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RATIOS USED IN CONTROL IN WORKING CAPITAL
Presented By:Amit Pradhan
MBA, 4th Sem.
IB&MS
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RATIO ANALYSIS
Ratio analysis is a technique of analysis andinterpretation of
financial statement throughmathematical figures.
Provides information relating to strengthsand weaknesses of the
firm.
An important tool to extract additionalmeaning from the figures
of financialstatements of a firm.
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RATIO ANALYSIS
Liquidity Ratio
Assets Management Ratio
Debt Management or Leverage RatioProfitability Ratio
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LIQUIDITY RATIO
Measure the firms ability to satisfy its short-
term commitments out of current or liquid
assets.
Focus on current assets and liabilities and
are used to ascertain the short-term solvency
position of a firm.
Current Ratio
Quick Ratio
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LIQUIDITY RATIO CONT..
Current Ratio: The quantitative relationshipbetween current
assets (CA) and currentliabilities(CL).
Current Ratio= Current Assets/ Current Liabilities
The ratio 2:1 is employed as a standard forcomparison.
Quick Ratio:Also known as acid-test ratio orliquid ratio,
measure of short-term solvency of afirm.
Quick Ratio= Quick Assets/ Current Liabilities
The ratio 1:1 is employed as standard for
comparison.
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ASSETS MANAGEMENT RATIO
Also known as turnover ratios or activity ratiosor efficiency
ratios.
They provide the measure for how effectivelythe firms assets are
being managed.
Measures the utilization of assets to generaterevenue or
profit.
Better off if low level of assets generates highvolume of sales
revenue.
Inventory turnover ratioReceivable turnover ratioDays sales
outstanding
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ASSETS MANAGEMENT RATIO CONT..
Inventory Turnover Ratio: Measures how a firmsaverage investment
in inventory is capable ofgenerating sales. It is the test of the
liquidity of firmsinvestment in inventories.
ITOR = Cost of Goods Sold/ Average Inventoryor = Sales/
Inventory
A low inventory turnover ratio indicates that the firm is
holding excessive stock of inventory or is unable toturn it over
in terms of sales.
A high inventory turnover ratio indicates that the firmis
turning over its inventory at higher rate.
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ASSETS MANAGEMENT RATIO CONT..
Receivable Turnover Ratio:Measures howmany times the account
receivables or
debtors turnover occur during the year.
RTOR = Annual Credit Sales/ Average AccountsReceivable
A low receivable turnover ratio indicates that thefirm is making
excessive investment in receivables.
Comparatively higher RTOR shows better liquidityof debtors and
quick collection of receivables.
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ASSETS MANAGEMENT RATIO CONT..
Days Sales Outstanding :Also known as AverageCollection Period
(ACP), which measures how quicklythe accounts receivable are being
converted intocash.
DSO = Receivables/ Average Sales per Dayor = (Receivables x
360)/ Annual Sales
Working Capital Turnover Ratio: Measures theefficiency of
working capital requirement in relation to
all of sales and cost of goods sold.WCTOR = Cost of Goods Sold/
WC Requirement
Where,WC requirement = CCC x daily material & labour
or = CA - CL
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ASSETS MANAGEMENT RATIO CONT..
Creditors Turnover Ratio: Measures theefficiency of Account
payables in relation to
all purchase. It is calculated as Purchases
divided by Payables.
CTOR = Purchases/ Payables
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Thank You
