Question

Current Assets	3.49	3.24
Liquid Ratio	2.17	1.93
GP Ratio	0.65	0.50
NP Ratio	0.47	0.22
AR Rate	3.19	3.64
ROE	0.81	0.38
Debt to Equity	3.12	2.22
Total Asset Turnover	0.42	0.53
ROI	0.20	0.12
Times interest cover	4.80	3.48
EPS	2.19	1.10

Please give interpreations for the ratios given !!

Answer 1

Current assets ratio: This ratio is a measure of liquidity. It indicates whether the business would be able to repay the current liabilities out of current assets within a year. Current asset ratio of 3.49 indicates that we have $3.49 of current assets to repay $1 of current liabilities. As it can be seen that current ratio has been reduced from 3.49 to 3.24 which indicates that the current assets have declined.

Liquid ratio: This ratio indicates ability to meet short term liabilities with most liquid assets like cash and it excludes inventories. Decline in liquid ratio from 2.17 to 1.93 indicates that liquid assets are declining.

GP ratio: It stands for gross profit ratio. The formula for calculating gross profit ratio is: Gross profit/ Sales. It measures trading profitability of a company. Declining gross profit of 0.50 from previous level of 0.65 indicates that trading expenses have increased due to reduction in profit or the value of closing inventory has eroded or the opening stocks were overvalued.

NP ratio: It stands for net profit ratio. The formula for calculating net profit ratio is: Net profit/ Sales. Decline in net profit ratio from 0.47 to 0.22 may indicate decline in sales with no decline in operating expenses or increase in operating expenses leading to a decline in net profit.

AR Rate: It stands for accounts receivable rate. It means how many times the company can convert its accounts receivable into cash. The formula to calculate the same is: Net credit sales/ Average accounts receivable. An increase in accounts receivable rate from 3.19 to 3.64 indicates that the company is able to realise it debtors faster than earlier and thus is a positive sign.

Return on Equity: return on equity measures profitability. It is a measure of shareholders return. It is calculated by way of the following formula: Net income/ shareholders equity. A decline in ROE from 0.81 to 0.38 indicates that preference dividends have incresed thus resulting in a decline in income available for distribution to equity shareholders or it may also be due to decline in profits of a company.

Debt to Equity: Debt to equity ratio is calculated by the formula debt/equity. It indicates whether the company is financed by debt or equity. If this ratio is less than 1 then it means that capital/ equity is more and debt is less. A declining debt to equity from 3.12 to 2.22 is a good indicator which shows that either debt has been paid or more equity financing has been done.

Total Assets Turnover Ratio: It indicates how efficiently a company is able to generate sales from its assets. It is calculated by the formula: Net Sales/ Total Assets. Increase in this ratio from 0.42 to 0.53 indicates that sales have increased without increase in the assets employed.

ROI: It stands for return on investment. It is calculated by using the following formula: Net profit/ Total Assets. It indicates return on assets employed. Decrease in ROI means decrease in income or increase in total assets without increase income.

TImes interest cover: Times interest coverage ratio calculates the sufficiency/ adequacy of operating income before interest (EBIT) in order to pay interest on loan for a certain number of times. The formula to calculate times interest coverage ratio is EBIT/ interest on loan. Decline in this ratio from 4.80 to 3.48 indicates that either the operating income has declined or the loan amount has increased resulting into increase in the interest amount.

EPS: It stands for earning per share. It means that the profit made by the company if distributed fully, then a shareholder might earn an amount equivalent to the EPS calculated. Decline in EPS from 2.19 to 1.10 may be due to various factorss such as increase in the no of shares due to increase in share capital or bonus issue of shares or rights issue of shares or due to decline in profits of the company.