Category Ratio Ideal Significance

Liquidity
Current Ratio 2 Position for a
year.

Liquidity
Liquid/Quick/Acid Test Ratio 1 Position for a
Liquidity and quarter.
Solvency
Liquidity
Absolute Liquid Ratio/Cash Ratio/Super Quick 1 Position for a
month.
% of Cash to
Cash to Total Assets Ratio Total Assets
Interval Measure (No. of Days) 60 No of days Co. can run without any further c
Contribution
of
Proprietary Ratio shareholders
in each rupee
of asset.
Equity Ratio Proportion of Owners fund in Total capital E
Capital Debt Ratio Proportion of Debt fund in Total capital Emp
Structure
Ratios A Co. can
borrow upto
Debt Equity Ratio/Leverage Ratio 2 twice of its
shareholders
fund.
Fixed Assets Ratio % of CE invested in FA and it should not be >
Capital Gearing Ratio 2 Proportion of fixed interest/dividend bearing
Gross Profit to
Gross Profit Ratio Sales.

Net Profit to
Net Profit Ratio Sales.

Operating Ratio % of expenses to sales (100-Operating profit

Profits from
principal
Operating Profit Ratio business
activities.
Profitability
Ratios % return on
Return on Investment(ROI)/Capital Employed (ROCE) total capital
employed.

% return to a
equity
Return on Equity(ROE)/Equity Shareholders fund shareholder on
funds
invested.

% return to
shareholders
Return on Shareholders fund on funds
invested.
Preference shareholders’ coverage ratio Sufficiency of PAT to meet preference divide
Equity shareholder’s coverage ratio Sufficiency of EAESH to meet equity dividend
Coverage
Ratios
 Coverage Interest coverage  ratio Sufficiency of profits to meet interest obligati
Ratios Total coverage ratio Sufficiency of profits to meet fixed charges o

Debt Service Coverage Ratio 2 It Indicates how much sufficient are compan
its loan obligations.
Fixed expenses to total cost ratio Indicates the Idle capacity in the organizatio
Material consumption to sales ratio
Wages to sales ratio
Creditor’s Payment Period

Time lag
between credit
Creditor’s Turnover Ratio purchases &
payment.

Debtor’s Collection Period

It measures
how rapidly
Debtors Turnover Ratio debtors are
collected.

Turnover No. of times of

Ratios turnover to
Capital Employed Turnover Ratio capital
employed.

Working Capital Turnover Ratio Efficiency of Working Capital utilized in busin

Fixed Assets Turnover Ratio Extent to which FA have contributed toward
Total Assets Turnover Ratio Ability to generate sales per rupee of Total A
Finished Goods(Stock) Turnover Ratio Indicates how fast FG are sold.
Finished Goods(Stock) Holding Period

Level of WIP in
WIP Turnover Ratio production
process.

Indicates
Raw Material Turnover Ratio turnover of
RM.
Price Earning Ratio MP of Share for every Re.1 of earning per sh
Earnings per share [EPS] Shows earning capacity & dividend paying ca
Uncommitted Earnings per share [UEPS] EAESH after providing for DRR.
Diluted Earnings per Share [DEPS]
Other Ratios Dividend per share [DPS] A short term Investor looks for DPS, while LT
Payout Ratio % of earnings distributed as dividend.
Retention Ratio % of earnings retained by a Co.
Dividend Yield % dividend to a shareholder on MPS.
Earnings Yield/Cost of Equity (Ke) % return to a shareholder on MPS.

Notes
1 Logic behind ideal current ratio of 2:1 is conservatism. It means CA should be double of CL, as CA are subjec
decline in MV of Non-trade investments, etc.
a Following should be excluded from Current Assets while calculating Current ratio:
● Purchase of inventory to create buffer stock in anticipation of import restrictions, etc.
● Cash received by taking Long term loan at the end of year for purpose of capital expenditure.
 ● Disputed Debtors.
● Obsolete & Non-moving stock .
● Readily saleable stock should be included at its market value instead of cost price.
b Following should be included in Current Liabilities while calculating Current ratio:
● Overdue long term borrowings & Long term borrowings approaching maturity within one year.
● Creditors discharged at the end of year by sale of some long term investments should be increased to the e

2 Quick assets are current assets realizable within a period of 2 or 3 months.

● Quick assets does not include stock & prepaid expenses as these are realizable in kind only.
● However if stock is easily saleable in cash it should be included in quick assets.
● If Debtors are realizable after a considerable period of time, it should be excluded.
● Quick liabilities are current liabilities except short Bank borrowings, because practically it is more long term

3 Cash reservoir = Cash in Hand + Balance at bank + Marketable Non-Trade Investments.

● Non-Trade Investments means investments held for short term cash management.
● Marketable investments are those which can be easily converted into cash, like quoted and regularly traded
● Trade Investments are those which are held for the purpose of trade.

4 Cash reservoir = Cash in Hand + Balance at bank + Marketable Non-Trade Investments.

● Total Assets means total of assets side of Balance Sheet including intangible assets but excluding fictitious a
● Book Value of Non-Trade Investments is replaced by Current Market value.

5 Cash reservoir = Cash in Hand + Balance at bank + Marketable Non-Trade Investments.

● Average Daily Cash Expenditure = (COGS + Administrative + Selling & Distribution Expenses)/360

6 Proprietary Fund = Shareholders fund = Net Worth = Paid up Equity Capital + Paid up Preference Capital + R
● Total Assets = Total of Assets Side - Fictitious assets (Losses & Miscellaneous Expenditure)

7 Debt = All Long Term Borrowings (Secured & Unsecured)

● Equity = Proprietary Fund = Shareholders fund = Net Worth = Paid up Equity Capital + Paid up Preference Ca
● Equity ≠ Equity Shareholders Fund.

8 Fixed Cost Funds = Preference Share Capital + Long term Debts

● Funds Not Carryin Fixed Cost = Equity Shareholders Fund = Paid up Equity Capital + Reserves & Surplus - Los

9 Net profit = Operating Profit + Non operating Profit - Non Operating Expenses.
● Non operating Profit includes Interest & Dividend on Non Trade Investments, Profit on sale of Fixed Assets,

10 Other Operating Expenses include Administrative, Selling & Distribution expenses.

11 Operating Profit Ratio can be improved by:

● Increase in GP Ratio.
● Reduction in Administrative, Selling & Distribution expenses.
● Increase in Capacity Utilization.

12 EBIT = Operating Profit + Interest on Long term Borrowings + Provision for taxation (for pre-tax ROI)
● Capital employed = Equity Capital + Preference Capital + Reserves & Surplus + Long Term Borrowings - Non
● Intangible Assets should be included in the Capital Employed but Fictitious Assets should be excluded.
 ● Average Capital Employed = (Opening Capital + Closing Capital)/2
= Opening Capital + 1/2 of Profit
= Closing Capital - 1/2 of Profit

13 Shareholders fund = Equity = Proprietary Fund = Net Worth = Paid up Equity Capital + Paid up Preference Ca

14 Total Fixed Charges = Interest + Preference Dividend

15 Profits available for Debt Servicing = Profit After Tax + Non Cash Expenses + Interest on Long Term Borrowin

16 Average Creditors = (Opening Creditors + Closing Creditors)/2

● Creditors include Bills Payable also.

17 Average Debtors = (Opening Debtors + Closing Debtors)/2

● Debtors include Bill Receivables also.

18 Capital employed = Equity Capital + Preference Capital + Reserves & Surplus + Long Term Borrowings - Non
● Intangible Assets should be included in the Capital Employed but Fictitious Assets should be excluded.
● Average Capital Employed = (Opening Capital + Closing Capital)/2
= Opening Capital + 1/2 of Profit
= Closing Capital - 1/2 of Profit

19 Fictitious Assets should be excluded from Fixed Assets.

 High Low Formula
High WC, over Low WC Under
capitalization, more capitalization, Less
Liquidity, Less Liquidity, More Current Assets/Current Liabilities
profitability profitability

High Liquidity, Less Less Liquidity, High

Profitability profitability Quick Assets/Current Liabilities

High Liquidity, Less Less Liquidity, High

Profitability profitability Cash Reservoir/Current Liabilities

High Liquidity, Less Less Liquidity, High

Profitability profitability Cash Reservoir/Total Assets
of days Co. can run without any further cash inflow. Cash Reservoir/Average daily Cash Exp.

Higher proportion of Lower proportion of

Owner's fund in Total Owner's fund in Total
Assets of the Company, Assets of the Company, Proprietary (Shareholders) fund/Total Tangible Assets
Lower Debt-Equity ratio. Higher Debt-Equity ratio.

oportion of Owners fund in Total capital Employed Equity shareholders fund/Total Capital Employed
oportion of Debt fund in Total capital Employed Debt Fund/Total Capital Employed
If ROI is sufficient to Indicates cautitious
cover Interest, then attitude of ompany,
Equity shareholders will which may result in Debt/Equity
have advantage of lower return to equity
trading on Equity. shareholders.
of CE invested in FA and it should not be > 1 (Fixed Assets+Trade Inv. )/Capital Employed
oportion of fixed interest/dividend bearing capital to ESHF. Fixed Cost Funds/Funds not carrying Fixed Cost
Effective utilization of High COGS, ineffective
resources, Low COGS. utilization of resources. Gross Profit/Sales

High OP ratio or if low Low OP ratio or if high

OPR, then due to high OPR, then due to low
NO Profit or Low NO NO Profit or high NO Net Profit/Sales
expenses. expenses.
of expenses to sales (100-Operating profit ratio). (COGS + Other Operating Exp.)/Sales
Low ROI & if Low OP
High ROI, high GP ratio. ratio is along with high Operating Profit/Sales
SP, Co. must reduce its
overheads.

High capital employed Low capital employed

turnover ratio & high turnover ratio & low EBIT/Average Capital Employed
operating profit ratio. operating profit ratio.

ROE > after tax ROI, ROE < after tax ROI,
company's before tax company's before tax
ROI is higher than rate ROI is less than rate of EAESH/Equity Shareholders fund
of Interest & trading on
equity. Interest.

PAT/Shareholders fund

fficiency of PAT to meet preference dividend obligations. PAT/Preference Dividend

fficiency of EAESH to meet equity dividend obligations. EAESH/Equity Dividend
 fficiency of profits to meet interest obligations. EBIT/Interest
fficiency of profits to meet fixed charges obligations. (PAT + Interest)/Total Fixed Charges
ndicates how much sufficient are company's earnings to serve
loan obligations. Profit available for Debt Servicing/(Principal+Interest)

dicates the Idle capacity in the organization. Fixed Expenses/Total Cost

Material Consumption/Sales
Wages/Sales
360 days or 12 months/Creditors Turnover ratio

Higher Credit Period,

Lower credit period.
Credibility of Company. Credit Purchases/Average Creditors

360 days or 12 months/Debtors Turnover ratio

Indicates a shorter credit Longer credit period or

period or better Inefficient collection Credit Sales/Average Debtors(before provision)
collection policy. policy.

Better utilization of
capital, increased Over-capitalization,
profitability, over-
trading, under- under-trading & reduced Turnover(Net Sales)/Average Capital Employed
profitability.
capitalization & reduced
liquidity.

fficiency of Working Capital utilized in business. Turnover/Working Capital

ent to which FA have contributed towards Sales. Turnover/Fixed Assets(after depreciation)
ility to generate sales per rupee of Total Assets. Turnover/Total Assets(Less Preliminary Exp.)
dicates how fast FG are sold. COGS/Average stock of FG
360 days or 12 months/FG Turnover Ratio
Lower level of WIP,
lower processing period High level of WIP, lower
& High level of level of production & Cost of production/Average stock of WIP
high processing period.
production.

Lower stock of RM & Higher stock of RM &

Low liquidity High liquidity. RM Consumed/Average Stock of RM

P of Share for every Re.1 of earning per share. MPS/EPS

ows earning capacity & dividend paying capacity of a Co. EAESH/No. of Equity Shares
ESH after providing for DRR. (EAESH - Transfer to Sinking Fund)/No. of Equity Shares
EAESH/(No. of Equity Shares+Potential Equity Shares)
hort term Investor looks for DPS, while LTI for EPS. Dividend Declared/No. of Equity shares
of earnings distributed as dividend. DPS/EPS
of earnings retained by a Co. (EPS-DPS)/EPS
dividend to a shareholder on MPS. DPS/MPS
eturn to a shareholder on MPS. EPS/PS

ould be double of CL, as CA are subject to shrinkage in value due to various reasons like bad debts, obsolete inventory, unexpected

urrent ratio:
restrictions, etc.
e of capital expenditure.
of cost price.
urrent ratio:
maturity within one year.
estments should be increased to the extent of such of payment.

ealizable in kind only.

be excluded.
ecause practically it is more long term than long term loans.

ade Investments.
management.
cash, like quoted and regularly traded investments.

ade Investments.
ngible assets but excluding fictitious assets.

ade Investments.
Distribution Expenses)/360

apital + Paid up Preference Capital + Reserve & Surplus - Losses & Miscellaneous Expenses.
aneous Expenditure)

Equity Capital + Paid up Preference Capital + Reserve & Surplus - Losses & Miscellaneous Expenses.

uity Capital + Reserves & Surplus - Losses & Miscellaneous Expenses.

tments, Profit on sale of Fixed Assets, etc. and Non-Operating expenses include loss on sale of assets.

on expenses.

n for taxation (for pre-tax ROI)

urplus + Long Term Borrowings - Non Trade Investments - Miscellaneous Expenditure & Losses.
tious Assets should be excluded.
 pital + Closing Capital)/2
pital + 1/2 of Profit
tal - 1/2 of Profit

Equity Capital + Paid up Preference Capital + Reserve & Surplus - Losses & Miscellaneous Expenses.

nses + Interest on Long Term Borrowings

urplus + Long Term Borrowings - Non Trade Investments - Miscellaneous Expenditure & Losses.
tious Assets should be excluded.
pital + Closing Capital)/2
pital + 1/2 of Profit
tal - 1/2 of Profit
Notes

4
5

10

11

12

13
 14

15

16

17

18

19

nventory, unexpected