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Ratios 1

The document discusses various types of financial ratios used to analyze the performance and financial health of a business. It covers liquidity ratios like current ratio and quick ratio, turnover ratios like inventory and debtors turnover, profitability ratios like gross profit ratio and return on equity, and capital adequacy ratios like debt-equity ratio and proprietary ratio.

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Ayush Bankar
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9 views

Ratios 1

The document discusses various types of financial ratios used to analyze the performance and financial health of a business. It covers liquidity ratios like current ratio and quick ratio, turnover ratios like inventory and debtors turnover, profitability ratios like gross profit ratio and return on equity, and capital adequacy ratios like debt-equity ratio and proprietary ratio.

Uploaded by

Ayush Bankar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Ratio Analysis

I. Liquidity Ratios:
Liquidity Ratio reflects the ability of business to pay off its current liabilities (short term) by
converting its current assets in their liquid form. Such an ability in short run is reflected in
Current Ratio and in very short run with the help of Quick Ratio or Liquid Ratio.

1) Current Ratio:
Current Ratio of 2:1 is a good indicator. A higher ratio indicates the higher capacity of a
company to pay back its short term debts while a low current ratio indicates that a firm may
have a hard time paying their current liabilities in the short run.

Current Ratio= Current Assets


Current Liabilities

2) Quick Ratio/ Liquid Ratio/ Acid Test Ratio:


Quick ratio of 1:1 is favourable. A higher ratio indicates the better position of a company
and vice versa.

Quick ratio= Quick Assets


Quick Liabilities
Quick Assets= Current Assets- Inventory- Prepaid Expenses
Quick Liabilities= Current Liabilities- Bank Overdraft

3) Cash Ratio/ Absolute Liquid Ratio= Cash + Bank + Marketable Investment


Current Liabilities
II. Turnover ratio:
Turnover ratio indicates churning of various components of business cycle.

1) Inventory Turnover Ratio= Cost Of Goods Sold


Average Inventory
Average Inventory= (Opening + Closing )/2

2) Debtors Turnover Ratio= Credit Sales


Average Debtors

Average Debtors= (Opening + Closing)/2


Average Collection Period= 365 days
Debtors Turnover

3) Asset Turnover Ratio= Net Sales


Total Assets

4) Net Worth Turnover Ratio:


The ratio is developed from the perspective of the shareholder and is used to analyze
investor returns. The ratio is used to determine how well a company is utilizing the
shareholder investment to create returns for them.

Net Worth Turnover Ratio = PAT


Net Worth
Net Worth= Equity Share Capital + Reserves and Surplus

5) Net Working Capital Ratio= Net Sales


Average Working Capital

6) Capital Turnover Ratio:


The ratio indicates whether the firm is able to generate sales from its long term
investment.
Capital Turnover Ratio = Sales
Capital Employed
Capital Employed= Owned Funds + Borrowed Funds
III. Profitability Ratio/ Performance Ratios:
They are based on sales and relate to efficiency ratio because they show how well
companies are using their assets to generate profits.

1) Gross Profit Ratio= Gross Profit


Net Sales

2) Operating Profit Ratio= Operating Profit


Net Sales
Operating Profit= Net Sales- COGS- Operating Expenses (Admin, S/D, Financial,
Depreciation)

3) Net Profit Ratio= Net Profit


Net Sales

4) Return On Capital Employed= EBIT


Capital Employed
Capital Employed= Owned Funds + Borrowed Funds

5) Return On Equity= Net Profit After Tax


Net Worth
Net Worth= Fixed Assets+ Investments+ Working Capital – Borrowed Funds
= Owned Funds
= Equity Share Capital + Reserves and Surplus

6) Earnings Per Share (EPS)= Net Profit After Tax- Preference Dividend
No. of Equity Shares

7) Dividend Per Share (DPS)= Total Profit Distributed


No. of Equity Shares
8) Dividend Payout Ratio:
It measures the percentage of net income that is distributed to shareholders in the form of
dividends during the year.

Dividend Payout Ratio= DPS


EPS
9) Price Earnings Ratio:
PE Ratio indicates market sentiments it is expressed in number of times and generally used
as a tool for secondary market investment. Positive PE indicates positive future
performance and investors are willing to pay more for shares of such companies.

PE Ratio= Market Price of an Equity Share


EPS

10) Dividend Yield Ratio= DPS


MPS

11) Book Value Per Share= Equity Capital + Reserves


No. of Equity Shares

12) Capital Gearing Ratio:


It is used to analyze the capital structure and indicates relationship between various types
of securities and capitalization. High geared ratio indicates lower proportion of equity.

Capital Gearing Ratio= Funds with Fixed Returns


Funds without Fixed Returns

= Preference Share Capital + Debentures + Long Term borrowings


Equity Funds

13) Preference Dividend Coverage Ratio= NPAT


Preference Dividend

14) Equity Dividend Coverage Ratio= NPAT- Preference Dividend


Equity Dividend

15) Dividend Cover Ratio= EPS


DPS

16) Stock Working Capital Ratio= Stock


Working Capital
IV. Capital Adequacy Ratio/ Solvency Ratio:

Solvency ratios measure a company’s ability to meet its long term obligations.

1) Proprietary Ratio= Total Equity


Total assets

2) Debt- Equity Ratio= Debt


Equity

3) Debt To Total Funds Ratio = Debt


Total funds
= Borrowed Funds
Owned Funds + Borrowed Funds

4) Equity To Total Funds Ratio = Equity


Total Funds

5) Interest Coverage Ratio:


It measures a company’s cash flows generated compared to its interest payment. Higher
ratio indicates less chance of a company to fail to meet its debt repayment obligations.

Interest coverage ratio= EBIT


Interest

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