01

WINTER
RATIO ANALYSIS
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DARPAN BATRA( ROLL NO: 07)

DEEPTI BAWANKAR( ROLL NO: 08)
RAUNICA BAWEJA ( ROLL NO: 09)
SHINJA BHARDWAJ ( ROLL NO: 10)
ANUPMA CHAUDHARY ( ROLL NO: 11)
DHAVAL DAVE ( ROLL NO: 12)
 CONTENTS 02
1. Balance Sheet , Income Statement and Cash Flow
Statement
2. Ratio Analysis
3. Significance Of Ratio Analysis
4. Advantages and Uses Of Ratio Analysis
5. Types of Ratios
Balance Sheet Ratios
Income Statement Ratios
6. Motorola Example
7. Limitations Of Ratio Analysis
8. Conclusion
9. References
 03
The Balance Sheet and the Statement of
Income are essential, but they are only the
starting point for successful financial
management.

Ratio Analysis is applied to the Financial

Statements to analyze the success, failure,
and progress of business.
 04
BALANCE SHEET ,
INCOME
STATEMENT , CASH
FLOW STATEMENT
 05
BALANCE
●

●
WINTER
Snapshot of a company's financial condition

Template
It presents an enterprise’s assets, liabilities,
and equity at a point in time
SHEET ●
It represents a single moment in time

INCOME Summarizes the activities of an enterprise in a period by

●

disclosing the revenues earned and the expenses incurred

Indicates degree of OPERATING SUCCESS of a business
STATEMENT
●

●
It represents a period of time

●
It shows how changes in balance sheet and income accounts

CASH FLOW ●
affect cash and cash equivalents.
Determine Short Term Viability of the company
It includes only inflows and outflows of cash and cash equivalents
STATEMENT
●

and excludes transactions that do not directly affect cash receipts

and payments
 Ratio Analysis 06

Tool to conduct a quantitative analysis of

information in a company's financial statements.

Calculated from current year numbers and are

then compared to previous years ratios for
several successive years
 Ratio Analysis 07

Used by Proponents of Fundamental Analysis.

Check growth or performance of an individuals own company,

with other companies, the industry, or even the economy to judge
the performance of the company
 Significance 08
Ratio Analysis enables the business owner/manager to spot trends
in a business and hence provide early warning indications that
allow the businesses to solve their business problems before they
destroy the entire business.

Ratios help managers understand their company's performance

relative to that of competitors and are often used to trace
performance over time.

Ratio Analysis can Reveal much about a company and its

operations.
 09
WINTER
Template
ADVANTAGES AND
USES OF RATIO
ANALYSIS
 Helpful for
USES
&
ADVANTAGE
S
10
forecasting
purposes

To workout To workout
short-term
financial
the
position profitability

To workout To workout
the operating the
efficiency solvency

To simplify Helpful in
the analysis of
accounting financial
comparative
information statement
analysis of
the
performance
BALANCE SHEET RATIOS 11

These ratios measure liquidity

and solvency (a business's
ability to pay its bills as they
come due) and leverage (the
extent to which the business is
dependent on creditors' funding)
 12
LIQUIDITY
RATIOS

Quick(Acid
Current Working
Ratio Test )Ratio
Capita Ratio
 13
WINTER
INCOME STATEMENT RATIOS

ACTIVIT Template DU PONT

PROFIT
Y ABILITY APPROA
RATIOS RATIOS CH
●
Receivables ●
Gross Profit
●
Return on
Activity
●
Payables
Margin Investment
Net Profit Margin
(ROI)
●
Activity ●
Return On
●
Inventory ●
Return on
Investment (ROI)
Activity
●
Operating Cycle
●
Return on Equity Equity
(ROE)
●
Cash Cycle (ROE)
 14
FINANCIAL RATIO
ANALYSIS

The case of
Motorola
 15
Personal
Commun
ication
Segment

Global
Telecomm
unication
Segment

Broadband
Communic
ation
Segment

Commercial
Government
& Industrial

Motorola’s Operating Segment

Segments Semicon
ductor
Product
Segment

Integrated
Electroni
c System
Segment
 LIQUIDITY RATIOS 16

CURRENT RATIO:
Total current Assets / Total
Current Liabilities

MOTOROLA SEMICONDUCTO TELECOM

R INDUSTRY INDUSTRY
CURRENT 1.77 2.44 1.52
RATIO
 17

• Motorola is slightly less liquid than the

average firm in the semiconductor industry.
• Motorola has better liquidity position in case
of telecommunication industry.
 18
QUICK RATIO
WINTER
Template
(Current Assets – Inventories) /
Current Liabilities

MOTOROLA SEMICONDUCTO TELECOM

R INDUSTRY INDUSTRY

QUICK RATIO 1.47 2.08 1.23

 19

• Motorola uses its total assets slightly less

efficiently than the average firm in the
telecommunication industry
• Motorola should evaluate its credit
policies in case of semiconductor industry.
AVERAGE
COLLECTION PERIOD
20

• Receivables * Days in the

year / Annual Credit Sales

MOTOROLA SEMICONDUCT TELECOM

OR INDUSTRY INDUSTRY
AVERAGE 61 days 50 days 73 days
COLLECTION
PERIOD
 Inventory Turnover Ratio
21
Inventory Turnover
WINTER
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Ratio = Costs Of
Goods / Inventory

Motorola Semiconductor Telecom

Industry Industry

Inventory
Turnover 6.25 6.01 5.66
Ratio
 Fixed Asset Turnover Ratio 22

Fixed Asset Turnover = Net Sales /

Fixed Assets

Motorola Semiconductor Telecom

Industry Industry
Fixed Asset
4.37 1.58 6.24
Turnover
 Total Asset Turnover Ratio 23

Total Asset Turnover Ratio = Sales / Net

Total Assets

Motorola Semiconductor Telecom

Industry Industry

Total Asset
Turnover Ratio 0.86 0.61 0.90
 24
• Motorola manages its inventory quite
efficiently as its ratio is better than both
industries.
• Motorola uses its total assets slightly
less efficiently than the average firm in
the telecommunications equipment
industry.
 DEBT RATIOS 25
WINTER
Debt ratios checkTemplate
the financial structure of
the business by comparing debt against total
capital, against total assets and against
owners' funds
(FEASIBLE=1)

The ratios help check how "leveraged" a

company is
 DEBT EQUITY RATIO 26
Ratio = Total liabilities/shareholders equity

• A high debt/equity ratio generally means a

company has been aggressive in financing its
growth with debt.
(FEASIBLE=1:1)

Motorola Semiconducto Telecom

r Industry Industry
Debt Ratio 0.64 0.34 0.65
 DEBT EQUITY RATIO 27

Ratio = Total liabilities/shareholders equity

• A high debt/equity ratio generally means a

company has been aggressive in financing its
growth with debt.
(FEASIBLE=1:1)
Motorola Semiconductor Telecom
Industry Industry

Debt to
1.77 0.52 1.82
Equity Ratio
 DEBT ASSET RATIO 28

RATIO = TOTAL LIABILITIES /

TOTAL ASSET

• It tells you the percentage of total

assets that were financed by creditors,
liabilities, debt.

 
 29
WINTER
DEBT CAPITAL RATIO

Template
A measurement of how leveraged the
company is.
A high debt to capital ratio indicates that
a high proportion of company’s capital is
comprised of debt
 Profitability Ratios 30
• A class of financial indicators that are
used to assess a business's ability to
generate earnings as compared to its
expenses and other relevant costs
incurred during a specific period of
time.
• In short these ratios relate profits to
sales and investment
 31
Profitability ratios

Relation to Sales Relation to Investment

Profitability in Relation to Sales 32
• Gross Profit Margin =
Net Sales – Cost of Goods Sold x 100
Net Sales
• This indicates that Motorola has a higher cost of
sales than the average firm in the semiconductor
industry, resulting in a lower gross profit margin,
and higher indirect costs

Motorola Semiconductor Telecom

Industry Industry
Gross Profit 32.76% 37.49% 29.52%
Margin
 33
Net profit margin= WINTER
Net Profit Template
after Sales x 100
Net Sales

Motorola Semiconductor Telecom

Industry Industry

Net profit
-9.31% -3% -1.24%
margin
Profitability in Relation to
Investment
34
• Return on Investment (ROI) =
Net profit after Taxes
Total Assets
• Motorola is deficient in its ability to generate
profits from its sales.

Motorola Semiconductor Telecom

Industry Industry
Return on
-7.98% -1.82% -1.11%
Investment
 35
• Return on Equity =
Net Profit after Interest, Tax and
Preference Dividend * 100
Shareholder’s Equity

Motorola Semiconducto Telecom

r Industry Industry

Return on -22.11% -2.78% -3.14%

Equity
 Du Pont Approach 36
• Return on Investment(ROI) =
Net profit Margin* Total asset turnover

• Large variable and fixed expenses are negatively

impacting ROA, and these expenses, especially variable
expenses ,since they are perceived to be more easily
controllable, need to be closely evaluated. Increases in
sales revenues may also help the ROA situation

Motorola Semiconductor Telecom

Industry Industry
Return on
-8% -1.83% -1.11%
Investment
 37
• Return on Equity =
Net Profit after Taxes
Shareholder’s equity
ROE= Net Profit Margin * Total asset turnover *
Equity Multiplier

Motorola Semiconductor Telecom

Industry Industry
Return on -22.11% -2.78% -3.14%
Equity
 SUMMARY 38
• Involved in diverse segments
• Evaluation of administrative and
infrastructure costs
• Synergies between diverse segments
• Financial ratio analysis is complicated
for companies that do not readily fall
into single industry.
 39

CONCLUSION
 40
• Analysis of a firm’s :
1) Financial position
2) Business risk
3) Kinds of funds required
• Comparative analysis
• Thus ratios are very important
Points to keep in mind 41
WINTER
•Industry averages, not benchmarks
Template
•Not use the rule of thumb indiscriminately
•Kind of business very important
•Standardize the ratios
•Seasonal character of business
•An analysis over time
ECONOMIC CHARACTERISTICS AND
STRATEGIES
42
• Reflect industry trends and products
• Competitive strategy
e.g. specialty foods vs. supermarkets
• Influence on product life cycle
By Savich and Thompson
Start up, growth and harvest
Limitations
To sum up… 43
• Insight into firm’s analysis and
performance
• Various aspects of firm’s operations
• Comparative analysis
• Very essential financial tool
 44

Thank You