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Ebook Accounting and financial management: Part 2

(BQ) Part 2 book "Accounting and financial management" has contents: Management & cost accounting, ratio analysis, fund flow statement (FFS), cost accounting. | Ratio Analysis 107 Part – II Management & Cost Accounting This page intentionally left blank Ratio Analysis 109 Chapter–4 Ratio Analysis LEARNING OBJECTIVES In this chapter we will study: Introduction Concept of Ratio Types of Ratios Measurement and Interpretation of Ratios Application of Ratios Methodology for Ratio Analysis Du-pont Chart for Ratio Analysis Advantages of Ratio Analysis Limitations of Ratio Analysis 110 Accounting and Financial Management for I.T. Professionals 4.1 INTRODUCTION Ratio analysis is a technique used to evaluate the financial health of the concerned organisation from interested groups’ point of view using different ratios as a tool. It comprises of two terms viz. ratio and analysis and therefore both the terms should be dealt separately while studying ratio analysis. Ratio Analysis Ratio l l l l Analysis1 + Concept of Ratio Types of Ratios Measurement of Ratios Interpretation of Ratios l l l l Trend Analysis Inter-firm Comparison Comparison with Industrial Average Horizontal/Vertical Analysis 4.2 CONCEPT OF RATIOS Absolute financial data of an organization does not provide useful information but whenever it is compared with another financial data of the same organization it provides useful information and constitutes a ratio. Illustration Suppose following is the data related to Company A. Profit — Rs.10,000 Sales — Rs.1,00,000 Data dealt separately is not useful. [(Profit/Sales)*100/Sales = 10%] is useful information as it represents profit margin ratio. 4.3 TYPES OF RATIOS There are various groups, which are interested in financial health of the organization. These groups are Owners/Shareholders, Short-term creditors (suppliers, suppliers of short-term loans), Long-term creditors (Debenture holders, Banks and Financial Institutions providing term loans), Management and government. Furthermore, the risk and return perceived by abovesaid groups are varying in nature and since risk–return trade off is the objective .