1.ratios-12 Important Formulas and Points Lyst8355

Important
Points:
• Current Assets are those, which undergo change in their shape/form within 12
months. These are also called Working Capital or Gross Working Capital.
• Acid test / quick asset ratio- should be at least 1:1
• debt equity ratio- ideal ratio is 2:1
• Current Assets are Short Term Use of Funds
• Current Liabilities are known as Short Term Sources of Funds
• Proprietary ratio: the extent to which tangible assets are financed by owner’s
funds i.e net worth.
• Proprietary ratio= tangible net worth/ tangible assets. Ideal ratio is 0.5:1. The ratio
will be 100% when there is no borrowing for purchase of assets.
• Long Term Liabilities & Short Term Liabilities are also called Outside Liabilities
• Net working capital = current assets - current liabilities.
• Gross profit ratio- a higher GP ratio indicates efficiency in production.
• Debtors turnover ratio- measures average collection period.
• Asset turnover ratio- sales/ assets
• Fixed assets turnover ratio- net sales/ fixed assets
• Current assets turnover ratio- net sales/ current assets
• Creditors turnover ratio- determines credit payment period. Net credit purchase/
average payable
• Return on assets ratio- net profit/ total assets
• Return on capital employed- net profit/ capital employed. Capital employed is the
sum of equity capital and long term funds provided by owners.
• Price earning ratio- number of times EPS is covered by market price. Market price
per equity share/ earning per share.
• Debt service coverage ratio- ability of an enterprise to meet its liabilities by
payment of instalments on term loans and interest. DSCR= PAT + depreciation +
annual interest received/ annual interest and principal payments to be made. ideal
DSCR is 2.
• fixed assets to net worth ratio- ideal ratio is 0.75:1
successrbi@anujjindal.in www.anujjindal.in 1

• Net Worth is the amount by which assets exceed liabilities. Net worth is a concept
applicable to individuals and businesses as a key measure of how much an entity is
worth. A consistent increase in net worth indicates good financial health; conversely,
net worth may be depleted by annual operating losses or a substantial decrease in
asset values relative to liabilities. In the business context, net worth is also known
as book value or shareholders' equity.
• Net Worth & Long Term Liabilities are also called Long Term Sources of Funds
• If there is profit it shall become part of Net Worth under the head Reserves and if
there is loss it will become part of Intangible Assets under the head Debit Balance of
P & L A/c
• Capital employed represents the capital investment necessary for a business to
function. Consequently, it is not a measure of assets, but of capital investment: stock
or shares and long-term liabilities. CE can be defined as the following:
o The total amount of capital used for the acquisition of profits.
o The value of all the assets employed in a business.
o Fixed assets plus working capital.
o Total assets less current liabilities.

• Bonus Shares are issued by capitalization of General reserves (when a company
issues bonus shares, it uses reserves to increase its equity capital. There is transfer of
funds from reserves account to capital account. Thus, there is no net reduction or
increase in net worth) and as such do not affect the Net Worth.
• In Rights Issue, existing shareholders are given an option to purchase new issue in
proportion of their present holding. Under rights issue, there is a change in Net
Worth.
• Net income, also called net profit, is a calculation that measures the amount of total
revenues that exceed total expenses. It other words, it shows how much revenues
are left over after all expenses have been paid. This is the amount of money that the
company can save for a rainy day, use to pay off debt, invest in new projects, or
distribute to shareholders. Investors, creditors, and company management tend to
focus on the net income calculation because it is a good indicator of the company’s

financial position and ability to manage assets efficiently. Investors want to know
that their investment will continue to appreciate and that the company will have
enough cash to pay them a dividend. Creditors want to know the company if
financially sound and able to pay off its debt with successful operations. Company
management is typically concerned with both investor and credit concerns along
with the company’s ability to pay salaries and bonuses.
• EBITDA, which stands for earnings before interest, taxes, depreciation, and
amortization, is a financial calculation that measures a company’s profitability
before deductions that are often considered irrelevant in the decision making
process. In other words, it’s the net income of a company with certain expenses like
amortization, depreciation, taxes, and interest added back into the total. Investors
and creditors often use EBITDA as a coverage ratio to compare big companies that
either have significant amounts of debt or large investments in fixed assets because
this measurement excludes the accounting effects of non-operating expenses like
interest and paper expenses like depreciation. Adding these expenses back into net
income allows us to analyze and compare the true operating cash flows of the
businesses.


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