A.

LIQUIDITY RATIOS - SHORT TERM SOLVENCY

N o Ratio

Formula

Numerator

Denominator

Significance

Quick Ratio or Acid test Ratio

Quick Assets Quick Liabilities

Current Assets Less: Inventories Less Prepaid Expenses

Current Liabilities Less : Bank Overdraft Less Cash Credit

Ability to meet immediate liabilities. Ideal ratio is 1.33:1

A. LIQUIDITY RATIOS - SHORT TERM SOLVE

NCY

N o

Significance Ratio Formula Numerator Denominator

2 3

Cash In Hand (Cash + Marketable +Balance at Bank Absolute securities) +Marketable Cash Ratio Current Liabilities securities & short Term investments

Sundry Creditors (For Goods) +Outstanding Expenses +Short Term Loans & Availability of cash to advances meet short term +Bank Overdraft/ Cash commitments Credit +Provision for Taxation +Proposed or Unclaimed Dividend

A. LIQUIDITY RATIOS - SHORT TERM SOLVENCY

N Ratio o Significance

Formula

Numerator

Denominator

Interval Measure

Annual Cash Expenses Current Assets 365 Quick Assets Ability to meet regular Less: Inventories Cash expenses=Total Cash Expenses per Day cash expenses Less Prepaid Expenses expenses Less Depreciation and write offs

B. CAPITAL STRUCTRE RATIOS-INDICATOR OF FINANCING TECHNIQUES AND LONG TERM SOLVENCY

No Ratio

Formula

Numerator Equity Share Capital +Preference Share Capital +Reserves and Surplus Less Accumulated Losses

Denominator

Significance

Equity to Total Funds Ratios

Share Holders Fund Total Funds

Total Long term Funds employed in business =Debts+ Equity

Indicates long term solvency; mode of financing; extend of own funds used in operations

Debt Equity Ratio

Debt Equity

Long term borrowed funds, i.e. Debentures, Long term loans from institutions

Equity Share Capital + Preference Share Indicates relationship Capital between debt & Equity, +Reserves and Surplus Ideal ratio is 2:1 Less Accumulated losses if any
Shows Proportion of fixed charge (dividend or interest) bearing capital to equity funds, the extend of advantage or leverage enjoyed by equity share holders

Equity Share Capital Preference Share Capital + Reserves and Surplus Fixed Charge Bearing +Debentures Capital Gearing 3 Less Accumulated Losses if Capital + Long Term Loans Ratio Equity share holders Funds any

Fixed Asset to Long Term 4 Fund Ratio

Fixed Assets Long Term Funds

Net Fixed Assets ie Gross Block Less Depreciation

shows proportion of Fixed Assets financed by by long term funds. Indicates the Share Holders Fund financing approach + Debt Funds (Numerator followed by the 1+Numerator 2 as in 1 & 20 firm.conservative,matching or aggressive; idea ratio is less than 1

Proprietary Ratios

Proprietary Funds Total Assets

Equity Share Capital + Preference Share Capital +Reserves & Surplus Less Accumulated Reserves

Net Fixed Assets + Total Current Assets (Only tangiable Assets will be included)

Shows extend of owners fund utilized in financing assets

Preference Dividend Coverage Ratio

Earnings after Tax Preference Dividend

EAT

Dividend on Preference Share Capital

Indicates ability to pay dividend on preference share capital

C. COVERAGE RATIOS - ABILITY TO SERVE FIXED LIABILITIES

No Ratio Formula

Numerator

Denominator

Significance

Debt Service Coverage Ratio

Earnings for Debt service (Interest + Installment)

Net Profit after Taxation + Taxation + Interest on Debt Funds + Non Cash Operating expense + Non Operating Adjustments

Interest on Debt + Installment of Debt (Principal Repaid)

Indicates extend of current earnings available for meeting commitments and outflow towards interest and installments; Ideal ratio must be between 2 to 3 times

Interest Coverage Ratio

Sales Less variable cost Earnings before Interest & Less Fixed Cost(excluding Tax Int) Interest or EAT+Tax+ Interest

Interest on debt Fund

Indicates ability to meet interest obligations of the current year. Should be generally greater than 1

D. TURNOVER / ACTIVITY / PERFORMANCE RATIOS

N o Ratio Formula Numerator Denominator Significance

Capital Turnover Ratio

Sales Capital Employed

Sales net of returns

Equity share Capital + Preference Share Capital +Reserves & Surplus + Debentures + Long Term Loans Less Accumulated Losses

Ability to generate sales per rupee of long term investment. The higher the turnover ratio the better is

Fixed Asset Turnover Ratio

Turnover Fixed Assets

Sales Net of returns

Net Fixed Assets

Ability to generate sales per rupee of Fixed Asset

Working Capital Turnover Ratio

Turnover Net Working Capital

Sales Net of

returns

Current Assets Less Current liabilities

Ability to generate sales per rupee of Fixed Assets

Finished Goods or Stock 4 Turnover ratio

Cost of Goods Sold Average Stock

For Manufacturers Opening Stock +Cost fo production less Closing stock For Traders Opening Stock + Purchases Less Closing stock

Indicates how fast inventory is used / Sold A higher turnover ratio generally indicates fast Maximum Stock + Minimum moving material while low ratio may mean dead or Stock 2 excessive stock.

Opening Stock +Closing Stock 2

WIP Turnover 5 Ratio

Factory Cost Average stock o WIP

Materials Opening WIP+Closing WIP +wages+Production OH 2

Indicates the WIP movement /Production cycle.

Debtors Turnover ratio

Credit Sales Average Accounts receivable

Credit Sales net of returns

AR= Debtors+ BR Average AR= Opening Bal+Closing Bal 2

Indicates speed of collection of credit sales

Creditors Turnover ratio

Credit Purchases Credit Purchases Net of Average Accounts payable returns if any

AP= Creditors+ BP Average AP= Opening Bal+Closing Bal 2

Indicates Velocity of debt payment

E. PROFITABILITY RATOS BASED ON SALES

N o

Ratio

Formula

Numerator

Denominator

Significance

1 Gross Profit ratio

Gross profit Sales

Gross profit As per trading Account

sales net of returns

Indicator of basic profitability

Sales Less Cost of sales or Operating Operating profit Net profit profit Ratio Sales Add Non operating expenses Less Non operating Incomes

sales net of returns

Indicator of Operating performance of business

3 Net profit Ratio

Net profit Sales

Net profit

sales net of returns

Indicator of overall profitability

Contribution Sales Ratio

Contribution Sales

Sales less Variable costs

sales net of returns

Indicator of profitability in marginal costing

F. PROFITABILITY RATOS OWNERS VIEW POINT

N o Significance

Ratio

Formula

Numerator

Denominator

Return on investment (ROI) 1 or return on capital employed

Total Earnings Total capital Employed

Asset Route: Net fixed assets (Including intangible assets like patents, Overall profitability of the but not fictitious assets Profit After Taxes business for the capital miscellaneous expenditure not Add : Taxation employed; indicates the w/off) Add : Interest return on the total capital +Net Working Capital Add: Non Trading employed. Liability Route Expenses Comparison of ROCE with Equity Share Capital Add: Non Operating rate of interest of debt leads +Presence share capital incomes like rents,interest to financial leverage. If +reserves & Surplus and dividends ROCE> Interest rate, use of +Debentures and long term debt funds is justified Loans Less Accumulated Losses Less Non trade Investments

Return on Equity

Earnings After Tax Net Worth

Profit After Taxes

Net Fixed Assets Profitability of Equity funds +Net working Capital Less External Liabilites(Long invested in the business Term)

Earnings Per Share

(PAT-Preference Dividend) Number of Equity Shares

Profit After Taxes Less Preference Dividend

Number of Equity Return or income per shares Outstanding= share, whether or not Equity Share Capital distributed as dividends Face value per share

Dividend Per Share

Dividend

Number of Equity Shares

Number of Equity Profit distributed to shares Outstanding= Amounts of dividend equity share Equity Share Capital distributed per share holders Face value per share

Return On Net Profit after Taxes 5 Assets Average Total Assets

Net Profit After Taxes

1/2 of Opening and Closing Balance

Net Income per rupee of average fixed assets