio 
TotalOutsideLiabilities
TotalAssets
 
It measures how much of 
total assets is financed by 
the debt. 
Capital Gearing 
Ratio 
?
PreferenceShareCapital+Debentures
+Other?Borrowed?funds
?
?
EquityShareCapital+
Reserves&Surplus-Losses
?
 
It shows the proportion of 
fixed interest bearing 
capital to equity 
shareholders’ fund. It also 
signifies the advantage of 
financial leverage to the 
equity shareholder. 
Proprietary Ratio Proprietary  Fund
Total  Assets 
 
It measures the proportion 
of total assets financed by 
shareholders. 
Coverage Ratios 
Debt Service 
Coverage Ratio 
(DSCR) 
Earningsavailablefordebtservices
Interest+Instalments
 
It measures the ability to 
meet the commitment of 
various debt services like 
interest, instalment etc. 
Ideal ratio is 2. 
Interest 
Coverage Ratio 
EBIT
Interest
 
It measures the ability of 
the business to meet 
interest obligations. Ideal 
ratio is > 1. 
Preference 
Dividend 
Coverage Ratio 
NetProfit / Earning after taxes (EAT)
Preferencedividendliability
 
It measures the ability to 
pay the preference 
shareholders’ dividend. 
Ideal ratio is > 1. 
Fixed Charges 
Coverage Ratio 
EBIT + Depreciation
Interest + Repayment of loan 
 
This ratio shows how many 
times the cash flow before 
interest and taxes covers 
all fixed financing charges. 
The ideal ratio is > 1. 
Activity Ratio/ Efficiency Ratio/ Performance Ratio/ Turnover Ratio 
Total Asset 
Turnover Ratio 
Sales /Costof GoodsSold
AverageTotalAssets
 
A measure of total asset 
utilisation. It helps to answer 
  
 
3.36 FINANCIAL MANAGEMENT  
 the question - What sales are 
being generated by each 
rupee’s worth of assets 
invested in the business?  
Fixed Assets 
Turnover Ratio  
 
Sales /Costof GoodsSold
FixedAssets
 
This ratio is about fixed asset 
capacity. A reducing sales or 
profit being generated from 
each rupee invested in fixed 
assets may indicate 
overcapacity or poorer-
performing equipment. 
Capital Turnover 
Ratio  
 
Sales /Costof GoodsSold
Net Assets
 
This indicates the firm’s 
ability to generate sales per 
rupee of long term 
investment. 
Working Capital 
Turnover Ratio 
Sales /COGS
WorkingCapital
 
It measures the efficiency of 
the firm to use working 
capital. 
Inventory 
Turnover Ratio  
COGS / Sales
AverageInventory
 
It measures the efficiency of 
the firm to manage its 
inventory. 
Debtors Turnover 
Ratio 
CreditSales
Average Accounts Receivable
 
It measures the efficiency at 
which firm is managing its 
receivables. 
Receivables 
(Debtors’) 
Velocity 
Average Accounts Receivables
 
Average Daily Credit Sales
 
It measures the velocity of 
collection of receivables. 
Payables 
Turnover Ratio  
AnnualNetCreditPurchases
AverageAccountsPayables
 
It measures the velocity of 
payables payment. 
Profitability Ratios based on Sales 
Gross Profit Ratio  
 
GrossProfit
×100
Sales
 
This ratio tells us something 
about the business's ability 
consistently to control its 
production costs or to 
manage the margins it 
 
 
 3.37 
 
FINANCIAL ANALYSIS AND PLANNING RATIO ANALYSIS 
makes on products it buys 
and sells.  
Net Profit Ratio  NetProfit
×100
Sales
 
It measures the relationship 
between net profit and 
sales of the business. 
Operating Profit 
Ratio  
Operating Profit
×100
Sales
 
It measures operating 
performance of business. 
Expenses Ratio 
Cost of Goods 
Sold (COGS) 
Ratio 
COGS
×100
Sales
 
It measures portion of a 
particular expenses in 
comparison to sales. 
Operating 
Expenses Ratio  
?
?
?
?
?
?
?
?
?
?
?
?
?
? +
Sales
.
Overhead on Distributi &  Selling
 exp. tive Administra
x100 
Operating Ratio  COGS+Operatingexpenses
×100
Sales
 
Financial 
Expenses Ratio  
Financialexpenses
×100
Sales
 
Profitability Ratios related to Overall Return on Assets/ Investments 
Return on 
Investment (ROI) 
Return /Profit /Earnings
×100
Investments
 
It measures overall return of 
the business on investment/ 
equity funds/capital 
employed/ assets. 
Return on Assets 
(ROA)  
Net Profitaftertaxes
Averagetotal assets
 
It measures net profit per 
rupee of average total 
assets/ average tangible 
assets/ average fixed assets. 
Return on Capital 
Employed ROCE 
(Pre-tax)  
EBIT
×100
CapitalEmployed
 
It measures overall earnings 
(either pre-tax or post tax) 
on total capital employed. 
 
Return on Capital 
Employed ROCE 
(Post-tax) 
EBIT(1- t)
×100
CapitalEmployed
 
It indicates earnings 
available to equity 
shareholders in comparison 
  
 
3.38 FINANCIAL MANAGEMENT  
Return on Equity 
(ROE)  
NetProfitaftertaxes-
Preferencedividend(ifany)
×100
Networth /equityshareholders'fund
??
??
??
 
to equity shareholders’ net 
worth. 
Profitability Ratios Required for Analysis from Owner’s Point of View 
Earnings per 
Share (EPS)  
 
Netprofitavailabletoequityshareholders
Numberofequitysharesoutstanding
 
EPS measures the overall 
profit generated for each 
share in existence over a 
particular period. 
Dividend per 
Share (DPS)  
Dividendpaidtoequity shareholders
Number of equity sharesoutstanding
 
Proportion of profit 
distributed per equity share. 
Dividend payout 
Ratio (DP)  
Dividendperequityshare
EarningperShare(EPS)
 
It shows % of EPS paid as 
dividend and retained 
earnings. 
Profitability Ratios related to market/ valuation/ Investors 
Price-Earnings 
per Share (P/E 
Ratio) 
 
MarketPriceperShare(MPS)
EarningperShare(EPS)
 
At any time, the P/E ratio is 
an indication of how highly 
the market "rates" or 
"values" a business. A P/E 
ratio is best viewed in the 
context of a sector or 
market average to get a feel 
for relative value and stock 
market pricing. 
Dividend Yield  
 
Dividend±Changeinsharepeice
×100
Initialshareprice
OR 
DividendperShare(DPS)
×100
MarketPriceperShare(MPS)
 
It measures dividend paid 
based on market price of 
shares. 
Earnings Yield 
 
EarningsperShare(EPS)
×100
MarketPriceperShare(MPS)
 
It is the relationship of 
earning per share and market 
value of shares. 
Market Value 
/Book Value per 
Share 
Market valuepershare
Book valuepershare
 
It indicates market response of 
the shareholders’ investment. 
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FAQs on Financial Analysis & Planning: Ratio Analysis- 2 - Financial Management & Economics Finance: CA Intermediate (Old Scheme)

1. What is ratio analysis and why is it important in financial analysis and planning?
Ans. Ratio analysis is a technique used to evaluate the financial performance of a company by analyzing the relationship between different financial figures. It involves calculating and interpreting various ratios such as liquidity ratios, profitability ratios, and solvency ratios. Ratio analysis is important in financial analysis and planning as it helps in assessing the company's financial health, identifying trends, and making informed business decisions based on the analysis of these ratios.
2. What are liquidity ratios and how are they useful in financial analysis?
Ans. Liquidity ratios measure a company's ability to meet its short-term obligations and assess its liquidity position. The commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. These ratios help in evaluating the company's ability to pay off its current liabilities using its current assets. Liquidity ratios are useful in financial analysis as they provide insights into the company's short-term solvency, ability to handle financial emergencies, and the efficiency of its working capital management.
3. How can profitability ratios be used to assess a company's financial performance?
Ans. Profitability ratios are used to evaluate a company's ability to generate profits in relation to its sales, assets, and equity. Examples of profitability ratios include gross profit margin, operating profit margin, and return on equity. These ratios help in assessing the company's profitability, efficiency in managing costs, and the return on investments made by shareholders. By comparing profitability ratios over time or with industry benchmarks, analysts can identify trends and evaluate the company's financial performance.
4. What are solvency ratios and why are they important in financial analysis?
Ans. Solvency ratios measure a company's ability to meet its long-term obligations and assess its financial stability. The debt-to-equity ratio, interest coverage ratio, and debt ratio are examples of solvency ratios. These ratios help in evaluating the company's leverage, risk of bankruptcy, and ability to attract creditors and investors. Solvency ratios are important in financial analysis as they provide insights into the company's long-term financial health and its capacity to fulfill its debt obligations.
5. How can ratio analysis help in financial planning and decision-making?
Ans. Ratio analysis plays a crucial role in financial planning and decision-making by providing valuable insights into a company's financial performance and position. By analyzing the ratios, financial planners can identify areas of improvement, such as optimizing working capital or reducing debt levels. Ratio analysis also helps in benchmarking against industry standards, setting financial goals, and monitoring progress towards achieving those goals. Additionally, ratio analysis aids in making informed decisions regarding investments, expansion plans, and capital allocation strategies based on the company's financial strengths and weaknesses identified through the analysis.
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