Overview: What is Ratio Analysis? Video Lecture | Accountancy CUET Preparation - Commerce

hello friends in this lecture we shall
discuss financial ratio analysis this is
the information provided to us so we
have a balance sheet of a business
organization where information has been
given in a jumble deform so assets and
liabilities are given but these are
given in a jumbled format without any
classification so these are liabilities
these are assets here we are given the
information about the sales and here we
are given information about net profits
what we are supposed to calculate we are
supposed to calculate these twelve
ratios current ratio quick ratio debt
equity ratio total outside liability
ratio stock turnover our inventory
turnover ratio that is turnover ratio
that is a collection period that is a
velocity ratio net profit to sales ratio
return on equity ratio return on
investment ratio and debt the service
coverage ratio and this ratio is to be
calculated assuming that depreciation is
thirty term loan is trial interest is
thirty term loan installment is seventy
so this is given information now how to
make use of this information so first of
all we will classify this given
information
we will classify the assets and
liabilities according to their nature so
a liability can be long-term liability
or a current liability or it can be in
the form of net worth so first of all we
will mark the exact nature of that
liability so here in red font we have
marked their exact nature so term loans
they're a long-term liability reserves
they are part of net worth bank
overdraft their current liability
provisions of various types their
current liability debentures long term
liabilities capital part of network
creditors or sundry creditors or trade
creditors current liability expenses
payable or outstanding expenses current
liability known from friends relatives
long-term liability or was from
customers current liability on sside
prepaid expenses current asset land and
building fixed assets investment in
shares non current assets
goodwill intangible asset debtors grunt
assets as well as quick asset blunt
machinery fixed asset preliminary
expenses intangible assets cash in hand
current asset as well as quick asset
stocks current asset or vs. to suppliers
grantor asset as well as quick asset now
based on this classification we will
prepare a summary of balance sheet
assets liabilities
so here we have that summary capital and
reserves that is net worth it is 400 so
sum total of item number two and seven
so number two and number six sorry not
seven number six so two plus six capital
plus the reserves it is four hundred
long-term liabilities one plus five plus
nine so one plus five plus nine so it
gives us six hundred then current
liabilities three plus four plus 7 plus
8 plus 10 so it is current liabilities
total so total liabilities will remain
same similarly we summarized the assets
fixed assets item number trailer and
item number 16 so total is 440
non-current asset only one item that is
number thirteen intangible assets item
number fourteen and seventeen so 14 is
goodwill seventeen is preliminary
expenses current assets 11 that is
prepaid expenses 15 that is debtors
eighteen that is cash in hand nineteen
that is torque and 20 that is advanced
to suppliers out of this fifteen
eighteen and twenty they are quick
assets also so the total of quick assets
is 390 and it is part of this 980
which is total of current assets so here
we have summarized the balance sheet now
we shall make use of this information
for calculation of ratios let us now
start the calculation of ratios
so it is same information which we had
summarized on the previous slide let us
now start calculation of ratios first of
all current ratio current ratio is equal
to current assets divided by current
liabilities this is the formula we place
the information in this formula 980 is
the amount of current assets 520 is
amount of current liabilities so we make
the calculation the ratio is one point
double eight is to one so the benchmark
ratio is one point 2 3 3 is to 1 and
here the current ratio is one point
eight eight is to one this shows high
liquidity position no quick ratio so
quick assets divided by current
liability so this ratio is also known as
acid test ratio so 390 is amount of
quick assets 520 is amount of current
liability we make the calculation and it
is 0.75 is to 1 and there is no
benchmark for this ratio third one is
debt equity ratio so it is part of
leverage ratio this these two ratios are
part of liquidity ratios and this is
part of leverage ratio so dedicatory
ratio is calculated as long term
liability divided by tangible net worth
so long term liabilities 600 tangible
net worth is 350 so how do we calculate
so net worth
- intangible asset that gives us
tangible net worth so this is
three-fifty so 600 by 350 the ratio is
1.71 is to 1 the benchmark ratio is 2 is
to 1 so this also is within that
benchmark level so we can also say it's
healthy ratio not total outside
liability ratios so this also is part of
leverage ratios to calculate this is the
formula long-term liability plus a
current liability divided by tangible
Network so here we have long-term
liability here we have current liability
divided by tangible net worth so the
ratio is 3.2 is to 1 there is no
benchmark for this ratio let us now go
to next ratio stock turnover ratio so
this ratio is calculated as sales by
amount of stocks so sales are 2500 and
stocks are 560 in the previous slide we
are given the amount of stocks so 560 is
the amount of stocks so the ratio is 4.5
times so there are 4 and of 4.5
rotations in one year of the stock to be
equal to sales so this also is known as
inventory turnover ratio now debtors
turnover ratio so this ratio is
calculated as sales by debtors sales we
are given 2500 that is in the previous
slide we are given 320 so we calculated
the ratio it is a 7.8 times
so higher the turnover ratio better it
is so datas turnover ratio has another
forum which is called detrás collection
period or debtors of velocity ratio so
that we are going to do in this slide so
detrás velocity or detrás the collection
period so here the ratio is calculated
as detrás divided by sales in two period
since we have to calculate the ratio in
months we multiply it by 12 if a
calculation is to be made in days then
we will multiply it by 365 so 320 is
level of debtors 2500 is level of sales
into 12 so the ratio is 1.5 for months
this indicates that the credit sales
made by this a firm on average basis are
recovered in 1.5 four months that is
roughly within two months and there is
no benchmark for that no net profit to
sales margin so ratio is calculated as
net profit by sales in 200 so 250 is
level of net profit 2500 is level of
sales so 10 percent is the net profit to
sales margin return on equity so this is
also called equity net worth is also
known as equity so net profit divided by
tangible net worth in 200 so return on
equity or return on net worth 250 is
amount of net profit 350 is amount of
net tangible net worth so the ratio is
71% so the return which this business is
getting on the funds invested by it in
the business is a 71% very high return
then return on investment to calculate
return on investment in addition to
tangible net worth we also add amount of
long term liabilities so amount of
tangible net worth plus amount of long
term liabilities this is called
investment or a capital employed return
on investment is also known as return on
capital employed so here we have the net
profit divided by tangible net worth
plus long term liabilities so 250 is
amount of profit
three-fifty amount of tangible net worth
600 amount of long-term liability so the
return is 26% and for these ratios also
there is no match mark now debt service
coverage ratio this ratio is calculated
for taking a decision on a term loan
proposal and also to calculate amount of
term loan installment this is the
formula so numerator net profit plus
depreciation plus a term loan interest
and the denominator term loan
installment plus a term loan interest so
net profit is after-tax so we have net
profit after tax 250 then 30 is amount
of depreciation we are given term loan
in tests we are given 30 term loan
interest we are given 30 term loan
installment we are given 70
so 250 plus 30 plus 33 10 divided by 100
so the ratio is 3.1 the benchmark level
is 2 so this way we can make calculation
of financial ratios so whenever huge
information is given large information
is given it is a better to classify the
SN liabilities then convert that
classification into summary so that we
can make use of the summary information
for calculation of the ratios well
friends I am sure the contents of this
video will benefit you thank you for
watching the video