RATIOS:

Sr. Category Formula Interpretation

No
A LIQUIDITY RATIOS:
Measures Co.'s liquidity & its ability to meet its near-term obligations
1 Current (Working Current Assets 1. Measures the ability of the company to pay
Capital) Ratio Current Liabilities & current debts as they become due.
Provisions 2. A current ratio of 2:1 indicates a highly
solvent position.
3. And 1.33:1 is considered for working
capital loans by banks.
4. If it’s too high means too many current
assets e.g. might have too much stock, could
use the money tied up in current assets more
effectively
5. If it’s too low you run the risk of not being
able to meet current liabilities and you
could have liquidity problems
2 Acid-Test Quick Assets 1. Quick assets are those assets that can be
(Quick/ Liquid) Quick Liabilities converted into cash quickly, with little or no
Ratio loss in value. Indicates immediate solvency
position of the co.
2. It includes all current assets except
inventories and prepaid expenses.
3. Liquid Liabilities includes all current
liabilities & Provisions except bank
overdraft or cash credit (As they are secured
by Inventories). Standard is 1:1
3 Absolute Liquid / Absolute liquid Assets 1. Absolute liquid assets includes cash in hand,
Cash Ratio Current Liabilities cash at bank and short term or temporary
investments.
2. It indicates how far cash reservoir is
sufficient to meet its liabilities
3. The ideal absolute liquid ratio is taken as
1:2.
B ASSET MANAGEMENT RATIOS / TURNOVER RATIOS/ ACTIVITY RATIOS
4 Inventory Cost of Goods Sold 1. Measures the number of times inventory is
Turnover Ratio Average Inventory sold and replaced during the year.
2. High stock turnover means increased
efficiency
3. However it depends on the type of business
4. Low stock turnover could mean poor
customer satisfaction as people might not
be buying the stock
5. It indicates whether an item is a fast moving
or slow moving item. It helps in framing
inventory policy. Higher the turnover, more
the profitability and vice versa.
5 Accounts Credit Sales 1.This ratio measures how many times a
Receivable/ Average Accounts company converts its receivables into
Debtors Turnover Receivable cash each year.
Ratio 2.It measures the efficiency of collection
department
6 Number of Days’ 365 Days 1. Measures, on average, how many days
Sales/ Debtors Debtors Turnover it takes to collect an account receivable.
Collection Period 2. This should be compared with the credit
period sanctioned by the org. to measure
the efficiency of collection dept.
7 Accounts Credit Purchase 1. This ratio measures how many times a
Payable/ Average Creditors company takes to pay in cash each year.
Creditors 2. It is calculated by suppliers before
Turnover Ratio allowing credit to any company.

8 No of Days’ 365 Days 1. Measures, on average, how many days

Purchase/ Creditors Turnover it takes to pay for goods and services
Creditors purchased.
Payment Period 2. Indicates the promptness of payment to
suppliers by the firm.
9 Fixed Assets Sales / Cost of Sales It identifies how much assets are used to
Turnover Ratio Net Fixed Assets generate sales
Net assets = Total assets – current liabilities
The value will vary with the type of
business:
 Businesses with a high value of assets
who have few sales will have a low
asset turnover ratio
 If a business has a high sales and a low
value of assets it will have a high asset
turnover ratio
 Businesses can improve this by either
increasing sales performance or getting
rid of any additional assets
10 Total Assets Sales / Cost of Sales It indicates how efficiently an asset is
Turnover Ratio Total Assets used.
Fixed asset + Current Asset +
Investments
C PROFITABILITY RATIO
There are two types: Profit Margin Ratios & Rate of Return Ratios.
Profit Margin Ratios show the relationship between profit and sales. Eg. Gross Profit, Net
Profit, Operating Profit Ratio
Rate of Return Ratios reflect the relationship between profit and investment. E.g. Return on
Assets, Earning Power, ROCE, and ROE.
11 Gross Profit Ratio Gross Profit X 100 1. Gross Profit = Sales – Cost of goods
Net Sales sold
2. Net Sales means cash sales + Credit
Sales - Returns
3. It indicates the manufacturing
efficiency as well as the pricing policy
of the concern.
4. This ratio indicates the basic margin on
sale of goods.
5. A higher Gross Profit Ratio indicates
efficiency in production of the unit.
12 Operating Profit Operating Profit x100 It shows the margin left after meeting
Ratio Net Sales manufacturing, selling, general and
administration expenses and depreciation
charges.
13 Net Profit Ratio Net Profit x100 1. Measures the proportion of the sales
Net Sales which is retained as profit.
2. It indicates the final profit earned during
that year on sale of Rs. 100
3. It indicates profitability from owners
view point.
14 Return on Capital EBIT×100 Capital Employed = Share Capital +
Employed Capital Employed Reserves & Surplus+ Loans (Secured &
(ROCE) Unsecured – Capital in Progress –
Preliminary Expenses – Debit Balance of P
& L A/c
1. It indicates the overall profitability of
the business.
2. It indicates out of every Rs. 100 invested
in business, what is the profit on it.
3. This ratio should be compared with the
rate of interest prevailing in the market,
so as to take decisions regarding
additional investment in the business.
4. Where return on invest ratio is greater
than the rate of interest, the company is
said to be trading on equity.
5. It abstracts way the effect of capital
structure and tax factor & focuses on
operating performance.
15 Return on Net Profit after Interest & 1. Net worth = Equity + Preference+
Shareholders Tax x 100 Reserves-Fictitious Assets & Losses
Funds / Return on Net worth / Proprietor’s 2. This ratio indicates the profitability on
Net Worth Funds owner’s funds.
3. It helps investors in taking decisions on
investing in the shares of that company.

16 Return on NPAT–Preference Indicates the profitability on the actual

Average Dividend capital invested by the equity shareholders.
Common Equity share capital+
Stockholders’ Reserves – Fictitious
Equity (ROE) Assets. or (NW– Pref.
capital)
D INVESTMENT/SHAREHOLDERS
MARKET BASED RATIOS / VALUATION RATIOS
The market based ratios relates the firm's stock price to its earnings and book value per share.
These ratios give management an indication of what investors think of the company's past
performance and future prospects.
It indicate how the equity stock of the company is assessed in the capital market.
17 Earnings Per NPAT–Pref. Dividend This ratio indicates the profit earned and
Share No.of Equity Shares available per equity share.
18 Dividend Cover
Ratio
Cover for Pref. NPAT This ratio indicates the ability to pay
Dividend Pref Dividend preference dividend.

NPAT – Pref. Dividend

Cover for Equity Equity Dividend This ratio indicates the ability to pay Equity
Dividend dividend
19 Dividend Yield Dividend Per Share x100
Market Price Per Share
20 Book Value Per Equity Share Capital + It identifies how much assets are used to
Share Reserves – Dr. Bal generate sales
Of P& L Net assets = Total assets – current liabilities
No. of Equity Shares
21 Price Earnings MPS 1. This ratio indicates how much the public
Ratio (P / E Ratio) EPS is willing to pay for the company’s
prospectus for earnings.
2. It is important in predicting the market
price of the share on a future date and in
knowing whether the shares of the
company are undervalued or
overvalued.
22 Market Price to MPS 1. This ratio indicates the contribution of
BookValue BPS a firm to the wealth of society.
Ratio(P/BVRatio) 2. When it exceeds 1 it means that the firm
has contributed to wealth creation.
23 EV-EBITDA Enterprise Value (EV) 1. EV is the sum of market value of equity
Ratio EBIDTA and the market value of debt
2. Market value of equity = the no. of shares
outstanding * price per share.
3. It reflects profitability, growth, risk,
liquidity and corporate image.
24 Dividend Payout DPS 1. It indicates what % of the total earnings
Ratio EPS are distributed to the shareholders while
the rest is retained by the firm.
2. The retained earnings or the retention
relation can be determined as : (1-payout
ratio)
E LEVERAGE RATIO
It is also known as Long Term Solvency Ratios.
These ratios indicate the long term financial prospects of the company’s.
The long term stability of the firm may be considered as dependent upon its ability to meet
its all liabilities.
Leverage ratios help in assessing the risk arising from the use of debt capital. It indicates the
ability of a firm in employing long term funds having a fixed cost, to enhance returns to
owners.
Financial leverage refers to use of debt finance.
The higher the leverage, higher the profits and vice versa.
Two types of Leverage Ratios : Structural Ratios & Coverage Ratios
 Structural Ratios are based on the proportion of debt and equity in the financial structure of
the firm.
Coverage Ratios shows the relationship between debt servicing commitments and the sources
for meeting these burdens.
25 Debt Equity Ratio TotalDebt 1. Shows the extent to which the firm is
Shareholders’ Equity financed by debt.
2. Total Debt = Short Term + Long Term
Debt
3. Shareholders’ Equity = Net worth +
Preference Capital+ Deferred Tax
Liability
4. If the proportion of debt to equity is
low, a company is said to be low-
geared, and vice versa.
5. A debt equity ratio of 2:1 is the norm
accepted by financial institutions for
financing of projects.
6. The lower ratio indicates higher
protection to the creditors.
7. Gearing should be low for industries
with volatile demand and profits.
26 Debt to Total TotalDebt Shows the % of the firm’s assets that are
Assets Ratio Total Assets supported by debt financing.
Total Debt = Short Term + Long Term Debt
Total Assets = Balance Sheet Total
27 Shareholders Shareholder’s Equity It is a relationship between the
Equity Ratio / Total Assets (Tangible) shareholder’s funds and the total assets.
Proprietary Ratio Net Worth = Equity share capital +
Preference share capital + Reserves –
Fictitious assets - accumulated losses
Total Assets = Fixed assets + Current
assets+ Investments – Fictitious assets
28 Capital Gearing Fixed Interest Bearing 1. The fixed interest bearing funds include
Ratio Funds debentures, long-term loans and
Equity Shareholders’ preference share capital.
Funds 2. The equity shareholders’ funds include
equity share capital, reserves and
surplus less fictitious assets & losses.
3. It indicates the capital structure of the
co.
4. If the funds bearing fixed rate exceeds
then the co’s capital structure is highly
geared.
29 Fixed Assets to FixedAssets 1. Fixed assets represents the gross fixed
Long Term Funds Long Term Funds assets minus depreciation.
Ratio 2. Long term funds include share capital,
reserves and surplus & long term loans.
30 Interest Coverage PBDIT 1. It shows how many times interest
Ratio Interest charges are covered by funds or (current
 profits) that are available for the
payment of interest.
2. An interest cover of 2 times is
considered reasonable by financial
institutions.
3. A high ratio indicates that firm can
easily meet its interest burden.
4. A very high ratio indicates that the firm
is conservative in using debt and very
low indicates excessive use of debt.
31 Debt Service PAT+Depreciation+Other 1. It indicates whether the business is
Coverage Ratio non cash charges+ Interest earning sufficient profits to pay not only
on loan the interest charges, but also the
Interest on loan + Loan instalments due of the principal amount.
repayment in a year 2. This ratio enables the lender to take the
correct view of borrower’s repayment
capacity.
3. A ratio of 2 is considered as satisfactory.
F OPERATING RATIOS
1. The ratios of all operating expenses (i.e. materials used, labor, factory overheads,
administration and selling expenses) to sales is the operating ratio.
2. A comparison of the operating ratio would indicate whether the cost content is high or
low in the figure of sales.
3. The three major components are: material, labour and overheads.
32 Material Cost Material Consumed*100
Ratio Sales

33 Labor Cost Ratio Labor Cost × 100

Sales
34 Factory Overhead Factory Expenses× 100
Ratio Sales

35 Administrative Administrative Exps×100

Expenses Ratio Sales

36 Selling & Selling&Distribution

Distribution Exps × 100
Expenses Ratio Sales
37 Operating Ratio COGS+Operating Exps ×
100
Sales