Ratio Analysis

1
Explanation
Calculation
Interpretation

Capital employed = Share capital + All Reserves + Non Current Liabilites

Interpretation:
Lower ROCE: i) under utilization of resources
ii) may be due to increase in capital employed without
corresponding increase in profit.

Higher ROCE: i) better utilization of resources

ii) will attract new investments / Investors

2 Gross profit ratio

The trading performance of a business can be analysed through this

ratio.
Higher Ratio:
i) due to increase in selling price
ii) decrease in cost of sales
iii) Increase in sales mix

Lower Ratio:
i) decrease in selling price
ii) decrease in sales volume
iii) Increase in cost of sales
 3 In this ratio, Gross profit is expressed as a %age of
cost of sales to analyse trading performance of a
business.

4 Net profit ratio

This ratio indicates overall
profitability of a business. it helps
to determine the managerial
efficiency to use the resources of
a business.

Higher Net Profit Ratio:

i) Increase in trading performance / Gross profit ratio
ii)Reduction in opetating cost / Expenses
iii) Increase in other income
Lower Ratio:
All of the above points will be considered vise versa.

OR
5

This ratio is a common measure to anaylise the opetaing cost and the
contol of business over expenses.

Interpretation: a lower percentage is better which means expenses

are lower and earnings are higher. A decrese in ratio also indicates
increase in management efficiency.
In case of higher percentage, management should take action to
control over expenses.
 Solvency Ratios

1 working capital ratio

The ability of a business to meet its current liabilities with its

current assets can be measured through this ratio.

= 200000/100000 = 2:1

Interpretation
Current Assets:Current Liabilities
Ideal Ratio 2:1
Satisfactory Ratio 1:1
Danger Level less than 1:1

very important note: A current ratio more than ideal level i-e 5:1indicates
poor management of resources and capital is tied up in form of
inventory and trade receivables.
 2

Interpretation
Current Assets:Current Liabilities
Ideal Ratio 1:1
Satisfactory Ratio 0.5:1
Danger Level less than 0.5:1

to generate revenue and profits.

i
Interpretation

ii) Higher recovery of investment

iii) more effective utilization of resources
 =Ans in times

Net Book Value of NCA

= ans in days

Interpretation:
Long collection period:
i) more chances of bad debts
ii) poor credit control
iii) may arise liquid problems

Short collection period: all of the above points will be considered vise
versa
 3

= ans in days

Interpretation:
Long credit period:
may be good as it represnts a source of free finance.

Short credit period:

the suppliers are demanding fast payment.

4 in days

= ans in days

Inventory turnover indicates the rate at which a business sells and replaces its stock of goods
during a particular period.
Interpretation:
A high turnover normally indicates higher profits, reduction in the holding cost and delivery of
goods more frequently.
A lower turnover indicates lower sales and lower profits and business may face holding of higher
level of inventory.
5

365 days = ans in times

10 times