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Ratio Analysis: Important Formula

This document defines 22 important financial ratios used in ratio analysis. These ratios are used to analyze a company's profitability, liquidity, asset use efficiency, debt usage, and investor returns. The key ratios include gross profit ratio, net profit ratio, return on investment, current ratio, quick ratio, debt-to-equity ratio, and return on equity. Formulas are provided for calculating each ratio based on figures from a company's income statement, balance sheet, and other financial records.

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Harsh Vardhan Katna
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120 views

Ratio Analysis: Important Formula

This document defines 22 important financial ratios used in ratio analysis. These ratios are used to analyze a company's profitability, liquidity, asset use efficiency, debt usage, and investor returns. The key ratios include gross profit ratio, net profit ratio, return on investment, current ratio, quick ratio, debt-to-equity ratio, and return on equity. Formulas are provided for calculating each ratio based on figures from a company's income statement, balance sheet, and other financial records.

Uploaded by

Harsh Vardhan Katna
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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RATIO ANALYSIS

Important Formula:
(1) Gross Profit Ratio = Gross Profit X 100 Net Sales Gross Profit = Net Sales Cost of Goods Sold Net Sales = Total Sales Sales Return Total Sales = Cash Sales + Credit Sales Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses Purchase Return Closing Stock (2) Net Profit Ratio = Net Profit X 100 Net Sales Net Profit = Gross Profit Operating Expenses + Non Operating Incomes Non Operating Expenses Operating Expenses = (SODA) Selling Expenses + Office Expenses + Distribution Expenses + Administrative Expenses (3) Operating Profit Ratio = Operating Profit X 100 Net Sales Operating Profit = Gross Profit Operating Expenses OR Operating Profit = Net Profit + Non Operating Expenses Non Operating Income (4) Operating Ratio = Operating Cost X 100 Net Sales Operating Cost = Cost of Goods Sold + Operating Expenses

(5) Operating Ratio + Operating Profit Ratio =1


(6) Return on Investment (ROI) = Profit before Interest, Tax & Dividend X 100 Capital Employed Also

Where, Profit before interest, Tax & Dividend = Profit After Tax + Interest + Tax = Profit after Interest + Interest Capital Employed = Share Capital (Equity + Preference) + Reserves + Surplus/Profit & Loss A/c (Cr.)/Accumulated Profits

+ Debentures + Long term loans [Preliminary Expenses Discount/Commission or Issue of Share / Debenture Profit & Loss A/c (Dr. Balance)]

ALTERNATIVELY
Capital Employed = Net Fixed Assets + Long Term Investments + Working Capital Net Fixed Assets = Total Fixed Assets Depreciation Working Capital = Current Assets Current Liabilities (7) (a) Return on Shareholder's Funds = Profit after Interest & Tax but before Dividend X 100 Equity or Shareholder's Funds Equity or Shareholders' Fund = Share Capital (Equity + Preference) + Reserve + Surplus / Profit & Loss A/c (Cr. Balance) or accumulated profits Preliminary Expenses Discount/Commission on Issue of Share Debentures Profit & Loss A/c (Dr. Balance) or Accumulated Losses

Profit after Interest, Tax but before Preference Dividend


= Profit after Tax Preference Dividend = Profit after Interest Tax Preference Dividend = Profit before Interest Interest Tax Preference Dividend (7) (b) Return on Equity (ROE) = Profit after interest, Tax & Pref. Dividend X 100 Equity Shareholder's Funds Equity shareholder's Fund = Equity Share Capital + Reserve + Surplus / Profit & Loss A/c (Cr. Balance) or accumulated profits Preliminary Expenses Discount / commission on issue of Share Debentures Profit & Loss A/c (Dr. Balance) or Accumulated Losses (8) Interest coverage (Debt Service) Ratio = Profit before Interest, Tax & Dividend Interest on Debentures & Loans (9) Current Ratio = Current Assets Current Liabilities Current Assets = Cash in Hand + Cash at Bank + Bills Receivable + Sundry Debtors + Marketable Securities or Short term Investments + Loans & Advances + Stock / Inventories + Prepaid Expenses + Accrued Incomes

(10) Liquid Ratio / Quick Ratio / Acid Test Ratio = Liquid Assets or Quick Assets Current Liabilities Liquid Assets = Current Assets Closing Stock Prepaid Expenses (11) Stock Turnover Ratio (STR) = Cost of Goods Sold Average Stock Average Stock = (Opening Stock + Closing Stock) (12) Debtors Turnover Ratio (DTR) = Net Credit Sales in a year Average Accounts Receivable Average A/c Receivable = (Opening A/c Receivable + Closing A/c Receivable) Accounts Receivable = Debtors + B/R OR Account Receivable = Opening Debtor + Opening B/R + Closing Debtors + Closing B/R 2 (13) Average Debt Collection Period = Days or Months in a year Debtors Turnover Ratio Alternatively, Average Debt Collection Period = Days or Months in a year X Accounts Receivable in a year Net Credit Sales in a year (14) Creditors Turnover Ratio (CTR) = Net Credit Purchases Average Accounts Payable Average A/c Payable = (Opening A/c Payable + closing A/c Payable) Accounts Payable = Creditors + B/P (15) Average Payment Period = Days or Months in a year Creditors Turnover Ratio Alternatively, Average Payment Period = Days or Months in a year X Accounts Payable in a year Net Credit Purchases in a year (16) Capital Turnover Ratio = Net Sales Capital Employed (17) Fixed Assets Turnover Ratio = Net Sales Net Fixed Assets Net Fixed Assets = Gross Fixed Assets - Depreciation (18) Working Capital Turnover Ratio = Net Sales Working Capital Working Capital = current Assets Current Liabilities

(19) Assets Turnover Ratio = Net Sales Total Assets Total Assets = Fixed Assets + Long Term Investment Current Assets (20) Debt-Equity Ratio = Long term Debt or Loans Equity or Shareholders' Funds Long term Debts = Debentures + Loans or Mortgage OR Long Term Debts = Total Debts Current Liabilities (21) Debt Total Fund Ratio = Long Term Debts Total Long Term Funds Total Funds Term Fund = shareholder's Funds + Long Term Debts (22) Proprietary Ratio = Shareholder's Funds or Proprietor's Fund Total Assets Shareholder's Funds = Share Capital (Equity + Preference) + Reserves + Surplus/Accumulated Profit or P/L A/c(Cr) - Preliminary Expenses Discount on issue of Shares/Debentures P/L A/c (Dr.) Also

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