11-10-2012, 04:41 PM
RATIO ANALYSIS
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A financial ratio is a relationship of two values of financial statements. Ratios basically are mathematical expressions, which are calculated to derive certain conclusion. The ratio may be expressed as number of times, proportion or percentage. There is number of ratios, but which to consider for a particular type of analysis is left to the personal judgement of the analyst. As a matter of fact, all the ratios are for different purposes and have different objectives. Ratio analysis is a type of analysis that helps you better understand and guide the financial affairs of your business. A ratio is a mathematical expression and is computed using information from the balance sheet and/or income statement.
USES OF RATIOS:
. Ratios offer help in intra firm comparisons, industry comparison and also for inter-firm comparison.
. Financial position of the entity can be studied.
LIMITATIONS & PROBLEMS OF RATIO ANALYSIS:
.
Ratios are based on financial statements, so contain almost all of the deficiencies of those accounts.
. Some ratios are open for manipulation and need to be interpreted with care. E.g. stock levels may be kept artificially low at year-end, creating an impression of high efficiency in this area.
. Inter-firm comparisons are faced with the problem that different organizations might use rather different accounting policies. E.g. depreciation methods etc.
. Detailed knowledge of a company.s markets is seldom obtainable from the published
Accounts, but is extremely important for assessing future profitability.
. Ratios are useful when comparing similar organizations operating under similar conditions. Comparisons with different types of organizations can be misleading.
. There is a real danger that ratio analysis can lead to conclusions, which are over-simplified.
e.g. high current ratio.
RATIO ANALYSIS OF FMCG COMPANIES:
There are many ratios but it depends upon user how he/she can derive meaning from it.In our project we have used many ratios but they are broadly classified under 4 categories:
. Liquidity Ratio
. Leverage Ratio
. Profitability Ratio
. Activity/Management efficiency Ratio
LIQUIDITY RATIO:
Liquidity measure the firm.s ability to meet current obligation. A firm should ensure that it does not suffer from lack of liquidity, and it does not have excess liquidity.
Three common measures of liquidity include:
. Current ratio
. Quick ratio
. Cash ratio