Solved Problems On Ratio Analysis
Explain the reasoning for the indicator chosen? Funds provided by equity shareholders do not bear fixed commitment, unlike preference shareholders and debenture holders. In the place of debtors, creditors are to be substituted and credit purchases in place of credit sales. If the rate of return on total capital employed is more than the average cost of fixed charge bearing funds, the residue goes to the benefit of equity shareholders.
The firm may not be maintaining the total range of inventory and so may be missing business opportunities, which may otherwise be available. Debt is advantageous to the equity shareholders. If the number of days is lower than the assured period of payment, it indicates liquidity of the firm. Shareholders are the true owners, interested in the earnings distributed and paid to them as dividend.
The reason is short-term loans are not included in capital employed. This ratio indicates the number of times the earnings per share is covered by its market price. So, the operating results of both the firms vary, substantially. Ratios are the symptoms of health of an organisation like blood pressure, pulse or temperature of an individual. It means the firm is not dependent on outside liabilities.
No Indication of Cause of Changes Ratios tell a business owner what happened but they do not tell him why it happened. To borrow money for a short period, with a nominal Interest rate, executing a promissory note. The economic condition of the firm is not sound. Ratios are expressed in quantitative form only.
Ratio problems are word problems that use ratios to relate the different items in the question. Loss of creditworthiness may result in legal problems, finally, culminating in the closure of business of a company, even. Ratios Based on Book Value This is one of the largest problems with relying on financial ratios. Ratios are the indicators for further investigation. As a profitability index, mannan mp3 songs tamilwire it is widely used ratio.
Historical financial statements indicate what has happened in the past. Equity shareholders are the real of the firm. The owners are interested in knowing the profitability of the firm, in relation to the total assets and amount invested in the firm.
Ratio Word Problems (solutions examples videos)
Preference shareholders enjoy a different status, as they do not assume the risk, similar to equity shareholders. Both the terms Debtors Turnover Ratio and Velocity convey the same meaning. If credit period is relaxed more, the firm may gain more sales and improved profitability, even after providing for the losses towards bad debts.
Cash and balance in current account with bank are the most liquid assets. The position of current assets and current liabilities is not the true picture, as they do not appear, always, in the normal times. To pay substantial amount of creditors from the available cash balance? The results are not the end, but they are the beginning for further investigation.
Last year closing stock is the opening stock of the current year. Photo Credits financial report image by PaulPaladin from Fotolia. It means current assets of Rs. For every hero, there should be a heroine.
Ratio Analysis Exercise
Current ratio shows the liquidity strength of the firm. In the ratio analysis, readers would have observed, by now, it is difficult to lay down specific standards.
Balance amount of profit retained in the firm, after payment of dividend, is called retained profits. The aging schedule gives the detailed break up of debtors, according to the length of time, they have been outstanding. What is the adjusted earning per share of the year in which bonus is made?
Some authors include short-term bank borrowing in current liabilities, while some do not include, again for different interpretations. Profit is earned, after meeting all expenses, as and when sales are made. The rate of interest on the borrowings should always be lower than the return on capital employed. Interpretation is concerned with explaining the reasons for the results.
What Are Some of the Problems Associated With Using Financial Ratios
Financial ratios provide useful analysis and can help drive management toward making better decisions if they are interpreted correctly. Ratio analysis is a technique of planning and control. It means operating expenses are higher. This situation creates undue pressures and unfavourable conditions to the firm from the creditors.
More so, sanctioned working capital limits of the bank are not always, fully, utilised and the balance drawing power is available to the firm for immediate withdrawal of cash. These ratios measure the extent of debt financing in a firm. The firm has concealed the true picture, just by postponing credit purchases, at the end of the year, though very much needed to its requirements. Using the historical data and equipped with the knowledge of future plans and constraints to achieve, management is in a better position to predict future happening to a certain reasonable extent. They identify the trends, shift in trends or other factors.
The equity shareholders have been benefited, at the expense of fixed charge bearing funds. When the return on capital employed is greater than the cost of debt, it is advantageous to borrow as the return on equity goes up. Every management wants to satisfy the real owners. An outsider is not aware of the likely changes in policies.
However, intangible assets like goodwill, patents and trademarks are to be included. Comparison would be meaningful and valuable, if their base is similar.
They assume the risk in the firm. The surplus earned on the fixed charge bearing funds can be utilised for paying dividend to the equity shareholders, at a rate higher than the return on the total capital employed in the company. Both the ratios of a particular firm should be compared with the industry average or its immediate competitor to understand the efficiency of the management in managing the assets, profitably.
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