RATIOS ANALYSIS
  A tool used by individuals to conduct a 
  quantitative analysis of information in a 
  company’s financial statements. Ratios are 
  calculated from current year numbers and are 
  then compared to previous years, other 
  companies, the industry, or even the economy 
  to judge the performance of the company. 
  (Source: Investopedia)
   ADVANTAGES OF RATIO ANALYSIS
  • It simplifies financial statements
  • It helps in comparing companies of different size 
   with each other
  • It helps in trend analysis which involves 
   comparing a single company over a period
  • It highlights important information in a simple to 
   use form quickly. A user can judge a company by 
   just looking at a few numbers instead of reading 
   the whole financial statements
   LIMITATIONS OF RATIO ANALYSIS
  • One ratio result is not very helpful. Comparisons need 
   to be made.
  • May be difficult to compare firms in different 
   industries.
  • Trend analysis need to take into account changing 
   circumstances over time which could have affected 
   the ratio results.
  • Ratios are only concerned with accounting items to 
   which a numerical value can be given. There are 
   qualitative factors to consider.
       TYPES OF RATIOS
  • Liquidity Ratios
  • Profitability Ratios
  • Efficiency / Activity Ratios
  • Gearing / Solvency Ratios
  • Investors/ Shareholders Ratios
                                 LIQUIDITY RATIOS
    RATIO                CALCULATION                    MEANING                      USE
    Current Ratio        Current Assets / Curent        This shows the ability of    Shareholders or investors in 
                         Liabilities expressed as       the firm to pay short        the firm can use this ratio to 
                         Current Assets : Current       term obligations as they     determine that if all 
                         Liabilities                    fall due.                    creditors were to request 
                         Eg. 2:1                                                     their funds, would the firm 
                                                                                     be able to pay its debts and 
                                                                                     not suffer because of 
                                                                                     working capital problems. 
                                                                                     The ideal ratio is 2:1. 
    Quick / Acid Test    (Current Assets – Stock) /     This ratio is similar to     This measures the real short 
    Ratio                Current Liabilities            the current ratio            term liquidity of the firm 
                         expressed as Current           however, stock is            since stock is excluded. 
                         Assets - Stock : Current       excluded, as it is not as    There is an optimum ratio of 
                         Liabilities                    liquid as other current      1:1 that firms try to keep 
                         Eg. 2:1                        assets. It only becomes      however, a ratio of 0.55 to 1 
                                                        liquid when it is sold       and over is acceptable.
                                                        and this takes time.