Current Ratio

This ratio measures the relationship between current assets and current
liabilities. It is calculated as follows:

Current Ratio = Current Assets

Current Liabilities
Note-

“Current Assets” are the assets that are either in form of cash or cash
equivalents or can be converted in to cash or cash equivalents in short
time (say, within a year’s time).

Ex- Cash and Bank balance, Debtors, Bills Receivable, Prepaid Expenses etc.

“Current Liabilities” are liabilities repayable in a short time i.e. with in a

year.

Ex- Creditors, Bills Payable, Bank Overdraft, short term loans, outstanding
expenses.
Ideal current ratio = 2 : 1
 Debt-Equity Ratio

This ratio expresses a relationship between debt and the equity. In

other words, the ratio is calculated to measure the relative proportion
of outsiders fund and share holders fund invested in a company.

Debt means long term loans i.e. debentures, loans from financial
institutions.

Equity means shareholders funds, i.e. Preference share capital, equity

share capital.

This ratio is calculated as follows:

Debt-Equity Ratio= Debt(Long-term loans)

Equity(Shareholders fund)
Debt-Equity Ratio is acceptable if it is 2 : 1, which means debt can be
twice the equity.
 Net Profit Ratio

This ratio establishes the relationship between net profit and net sales i.e. it
shows the percentage of net profit earned on the sales. This Ratio is
computed by the following formula:

Net Profit Ratio = Net Profit * 100

Net Sales
Net profit is computed by deducting all direct costs i.e. COGS and indirect
costs.

The Net Profit Ratio is an indicator of overall efficiency of the business.

Higher the net profit ratio better the business.
 Return on Equity

This ratio measures relationship between equity earnings and

average equity. It is calculated as follows:

Return On Equity= Equity Earnings

Average equity
The rate of return on equity is an important factor in
determining the market value of the ordinary share.
A comparison of the rate with the similar company also
indicates the performance of equity capital.
 Earning Power
The Earning-Power is defined as:

Earning Power = Profit before interest and tax

Average total assets

Earning Power is a measure of business performance which is not affected

by interest charges and tax burden. The numerator represents a measure of
pre-tax earnings belonging to all sources of finance and the denominator
represents total financing.