ACCA CAT O&A LEVELS

ACCOUNTING RATIOS

M.USMAN 0321-4065420

Accounting Ratios

Liquidity Ratios Particulars

Net Working Capital

Formula
Current Asset Current Liabilities

Interpretation
+Ve / -Ve shows we have Surplus / Deficit funds The ratio indicates the ability of the enterprise to pay its current obligation out of current asset. usually 2:1 is acceptable The ratio reflects most liquid assets available to meet current liabilities. A 1:1 ratio is usually considered to be satisfactory.

Current Ratio

Current Asset ) = . times Current Liabilities

Liquid Ratio

( C.A Inventories Prepayments ) C.L ( Answer is in Times )

Activity / Efficiency / Turnover Ratios Particulars Formula Interpretation

The ratio shows should whether investment in stock is within limit or not. Ratio should be higher due to more sales not due to lower stock. This should be as minimum as possible. Normally higher the turn over ratio is better because it signifies speedy and effective collection. Usually this should not exceed 3 months. However the evaluation is made in the context of entitys credit policy.

Inventory Turnover

Cost of Goods Sold Average inventory

= .. times

Inventory Turnover Period

365 = days Inventory Turnover Ratio Net Credit Sales s Avg Trade Debtors + Bills Receivable ( Answer is in times )

Debtor Turnover

Debtor Turnover Period

365 = days Debtor Turnover Ratio

ACCA CAT O&A LEVELS Particulars

Creditor Turnover

ACCOUNTING RATIOS

M.USMAN 0321-4065420

Formula
Net Credit Purchases s Avg Trade Creditors + Bills Payable ( Answer is in times )

Interpretation
This ratio should be minimum.

Creditor Turnover Period

365 Creditor Turnover Ratio

= days

This ratio should be compared with credit terms agreed in the contract, and should be close to that. The shows that by investment of Rs. 1 in avg assets how much sale is generated. It should be maximum. The shows that by investment of Rs. 1 in avg Fixed Asset show much sale is generated. It should be maximum.

Asset Turnover

Net Sales Average Assets

= Times

Fixed Asset Turnover

Net Sales = Times Average Fixed Assets

Profitability Ratios Particulars

Gross Profit Ratio

Formula
( Gross Profit Net Sales ) 100 = %

Interpretation
This ratio shows margin of G.P on sales. it should be maximum. This ratio shows margin of operating profit on sales. It should be maximum. This ratio shows margin of operating profit on sales. It is an expense ratio so should be minimum. This ratio shows margin of profit (after tax) on sales. It should be maximum. This is the basic ratio to measure profitability. In it, profitability is related to employed assets so it should be maximum.

Operating Profit Ratio

( Operating Profit ) 100= % Net Sales

Operating / Operating Expense Ratio

( Operating Expense ) 100 = % Net Sales OR 1 Operating Profit Ratio = . % ( Profit After Tax ) 100 = % Net Sales

Net Profit Ratio (After Tax)

Return on Assets ( ROA) / Return on Investment ( ROI)

( Profit After Tax ) 100 = % Average Assets

ACCA CAT O&A LEVELS Particulars

ACCOUNTING RATIOS

M.USMAN 0321-4065420

Formula
( Profit after tax + Interest Expense )100 Average Capital Employed

Interpretation

Return On Capital Employed ( ROCE )

(Answer is in %) Capital Employed = Total Assets C.L Capital Employed = Equity + L.T.Loans

This ratio shows return on total funds invested in the business. It should be maximum.

Return on Equity ( ROE ) Return on Ordinary Share Capital ( ROSC)

( PAT + Preference Dividend ) 100 Average Equity ( PAT Preference Dividend ) 100 Average ordinary share capital

It should be maximum.

It should be maximum

Investment / Stock Exchange / Market Value / Potential Investors Ratios Particulars Formula
( PAT Preference Dividend )= Rs Ordinary Dividend

Interpretation
The ratio is an indication of the extent to which the directors will not have to reduce the dividend from existing level.

Dividend Cover

Dividend Per Share ( DPS )

Ordinary Dividend No. of Ordinary Shares

= Rs

Higher is better from investors point of view.

Dividend Yield

DPS )100= % Market Price Per Share

This ratio indicates the return on investment in the form of dividends, based on the Market Price of the Shares. Higher is better for potential investors.

( PAT Preference Dividend ) =Rs No. of Ordinary Shares outstanding OR Earning Per Share ( EPS ) ( PAT Preference Dividend ) =Rs Weighted Average No. of Ordinary Shares

An high earning per share implies an effective and efficient use of entitys resources. As a result, the shareholders may expect better dividends and consequent increase in the market value of shares.

The number of shares outstanding can fluctuate; a weighted average is typically used. 3

ACCA CAT O&A LEVELS Particulars

Earning Yield (

ACCOUNTING RATIOS

M.USMAN 0321-4065420

Formula
EPS )100= % Market Price Per Share Market Price Per Share Earning Per Share = times

Interpretation
The ratio shows how much is earn in relation to market price. It measures market price is how many times of earnings. This ratio tells us about the dividend distribution policy of the company. If: Ratio < 50 % then maximization of wealth. Reinvesting the profits. Ratio > 50 % then maximization of Dividend. Paid out to shareholders. The ratio indicates break up value per share. It should be maximum.

Price Earning Ratio

( Total Dividend )100= % Profit after tax Payout Ratio OR ( DPS EPS )100= %

Book Value Per Share

NBV of Ordinary Shares No. of Ordinary Shares

= . Rs

Debt / Gearing / Long Term Financial Stability / Leverage Ratios Particulars Formula Interpretation
This ratio is also a measure of long term solvency of the entity. The ratio indicates companys ability to pay the interest charges out of profit. The higher the ratio, the more confident are the debt holders to receive their interest. This ratio is an indicator of the financial stability of the enterprise. The lower is the debt ratio, more comfortable the creditors will fell as regards of their debts. Too excessive debt to total assets may expose an entity to insolvency.

( Interest Cover Ratio / Times interest Earned

EBIT ) 100 = % Interest Expense

EBIT= Earning before Tax and Interest Expense

Debt to Total Asset or Debt Ratio

Total Liabilities Total Assets

) 100 = %

ACCA CAT O&A LEVELS Particulars

ACCOUNTING RATIOS

M.USMAN 0321-4065420

Formula
( Long Term Debts )100 = % Long Term Debts + Equity OR ( Prior Charge Capital )100 = % Total Capital OR ( Prior Charge Capital )100 = % Total Assets C.L ( Long Term Debts )100 = % Total Shareholders Equity OR ( Prior Charge Capital )100 = % Total Shareholders Equity

Interpretation

Capital Gearing Ratio

Debt to Equity Ratio

The ratio is measure of long term solvency of a company. This ratio shows how much portion of long term funds was financed through long term debt. Maximum ratio is 60:40. A company with higher proportion of interest bearing securities is termed as highly geared Company.

Prior Charge Capital = Long Term Debts = Preference Shares + Term Finance Certificates + Debentures Total Capital = Total Assets Current Liabilities = Long Term Debts + Equity