Comparison of two or more relevant variables

Ratio with each other , to understand the

correlation between them. ( to understand
Analysis the impact / proportion of the one on the
other(s))
 Revenue:- Increase
by 11.52 %

Expenses to Rev :-
Reve : 1000 1120 87 .34 % for 18 &
84.04% for 19
Exp : 870 940
PBT :- Increase by
PBT : 130 180 40.66%

Increase in PBT by 38.46%

PBT to Sales :- 2019:- 15.95% 2018:- 12.65 %
Classification of Ratios

Statements
Functional
Based Liquidity
Balance Sheet
Ratios Profitability

P & L A/c Ratios

Capital Structure

Interstatement
Turnover
Ratios
Liquidity Ratios

• Let’s understand the term Solvency first:- The person is said to be

solvent when his assets exceed liabilities or in other words income is
more than expenses
• Liabilities of any organization can be divided into 2 categories :- Long
Term(LT) & Short Term(ST).
• We must assess firm’s ability to settle both the types of liabilities LT &
ST separately.
• Liquidity:- Firm's ability to pay its short-term debt (current liabilities)
• So Liquidity Ratios are also known as “ Short Term Solvency” Ratios .
• For Payment of CL :- Current Assets , as CL are the
liabilities which have to be paid off in a period or 1 year or less than
that (usually) & CAs are the assets which can be converted into cash
within a period of 1 year or less than that (usually)
• Liquidity Ratios are based on ST Assets & ST Liabilities
• Current Ratio = CA/ CL = 2:1 (not 1:1)
• Quick Ratio =( CA – (Stock + Prepaid Exp))/ CL
• Or Quick Ratio =( CA – (Stock + Prepaid Exp))/ QL (QL = CL – Bank
Over Draft)
• CA :- Rs.2,00,000 , CL :- Rs.1,00,000 , Bank OD :- Rs.20,000/-
• QR = 2,00,000/1,00,000 = 2:1
• QR = 2,00,000 / 80,000 = 2.5: 1
• Super quick ratio =( Cash + Bank + ST Invt) / CL or QL = 0.50:1
CA Rs. CL Rs.
Cash 100000 Bills Payable 200000
Debtors 200000 Creditors 50000
Bills receivables 50000 Outstanding Expenses 40000
Stock 450000 Bank Overdraft 40000
Short term Investments 20000 Provision for Taxation 50000
Prepaid Expenses 10000
TOTAL 830000 TOTAL 380000
Current Ratio = Current Assets Quick Ratio = Current Assets – (Stock +Prepaid Exp)(Or
-------------------- Quick Assets)
Current Liabilities -----------------------------------------------
Current Liabilities (or Quick Liab)
= 830000
------------- =2.18:1 = 830000 – (450000+10000)
380000 ------------------------------------ =0.97:1
• QR :- 370,000/(380,000-40,000) = 1.08:1
 CA Rs. CL Rs.
Cash 100000 Bills Payable 200000
Debtors 200000 Creditors 50000
Bills receivables 50000 Outstanding Expenses 40000
Stock 450000 Bank Overdraft 40000
Short term Investments 20000 Provision for Taxation 50000
Prepaid Expenses 10000
TOTAL 830000 TOTAL 380000
OR Super Quick Ratio = Cash & Bank + ST Invt
Super Quick Ratio = Cash & Bank + ST Invt -----------------------------------------------
----------------------------------------------- Quick Liab
Current Liabilities
=1,20,000 =1,20,000
------------------------------------ =0.31:1 ------------------------------------ =0.35:1
380000 380000 -40000
• QR =Quick Assets / Quick Liab.
• Quick Liab = CL –Bank O/D

• Superquick ratio = Cash + bank +Mkt Sec

CL or QL
• 0.50:1
 A B C
CR 3:1 2:1 2:1
QR 1.5:1 1.8:1 0.90:1
SQR 0.60:1 1:1 0.30:1
• Current Ratio :- CA/ CL = 2:1

• Quick Ratio =CA – (Stck + Prepaid Exp)/ CL = Quick Assets (2,00,000/

1,00,000)CL = 2:1
• Or Quick Ratio = Quick Assets(2,00,000) /(80,000)Quick Liabilities =
2.5:1
• QL = CL (-) Bank OD (1,00,000 – 20000 = 80,000)
• Superquick Ratio = (Cash + Bank + sT Ivts )/ CL or QL = 0.50:1
CA Rs. CL Rs.
Bank 200000 Bills Payable 180000
Debtors 215000 Creditors 50000
Bills receivables 150000 Outstanding Expenses 40000
Inventory 155000 Bank Overdraft 40000
Marketable Investments 80000 Provision for Taxation 50000
Prepaid Expenses 50000 Provision for Dividend 50000
 2)Quick Ratio =
CA– (Stock &Prepaid Exp)
----------------------------------
Current Liabilities
1)Current Ratio = Current Assets = 850000 – (155000 +50000)
-------------------- ----------------------------------------
Current Liabilities 410000
=1.57:1
= Bank + Debtors +B.Rece.+Inventory+ OR
Mkt Sec.+ Prepaid Exp.
2)Quick Ratio =
--------------------------------------------------
CA– (Stock &Prepaid Exp)
Creditors + B.Pay.+ Bank O/d + Pro.for
Tax + Pro.for Div. + O/s Exp -----------------------------------------
= 850000 Current Liabilities – Bank O/D
-------------- = 2.07:1 =850000 – (155000 +50000)
410000 ----------------------------------------
410000 – 40000
=1.74:1
3)Superquick Ratio = Bank + Mkt Sec
CL- Bank OD
= 2,80,000/3,70,000
= 0.75 :1
Or 3)Superquick Ratio =
2,80,000/4,10,000 = 0.64:1
CA Rs. CL Rs.
Bank 20000 Bills Payable 220000
Debtors 100000 Creditors 50000
Bills receivables 150000 Outstanding Expenses 45000
Inventory 470000 Bank Overdraft 70000
Marketable Investments 75000 Provision for Taxation 15000
Prepaid Expenses 55000
TOTAL 870000 TOTAL 400000
 Quick Ratio =
CA– (Stock &Prepaid Exp)
Current Ratio = Current Assets ----------------------------------
-------------------- Current Liabilities
Current Liabilities = 870000 – (470000 +55000)
----------------------------------------
= Bank + Debtors +B.Rece.+Inventory+ Mkt Sec.+ Prepaid 400000
Exp. =0.86:1
-------------------------------------------------- OR
Creditors + B.Pay.+ Bank O/d + Pro.for Tax + Pro.for Div. + O/s Quick Ratio =
Exp
CA– (Stock &Prepaid Exp)
= 870000
-----------------------------------------
-------------- = 2.18:1
Current Liabilities – Bank O/D
400000
=870000 – (470000 +55000)
----------------------------------------
3)Superquick Ratio = Bank + Mkt Sec 400000 - 70000
CL- Bank OD =1.05:1
= 95,000/3,30,000
= 0.29 :1
Or 3)Superquick Ratio =
95,000/4,00,000 = 0.23:1
CA Rs. CL Rs.
Bank 245800 Bills Payable 90000
Debtors 197000 Creditors 50000
Bills receivables 98000 Outstanding Expenses 18000
Inventory 48000 Provision for Taxation 45000
Marketable Investments 26000 Unearned Revenue 35000

TOTAL TOTAL
 Quick Ratio =
CA– (Stock)
Current Ratio = Current Assets
----------------------------------
--------------------
Current Liabilities Current Liabilities
= 614000 - 48000
= Bank + Debtors +B.Rece.+Inventory+ MktSec
----------------------------------------
--------------------------------------------------------------
Creditors + B.Pay.+ Pro.for Tax + Unearned Revenue + O/s 238000
Exp
= 2.37:1
= 614000
---------------------------------- = 2.57: 1 OR
238000 Quick Ratio =
CA– (Stock)
3)Superquick Ratio = Bank + Mkt Sec
CL -----------------------------------------
= 1.14:1 Current Liabilities – Unearned Rev
= 614000 - 48000

= ----------------------------------------
Or 3)Superquick Ratio =Bank + Mkt Sec 238000 - 35000
CL – Un .Rv
=2.79 : 1

= 1.34:1

=
 Profitability Ratios

• Measure Income earning capacity of the organization

• Comparison of profits at every stage with the variables correlated with it to understand the
impact of business operations on profit
• Determines the availability of Profit / margin of profit available for the different
stakeholders
•A
• Cap Rs. 50,00,000/-
• NP Rs. 10,00,000/-

•B
• Cap Rs. 80,00,000/-
• NP Rs.10,00,000
 Profitability Ratios are broadly categorized into 2
parts :-

❑Ratios related to Sales :- Measures the profitability with reference to

turnover

❑Ratios related to Investment (of capital ):- Measures the profitability with
reference to capital invested
Data of Income & Exp of a
Manu . Com
Purchases of R/M 1,00,000

Production Exp 50,000

Office Expenses 40,000

Distribution Expenses 20,000

Sales 3,50,000

Loss on Sale of Long Term 10,000

Assets
Gain on sale of Long Term 20,000
Assets
Interest 30,000

Tax 60,000
Data of Income & Exp of a Income Statement
Manu . Com
Purchases of R/M 1,00,000 Sales 3,50,000

Production Exp 50,000 (-) Purchases of R/M 1,00,000

Office Expenses 40,000 (-) Production Exp 50,000

Distribution Expenses 20,000 Gross Profit 2,00,000

Sales 3,50,000 (-) Office Expenses 40,000

Loss on Sale of Long Term 10,000 (-)Distribution Expenses 20,000

Assets
Gain on sale of Long Term 20,000 Operating Profit 140000
Assets
Interest 30,000 (+) Gain on sale of Long Term Assets 20,000

Tax 60,000 (-) Loss on Sale of Long Term Assets 10,000

EBIT
• A :- Sales Rs.1,00,00,000
• NP :- 50,00,000:- Op Income Rs. 45,00,000 Non Op Income
Rs.5,00,000

• B Sales Rs.1,00,00,000
• NP:- 80,00,000:- operating Income Rs. 30,00,000 Non Op Income Rs.
50,00,000
• TC + Profit = SP
• 45 + 5 = 50/-

• 30 RM + 15 Dist.
 .
Following data is from a Manufacturing Ltd

• Sales :- Rs. 5980000

• COGS :- Rs. 3500000
• Admin Exp:- Rs. 85000
• Selling Exp :- Rs.90000
• Profit on sale of Machine :-
Rs.10000
• Interest :- Rs.10000
• Tax :- Rs.21900
Income Statement
• Sales 59,80,000 (-) Int 10,000
(-) COGS 35,00,000 PBT 23,05,000
GP 24,80,000 (-) Tax 21,900
(-) Admin Exp 85,000 PAT 22,83,100
(-) Selling Exp 90,000 ======================
Operating Profit 23,05,000 Operating Exp= COGS + Admin Exp + Selling Exp
(+) NOI – Profit on =36,75,000
Sale of Mch 10,000 1) GPR = (24,80,000/59,80,000)* 100=
41.47%
PBIT 23,15,000 2) NPR = (22,83,100/59,80,000) * 100
=38.17%
3) Op Ratio = (36,75,000/59,80,000)
*100=61.45%
P & L for the year ended 2014

Dr Exp Cr Income
• Cogs 2010000 • Sales 2590000
• GP 580000

• GP 580000
• Admin 112000
• Selling 85000
• Income on sale invt 15000
• Int 50000
• Tax 105000
• NP 243000
 Income State 2016 2017
Sales 2400000 2200000
(-) COGS 1970000 2053000 COGS = Open Stk + Purch +Direct Exp
– Clos Stk
Gross Profit 430000 147000
(-) 1 Sal & Off Exp 60000 65000 OR

2 S & D Exp 50000 48000 COGS = Sales – GP

4 Depreciation 100000 90000
2016 = 1800000+250000 – 80000
Operating Profit / Loss 220000 (56000) = 1970000
OR
(-) Non Op Exp -
Laws Sett Charges 80000 2016 = 2400000 – 430000
(+) Non Op Income = 1970000
1 Interest Rec 45000 25000
2 Prof on Invt - 24000 COGS
PBIT 185000 (7000) 2017 = 80000 + 1800000 + 245000 –
72000 = 2053000
(-) Interest 120000 20000 OR
PBT/ Loss 65000 (27000) COGS = 2200000 – 147000
(-) Tax @ 30% 19500 - = 2053000
PAT 45500
 P & L Acc for 2016
Amt Amt
Material ( Op E) 1800000 Sales ( 2400000
Op I)
Direct Exp ( Op E) 250000 Clos stk ( 80000
Op I)
GP 430000
=================== ================
S & D ( Op E) 50000 GP 430000
Salr & Off Exp ( Op E) 60000 Interest ( Non Op I) 45000
Depreciation ( Op E) 100000

Law sttl Chgre( Non Op E) 80000

Interest ( Non Op E) 120000
(PBT 65000)
Tax(30%*65000) ( Non Op 19500
 P & L Acc for 2017
Amt Amt
Open Stk 80000 Sales ( 2200000
Material ( Op E) 1800000 Op I)
Direct Exp ( Op E) 245000 Clos stk ( 72000
Op I)
GP 147000
=================== ================
S & D ( Op E) 48000 GP 147000
Salr & Off Exp ( Op E) 65000 Interest ( Non Op I) 25000
Dep 90000 Profit Invt 24000

Interest ( Non Op E) 20000 Net Loss 27000

PBT
• GP Ratio = GP / NS * 100
• 2016 = 430000/ 2400000 *100 = 17.91 %
• 2017 = 147000 / 2200000 * 100 = 6.68 %
• NP Ratio = NP /NS * 100
• 2016 = 45500 / 2400000 * 100 = 1.89%
• 2017 = there is Net Loss Rs.27000
• Operating Ratio = Op.Exp / NS * 100
• Op Exp = COGS + Sal & Off Exp + S & D Exp + Dep
• 2016 = Op Exp = 1970000 + 60000 + 50000 + 100000= 2180000
• 2016 = Operating Ratio = 2180000/2400000 * 100 = 90.83 %
• 2017 = Op Exp = 2053000 + 65000 + 48000 + 90000 = 2256000
• 2017 = Operating Ratio = 2256000 / 2200000 * 100 = 102.54 %
P & L Acc for 2016
Amt Amt
Material 1500000 Sales 4500000
Fac. Rent 100000 Clso. Stk 20000
Dep – Fac Mach 50000

GP 2870000
=================== ================
Sal & Wages (Op Exp) 200000 GP 2870000
Adv(Op Exp) 40000
Tran Exp (Op Exp) 80000
Dep – Off Buld(Op Exp) 200000

Prelim Exp W Off (Non Op 10000

Exp)

Interest (Non Op Exp) 28000

(PBT 2312000)
Tax (30%* 2312000) (Non 693600
 P & L Acc for 2017
Amt Amt
Opening Stk 20000 Sales 4800000
Material 1800000 Clso Stk 22000
Fac. Rent 100000
Dep – Fac Mach 45000
GP 2857000 ================
===================
Sal & Wages 210000 GP 2857000
Adv 40000
Tran Exp 78000
Dep – Off Buld 200000

Prelim Exp W Off 5000

Interest 25000
 Income State
2016 2017
Total Revenue 4500000 4800000 COGS = Open Stk + Mat Puch +Fac.
Rent +Dep on Mch – Clos Stk
(-) COGS 1630000 1943000
OR
Gross Profit 2870000 2857000
(-) 1 Sal & Wages 200000 210000 COGS = Sales – GP
2 Adver 40000 40000 2016= 1500000 + 100000 + 50000 –
3 Tranpos Exp 80000 78000 20000 = 1630000/-
4 Depreciation – Off 200000 200000 (2016does not have Op Stk)
Buld
Operating Profit / Loss 2350000 2329000 2017 = 20000 + 1800000 + 100000+
45000 – 22000 = 1943000 /-
(-) Non Op Exp
Preli Exp W Off 10000 5000
(+) Non Op Income - -

PBIT 2340000 (23,50,000 - 2324000

10,000)
(-) Interest 28000 25000
• GP R = 2016 = 2870000/4500000 * 100 = 63.78%
• GP R = 2017 = 2857000 / 4800000* 100 = 59.52%

• NP R = 2016 = 1618400/ 4500000 *100 = 35.96 %

• NP R = 2017 = 1609300/ 4800000 *100 = 33.52 %
• Operating Ratio = Operating Exp / NS* 100
• Operating Exp = COGS + Sal & Wages + Adv + Transportation + Dep
• Operating Exp = 2016 = 2150000
• Operating Exp = 2017 = 2471000

• Op R = 2016 = 2150000/ 4500000 * 100 = 47.77 %

• Op R = 2017 = 2471000 / 4800000 * 100 = 51.47 %
• EPS (Earnings Per Share)
• Div. Payout Ratio
• Price Earnings Ratio
• PAT :-1000000
(-)Pref Div :- 100000
• PAT – PD = 900000 (Profit ava for Eqty Sh holders )
• No.of equity shares = 10000 ,FV per Equin Sh Rs. 100 /-Equi Div Per Sh – Rs. 10 ( Equity Div Rate =
10% )
• (Equity Sh Cap= 10000*Rs.100 = Rs. 10,00,000/-
• Equity Div = Rs.10,00,000 * 10% = Rs.1,00,000/- )
• OR
• Equity Div = 10000* Rs.10= Rs.1,00,000/-
• EPS = PAT – PD/No.of Equi Shs
• 900000/10000=
• Rs.90/-
• Div P/o R = (Equity Div / PAT – PD) *100 D P R = (10/90)*100 = 11.11%
• = (1,00,000 / 900000 )* 100 = 11.11 %
• PAT Rs. 1000000
• Pref Div Rs. 200000
• Equity Sh Cap Rs. 500000( @ Rs. 10 each)
• Equity Div Rate – 10% ( Div Per Share Rs 10% *10 = Rs.1)
• Calculate EPS & P/O Ratio
• EPS = PAT –PD / No. of Equi Shas
• `No.of Equity Shs = 500000/10 = 50000
• EPS = 1000000 – 200000 / 50000 = Rs.16 /-

• Div P/o Ratio = Equity Div / PAT – PD *100 OR DPS/EPS * 100

• = 500000 * 10% / 800000 *100 = 6.25 % 1/16 * 100 = 6.25 %
• Price Earnings Ratio = Mket Price Per Sh(MPS) / EPS
• e.g. MPS = Rs.50, EPS = Rs.5
So P/E Ratio =50/5= 10
• Return On Investment / On Capital Emp (ROI)
= (PBIT /Cap Emp)*100
=Cap Emp = Debt (BC)+ Equity (OC) – Fict Assets

ROI = (50,000/ 100000)*100 = 50%

Cap= Rs.100000 – 10000= 90000

ROI = (50000/90000) * 100 = 55%

• Calculation of PBIT :-
Sales PBIT
(-) COGS (-) Int
------------------ ------------
GP PBT
(-) Other Op Exp (-) Tax
--------------------- -----------
Op PAT
(-) NOE
+ NOI
----------------------
PBIT
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Therefore :- PBIT = PAT + Tax +Int

PBIT X = 950000 + 323000+125000= 1398000

PBIT Y = 897000+238000+149000 = 1284000
• Capital Emp = (Equity)+ (debt ) – Fict Assets
=( Equi Sh Cap+ Pref Sh Cap + Res & Sur) + (Deb + Term
Loans) – Prel Exp
X = 2000000+ 500000+300000+800000+1250000 - 50000 = 4800000
Y = 1800000+300000+900000+1148000 - 60000 = 4038000

• PBIT – x =1398000 & PBIT – Y = 1284000

• ROI X = (1398000/4800000)*100 = 29.12% ROI X = 28.82%
• ROI Y= (1284000/4038000 )*100 = 31.79% ROI Y = 31.33%
• PBIT = Op Profit – NOE + NOI
• PBIT QR = 1800000 – 84000 + 120000 = 1836000
• PBIT PR = 2100000 – 790000 = 1310000

• Cap Emp = Equity + Debt – Fict Assts

• Equity = Eq Sh Cap + Pref Cap +Res.
• Debt = Debentures + T Loans
• Fict Assts = Prelim Exp
• Cap Emp QR = 7000000+1200000 + 500000+800000+ 700000 - 50000
= 10150000

• Cap Emp PR = 7200000+1300000+100000+1500000+850000-80000

= 10870000
• ROI QR = 1836000_ *100
10150000 = 18.08%

• ROI PR = 1310000_ *100

10870000 = 12.05%
• ROI = PBIT / Cap Emp * 100
• Return on Sh holders Fund = PAT / Sh holders Fund * 100
• Return on Equity / Net Worth =PAT – PD / Equi Cap + Res * 100

• Equity (OC)= Sh holders Fund = Equi Cap + Prf Cap + Res

• Net Worth = Equi Cap + Res
Capital Structure / Long Term Solvency Ratios

• Debt Equity Ratio = Debt / Equity=200000/100000= 2:1

AB AC
Equi Cap (@ 10/-per share 200000 100000
FV)
Deb (@ 10%) 100000 200000
Total Cap 300000 300000

AB AC
PBIT 200000 200000
(-) Int (Deb at 10%) 10000 20000
PBT 190000 180000
(-)Tax rate 50 %(of PBT) 95000 90000
PAT 95000 90000
No of shares 20000 10000
• Debt Equity R QR = 1500000/8700000 = 0.17 : 1
• Debt Equity R PR = 2350000 / 8600000 = 0.27: 1

• Debt Equity R = Deb + T loans / Eq cap + Pref Cap + Res

• Debt Equity R X = 2050000 / 2800000 = 0.73:1
• Debt Equity R Y = 2048000 / 2050000= 0.99:1
• Debt Equity Ratio = Debt /Equity =
• X = Debentures + T Loans / Eqi Sh cap + Pref cap +Res
=800000+1250000/ 2000000+500000+300000 = 0.73:1
• Y = Debentures + T Loans / Eqi Sh cap + Res
= 900000+1148000/1800000+250000 = 0.99:1
Activity Ratios
RM - WIP – FG – Sales ( Drs) – Cash

DTR = Net Cre Sales / Ave Drs = 10 times , DCP = 360/10 =36 days

Industry ave = DTR = 5 times , DCP = 360/5 = 72 days