everyone this is muhammad sawrap and you
are watching our search virtual learning it's our second session today we will do
some ratio analysis uh but before that uh i would like to introduce you to one of
the top and successful uh investor in the world and one of the top financial
analysts his name is warren buffet forbes magazine listed one of your name as the
richest person in the world and according to the estimation his wealth his wealth was 62 billion
dollars so the question is how warren buffet how is very simple he earned this amount through
investing through investing in different companies what was his strategy before investing in any
company according to warren buffet in 1950 he learned the technique of investing in company but
before investing he said that and that analysis are extremely important so let's know what was
the strategy wrote was the technique of what boring buffet warning of before and masking in
any company according to warren buffet he invest in those companies that have good long-term
potential and they are currently underpriced so this was one of his technique of investing in
different companies he said that i invest in those companies which are enterprised but they have
long-term potential so how he calculated this data how he could do nothing which company has long
term potential and which company has underpriced in uh grants native so he used a financial
analysis before making any investment he used fine used financial analysis and on the
passes of those analysis he taken his old decisions of investment so he earned
62 billion dollars uh through investing in different companies but before that he
said that analysis are critically important they decide analysis decide whether uh you should
invest in any company or not so it was all about warren buffet so have you got the importance of
financial analysis so guys financial analysis mean as i said you earlier in previous session that
financial analysis introduced us to different methods of analysis where we use the financial
information or financial statement of a company and on the passes of that statement we get to
know about the strength and weaknesses of that company we use financial statement of a company
and we analyze how that company has performed in the past and how this company will perform
in the future okay guys financial analysis are being performed on financial statement okay and
financial statement consists on three statements one is balance sheet then second is income
statement and then third is cash flow statement okay financial statement for corporations are
are the are the balance sheet income statement and cash flow statement so user need to understand
these statement very deeply okay the data on which we perform different analysis we extract their
data from these three statements so we must know that which data is which data is being provided
by which statement uh when we talk about balance sheet balance sheet show the financial condition
or financial position of an entity and balance sheet sheet consists on three major sections the
resource or firm which called assets and then the debt of firms which called liabilities and
then the investment of the honored which called as equity or kpl okay i i'm repeating it again
vanishing consists of three major sections one is uh the resources of the firm which called as exit
okay then the date of the firm which called as liabilities and the amount which is being invested
by the on it is called you could equity or capital okay so all data related to assets liabilities
and equity is available in balance sheet okay okay guys then second major statement is income
statement or guess that income statement uh showed the performance of the business during a specific
period summarize the result of our operation for a particular time period okay so income
statement provides the information related to the company performance how that company has
performed in previous year and it consists on sales expenses and profit like it show how much
profit we have earned during the period and how much expenses we during the period so all uh data
related to sales expenses and profit is available in income statement okay then the last statement
is a statement of cash flow the statement of cash flow detail the inflow and outflow of cash
during a specific period so it consists on three sections one is uh cash flow from uh operating
activities then second is cash flow from and lasting activities and again then last
is cash flow through financing activities when it comes to financial statement analysis
there are several methods of analysis the most common methods are ratio analysis common
size analysis and dew point framework analysis each of these analysis are so necessary because
they provide the detail uh information about the company they show us the health of the company
through in terms of financial uh position in today's session we will uh discuss about ratio
analysis and we will study ratio analysis in more detail and we will perform different ratio
analysis so what actually uh why actually we do ratio analysis because it has shown this is tell
us about the uh capacity of the firm the worrying capacity of the firm the profitability of the
platform and and the efficiency of the firm further assurances also uh tell us how the firm
is operating so ratios are so necessary and we today will do different ratio analysis okay guys
when it come to fresh analysis ratio analysis are so necessary because ratio analysis evaluate
the financial health of companies by scrutinizing past and current financial statement okay so
what actually we do in financial ratio analysis in pressure analysis we extract data from these
three statements which we have studied uh here uh these statements consist on financial in
balance sheet income statement and cash flow statements we extract data from these statements
and then we perform different analysis and we uh extract the relevant data from these
statements and on the basis of their data we evaluate that data and rational analysis
are divided into four groups one is liquidity ratio then second is solvency ratio and
then third is profitability ratio and then fourth is efficiency ratio so guys what
is our objective of doing this analysis because uh users of financial statement use this
ratio to know about the health of the company okay so the user of the financial statement use these
ratio to know about the health of a company so as today we will do different ratios and the
first ratio is liquidity ratio what hd liquidity ratio is liquidity ratio measure the ability
of the firm to repay its short-term obligations okay it measure whether company will be able to
repay its short-term or current obligations or not through its current assets okay because liquidity
ratio measure the ability of the borrower to pay obligations when they come to you when
they come to you so liquidity issue measure the ability of the borrower to pay its
obligations when they come to you so if the liquidity of our firm is strong strong then
definitely i will provide more credit to that firm so these ratios are necessary for those who
provide short-term obligations who provide short-term credit to uh firm when we
talk about solvency ratios solvency ratio measures the ability of the firm to
repay its long-term liabilities okay so the difference between liquidity and solvency
ratio is that so a liquidity ratio measures the short-term obligation of the firm to repair its
obligations and solvency ratio main the long-term ability of the firm to repay its obligations so if
i am a long-term creditors then definitely i will interested in solvency ratios okay because
it measure the profitability and solvency of the firm ability of the firm to survive over
a longer period of time and whether that company will be able to repay its long-term creators
or not this is being indicated by the solvency ratio user of financial statement use these ratios
like a short-term trader like supplier or banker will use solvency ratio because they want to know
whether the firm is able to repair liabilities or not in the in a shorter period okay if the user
is long-term creator then definitely you will interested to know about the servancy position
of the firm and if the user is shareholder then he will interested to know about the
profitability ratio because profitability ratio measure how the company has converted converted
its revenue into profit how company has controlled its uh its expenses and it has converted its
revenue into profit so uh shareholders looks at the profitability and solvency of the company
because they want to assess the likelihood of dividend and the growth potential of the
stock so a profitability ratio is necessary for shareholders okay then the last is efficiency
ratio so the efficiency ratio measure how company has used its assets and how efficiently
company has used its asset and how the firm has converted the use of its asset into revenue
or profit so so the efficiency ratios are so necessary because it's measured the usage of
acid how efficiently firm is using its asset so today we will do liquidity ratios and as i
said you earlier that liquidity ratio measures the ability of the firm to pay its current
obligations what does this mean this means that it measures the ability of the firm to pay off its
short-term liabilities oh let me repeat it again liquidity ratio measure the ability of the
firm pay its short-term obligations okay and to meet the unexpected need of cash
the short-term creditors such as banks and suppliers are too not too much interested to know
about the liquidity ratios because they provide short-term obligations to the firm and they are
interested to know the short-term ability of the firm to repay its obligations so obviously we
calculate liquidity ratio the liquidity ratios are a result of dividing liquid assets by the
short-term borrowing or current liabilities okay so liquidity ratio contents on three types of
ratios okay liquidity ratios content on three types of ratios one is current ratio then second
is quick ratio and then third is cash ratios first you will measure current ratios when
what is the current ratio is current ratio measure the ability of the firm to repay its
uh short-term liabilities as we studied here so the current ratio will measure
whether the firm is able to pay its short-term liabilities or not so how actually
we calculate uh trend ratios and which data is required for current ratios as its name
suggests that a portion related to current data is available in balance sheets where we divide our
assets into current or non-current assets and then we also divide our liabilities into current
liabilities and non-current liabilities so its name suggests that we have to bring data that
is related to friend uh trend data so the current data is available in the form of current assets
and then in the form of current liabilities so how we calculate current ratios current ratios
equal to total current assets divided by total current lines so how we calculate
condition by dividing our own current assets with the current liabilities so the question
is what the results of current ratio indicates so the result indicate that for every dollar
of liabilities how much current assets did you have to pay for that liabilities
so your current ratio is more than one that indicate that the firm has more assets than
its liabilities and the firm is able to pay its short-term liabilities i'm repeating it again
if you are cr current ratio is more than one that indicate that firm has the ability to build
short-term liabilities uh it's its assets are more than its current liabilities its current assets
are more than its current liabilities so as let's calculate current ratio as we know that current
ratio is calculated by dividing all current assets by uh total current liabilities so we have
these current current assets okay here i listed the current assets and here are some current
liabilities so how we can calculate it we will uh add all our current assets equal to 5000 plus uh
6000 plus four thousand plus seven thousand plus two thousand so that current assets are twenty
twenty twenty four thousand dollars now i will uh add all the current liabilities here okay so
print liability is equal to 7000 for account payable and then and then uh 9000 for short-term
loan okay so the current liabilities are for 16 000 so let's divide this figure and know the
results okay so here i will divide this figure equal to 24 000 divided by 16 000 so here is
the result and it is 1.5 okay the result is 1.5 so what actually this results suggest
and what actually this result indicates so let's know what actually this result indicate
so uh the current ratio is 1.5 that mean our short-term obligations are fully covered because
the ratio is more than one and the firm is able to pay its short-term liabilities okay so the current
ratio greater than one indicate the company is in good health and it is less likely uh fall into
financial difficulties and further 1.5 mean 1.5 million date for every dollar of front liabilities
for every dollar of current liabilities this company has 1.5 dollars of current assets i
am repeating it again what xd 1.5 indicates that for every dollar of current liabilities
for every dollar of current liabilities this firm has 1.5 dollars of front assets
it's obvious that this firm is able to pay its current liabilities through its current
assets because because its current assets are more than its current liabilities this form has
adequate current assets relative to its current liabilities so this was the interpretation of
this result and so the second ratio is quick ratio guys so what why actually we calculate quick
ratio why uh current ratio is not enough for our liquidity ratios and liquid for calculation of
liquidity ratios because current ratio consists on many current assets and so here are many assets
which take time in converting into the cash so liquidity mean those assets which quickly respond
again against the current liabilities be so here are some assets which uh doesn't respond quickly
to our current liabilities like we have inventory which is one of the slow uh so uh inventory
is slow moving inventory because it take time in converting into the cash so we want those
assets which quickly convert into the cash and so we pay over current liabilities so here are
some assets which take time in converting into the cash so we will exclude those assets which take
time in converting into liquid form so we will add just those assets which quickly convert or which
we could uh now we will calculate quick ratio and quick ratio includes on those assets which
quickly or immediately convert into cash and they quickly uh liquidate or and doesn't take
time in liquidation or which assets actually we exclude from this list we will exclude
inventory and prepaid expenses why we actually exclude inventory because inventory takes time
in converting into cash so because inventory is slow moving uh assets so inventory is slow moving
assets so we will exclude it from here because we because inventory is in different form like it
could be in the form of a raw material it could be in the form of work in progress so it could be in
the form of finished goods so we do not know that when our raw material will convert into
finish good and when our finished good will be sold to our customers so that's why we exclude
inventory because inventory take too much time in converting into liquid form so uh because
quick show includes those assets which quickly and immediately immediately convert into cash so
we actually want to know how quickly we can respond against our current liabilities let's
calculate quick ratio so we will exclude inventory from our from quick ratios from
quick uh assets and then we will exclude prepaid expenses from our quick assets
okay so here uh we will add over all uh quick assets which were cash for five thousand
and then accountable for six thousand then uh cash for grant is for seven thousand so the
quarterback assets are for eighteen thousand so let's calculate our total liabilities here
are for account payable is for seven thousand then short-term loan is for nine thousand so so
the total liabilities are for sixteen thousand so let's calculate its ratio eighteen thousand
divided by 16 000 so the quick ratio is 1.125 so what actually this figure indicated it indicate
that so here the value is greater than 1 that in that indicate that the short-term obligations
are fully covered because quick ratio is greater than one indicate that form has good financial
condition and it is less likely that firm will face financial difficulties and this firm is
able to pay its short-term liabilities through its quick ratio so furthermore we can say that
for every dollar of current liabilities this firm has 1.125 dollar of current assets so this
firm can pay its current liabilities okay so let's calculate now we will calculate cash
ratio okay so here actually we want to know that how much cash do we have in our company to pay
our total current liabilities so the current assets will include cash and cash equivalent
for the cash equivalent includes money market accounts treasury bills and we can easily convert
them into cash we can convert these assets into cash more quickly so we will consider these
assets as cash so our total assets are for twelve thousand and our total liabilities are for seven
thousand plus nine thousand and total liabilities are for sixteen thousand so let's see cash ratio
so 12 000 divided by 16 000 so the ratio is 4. so the crash ratio is 0.75 what does this mean
this mean that against one dollar of liability firm has less cash than its liabilities so
this firm is unable to pay its total current liabilities through its through the source of
cash the firm has less cash than its total current liabilities and firm is unable to pay its all
liabilities through the source of cash so we can say that for every dollar of current liabilities
firm has 0.7 uh dollar cash current assets firm has 0.7 current assets so that means so cash is
less than liabilities so firm is unable to pay its current liabilities through the source of cash
through the asset of cash hopefully this was a nice session for girls and we will meet in next
session next session we will do solvency ratios
