Professional Documents
Culture Documents
Ratio Analysis Formulas + Theories
Ratio Analysis Formulas + Theories
* 100
3) Interval measure
= Cash Reservoir
(ability of cash reservoir to meet cash expenses) Average daily cash expenses
( Answer in days)
Notes : Cash Reservoir = Cash in hand + Bank + Marketable Non trade
investment at market value.
Current liabilities = Creditors + Bills Payable + Outstanding Expenses +
Provision for tax (Net of advance tax) + Proposed dividend + Other
provisions.
Total assets = Total in asset side Miscellaneous expenses Preliminary
expenses + Any increase in value of marketable non trading Investments.
Average cash expenses =Total expenses in debit side of P & L a/c Non
cash item such as depreciation, goodwill, preliminary expenses written
off, loss on sale of investments, fixed assets written off + advance tax
(Ignore provision for tax) . The net amount is divided by 365 to arrive
average expenses.
Remarks : - In Comparison
When absolute cash ratio is lower then current liability is higher
When cash position to Total Asset ratio is lower then the total asset is
relatively higher.
When cash interval is lower the company maintain low cash position. It is
not good to maintain too low cash position or too high cash position.
B) Liquidity Ratio : 1) Current ratio = Current asset
Current Liability
2) Quick ratio or Acid Test ratio = Quick Asset
Quick liability
= Debt
Equity
= Long term debt
Long term fund
= External Equity
Internal Equity
= Share holders fund
Long term fund
Remarks : In debt equity ratio higher the debt fund used in capital structure, greater
is the risk.
In debt equity ratio, operates favorable when if rate of interest is lower
than the return on capital employed.
In total liability to Net worth Ratio = Lower the ratio, better is solvency
position of business, Higher the ratio lower is its solvency position.
If debt equity ratio is comparatively higher then the financial strength is
better.
D) Profitability Ratio : 1) Gross Profit Ratio = Gross Profit
Sales
2) Net Profit Ratio = Net Profit
Sales
* 100
* 100
* 100
* 100
* 100
* 100
365
* 100
* 100
* 100
Stock turnover ratio denotes how many days we are holding stock.
In stock turnover ratio greater the number of days, the movement of
goods will be on the lower side.
Financial ratios are Current ratio, Quick ratio, Debt equity ratio,
Proprietary ratio, Fixed asset ratio.
Short term solvency ratios are current ratio, Liquidity ratio
Long term solvency or testing solvency of the company ratios are Debt
equity ratio, fixed asset ratio, fixed charges coverage ratio (or) Interest
coverage ratio.
To compute financial position of the business ratios to be calculated are
current ratio, Debt equity ratio, Proprietary ratio, fixed asset ratio.
Fictitious asset are Preliminary expenses, Discount on issue of shares and
debentures, Profit and loss account debit balance.