This document discusses various financial ratios used to analyze the financial performance and position of a business. It defines financial ratios as relative metrics calculated from a company's financial statements used to evaluate the firm's overall condition. The document then provides examples of different types of ratios (profitability, liquidity, solvency) and their formulas. It notes that ratios should be compared over time for a single company and against industry peers to identify trends and competitive strengths/weaknesses. Finally, it outlines some limitations of ratio analysis.

1. AC (5.1 & 5.2)
Investment is putting money into something with the expectation of profit. More specifically,
investment is the commitment of money or capital to the purchase of financial instruments or other
assets so as to gain profitable returns in the form of interest, dividends, or appreciation of the value
of the instrument (capital gains).
It is related to saving or deferring consumption. Investment is involved in many areas of the
economy, such as business management and finance whether for households, firms, or
governments. An investment involves the choice by an individual or an organization, such as a
pension fund, after some analysis or thought, to place or lend money in a vehicle, instrument or
asset, such as property, commodity, stock, bond, financial derivatives (e.g. futures or options), or
the foreign asset denominated in foreign currency, that has certain level of risk and provides the
possibility of generating returns over a period of time.
Capital and Revenue expenditure
Expenditure refers to spending on goods or services. Business expenditure may be classified as
capital or revenue in nature. Capital expenditure refers to spending on long-term assets. Long-term
assets are mainly fixed assets which are used in business operations over several periods.
Expenditure on plant, equipment’s and buildings are examples of capital expenditure. Capital
expenditure is recorded in long-term asset accounts instead of in expense accounts.
Revenue expenditure differs from capital expenditure. Revenue expenditure refers to expenditure
on goods and services which are expected to be used up within an accounting period. Such
expenditure is treated as expenses and is charged to the profit and loss account. Examples of
revenue expenditure being rent, wages, utilities, and cost of goods sold.
When an item of expenditure is capitalized, it is treated as a fixed asset and is shown in the balance
sheet. However, if the same item is 'expensed', it affects the profit or loss for the period.
Payback Period
Payback period is a capital budgeting concept which refers to period of time which is required for
a project to generate a return on investment which will cover the original investment made by a
company on the initial project cost. .
 Advantages
The advantage of using payback period is that its ease of use and anybody who is having
limited financial knowledge can apply it. It is also beneficial for those companies who are
recently established and want to know the time frame in which they would recover their
original investment, therefore those companies which do not want to take risk and want

2. quick return on their investments can select those projects which have low payback period
and ignore those projects which require long gestation projects.
 Disadvantages
While disadvantage of payback period is that ignores an important concept which is time
value of money and therefore may not present true picture when it comes to evaluating
cash flows of a project. It also ignores cash flows beyond the payback period and therefore
it does not take into account the complete return which a project can generate and therefore
it may reject a project which in the long term may be beneficial for a company.
ARR (Average Rate of Return)
Average rate of return (ARR) is a method of comparing the average profits you expect to the
amount you need to invest
 Advantages
Clearly shows the profitability of the investment
Can take account of interest rate changes
Can be used to compare with alternative investment projects to see how rates of return
differ
 Disadvantages
Doesn't take account of the fact that future returns may be less valuable
Ignores qualitative aspects of the decision
Doesn't consider how long it may take to recover initial investment and the costs of finance
that may be needed
NPV (Net Present Value)
The advantage of NPV is that is increases the wealth of the share holders.as it gives you money.
NPV (Net present Value) is used to determine future stream of benefits and costs converted into
equivalent values today.
 Advantages
Takes account of interest rates
Looks at the profitability of the project
Allows for the fact the future returns may be less valuable than current returns and so takes
account of the 'opportunity cost' of the money
 Disadvantages
Ignores qualitative aspects of the decision
Expressed in terms of dollars, not as a percentage

3. AC 6.1 & 6.2 & 6.3:
Profitability Ratio:
1: Gross Profit Margin
Gross Profit Margin = 184642 / 322917 * 100 164208 / 304818 * 100
Gross Profit Margin = 57.179 53.871
2011 2010
2: Net Profit Margin
Net Profit Margin = 44677 / 322917 * 100 36853 / 304818 * 100
Net Profit Margin = 13.835 12.09
2011 2010
3: R.O.C.E
R.O.C.E = 44677 / 52640 * 100 36853 / 38363 * 100
R.O.C.E = 84.873 96.064
2011 2010
4: Asset Turnover
Asset Turnover = 322917 / 52640 304818 / 38363
Asset Turnover = 6.1344 Times 7.9456 Times
2011 2010
Liquidity Ratio:

4. 2010
Current Ratio 0.6:1 0.5:1
Quick Ratio 0.3:1 0.3:1
Stock Days 57.2 Days 75.1 Days
Receivable Days 14.1 Days 12.6 Days
Trade Payable Days 195.3 Days 246 Days
2011
Solvency Ratio:
Gearing Ratio = 2674 + 111 / 35578 x 100 4699 + 332 / 47609 x 100
Distribution Cost = 7.82787 % 10.5673 %
20112010
A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values
taken from an enterprise's financial statements. Often used in accounting, there are many standard
ratios used to try to evaluate the overall financial condition of a corporation or other organization.
Financial ratios may be used by managers within a firm, by current and potential shareholders
(owners) of a firm, and by a firm's creditors. Security analysts use financial ratios to compare the
strengths and weaknesses in various companies.
Financial statement analysis evaluates the financial strengths and weaknesses of a business. When
the company prepares ratios for a banker, liquidity is of prime concern, since the business must be
liquid if the debt is to be repaid. If a long-term obligation is involved, earning power and operating
efficiency of the borrower are emphasized. After the ratio is computed, it is compared with related
ratios of the company, the same ratios from prior years, and the ratios of the competitive firms.
The comparisons reveal trends over a period of time and hence the ability of the company to
compete with others in the industry. Ratio comparisons do not mark the end of the analysis of the
business, but rather point to areas requiring further investigation.
The various limitations inherent in ratio analysis may include
 It is often difficult to identify the industry group to which the company belongs. This makes
the industry comparisons a problem.

5.  Diversity among the companies in applying GAAP may result in distorted ratios and
comparisons. An example is a company using LIFO while another uses FIFO to value
inventory.
 Published industry norms are only approximations.
 The historical cost of an asset may differ from its current value. An example being land.
 The ratio does not reveal its components. For instance, the current ratio may be high but
inventory may be composed of obsolete merchandise and receivables may include accounts
owed from a politically unstable foreign country.
 A company may “window dress”, making its financial picture look better than really it is.
 Liabilities may be understand from an analytical sense.
 Liabilities may be overstated from an analytical sense.