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Ratio Analysis

1729 words - 7 pages

Financial ratios are useful indicators of a firm's performance and financial situation. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms.Ratio analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity and another.

Objectives of the study
The study is designed to achieve the following objectives:
(i) To test the financial strengths and weaknesses of company.
(ii) To pinpoint the causes of poor financial performance and suggest some measures to overcome the problems.

Methodology of the study
Here we are using Ratio ...view middle of the document...

78 times |1.66 times |

From the analysis, we can see that in 2003-04 the current assets were 1.62 times than the current liabilities that has not fluctuated much through out these three years. A minimal increase is seen in 2004-05 and it went up to 1.66 times which kept slightly increasing and resulted at 1.78 times in 2005-06. The reason for such stability can be there not investing remarkably on assets and not making any huge loan or financing from outside. If we take a closer look on the balance sheet, this assumption gets a more realistic touch. Year by year assets have gone slightly up and the liabilities as well, but proportionately assets were a littler higher than the liabilities which actually reflected as a marginal increase in the ratio.
2.  Quick/ Acid Test ratio: 
Quick Ratio=(Current Assets-Inventories)/Current Liabilities

Following table shows the Quick/ acid test ratios of Square Pharmaceuticals in different years:

|Year |2005-06 |2004-05 |
|Quick ratio |1.19 times |1.08 times |

Analysis of this ratio speaks in a same language as current ratio. In 2003-04, the quick ratio was .98 times which increased very silently just like current ratio and resulted as 1.19 times in 2005-06. Both of these ratios portray the idea that square has so far an almost constant liquidity position which is good at some point, but at the same token it can be said that they have not been able to improve them-selves. Standing at this point, we can make an assumption that may be their profit margin was not so high that they can make some investments paying off the liabilities that could result in an increase in assets and decrease in liabilities to make the liquidity position far better. This assumption can only be proved as we go on analyzing their financial statement and calculate the profitability ratios.

1.  Inventory turnover ratio:
Inventory turnover ratio = Gross Turnover / Inventories
Following table shows the Inventory Turnover ratio of Square Pharmaceuticals in different years:

|Year |2005-06 |2004-05 |
|Inventory Turnover Ratio |5.27 times |5.41 times |

Analysis shows a gradual declination of Inventory Turnover Ratio over the last three yeas. In 2003-04, the ratio was 6.89 times, then it rapidly declined to 5.41 times in following year and dropped further to 5.27 times in the year 2005-06.
2. Fixed asset turnover ratio:
Fixed assets turnover ratio (FATO) = Gross Turnover / Net fixed assets

Following table shows the FATO ratios of Square Pharmaceuticals in different years:

|Year |2005-06 |2004-05 |
|FATO |1.35 times ...

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