Page 76 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 4: Ratio Analysis

4.9 Summary Notes

Ratio analysis is one of the important tools of financial statement analysis to study the
financial structure of the business fl eeces.

Financial ratio analysis is the calculation and comparison of ratios which are derived from
the information in a company's fi nancial statements.
The level and historical trends of these ratios can be used to make inferences about a
company's financial condition, its operations and attractiveness as an investment.

Financial ratios are calculated from one or more pieces of information from a company's
fi nancial statements.
A ratio gains utility by comparison to other data and standards.

Ratios are classified as liquidity, leverage, profitability, activity, integrated and growth ratio.
Although fi nancial ratio analysis is well-developed and the actual ratios are well-known,
practicing financial analysts often develop their own measures for particular industries

and even individual companies.
Analysts often differ drastically in their conclusions from the same ratio analysis.

4.10 Keywords

Balance Sheet or Positional Statement Ratios: These type of ratios are calculated from the
balance sheet of the enterprise which normally reveals the financial status of the position i.e.

short-term, long-term financial position, Share of the owners on the total assets of the enterprise

and so on.
Capital Structure Ratios: The capital structure position are analysed through leverage ratios as
well as coverage ratios.
Current Assets: Current assets are in the form of cash, equivalent to cash or easily convertible
into cash.

Current Liabilities: Current liabilities are short-term financial resources or payable in short span
of time within a year.
Income Statement Ratios: These ratios are computed from the statements of Trading, Profi t &
Loss account of the enterprise.

4.11 Review Questions

1. Is the fi rm satisfies the standard norm of the current asset ratio and liquid assets ratio?

M/s Shanmuga & Co
Balance sheet as on dated 31st Mar, 2005

Liabilities ` Assets `
Share capital 42,000 Fixed Assets Net 34,000
Reserve 3,000 Stock 12,400
Annual Profi t 5,000 Debtors 6,400
Bank overdraft 4,000 Cash 13,200
Sundry creditors 12,000
66,000 66,000

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