Understanding Ratio Analysis

Display Ratio Analysis Reports

Ratio analysis is a powerful tool for financial analysis. A meaningful analysis of a financial statement is made possible by the use of ratios.

Ratios are a set of figures compared with another set. The comparison gives an understanding of the financial position of a business unit. There are a number of ratios which can be computed from a single set of financial statements. The ratios to be computed depend on the purpose for which these ratios are required. A single ratio may sometimes give some information, but to make a comprehensive analysis, a set of inter-related ratios are required to be analysed.

To view the Ratio Analysis

• Go to Gateway of Tally> Ratio Analysis

The Ratio Analysis screen is displayed as shown.

The screen is divided into two parts:

• Principal Groups
• Principal Ratios

The Principal Groups are the key figures that give perspective to the ratios.

Principal Ratios relate two pieces of financial data to obtain a comparison that is meaningful.

Principal Groups

Working Capital

The Net Working Capital is calculated by subtracting Current Liabilities from Current Assets. Financial Analysts often consider the total Current Assets as the Working Capital. This serves as a measure of how far the firm is protected from liquidity problems.

Cash in Hand and Bank Balances

This data presents another perspective on the liquidity position.

Sundry Debtors

(due till today)

The list of all the debtors and the total debts due as on the date of the statement, are displayed.

Sundry Creditors

(due till today)

The list of all the creditors and the total credits due as on the date of the statement are displayed.

Sales and Purchase Accounts

The Sales and Purchase Accounts, which collate the trading activity for the period, are displayed.

Stock in Hand

This field displays the stock in hand as on the date of the report and together with Cash and Bank Balances and Debtors, completes the Current Assets aspect of the Working Capital.

Net Profit

This is derived from the Profit & Loss Account and is the profit after direct and indirect expenses.

Wkg. Capital Turnover

(Sales Accounts/Working Capital)

This is an activity or efficiency ratio that shows the number of times the working capital has been rolled over during a particular period. It depicts how effectively the firm is using its working capital.

Inventory Turnover

(Sales Accounts/Closing Stock)

This is an activity or efficiency ratio that shows the number of times the stock has been rolled over during the period of the report. It depicts how effectively the firm is using its inventories.

Principal Ratios

You can compare Principal Ratios of your company over a certain period with industry averages as well as with ratios pertaining to other periods to assess current performance.

Current Ratio

(Current Assets: Current Liabilities)

This indicates the solvency position of the enterprise. The ideal ratio is 2 under normal business conditions.

Quick Ratio

(Current Assets – Stock in Hand : Current Liabilities)

This indicates the liquidity position of the enterprise. This ratio is useful in planning future cash requirements.

Debt Equity Ratio

(Loans (Liabilities) : Capital + Net Profit)

This indicates the level of exposure to external borrowings and is a useful tool in determining the options of raising additional capital internally or externally.

Gross profit %

(Gross Profit / total Turnover)

This indicates the percentage of profit earned from direct operations (manufacturing)., This ratio is useful, where an enterprise produces more than one product, in identifying the order of profitability and making decisions such as increasing production capacity, continuance of a product etc.

Net Profit %

(Net Profit/ Total Turnover)

This indicates the percentage of net profit earned by the enterprise after considering all expenses of the enterprise. This is useful in identifying the overall profitability of the enterprise.

Operating Cost %

(As percentage of Sales Accounts)

This is referred to as the percentage of operating cost with respect to the total turnover This ratio is useful in making decisions in the areas of cost control, cost reduction etc.

Receivables Turnover in days

(Payment performance of Debtors)

This is an analysis of debtor wise payment performance and a useful tool in identifying the most preferred and least preferred customers or agents and planning the receivables collection process.

Return on Investment %

(Nett Profit/Capital Account + Nett Profit) %

This is a useful tool in measuring returns expected from the project/product and plan additional capital infusion, increase in production capacity (subject to market demand) etc.

Return on working capital

(Nett Profit/Working Capital) %

This is referred to as the percentage of net profit to working capital (current assets – current liabilities).

 Working capital turnover ratio

(Sales Account/Working Capital)

This indicates how effectively working capital is used in terms of turnover it can help to generate. It is a useful tool in identifying the level of deployment of funds with respect to sales.

Inventory turnover ratio

(Turnover / inventory)

This indicates the relationship of inventory with respect to sales. This is a useful tool in identifying the extent of investment in stock and indicates

• Stock control measures whether to be taken in case of change in demand
• Procurement planning