Mere statistics/data presented in the different financial statements do not reveal the true picture of a financial position of a firm. Properly analyzed and interpreted financial statements can provide valuable insights into a firm’s performance. To extract the information from the financial statements, a number of tools are used to analyse such statements. The most popular tool is the Ratio Analysis.

Financial ratios can be broadly classified into three groups:

(I) Liquidity ratios,

(II) Leverage/Capital structure ratio, and

(III) Profitability ratios.

Current Ratio = Current Assets / Current Liabilities
= 23.40/16.00 = 1.46

Quick Ratio = Quick Assets / Current Liabilities
=Current Assets-(inventory + prepaid expenses)/Current Liabilities
= [23.40-(10.60+0.8)]/16.00 = 12.00/16.00 = 0.75

Inventory Turnover Ratio = Cost of goods sold/Average Inventory
= (Net Sales-Gross Profit)/ [(opening stock+closing stock)/2] = (105-16)/ [(15+13)/2] = 89/14 = 6.36

Debtors Turnover Ratio= Net Sales/Average account receivables
(Debtors)
=105/11.80 =8.8983

Average Collection period = 365 days / Debtors turnover
= 365 days/8.8983 = 41 days

Fixed Assets Turnover ratio = Net Sales / Net Fixed Assets
= 105/60 = 1.75

Debt to Equity Ratio = Debt/ Equity
= (21.00+25.00)/(16.00+22.00) = 46/38 = 1.21

Gross Profit Ratio = Gross Profit/Net Sales
= 16.00/105.00 = 0.15238 or 15.24%

Net Profit Ratio = Net Profit / Net Sales
= 9/105.00 = 0.0857 or 8.57 %

Return on Shareholders’ Equity = Net Profit after tax/Net worth
= 5.00/(16.00+22.00) =0.13157 or 13.16%