Course Code : COM-405
Course Title : INTRODUCTION TO BUSINESS FINANCE
Credit Hours : 3(3-0)
Teacher Name : Moeez Ul Haq
Class : Lecture Room (Thu)
Class Time : 08:00 Am To 10:30 Am
Email address : moeez5338@[Link]
Link for Notes :
[Link]
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Business Finance & Types
Working Capital
Agency Problem
Financial Statements
Cash Flow Statement
Bond and it’s Types
Ratio analysis
Ratio analysis
This is a method or process by which the relationship of
items or groups of items in the financial statements are
computed, and presented.
This is an important tool of financial analysis.
It use to interpret the financial statements so that the
strengths and weaknesses of a firm, its historical
performance and current financial condition can be
determined.
Ratio
‘A mathematical yardstick that measures the
relationship between two figures or groups of
figures which are related to each other and are
mutually interdependent’.
It can be expressed as a pure ratio, percentage,
or as a rate.
Utility of Ratios
Accounting ratios are very useful in assessing the
financial position and profitability of an
enterprise.
However its utility lies in comparison of the
ratios.
Utility of Ratios
Comparison may be in any one of the following forms:
For the same enterprise over a number of years
For two enterprises in the same industry
For one enterprise against the industry as a whole
For one enterprise against a pre-determined standard
For inter-segment comparison within the same
organization
Classification of Ratios
Ratios can be broadly classified into four groups
namely:
Liquidity ratios
Capital structure/leverage ratios
Profitability ratios
Activity ratios
Liquidity ratios
These ratios analyze the short-term financial position of
a firm and indicate the ability of the firm to meet its
short-term commitments (current liabilities) out of its
short-term resources (current assets).
These are also known as ‘solvency ratios’. The ratios
which indicate the liquidity of a firm are:
Current ratio
Liquidity ratio or Quick ratio or acid test ratio
Current ratio
It is calculated by dividing current assets by current
liabilities.
Current ratio = Current assets
Current liabilities
Quick Ratio or Acid Test Ratio
This is a ratio between quick current assets and current
liabilities (alternatively quick liabilities).
It is calculated by dividing quick current assets by
current liabilities (quick current liabilities)
Quick ratio = Quick assets
Current liabilities/(quick liabilities)
QUICK ASSETS & QUICK LIABILITIES
QUICK ASSETS are current assets less prepaid
expenses and inventories.
QUICK LIABILITIES are current liabilities less bank
overdraft and incomes received in advance.
Capital structure/ leverage ratios
These ratios indicate the long term solvency of a
firm and indicate the ability of the firm to meet its
long-term commitment with respect to
Repayment of principal on maturity or in
predetermined instalments at due dates and
Periodic payment of interest during the period of
the loan.
Capital structure/ leverage ratios
The different ratios are:
Debt equity ratio
Proprietary ratio
Debt to total capital ratio
Interest coverage ratio
Debt service coverage ratio
Profitability ratios
These ratios measure the operating efficiency of
the firm and its ability to ensure adequate returns
to its shareholders.
The profitability of a firm can be measured by its
profitability ratios.
Further the profitability ratios can be determined
1. In relation to sales and
2. In relation to investments
Profitability ratios
Profitability ratios in relation to sales:
Gross profit margin
Net profit margin
Expenses ratio
Profitability ratios
Profitability ratios in relation to investments
1. Return on assets (ROA)
2. Return on capital employed (ROCE)
3. Return on shareholder’s equity (ROE)
4. Earnings per share (EPS)
5. Dividend per share (DPS)
6. Dividend payout ratio (D/P)
7. Price earning ratio (P/E)
Profitability ratios
Profitability ratios in relation to investments
1. Return on assets (ROA)
2. Return on capital employed (ROCE)
3. Return on shareholder’s equity (ROE)
4. Earnings per share (EPS)
5. Dividend per share (DPS)
6. Dividend payout ratio (D/P)
7. Price earning ratio (P/E)
Gross profit margin
This ratio is calculated by dividing gross profit by
sales. It is expressed as a percentage.
Gross profit is the result of relationship between
prices, sales volume and costs.
Gross profit margin = Gross Profit x 100
Net (Revenue) Sales
Net profit margin
This ratio is calculated by dividing net profit by sales. It
is expressed as a percentage.
This ratio is indicative of the firm’s ability to leave a
margin of reasonable compensation to the owners for
providing capital, after meeting the cost of production,
operating charges and the cost of borrowed funds.
Net profit margin =
Net profit after interest and tax x 100
Net (Revenue) Sales
Expenses ratio
These ratios are calculated by dividing the various expenses
by sales. The variants of expenses ratios are:
Material consumed ratio = Material consumed x 100
Net (Revenue) Sales
Manufacturing expenses ratio = Manufacturing expenses x 100
Net (Revenue) Sales
Question Answer session
