Parties Industr

To test Name of Ratio Formula

interested y norm
Liquidity and i) Current Ratio Current Assets Short-term 2:1
Solvency Current creditors,
Liabilities investors,
money lenders &
like parties
ii) Liquid/Quick/ Current assets - -do- 1:1
Acid Test Ratio Stock - Prepaid
Expenses
Current
Liabilities -
Bank Overdraft
- Prereceived
Income
iii) Absolute Liquid Cash + -do- 1:1
Ratio Marketable
securities
Quick Liabilities
iv) Proprietary Proprietor’s -do- 60% to
Ratio Fund 75%
Total Assets
[Proprietor’s
funds = Equity
Capital +
Preference
Capital +
Reserves and
Surplus +
Accumulated
funds - Debit
balances of P &
L A/c and
Miscellaneous
Expenses]
Capitalisation i) Debt Equity Ratio Debt -do- 2:1
Equity
[Debt =
Long/Short-
term loans,
debentures,
bills, etc, Equity
= Proprietor’s
funds]
ii) Capital Gearing Fixed cost -do- 2:1
Ratio funds
Funds not
carrying fixed
cost
[Fixed cost
funds =
Preference
 share capital,
Debentures,
Loans from
banks, financial
institutions,
other
unsecured
loans].
[Funds not
carrying fixed
cost = Equity
share capital +
undistributed
profit - P & L
A/c (Dr. Bal.) -
Misc.
expenses].
Profitability and i) Gross Profit Ratio Gross Profit x Shareholders, 20% to
management 100 Long-term 30%
efficiency Net sales Creditors,
Government
ii) Net Profit Ratio Net Profit x 100 -do- 5% to
Net sales 10%
[Net profit may
be either
Operating Net
profit, Profit
before tax or
Profit after tax].
iii) Return on Capital Net profit x 100 -do- —
Employed (ROCE) Capital
employed
[Capital
employed =
Fixed Assets +
Current Assets -
Current
Liabilities].
iv) Return on Profit after tax -do- —
Proprietors fund Proprietor’s
funds
v) Return on Capital Profit after tax -do- —
less pref.
Dividend x 100
Equity Share
Capital
vi) Earnings per Profit after tax -do- —
share [EPS] less pref.
Dividend
Total No. of
Equity Shares
 vii) Dividend per Total Dividend Shareholders, —
share [DPS] paid to ordinary Investors
shareholders
Number of
ordinary shares
Management i) Stock Turnover Cost of goods Management 5 to 6
efficiency sold times
Average Stock
ii) Debtors Turnover Debtors + Bills Management 45 to 60
Ratio receivable x days
365
Net Credit sales
iii) Debtor’s Turnover Credit sales Management 60 to 90
Rate Avg. Debtors + days
Bills receivable
iv) Creditor’s Creditors + -do-
Turnover Ratio Bills payable x
365
Credit
purchases
v) Creditor’s Credit
Turnover Rate purchases
Average
Creditors
vi) Operating Ratio Operating
Costs x 100
Net sales
[Operating Cost
= Cost of goods
sold +
Operating
expenses (viz.
Administrative,
selling &
finance
expenses)]
Number of times Preference Net profit (after Preference
preference shareholders’ Interest & Tax shareholders
dividends covered coverage ratio but before
by net profit equity
dividend)
Preference
Dividend
Number of times Equity shareholder’s Net profit (after Equity
equity dividends coverage ratio interest, tax & shareholders
covered by net Pref. Dividend)
profit Equity Dividend
Number of times Interest coverage Net profit Debentureholder
fixed interest ratio (before Interest s, Loan creditors
covered by net & Tax) (PBIT)
profit Fixed interests
& charges
Relationship Total coverage ratio Net profit Shareholders,
between net profit (before Interest investors,
and total fixed & Tax) (PBIT) creditors,
charges Total fixed lenders
charges
The idle capacity in Fixed expenses to Fixed expenses Management
the Organisation total cost ratio Total cost shareholders
Material Material Material Management
consumption to consumption to consumption
sales sales ratio Sales
Wages to sales Wages to sales ratio Wages Management
Sales
The future market Price earning ratio Market price of Investors,
price of a share a share (MPS) speculators
Earnings per
share (EPS)