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RATIO - BASICS
Gross profit = Sales – Cost of goods sold
Operating profit = GP – Operating Expenses
= Profit after operating expenses but before Interest and tax.
Operating Expenses = Administration Expenses + Selling and distribution expenses,
Interest on short term loans etc.
Capital employed = Share holders fund + Long term borrowings-Prelim expenses
Or = Fixed assets + Working capital
Share holders fund (or) Proprietary fund (or) Owners fund (or) Net worth = Equity
share + Preference share + Reserves and surplus – P & L a/c – Preliminary Expenses.
Equity shareholders funds = Shareholder funds – Preference Share capital
Long term liability = Secured loan + unsecured loan + Debentures.
Total asset = Total assets as per Balance sheet – Preliminary expenses.
Total liability = Long term liability + Current liability (or) short term liability
Long term fund = Total asset – Current liability or
Share holders funds + long term loan funds.
Working capital = Current asset – Current liability
Accounts Receivable = Debtors + Bills receivable
Accounts payable = Creditors + Bills Payable
Current Assets = Stock + Debtors + Bills Receivable + Cash + Bank Balances +
Prepaid expenses + accrued income
Quick Asset = Current Asset – Stock & Prepaid expenses
Current Liability = Creditors + Bills payable + Bank OD + Outstanding Expenses
Quick Liability = Current liability – Cash credit, Bank borrowings, OD
Liquidity Ratios (Short term Solvency Ratios): -
1) Current ratio = Current asset
Current Liability
2) Liquid Ratio = Quick Assets
Current Liabilities
3) Quick ratio or Acid Test ratio = Quick Asset
Quick liability
(1)
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D) Profitability Ratios : -
1) Gross Profit Ratio = Gross Profit * 100
Sales
2) Net Profit Ratio = Net Profit * 100
Sales
3) Operating Profit ratio = Operating profit * 100
Sales
4) Return to shareholders = Net profit after interest and tax
Share holders fund
5) Return on Net Worth = Return on Net worth * 100
Net worth
6) Return on capital employed (or) Return on investment = Return (EBIT)
Capital Employed
7) Expenses Ratios :-
a) Direct expenses Ratios : -
i) Raw material consumed * 100
Sales
ii) Wages * 100
Sales
iii) Production Expenses * 100
Sales
b) Indirect expenses Ratios : -
i) Administrative Expenses * 100
Sales
ii) Selling Expenses * 100
Sales
iii) Distribution Expenses * 100
Sales
iv) Finance Charge * 100
Sales
8) Earnings per share = Net profit after interest and tax – Dividend on Preference shares
Number of equity shares
9) Price earning ratio = Market price per equity share
Earning per share
10) Pay out ratio = Dividend per equity share * 100
Earning per equity share
(2)
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11) Dividend yield ratio = Dividend per share * 100
Market price per share
12) Fixed charges coverage ratio = Net profit before interest and tax
Interest charges
13) Interest coverage ratio = Earning before interest and tax
Interest charges
14) Fixed dividend coverage ratio = Net profit .
Annual Preference dividend
15) Over all profitability ratio = Operating profit * 100
Capital employed
16) Productivity of assets employed = Net profit * 100
Total tangible asset
17) Retained earning ratio = Retained earnings * 100
Total earnings (NP)
F) Turnover Ratios (Activity Ratios): -
1) Assets turnover = Sales (in times)
Total assets
2) Fixed assets turnover = Sales [Number of times fixed assets has
Fixed assets turned into sales]
3) Working capital turnover = Sales (in times)
Working capital
4) Inventory turnover = Cost of goods sold
(For finished goods) Average inventory
5) Debtors turnover (or) Average collection period = Credit sales (in times)
Average accounts receivable
(or) = Average accounts receivable * 365 (in days)
Credit sales
6) Creditors turnover (or) Average payment period Credit purchases (in times)
Average accounts payable
(or) = Average accounts Payable * 365 (in days)
Credit Purchases
(3)
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(4)
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7) Inventory Turnover (for WIP) = Cost of production (in times)
Average Inventory (for WIP)
8) Inventory Turnover (for Raw material) = Raw material consumed (in times)
Average inventory (for raw material)
10) Inventory Holding Period = 365 . (in days)
Inventory turnover ratio
11) Capital Turnover ratio = Cost of sales (in times)
Capital employed
Capital structure ratios (Long-term Solvency Ratios): -
1) Debt-equity ratio = Debt = External Equity
(or) Leverage ratio Equity Internal Equity
= Long term debt = Share holders fund
Long term fund Long term fund
2) Proprietary ratio = Proprietary fund
Total Assets
3) Total Liability to Net worth ratio = Total Liabilities
Net worth
4) Capital gearing ratio = Preference share capital + Debentures + Long Term Debt
Equity shareholders funds
(5)
