20-12-2012, 12:24 PM
RATIO ANALYSIS
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Ratio
A ratio is a simple mathematical expression. It is a number expressed in terms of another number, expressing the quantitative relationship between the two.
Ratio Analysis
It is the technique of interpretation of financial statements with the help of various meaningful ratios.
Ratios do not add to any information that is already available, but they show the relationship between two items in a more meaningful way.
Ratios may be used for:
Comparison of a firm with its own performance in the past.
Comparison of one firm with another firm in the industry.
Comparison of one firm with the industry as a whole.
Comparison of an achieved performance with pre-determined standards.
Comparison of one department of a concern with other departments.
Working capital ratio
Working capital ratio = current assets current liabilities
Ratios for :
2001 - 2.4
2000 - 2.63
Interpretation
Current ratio of the company is in accordance with the standard current ratio which is 2 times. The current ratio of the company is more than two times in both the years, hence it can comfortably meet it’s short term financial obligations.
Debt-equity ratio
Debt-equity ratio = long-term liabilities
shareholders funds
Ratios for :
2001 - 0.55
2000 - 1.185
Interpretation:
The ideal debt-equity ratio is 0.5 times. The debt-equity ratio in the year 2000 shows that the company was dependent on outsider’s fund for its existence as the long term loans were more than the shareholders’ funds.
The debt-equity of the company in the year 2001 shows that the long term financial position of the company was sound because the total shareholders’ funds were more than twice of long term loans.
Return on capital employed
Return on capital employed(ROCE) =
PBIT * 100
capital employed
Ratios for :
2001 - 14.409
2000 - 8.7487
Interpretation:
The higher the ROCE the better it is. On comparing the ROCE of both the years , we can state that the earning capacity of capital employed in the business is more in 2001 compared to 2000.
OVERALL INTERPRETATION
The overall performance of XYZ ltd. is satisfactory but the performance of 2001 is far more better than that of 2000 and there are future more chances that the company's prospects will increase in the coming years.