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Current Ratio
The current ratio is the ratio of total current assets to total current liabilities. It is calculated by dividing current assets by current liabilities:
The current assets of a firm, as already stated, represent those assets which can be, in the ordinary course of business, converted into cash within a short period of time, normally not exceeding one rear and include cash and bank balances market

Change In Net Working Capital
TABLE
Change In Net Working Capital
Although the N’WC has gone up for the firm in Table from Rs 75,000 to Rs 1,00,000, that is, by Rs 25,000 or 33.3 per cent between two points of time, there is, in reality, a deterioration in the liquidity position. In the first year, the firm had Rs 4 of current assets for each rupee of current liabilities; but by the end of the second year

Net Working Capital
TABLE
Net Working Capital
If the size of NWC is a measure of liquidity, Company A must be three times as liquid as Company B. However, a deeper probe would show that his is not so. A comparison of current liabilities and current assets of both the firms shows that for each rupee of current liability, B has Rs 3 of current assets, while A has only Rs 1.50. Thus, while A has-three times the N

Net Working Capital
Net working capital (NWC) represents the excess of current assets over current liabilities. The term assets refers to assets which in the normal course of business get convened into cash without dimension in value over a short period, usually not excluding one length of operating cash cycle whichever is more. Current Liabilities are those liabilities which at the inception are required to be

Liquidity Ratios
The importance of adequate liquidity in the sense ,of the ability of a firm to meet current short-term obligations when they become due for payment can hardly be over stressed, In fact, liquidity is it prerequisite for the very survival of a firm. The short-term creditors of the firm are interested in the short-term solvency or liquidity of a firm. But liquidity implies, from the viewpoint of u

Types of Ratios
Ratios can be classified into six broad groups: (i) Liquidity ratios, (ii) Capital structure/leverage ratios, (iii) Profitability ratios, (iv) Activity/Efficiency ratios, (v) Integrated analysis of ratios and (vi) Growth ratios.
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Trend Ratios
Involve a comparison of the ratios of a firm over time, that is, present ratios are , compared with past ratios for the same firm. The comparison of the profitability of a firm, say, year 1 through 5 is an illustration of a trend ratio. Trend ratios indicate the direction of change in the performance-improvement deterioration or constancy-over the years.
The Inter-firm comparison involving comparis

Basis of Comparison
Ratios, as shown above, are relative figures reflecting the relationship between variables, They enable analysis to draw conclusions regarding financial operations. The use of ratios, as a tool of financial analysis, involves their comparison, for a simple ratio, like absolute figures, fails to reveal the true position. For example, if in the case of a firm, the return on capital employed is

RATIO ANALYSIS
Meaning and Rationale
Ratio analysis is a widely-used tool of financial analysis. It can be used to compare the risk and return relationships of firms of different sizes. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical and current financial condition can determined. The term ratio refers t

FINANCIAL STATEMENTS ANALYSIS
INTRODUCTION
As observed in the preceding Chapter, a basic limitation of the traditional financial statements comprising the balance sheet and the profit and loss account is that they do not give all the information related to the financial operations of a firm. Nevertheless, they provide some extremely useful information to the extent that the balance sheet mirrors the financial p