14-02-2013, 11:35 AM
Financial Ratio Analysis
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Financial Ratios
Financial Ratio Analysis is a study of relationship among various factors in a business
It can be used as a preliminary screening tool for the assessment of a stock or future financial condition and hence result for a company
Most importantly these ratios are used from the perspectives of credit rating agency(debt instruments) , equity research firm(equity growth) and shareholders or investors(financial health) and Managers
Types of Financial Ratios
Liquidity Ratio
Profitability Ratio
Efficiency Ratio
Capital Structure Ratio
Cash Flow Ratio
Activity Ratio
Liquidity Ratio
A financial ratio indicating a companies ability to meet it’s short term financial obligations
It’s a ratio between Liquid Assets (that can be converted to cash) to short term liabilities
Greater the coverage the more likely is that a business will able to pay its debt and vice-versa
Commonly used liquidity ratios are
Current Ratio
Quick Ratio
Quick Ratio
It measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately
Include those current assets that presumably can be quickly converted to cash
Quick Ratio = (Cash Equivalents + Short term investments + Accounts receivable )/ current liabilities
Interpretation of Quick Ratio
A company with quick ratio < 1 cannot currently payback its current liabilities
Higher the quick ratio, more likely the company be able to pay its short term bills
Creditors are most concerned about the quick ratio and a lesser quick ratio leads to higher creditors concern
The quick ratio for HDFC is 6.2 for Mar 12 which indicates the bank’s robustness and financial soundness in paying off short term obligation though the figure has dipped as compared to the last year
But ICICI bank has far better liquidity ratio implying ICICI bank highly robust and hence its ability to extinguish short term liabilities is better than HDFC