Liquidity ratios
Current ratio = current assets / current liabilities (feasible ratio is 2:1)
Current assets = cash and bank balances, marketable securities, closing stock,
debtors net of provision, bills receivable and prepaid expenses.
Current liabilities = bills payable, trade creditors, bank credit, provision for taxation,
dividends payable and outstanding expenses.
Acid-test ratio, liquid or quick assets ratio = quick assets / current liabilities (feasible
ratio is 1:1)
Quick assets = current assets – closing stock and prepaid expenses.
Absolute liquidity ratios = cash in hand and at bank + marketable securities / current
liabilities(feasible ratio is 1:2)
Turnover ratios
Inventory turnover ratio = cost of goods sold / average inventory
Cost of goods sold = opening stock + purchases + direct expenses – closing stock or sales
– gross profit.
Average inventory = opening stock + closing stock / 2
Inventory holding period = number of days or months in a year / inventory turnover
Debtors turnover ratio = net credit sales / average debtors
Net credit sales = credit sales – sales returns
Average debtors = opening debtors + closing debtors / 2
Debtors velocity or debt collection period = number of days or months in a year / debtors
turnover
Creditors turnover ratio = net credit purchases / average creditors
Net credit purchases = credit purchases – purchase returns
Average creditors = opening creditors + closing creditors / 2
Creditors velocity or creditor’s payment period = number of days or months in a year /
creditors turnover
Total assets turnover ratio = cost of goods sold or sales / total assets
Fixed assets turnover ratio = cost of goods sold or sales / fixed assets
Current assets turnover ratio = cost of goods sold or sales / current assets
Tangible assets turnover ratio = cost of goods sold or sales / tangible assets
Intangible assets turnover ratio = cost of goods sold or sales / intangible assets
Working capital turnover ratio = cost of goods sold or sales / net working capital
Net working capital = current assets – current liabilities
Capital turnover ratio = cost of goods sold or sales / capital employed
Capital structure or leverage ratios
Debt to equity ratio = long term debt / shareholders’ equity or total debt / shareholders’
equity
Long term debt = total liabilities – current liabilities
Share holders’ equity or net worth = equity capital + preference capital + accumulated
profits but excludes accumulated losses and discount on issue of shares which are known
as fictitious assets/
Debt to total capital ratio = long term debt / permanent capital
Permanent capital = long term debt + share holders’ equity
Debt to total assets ratio = total debt / total assets
Total debt = long term debt + current liabilities
Proprietory ratio = proprietors funds / total assets
Proprietors’ funds = equity capital + preference capital + reserves and surpluses + profit
and loss
Capital gearing ratio = fixed interest bearing securities / equity capital
Fixed interest bearing securities = Preference shares and debentures and other borrowed
funds
Coverage ratios
Interest coverage ratio = earnings before interests and after taxes / interest
Earnings before interest and taxes = net profit + interest
Dividend coverage ratio = earnings after taxes / preference dividend
Earnings after taxes = net profit - taxes
Profitability ratios
Gross profit ratio = gross profit / sales x 100
Net profit ratio = net profit after taxes / sales x 100
Operating profit ratio = earnings before interest and taxes / sales x100
Raw materials consumed ratio = raw materials consumed / sales x100
Conversion cost ratio = labour cost + manufacturing cost / sales x100
Cost of goods sold ratio = cost of goods sold / sales x100
Administrative expenses ratio = Administrative expenses / sales x 100
Selling and distribution expenses ratio = Selling and distribution expenses / sales x 100
Financial expenses ratio = Financial expenses sales x 100
Operating expenses ratio = Administrative expenses + Selling and distribution expenses /
sales x 100
Operating ratio = cost of goods sold + Administrative expenses + Selling and distribution
expenses / sales x 100
Return on investment ratios
Return on assets ratio = earnings after taxes / total assets or earnings after taxes +
interest / total assets or earnings after taxes + interest / tangible assets or earnings after
taxes + interest / fixed assets
Return on capital employed = earnings after taxes / capital employed or earnings after
taxes + interest / capital employed – intangible assets
Return on shareholders’ equity earnings after taxes / shareholders’ equity
Return on equity = earnings after taxes – preference dividend / shareholders’ equity or net
worth
Earnings per share = earnings after taxes – preference dividend / number of equity shares
Dividend per share = earnings after taxes and preference3 dividend paid to equity share
holders / number of equity shares
Dividend pay out ratio = total dividend / total net profit available for share holders
or dividends per share / earnings per share
Earnings yield ratio = earnings per share / market value per share
Dividend yields ratio = dividend per share / market value per share
Price earnings ratio = market value per share / earnings per share.
