Theory of ratio analysis and interpretation
Ratio analysis introduction
Related Articles:. Important components of income statement are net sales, cost of goods sold, selling expenses, office expenses etc. Referred to also as earnings before Interest and Taxes, this represents a measure of profits which is not influenced by financial leverage and the tax factor. Liabilities are recorded on a company's balance sheet and can include accounts payable, taxes, wages, accrued expenses, and deferred revenues. It is difficult to say which business concern is more efficient unless figures of capital investment or sales are also available. Method of Expression of Ratio: How a Ratio is expressed? In terms of accounting ratios, comparison of these related figures makes them meaningful. The investors favour the company with higher ROE. The figures of the above components are matched with their corresponding figures of previous years individually and changes are noted. This is the amount of retained earnings that you post to the retained earnings account on your new balance sheet. Actually it ratio shows how rapidly debts are collected. Generally, the higher the receivables turnover, the better as it means we are collecting our credit accounts on a timely basis. We have enjoyed it to complete but could not bring perfection for lack of time. Current Liabilities In accounting terms, current liabilities are debts and obligations that a company must pay in the short-term within the next twelve months. Operating Profit: - Operating Profit is the difference between gross profit and operating expenses.
The higher the ratio, the better it is. A change in retained earnings can be on account of change in profitability or on account of changer in dividend policy, capitalization of free reserves or change in amounts transferred to various funds. The large amount has been invested in different purpose to provide industry loan, export- import finance, commercial lending, house-building finance and others.
Cash Flow Statement: An accounting statement that forecasts cash receipts and disbursements for a specified period. Owners' Equity, Also Known as Net Worth Owners' Equity is the combined investments of the owner s and the accumulation of profit or losses for the business since it began.
To workout the operating efficiency: Ratio analysis helps to workout the operating efficiency of the company with the help of various turnover ratios.
A variation of the above formula uses only the interest bearing long-term liabilities in the numerator. The retained earnings account under the Shareholder's Equity section of the balance sheet shows the retained earnings since the inception of the company.
Classify the various profitability ratios. Average collection period varies from industry to industry, however. The study has great significance and will provide benefits to various parties who directly or indirectly interact with the bank companies.
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