Welcome to the world of Ratio Analysis in Tally. Understanding financial ratios is crucial for assessing a company’s performance and making informed decisions.

9.1 Significance of Ratios:

Purpose:

Ratios offer insights into a company’s financial health, helping in effective decision-making.

Types of Ratios:

9.2 Liquidity Ratios:

Current Ratio:

Formula: Current Assets / Current Liabilities.

Measures a company’s ability to cover short-term liabilities.

Quick Ratio:

Formula: (Current Assets – Inventory) / Current Liabilities.

Assesses a company’s ability to meet short-term obligations without relying on inventory sales.

9.3 Profitability Ratios:

Gross Profit Ratio:

Formula: (Gross Profit / Net Sales) * 100.

Evaluates profitability after accounting for production costs.

Net Profit Ratio:

Formula: (Net Profit / Net Sales) * 100.

Measures overall profitability.

9.4 Efficiency Ratios:

Inventory Turnover Ratio:

Formula: Cost of Goods Sold / Average Inventory.

Assesses how quickly inventory is sold.

Receivables Turnover Ratio:

Formula: Net Credit Sales / Average Receivables.

Indicates how efficiently a company collects payment.

9.5 Solvency Ratios:

Debt Equity Ratio:

Formula: Total Debt / Shareholder’s Equity.

Evaluates the proportion of debt used for financing.

Interest Coverage Ratio:

Formula: Earnings Before Interest & Taxes (EBIT) / Interest Expense.

Gauges a company’s ability to meet interest obligations.

9.6 Interpreting Ratio Analysis:

Comparative Analysis:

Compare ratios with industry benchmarks or past performance.

Red Flags:

Identify ratios significantly deviating from industry standards.

Conclusion:

Ratio Analysis in Tally is a powerful tool for understanding and interpreting a company’s financial health. Regular ratio assessments aid in strategic decision-making.