RATIO ANALYSIS

Ratio is an expression of relationship between two or more items in mathematical terms.

Ratio Analysis and its Applications:Ratio analysis is a medium to understand the financial
weakness and soundness of an organization. Keeping in mind the objective of analysis, the
analyst has to select appropriate data to calculate appropriate ratios. Interpretation depends upon
the caliber of the analyst.Ratio analysis is useful in many ways to different concerned parties
according to their respective requirements. Ratio analysis can be used in the following ways:

 To know the financial strength and weakness of an organization.

 To measure operative efficiency of a concern.
 For the management to review past year’s activity.
 To assess level of efficiency.
 To predict the future plans of a business.
 To optimize capital structure.
 In inter and intra company comparisons.
 To measure liquidity, solvency, profitability and managerial efficiency of a concern.
 In proper utilization of assets of a company.
 In budget preparation.
 In assessing solvency of a firm, bankruptcy position of a firm, and chances of corporate sickness.

Advantages of Ratio Analysis

 It is powerful tool to measure short and long-term solvency of a company.

 It is a tool to measure profitability and managerial efficiency of a company.
 It is an important tool to measure operating activities of a business.
 It helps in analyzing the capital structure of a company.
 Large quantitative data may be summarized using ratio analysis.
 It relates past accounting performances with the current.
 It is useful in coordinating the different functional machineries of a company.
 It helps the management in future decision-making.
 It helps in maintaining a reasonable balance between sales and purchase and estimating
working capital requirements.

Limitations of Ratio Analysis::

 If the data received from financial accounting is incorrect, then the information derived
from ratio analysis could not be reliable.
 Unauthenticated data may lead to misinterpretation of ratio analysis.
 Future prediction may not be always dependable, as ratio analysis is based on the past
performance.
 To get a conclusive idea about the business, a series of ratios is to be calculated. A single
ratio cannot serve the purpose.
 It is not necessary that a ratio can give the real present situation of a business, as the
result is based on historical data.
  Trend analysis is done with the help of various calculated ratios that can be distorted due
to the changes in the price level.
 Ratio analysis is effective only where same accounting principles and policies are
adopted by other concerns too, otherwise inter-company comparison will not exhibit a
real picture at all.
 Through ratio analysis, special events cannot be identified. For example, maturity of
debentures cannot be identified with ratio analysis.
 For effective ratio analysis, practical experience and knowledge about particular industry
is essential. Otherwise, it may prove worthless.
 Ratio analysis is a useful tool only in the hands of an expert.

Types of Ratio: Ratios can be classified on the basis of financial statements or on the basis of
functional aspects.

Classification on the Basis of Financial Statement

Balance Sheet Ratios: Ratios calculated from taking various data from the balance sheet are called
balance sheet ratio. For example, current ratio, liquid ratio, capital gearing ratio, debt equity ratio,
and proprietary ratio, etc.

Revenue Statement Ratio: Ratios calculated on the basis of data appearing in the trading account
or the profit and loss account are called revenue statement ratios. For example, operating ratio, net
profit ratio, gross profit ratio, stock turnover ratio.

Mixed or Composite Ratio: When the data from both balance sheet and revenue statements are
used, it is called mixed or composite ratio. For example, working capital turnover ratio, inventory
turnover ratio, accounts payable turnover ratio, fixed assets turnover ratio, return of net worth
ratio, return on investment ratio.
Classification of Ratios on the Basis of Financial Statements

Balance Sheet Ratios Profit and Loss A/c Ratios Composite or Mixed Ratios

 Current Ratio  Stock Turnover Ratio

 Liquid Ratio  Receivable Turnover Ratio
 Absolute Liquid Ratio  Payable Turnover Ratio
 Gross Profit Ratio
 Debt Equity Ratio  Fixed Assets Turnover Ratio
 Operating Ratio
 Proprietorship Ratio  Total Assets Turnover Ratio
 Operating Profit Ratio
 Capita Gearing Ratio  Working Capital Turnover
 Net Profit Ratio
 Assets Proprietorship Ratio
 Cash Profit Ratio
Ratio  Capital Turnover Ratio
 Expenses Ratio
 Capital Inventory to  Return on Capital Employed
 Interest Coverage Ratio
Working Capital Ratio  Return on Equity Ratio
 Ratio of Current Assets to  Return on Shareholders Fund
Fixed Assets  Capital Turnover Ratio
Classification on the Basis of Financial Aspects:

Liquidity Ratios: Liquidity ratios are used to find out the short-term paying capacity of a firm,
to comment short term solvency of the firm, or to meet its current liabilities.

Long-Term Solvency and Leverage Ratios: Debt equity ratio and interest coverage ratio are
calculated to know the efficiency of a firm to pay long-term debts and to meet interest costs.
Leverage ratios are calculated to know the proportion of debt and equity in the financing of a
firm.

Activity Ratios: Activity ratios are also called turnover ratios. Activity ratios measure the
efficiency with which the resources of a firm are employed. Turnover ratios are calculated to
know the efficiency of liquid resources of the firm, Accounts Receivable (Debtors) Turnover
Ratio and Accounts Payable (Creditors).

Profitability Ratios: The results of business operations can be calculated through profitability
ratios. These ratios can also be used to know the overall performance and effectiveness of a firm.
FUNCTIONAL CLASSIFICATION OF RATIOS

Long-Term Solvency and Activity Ratios Asset

Liquidity Ratios Profit Abilities Ratios
Leverage Ratios Management Ratios

(A) In relation to sales

 Gross Profit Ratio

 Operating Ratio
(A)
 Inventory  Operating Ratio
Turnover Ratio  Operative Profit
 Current Ratio
 Debtors Turnover Ratio
 Liquid Ratio
Ratio  Net Profit Ratio
 Absolute Liquid  Debt/Equity Ratio
 Fixed Assets  Expenses Ratio
or Cash Ratios  Debt to total
Turnover Ratio
Capital Ratio
 Total Assets (B) In relation to
(B)  Interest Coverage
Turnover Ratio Investments
Ratio
 Working Capital
 Debtors Turnover  Cash Flow/ Debt
Turnover Ratio  Return on
Ratio  Capital Gearing
 Payable Turnover Investment
 Creditor Turnover
Ratio  Return on Capital
Ratio
 Capital Employed  Return on Equity
 Inventory
Turnover Ratio  Return on Total
Turnover Ratio
 Resources
 Earnings per Share
Ratio
 Price Earnings Ratio
LIQUIDITY RATIOS : Liquidity ratios are the ratios that measure the ability of a company
to meet its short term debt obligations. These ratios measure the ability of a company to pay off
its short-term liabilities when they fall due.

The liquidity ratios are a result of dividing cash and other liquid assets by the short term
borrowings and current liabilities. They show the number of times the short term debt obligations
are covered by the cash and liquid assets. If the value is greater than 1, it means the short term
obligations are fully covered.

Generally, the higher the liquidity ratios are, the higher the margin of safety that the company
posses to meet its current liabilities. Liquidity ratios greater than 1 indicate that the company is
in good financial health and it is less likely fall into financial difficulties.

Current ratio:The current ratio is balance-sheet financial performance measure of company

liquidity. The current ratio indicates a company's ability to meet short-term debt obligations. The
current ratio measures whether or not a firm has enough resources to pay its debts over the next
12 months. Potential creditors use this ratio in determining whether or not to make short-term
loans. The current ratio can also give a sense of the efficiency of a company's operating cycle or
its ability to turn its product into cash. The current ratio is also known as the working capital
ratio.

Calculation (formula)

The current ratio is calculated by dividing current assets by current liabilities:

The current ratio = Current Assets / Current Liabilities

Both variables are shown on the balance sheet (statement of financial position).

Current assets Current liabilities

Cash Accounts payable / creditors
Marketable securities Accrued payable
Accounts receivables / debtors Bonds payable
Inventories / stock
Prepaid expenses

The higher the ratio, the more liquid the company is. Commonly acceptable current ratio is 2; it's
a comfortable financial position for most enterprises. Acceptable current ratios vary from
industry to industry. For most industrial companies, 1.5 may be an acceptable current ratio.

Low values for the current ratio (values less than 1) indicate that a firm may have difficulty
meeting current obligations. However, an investor should also take note of a company's
operating cash flow in order to get a better sense of its liquidity. A low current ratio can often be
supported by a strong operating cash flow.

If the current ratio is too high (much more than 2), then the company may not be using its current
assets or its short-term financing facilities efficiently. This may also indicate problems in
working capital management.

Quick ratio: The quick ratio is a measure of a company's ability to meet its short-term
obligations using its most liquid assets (near cash or quick assets). Quick assets include those
current assets that presumably can be quickly converted to cash at close to their book values.
Quick ratio is viewed as a sign of a company's financial strength or weakness; it gives
information about a company’s short term liquidity. The ratio tells creditors how much of the
company's short term debt can be met by selling all the company's liquid assets at very short
notice.

The quick ratio is also known as the acid-test ratio or quick assets ratio.The quick ratio is
calculated by dividing liquid assets by current liabilities:

Quick ratio = (Current Assets - Inventories) / Current Liabilities

Calculating liquid assets inventories are deducted as less liquid from all current assets
(inventories are often difficult to convert to cash). All of those variables are shown on the
balance sheet (statement of financial position).

Alternative and more accurate formula for the quick ratio is the following:

Quick ratio = (Cash and cash equivalents + Marketable securities + Accounts receivable) /
Current Liabilities

The formula's numerator consists of the most liquid assets (cash and cash equivalents) and high
liquid assets (liquid securities and current receivables).

The higher the quick ratio, the better the position of the company. The commonly acceptable
current ratio is 1, but may vary from industry to industry. A company with a quick ratio of less
than 1 can not currently pay back its current liabilities; it's the bad sign for investors and
partners.
Cash Ratio:Cash ratio (also called cash asset ratio) is the ratio of a company's cash and cash
equivalent assets to its total liabilities. Cash ratio is a refinement of quick ratio and indicates the
extent to which readily available funds can pay off current liabilities. Potential creditors use this
ratio as a measure of a company's liquidity and how easily it can service debt and cover short-
term liabilities.

Cash ratio is the most stringent and conservative of the three liquidity ratios (current, quick and
cash ratio). It only looks at the company's most liquid short-term assets – cash and cash
equivalents – which can be most easily used to pay off current obligations.

Cash ratio is calculated by dividing absolute liquid assets by current liabilities:

Cash ratio = Cash and cash equivalents / Current Liabilities

Both variables are shown on the balance sheet (statement of financial position).

Norms and Limits

Cash ratio is not as popular in financial analysis as current or quick ratios, its usefulness is
limited. There is no common norm for cash ratio. In some countries a cash ratio of not less than
0.2 is considered as acceptable. But ratio that are too high may show poor asset utilization for a
company holding large amounts of cash on its balance sheet.

LEVERAGE RATIOS: Leverage ratios (debt ratios) measure the ability of a company to
meet its financial obligations when they fall due. Financial leverage ratios (debt ratios) indicate
the ability of a company to repay principal amount of its debts, pay interest on its borrowings,
and to meet its other financial obligations. They also give insights into the mix of equity and debt
a company is using.

Financial leverage ratios usually compare the debts of a company to its assets. The common
examples of financial leverage ratios include debt ratio, interest coverage ratio, capitalization
ratio, debt-to-equity ratio, and fixed assets to net worth ratio.

Financial leverage ratios indicate the short-term and long-term solvency of a company. They
give indications about the financial health of a company. These ratios give indications whether
the company has got enough financial resources to cover its financial obligations when the
creditors and lenders seek their payments. A company with adverse financial leverages ratios
may not be able to cover its debts and therefore may go bankrupt

CAPITAL STRUCTURE RATIOS :

The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative
proportion of entity's equity and debt used to finance an entity's assets. This ratio is also known
as financial leverage.
Debt-to-equity ratio is the key financial ratio and is used as a standard for judging a company's
financial standing. It is also a measure of a company's ability to repay its obligations. When
examining the health of a company, it is critical to pay attention to the debt/equity ratio. If the
ratio is increasing, the company is being financed by creditors rather than from its own financial
sources which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity
ratios because their interests are better protected in the event of a business decline. Thus,
companies with high debt-to-equity ratios may not be able to attract additional lending capital.

A debt-to-equity ratio is calculated by taking the total liabilities and dividing it by the
shareholders' equity:

Debt-to-equity ratio = Liabilities / Equity

Both variables are shown on the balance sheet (statement of financial position).

Optimal debt-to-equity ratio is considered to be about 1, i.e. liabilities = equity, but the ratio is
very industry specific because it depends on the proportion of current and non-current assets.
The more non-current the assets (as in the capital-intensive industries), the more equity is
required to finance these long term investments.

For most companies the maximum acceptable debt-to-equity ratio is 1.5-2 and less. For large
public companies the debt-to-equity ratio may be much more than 2, but for most small and
medium companies it is not acceptable. US companies show the average debt-to-equity ratio at
about 1.5 (it's typical for other countries too).

In general, a high debt-to-equity ratio indicates that a company may not be able to generate
enough cash to satisfy its debt obligations. However, a low debt-to-equity ratio may also indicate
that a company is not taking advantage of the increased profits that financial leverage may bring.

The debt ratio is the second most important ratio when it comes to gauging the capital structure
and solvency an organization. This article provides an in-depth look.

Debt Ratio = Total Debt / Total Capital

The debt ratio is a part to whole comparison as compared to debt to equity ratio which is a part to
part comparison. Another major difference between the debt to equity ratio and the debt ratio is
the fact that debt to equity ratio uses only long term debt while debt ratio uses total debt.

Total debt means current liabilities are also included in the calculation and so is the debt due for
maturity in the coming year.

The debt ratio tells the investment community the amount of funds that have been contributed by
creditors instead of the shareholders. The creditors of the firm accept a lower rate of return for
fixed secure payments whereas shareholders prefer the uncertainty and risk for higher payments.
If too much capital of the company is being contributed by the creditors it means that debt
holders are taking on all of the risk and they start demanding higher rates of interest to
compensate them for the same.

Debt To Total Capital Ratio

Debt to total capital ratio shows the relationship between long term debt and total capital
employed by the company. Total capital includes long term liabilities plus shareholders' equity.
Total capital is also regarded as permanent capital or capital employed or long term fund. Debt to
total capital ratio is ascertained by using the following formula.

Debt to total capital ratio = Long term debt/Total capital Or, Total debt/Total capital

* Total Debt = Long term debt+Current liabilities

* Total Capital = Long term debt+Shareholder's fund

Proprietary ratio: The proprietary ratio is not amongst the commonly used ratios. Very few
analysts prescribe its usage. This is because in reality it is the inverse of debt ratio. A higher debt
ratio would imply a lower proprietary ratio and vice versa. Hence this ratio does not reveal any
new information.

Proprietary Ratio = Total Equity / Debt + Equity

The proprietary ratio is the inverse of debt ratio. It is a part to whole comparison. The proprietary
ratio measures the amount of funds that investors have contributed towards the capital of a firm
in relation to the total capital that is required by the firm to conduct operations.

Capital Gearing Ratio:This ratio shows the relationship prevailing between equity share capital
including reserves and surplus and preference share capital along with fixed interest bearing
loans for long term. If equity share capital including reserves and surplus is less when compared
with preference share capital and fixed interest bearing loans for long term, there is a high
gearing and vice versa. The followings formulae are used to calculate Capital Gearing Ratio.

Capital Gearing Ratio = (Equity Share Capital + Reserves and Surplus) / (Preference Share
Capital+ Fixed Interest bearing loans) or

Capital Gearing Ratio = Fixed Income bearing Funds / Equity Shareholders’ Fund

( Or)Capital Gearing Ratio = Fixed Income bearing Funds / Total Capital Employed

TURNOVER RATIOS : Efficiency Ratios or Performance Ratios or Activity Ratios are the
other functional terms coined for Turnover ratio. Turnover Ratios draw attention to the diverse
aspects of financial statement to meet the requirements of different parties interested in the
business. It also underlines the efficiency with which different assets are vitalized in a business.
Turnover means the number of times assets are converted or turned over into sales. The activity
ratios indicate the rate at which different assets are turned over.

The following activities or turnover ratios can be calculated:

  Inventory Ratio or Stock Turnover Ratio
 Debtor's Turnover Ratio or Receivable Turnover Ratio
 Debtor's Collection Period Ratio
 Creditor's Turnover Ratio or Payable Turnover Ratio
 Working Capital Turnover Ratio
 Fixed Assets Turnover Ratio
 Capital Turnover Ratio.

Inventory Ratio or Stock Turnover Ratio:It is used to measure whether the investment in
stock in trade is effectively utilized or not. It reveals the affiliation between sales and cost of
goods sold or average inventory at cost price or average inventory at selling price. It indicates the
number of times the stock has been turned over in business during a particular period.

Stock Turnover Ratio = Cost of Goods Sold / Average Inventory at

Cost

Debtors Turnover Ratio:This ratio indicates the efficiency of the debt collection period and the
extent to which the debt have been converted into cash. This ratio is complementary to the
Debtor Turnover Ratio. It is very helpful to the management because it represents the average
debt collection period

Debtors Turnover Ratio = Net Credit Sales / Average

Receivables

Debt Collection Period Ratio:This ratio highlights the competence of the debt collection period
and the magnitude to which the debt have been converted into cash. This ratio is corresponding
to the Debtor Turnover Ratio. It plays an instrumental to the management because it denotes the
average debt collection period.

Debt Collection Period Ratio = Receivables x Months or days in a year / Net Credit Sales
for the year

Creditor's Turnover Ratio or Payable Turnover Ratio:Payable Turnover Ratio is also termed
as Creditor’s T.R or Creditor’s Velocity. The credit purchases are recorded in the accounts of the
buying companies as Creditors to Accounts Payable. The Term Accounts Payable or Trade
Creditors comprise of sundry creditors and bills payable. This ratio corroborates the relationship
between the net credit purchases and the average trade creditors. Creditor's velocity ratio
underlines the number of times with which the payment is made to the supplier apropos to credit
purchases.

Creditor's Turnover Ratio = Net Credit Purchases / Average Accounts

Payable
Working Capital Turnover Ratio:The effective employment of working capital pertaining to
sales is indicated by this ratio. This ratio signifies the firm's liquidity position. It institutes
relationship between cost of sales and networking capital.

Working Capital Turnover Ratio = Net Sales / Working

Capital

Fixed Asset Turnover Ratio:This ratio indicates the efficiency of assets management. Fixed
Assets T.R is put to application to gauge the optimum utilization of fixed assets. This ratio forms
the liaison between cost of goods sold and total fixed assets. Underutilization of fixed assets is
demonstrated, if the ratio is depressed.

Fixed Asset Turnover Ratio = Cost of goods Sold / Total Fixed

Assets

Capital Turnover Ratio:This ratio measures the efficiency of capital utilization in the business.
It illustrates the relationship between cost of sales or sales and capital employed or shareholders'
fund.

Capital Turnover Ratio = Cost of goods Sold / Total Fixed

Assets

PROFITABILITY RATIOS: The capacity of a business concern to earn profit can be termed
as profitability. Thus, profit earning can be ascertained on the basis of the volume of profit margin of any
activity and is calculated by subtracting costs from the total Revenue accruing to a firm during a
particular period. The overall efficiency or performance of a business can be ascertained with the help of
profitability ratios. Generally, a large number of ratios can also be put to implementation for
determination of the profitability, as the same is in consonance with the sales or investments.The
important profitability ratios are discussed below:

 Gross Profit Ratio

 Operating Ratio
 Operating Profit Ratio
 Net Profit Ratio
 Return on Investment Ratio
 Return on Capital Employed Ratio
 Earning Per Share Ratio
 Dividend Payout Ratio
 Dividend Yield Ratio
 Price Earning Ratio
 Net Profit to Net worth Ratio
1. Gross Profit Ratio:Gross Profit Ratio is the formative component in relationship between gross
profit and net sales. Higher Gross Profit Ratio is a precursor to the business concern that the firm has
higher profitability. It is also reflective of the standard of performance of firm's business apropos to its
effectiveness.
Gross Profit Ratio = Gross Profit / Net Sales X
100

Advantages

 The relationship between gross profit and net sales is adequately ascertained by it
 It reflects the efficiency and productivity of a firm
 This ratio highlights to the management, that a low gross profit ratio can be a precursor to the
adverse purchasing and mark-up policies
 A low gross profit ratio also underlines the incapacitated state of the management to increase
sales

2. Operating Ratio:Operating Ratio measures the relationship between total operating expenses
and sales. The total operating expenses is the sum total of cost of goods sold, office and
administrative expenses and selling and distribution expenses. This ratio equips the firm with the
ability to cover total operating expenses.
Operating Ratio = Operating Cost / Net Sales X
100

3. Operating Profit Ratio:It indicates the operational efficiency of the firm and is a measure of the
firm’s ability to cover the total operating expenses.
Operating Profit Ratio = Operating Profit / Net Sales X
100

4. Net Profit Ratio:This ratio tells us the overall efficiency in operating the business. It is used to
measure the relationship between net profit and sales. It includes non-operating incomes and
profits.
Net Profit Ratio = Net Profit after Tax / Net Sales X
100

Advantages

 This is the best yardstick to gauge profitability and liquidity

 It aids in evaluation of overall operational efficiency of the business concern
 It facilitates better decision making ability
 It leverages the process of determination of the managerial efficiency to utilize a firm's
resources to generate income on its invested capital
 Net profit Ratio is an indispensable tool of investment evaluation
5. Return On Investment Ratio:This ratio measures a return on owner’s or shareholders’
investment. It establishes the relationship between net profit after interest and taxes and the owner
investment.
Return on Investment Ratio = Net Profit after Interest & Taxes / Shareholder fund or
Investment X 100

Advantages

 This ratio indicates the owner’s viewpoint pertaining to the success of the business
 It aids in measuring an income on the shareholders' or proprietor's investments
 This ratio equips the management with the important decisions making with respect to the
business concern
 It facilitates in efficient handling of owner's investment

6. Return on Capital Employed Ratio:It measures the relationship between profit and capital
employed. Return means profits or net profits. Capital employed means total investment made in
the business.
Return on Capital Employed = Net Profit after Taxes/ Gross Capital Employed X
100

7. Earning Per Ratio:It measures the earning capacity of the firm from the owners view and helps
in determining the price of the equity share in the market.
Earning Per Ratio = Net Profit after Tax and Preference Dividend / No of Equity
Share

Advantages

 It measures the price of shares in the market

 It measures the capacity of the firm to pay dividend to its shareholders
 It is used as yardstick to measure the overall performance of the concern

8. Dividend Payout Ratio:It is the relationship between payment of dividend on equity share
capital and the profits available after meeting tax and preference dividend. Indication of the
dividend policy, as incorporated by the top management is underlined by this ratio. It highlights the
utilization of divisible profit to pay dividend or pertaining to the retention of both.
Dividend Payout Ratio = Equity Dividend / Net Profit after Tax & Preference Dividend X
100

9. Dividend Yield Ratio:It is the relationship is established between dividend per share and
market value per share. This ratio is a major factor that determines the dividend income from the
investor point of view.
Dividend Yield Ratio = Dividend Per Share / Market Value Per Share X
100
10. Price Earning Ratio:It highlights the earning per share reflected by market share. It establishes
the relationship between the market price of an equity share and the earning per equity share. It
helps to find out whether the equity shares of a company are undervalued or not. It is also useful in
financial forecasting.
Price Earning Ratio = Market Price per Equity Share / Earning Per
Share

11. Net Profit to Net Worth Ratio:It measures the profit return on investment. It indicates the
established relationship between net profit and shareholders net worth.
Net Profit to Net Worth Ratio = Net Profit After Taxes / Shareholders Net Worth X
100

Advantages

 It determines the incentive to owners.

 It measures the profit as well as net worth.
 It indicates the overall performance & effectiveness of the firm.

COVERAGE RATIOS: Coverage ratios are supplementary to solvency and liquidity ratios
and measure the risk inherent in lending to the business in long-term. They include debt coverage
ratio, interest coverage ratio (also known as times interest earned), etc.

A coverage ratio divides a company's income or cash flow by a certain expense in order to
determine financial solvency.Some of the most common coverage ratios include the fixed-charge
coverage ratio, debt service coverage ratio, times interest earned (TIE), and the interest coverage
ratio. However, many measures of a company's ability to meet a certain financial obligation can
be deemed coverage ratios.In general, coverage ratios equal to or greater than 1.0 indicate that a
company has enough earnings or cash to meet the obligation in question. Coverage ratios below
1.0 indicate that a company may not be able to fulfill these obligations.

Coverage ratios measure a company's ability to pay certain expenses, and thus show some
aspects of a company's financial strength. However, because coverage ratios typically include
current earnings and current expenses, they usually only describe a company's short-term ability
to meet obligations. Although certain coverage-ratio formulas may vary from company to
company,

Coverage ratio is a type of financial ratio. It indicates the ability of a firm to pay off the outsiders
obligations. Normally, a ratio greater than 1 implies a sound position of a firm to pay off the
liability or obligation under concern.

The ability to separate companies with a healthy amount of debt from those that are
overextended is one of the most important skills an investor can develop. Most businesses use
debt to help finance operations, whether it’s buying new equipment or hiring additional workers.
But relying too much on borrowing will catch up with any business. For example, when a
company has difficulty paying creditors on time, it may have to sell off assets, which puts it at a
competitive disadvantage. In extreme cases, it may have no choice but to file for bankruptcy.
Coverage ratios are a useful way to help gauge such risks. The most widely used coverage ratios
include the interest, debt-service and asset coverage ratios.

Interest Coverage Ratio: The basic concept behind the interest coverage ratio is pretty
straightforward. The more profit a company generates, the greater its ability to pay down
interest. To arrive at the figure, simply divide the earnings before interest and taxes (EBIT) by
the firm’s interest expense for the same period.

Interest coverage ratio = EBIT / Interest expense

A ratio of 2 means the company earns twice as much as it has to pay out in interest. As a general
rule, investors should lean toward companies with an interest coverage ratio – otherwise known
as the “times interest earned ratio” – of at least 1.5. A lower ratio usually indicates a firm that’s
struggling to pay off bondholders, preferred stockholders and other creditors.

Debt-Service Coverage Ratio: While the interest coverage ratio is widely used, it has an
important shortcoming. In addition to covering interest expenses, businesses usually have to pay
down part of the principal amount each quarter, too.The debt-service coverage ratio takes this
into account. Here, investors divide net income by the total borrowing expense – that is, principal
repayments plus interest costs.

Debt-service coverage ratio = Net income / (Principal repayments + Interest expense)

A figure under 1 means the business has a negative cash flow – it’s actually paying more in
borrowing expenses than it’s bringing in through revenue. Therefore, investors should look for
businesses with a debt-service coverage ratio of at least 1 and preferably a little higher to ensure
an adequate level of cash flow to address future liabilities.

 Practical Example: To see the potential difference between these two coverage ratios,
let’s look at fictional company Cedar Valley Brewing. The company generates a
quarterly profit of $200,000 (EBIT is $300,000) and corresponding interest payments of
$50,000. Because Cedar Valley did much of its borrowing during a period of low interest
rates, its interest coverage ratio looks extremely favorable.

Interest coverage ratio = 300,000 / 50,000 = 6

The debt-service coverage ratio, however, reflects a significant principal amount the
company pays each quarter totaling $140,000. The resulting figure of 1.05 leaves little
room for error if the company’s sales take an unexpected hit.

Debt-service coverage ratio = 200,000 / 190,000 = 1.05

Even though the company is generating a positive cash flow, it looks more risky from a
debt perspective once debt-service coverage is taken into account.
Asset Coverage Ratio: The aforementioned ratios compare a business’ debt in relation to its
earnings. Therefore, it’s a good way to look at an organization’s ability to cover liabilities today.
But if you want to forecast a company’s long-term profit potential, you have to look closely at
the balance sheet. In general, the more assets the company has when compared to its total
borrowings, the more likely it will be to make payments down the road.

The asset coverage ratio is based on this idea. Basically, it takes the company’s tangible assets
after accounting for near-term liabilities, and divides the remaining number by the outstanding
debt.

Asset coverage ratio = [(Total assets – Intangible assets) – (Current liabilities – Short-term debt
obligations)] / Total debt outstanding

Whether the resulting figure is acceptable depends on the industry. For example, utilities should
typically have an asset coverage ratio of at least 1.5, while the traditional threshold for industrial
companies is 2.

 Practical Example: This time let’s look at JXT Corp., which makes factory automation
equipment. The company has assets of $3.6 million of which $300,000 are intangible
items such as trademarks and patents. It also has current liabilities of $600,000, including
short-term debt obligations of $400,000. The company’s total debt equals $2.3 million.

Asset coverage ratio = [(3,600,000 – 300,000) – (600,000 – 400,000)] / 2,300,000 = 1.3

At 1.3, the company’s ratio is well below the typical threshold. By itself, this shows that
JXT has insufficient assets to draw upon, given its substantial amount of debt.

One limitation of this formula is that it relies on the book value of a business’s assets,
which will often vary from its actual market value. To obtain the most reliable results, it
usually helps to use multiple metrics to evaluate a corporation rather than relying on any
single ratio.

Cash Coverage Ratio: The cash coverage ratio is useful for determining the amount of
cash available to pay for a borrower's interest expense, and is expressed as a ratio of the
cash available to the amount of interest to be paid. To show a sufficient ability to pay, the
ratio should be substantially greater than 1:1.To calculate the cash coverage ratio, take the
earnings before interest and taxes (EBIT) from the income statement, add back to it all non-
cash expenses included in EBIT (such as depreciation and amortization), and divide by the
interest expense.

EarningsBeforeInterestandTaxes+Non-CashExpenses
Interest Expense

Types of Coverage Ratios: :There are major 5 types of coverage ratios. They are briefed below:
 Debt Service Coverage Ratio: Debt Service Coverage ratio (DSCR), one of the leverage /
coverage ratios, calculated in order to know the cash profit availability to repay the debt
including interest. Essentially, DSCR is calculated when a company / firm takes a loan
from bank / financial institution / any other loan provider. This ratio suggests the
capability of cash profits to meet the repayment of the financial loan. DSCR is very
important from the view point of the financing authority as it indicates the repaying
capability of the entity taking a loan.

 Interest Service Coverage Ratio: Interest service coverage ratio (ISCR) essentially
calculates the capacity of a borrower to repay the interest on borrowings. ISCR less than
1 suggests the inability of firm’s profits to serve its interest on debts and obviously the
debts. ISCR is a tool for financial institutions to judge the capacity of a borrower to repay
the interest on the loan. It is also known as Interest Coverage Ratio or Times Interest
Earned.

 Dividend Coverage Ratio: Dividend coverage ratio essentially calculates the capacity
of the firm to pay the dividend. Generally, this ratio is calculated specifically for
preference equity shareholders. Preference shareholders have right to receive
dividends. The dividends may be postponed but payment is compulsory and
therefore they are considered as a fixed liability.
 Total Fixed Charge Coverage Ratio: Total fixed charge coverage ratio can be called
as a consolidated ratio of all the fixed charges such as preference share dividend,
interest, installment, lease payments etc. Unlike, the other coverage ratios which
cover a specific fixed charge like dividend coverage ratio covers the only dividend of
preference share, this ratio takes into account all the fixed obligation.
 Total Cash Flow Coverage Ratio: Total cash flow coverage ratio is a coverage ratio
which considers the cash flows in place of the profits. It is because the payment of all
kinds of fixed charges will be met from the cash but not from the profits. It sounds
more appropriate to use cash flow as numerator instead of profits. Profits may be a
result of noncash transactions in the earnings statements.
 coverage Ratio:
The calculation of coverage ratio has earnings / cash flow as the numerator and the
denominator consist of the liability or the fixed charge for which the ratio is being
calculated. Normally, a ratio higher than 1 indicates that the earnings or cash flows are
sufficient to pay off the liabilities for which the ratio is calculated
Coverage Ratios

Coverage ratios are supplementary to solvency and liquidity ratios and measure the risk inherent
in lending to the business in long-term. They include EBIDTA coverage ratio, debt coverage
ratio, interest coverage ratio (also known as times interest earned), fixed charge coverage ratio,
etc.

A coverage ratio divides a company's income or cash flow by a certain expense in order to
determine financial solvency.

Some of the most common coverage ratios include the fixed-charge coverage ratio, debt service
coverage ratio, times interest earned (TIE), and the interest coverage ratio. However, many
measures of a company's ability to meet a certain financial obligation can be deemed coverage
ratios.In general, coverage ratios equal to or greater than 1.0 indicate that a company has enough
earnings or cash to meet the obligation in question. Coverage ratios below 1.0 indicate that a
company may not be able to fulfill these obligations.

Coverage ratios measure a company's ability to pay certain expenses, and thus show some
aspects of a company's financial strength. However, because coverage ratios typically include
current earnings and current expenses, they usually only describe a company's short-term ability
to meet obligations.Although certain coverage-ratio formulas may vary from company to
company, SEC Regulation G requires public companies to disclose their methods for calculating
them and other non-GAAP financial measures. Additionally, coverage ratio standards vary from
industry to industry, and comparisons of coverage ratios is generally most meaningful among
companies within the same industry. Thus, the definition of a "high" or "low" ratio should be
made within this context.

Coverage ratio is a type of financial ratio. It indicates the ability of a firm to pay off the outsiders
obligations. Normally, a ratio greater than 1 implies a sound position of a firm to pay off the
liability or obligation under concern. Important coverage ratios include debt service coverage
ratio, interest coverage ratio, dividend coverage ratio, and total cash flow coverage.

he ability to separate companies with a healthy amount of debt from those that are overextended
is one of the most important skills an investor can develop. Most businesses use debt to help
finance operations, whether it’s buying new equipment or hiring additional workers. But relying
too much on borrowing will catch up with any business. For example, when a company has
difficulty paying creditors on time, it may have to sell off assets, which puts it at a competitive
disadvantage. In extreme cases, it may have no choice but to file for bankruptcy.

Coverage ratios are a useful way to help gauge such risks. These relatively easy formulas
determine the company’s ability to service its existing debt, potentially sparing the investor from
heartache down the road.

The most widely used coverage ratios include the interest, debt-service and asset coverage ratios.

Interest Coverage Ratio

The basic concept behind the interest coverage ratio is pretty straightforward. The more profit a
company generates, the greater its ability to pay down interest. To arrive at the figure, simply
divide the earnings before interest and taxes (EBIT) by the firm’s interest expense for the same
period.

Interest coverage ratio = EBIT / Interest expense

A ratio of 2 means the company earns twice as much as it has to pay out in interest. As a general
rule, investors should lean toward companies with an interest coverage ratio – otherwise known
as the “times interest earned ratio” – of at least 1.5. A lower ratio usually indicates a firm that’s
struggling to pay off bondholders, preferred stockholders and other creditors.

Debt-Service Coverage Ratio

While the interest coverage ratio is widely used, it has an important shortcoming. In addition to
covering interest expenses, businesses usually have to pay down part of the principal amount
each quarter, too.

The debt-service coverage ratio takes this into account. Here, investors divide net income by the
total borrowing expense – that is, principal repayments plus interest costs.
Debt-service coverage ratio = Net income / (Principal repayments + Interest expense)

A figure under 1 means the business has a negative cash flow – it’s actually paying more in
borrowing expenses than it’s bringing in through revenue. Therefore, investors should look for
businesses with a debt-service coverage ratio of at least 1 and preferably a little higher to ensure
an adequate level of cash flow to address future liabilities.

 Practical Example: To see the potential difference between these two coverage ratios,
let’s look at fictional company Cedar Valley Brewing. The company generates a
quarterly profit of $200,000 (EBIT is $300,000) and corresponding interest payments of
$50,000. Because Cedar Valley did much of its borrowing during a period of low interest
rates, its interest coverage ratio looks extremely favorable.

Interest coverage ratio = 300,000 / 50,000 = 6

The debt-service coverage ratio, however, reflects a significant principal amount the
company pays each quarter totaling $140,000. The resulting figure of 1.05 leaves little
room for error if the company’s sales take an unexpected hit.

Debt-service coverage ratio = 200,000 / 190,000 = 1.05

Even though the company is generating a positive cash flow, it looks more risky from a
debt perspective once debt-service coverage is taken into account.

Asset Coverage Ratio:The aforementioned ratios compare a business’ debt in relation to its
earnings. Therefore, it’s a good way to look at an organization’s ability to cover liabilities today.
But if you want to forecast a company’s long-term profit potential, you have to look closely at
the balance sheet. In general, the more assets the company has when compared to its total
borrowings, the more likely it will be to make payments down the road.

The asset coverage ratio is based on this idea. Basically, it takes the company’s tangible assets
after accounting for near-term liabilities, and divides the remaining number by the outstanding
debt.

Asset coverage ratio = [(Total assets – Intangible assets) – (Current liabilities – Short-term debt
obligations)] / Total debt outstanding

Whether the resulting figure is acceptable depends on the industry. For example, utilities should
typically have an asset coverage ratio of at least 1.5, while the traditional threshold for industrial
companies is 2.

 Practical Example: This time let’s look at JXT Corp., which makes factory automation
equipment. The company has assets of $3.6 million of which $300,000 are intangible
items such as trademarks and patents. It also has current liabilities of $600,000, including
short-term debt obligations of $400,000. The company’s total debt equals $2.3 million.
 Asset coverage ratio = [(3,600,000 – 300,000) – (600,000 – 400,000)] / 2,300,000 = 1.3

At 1.3, the company’s ratio is well below the typical threshold. By itself, this shows that
JXT has insufficient assets to draw upon, given its substantial amount of debt.

One limitation of this formula is that it relies on the book value of a business’s assets,
which will often vary from its actual market value. To obtain the most reliable results, it
usually helps to use multiple metrics to evaluate a corporation rather than relying on any
single ratio.

Evaluating Businesses:Investors can use coverage ratios in one of two ways. First, you can track
changes in the company’s debt situation over time. In cases where the debt-service coverage
ratio is barely within the acceptable range, it may be a good idea to look at the company’s recent
history. If the ratio has been gradually declining, it may only be a matter of time before it falls
below the recommended figure.

Coverage ratios are also valuable when looking at a company in relation to its competitors.
Evaluating similar businesses is imperative, because an interest coverage ratio that’s acceptable
in one industry may be considered risky in another field. If the business you’re evaluating seems
out of step with major competitors, it’s often a red flag.

Over the long run, excessive reliance on debt can wreak havoc on a business. Tools such as the
interest coverage ratio, debt-service coverage ratio and asset coverage ratio can help you
determine up front whether a company can pay its creditors in a timely manner.

Coverage ratios are important financial ratios from the view point of the long-term creditors and
lenders. It is because the ratios speak of the ability of the firm to pay off the obligations of
creditors and lenders. On the basis of the ratios, the creditors or lenders take a decision on
whether to extend credit or loan or whatever kind of financial support to the firm or not.

Different coverage ratios are calculated by different stakeholders of a business. For example, a
financial institution or bank extending a loan to the business or firm will calculate the debt
service coverage ratio and interest service coverage ratio and an investor say equity shareholder
will look at the dividend coverage ratio.

Types of Coverage Ratios:

There are major 5 types of coverage ratios. They are briefed below:

 Debt Service Coverage Ratio: Debt Service Coverage ratio (DSCR), one of the leverage /
coverage ratios, calculated in order to know the cash profit availability to repay the debt
including interest. Essentially, DSCR is calculated when a company / firm takes a loan
from bank / financial institution / any other loan provider. This ratio suggests the
capability of cash profits to meet the repayment of the financial loan. DSCR is very
important from the view point of the financing authority as it indicates the repaying
capability of the entity taking a loan.
  Interest Service Coverage Ratio: Interest service coverage ratio (ISCR) essentially
calculates the capacity of a borrower to repay the interest on borrowings. ISCR less than
1 suggests the inability of firm’s profits to serve its interest on debts and obviously the
debts. ISCR is a tool for financial institutions to judge the capacity of a borrower to repay
the interest on the loan. It is also known as Interest Coverage Ratio or Times Interest
Earned.

 Dividend Coverage Ratio: Dividend coverage ratio essentially calculates the capacity of
the firm to pay the dividend. Generally, this ratio is calculated specifically for preference
equity shareholders. Preference shareholders have right to receive dividends. The
dividends may be postponed but payment is compulsory and therefore they are
considered as a fixed liability.
 Total Fixed Charge Coverage Ratio: Total fixed charge coverage ratio can be called as a
consolidated ratio of all the fixed charges such as preference share dividend, interest,
installment, lease payments etc. Unlike, the other coverage ratios which cover a specific
fixed charge like dividend coverage ratio covers the only dividend of preference share,
this ratio takes into account all the fixed obligation.
 Total Cash Flow Coverage Ratio: Total cash flow coverage ratio is a coverage ratio
which considers the cash flows in place of the profits. It is because the payment of all
kinds of fixed charges will be met from the cash but not from the profits. It sounds more
appropriate to use cash flow as numerator instead of profits. Profits may be a result of
noncash transactions in the earnings statements.
 coverage Ratio:
 The calculation of coverage ratio has earnings / cash flow as the numerator and the
denominator consist of the liability or the fixed charge for which the ratio is being
calculated. Normally, a ratio higher than 1 indicates that the earnings or cash flows are
sufficient to pay off the liabilities for which the ratio is calculated.

Cash Coverage Ratio

The cash coverage ratio is useful for determining the amount of cash available to pay for a
borrower's interest expense, and is expressed as a ratio of the cash available to the amount of
interest to be paid. To show a sufficient ability to pay, the ratio should be substantially greater
than 1:1.To calculate the cash coverage ratio, take the earnings before interest and taxes (EBIT)
from the income statement, add back to it all non-cash expenses included in EBIT (such as
depreciation and amortization), and divide by the interest expense. The formula is:

Earnings Before Interest and Taxes + Non-Cash Expenses

Interest Expense

The debt service coverage ratio (DSCR), also known as "debt coverage ratio" (DCR), is the
ratio of cash available for debt servicing to interest, principal and lease payments. It is a popular
benchmark used in the measurement of an entity's (person or corporation) ability to produce
enough cash to cover its debt (including lease) payments. The higher this ratio is, the easier it is
to obtain a loan. The phrase is also used in commercial banking and may be expressed as a
minimum ratio that is acceptable to a lender; it may be a loan condition. Breaching a DSCR
covenant can, in some circumstances, be an act of default.

DSCR=net operating income/debt services

NET OPERATING INCOME=NET INCOME+AMORTIZATION &

DEPRECIATION+INTEREST EXPENSE &OTHER NON CASH ITEMS
DEBT SERVICE=PRINCIPAL REPAYMENT + INTEREST PAYMENT+ LEASE
PAYMENTS

To calculate an entity’s debt coverage ratio, you first need to determine the entity’s net operating
income. To do this you must take the entity’s total income and deduct any vacancy amounts and
all operating expenses. Then take the net operating income and divide it by the property’s annual
debt service, which is the total amount of all interest and principal paid on all of the property’s
loans throughout the year.

If a property has a debt coverage ratio of less than one, the income that property generates is not
enough to cover the mortgage payments and the property’s operating expenses. A property with
a debt coverage ratio of .8 only generates enough income to pay for 80 percent of the yearly debt
payments. However, if a property has a debt coverage ratio of more than 1, the property does
generate enough revenue to cover annual debt payments. For example, a property with a debt
coverage ratio of 1.5 generates enough income to pay all of the annual debt expenses, all of the
operating expenses and actually generates fifty percent more income than is required to pay these
bills.

A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would
mean that there is only enough net operating income to cover 95% of annual debt payments. For
example, in the context of personal finance, this would mean that the borrower would have to
delve into his or her personal funds every month to keep the project afloat. Generally, lenders
frown on a negative cash flow, but some allow it if the borrower has strong outside income.[1][3]

Typically, most commercial banks require the ratio of 1.15–1.35 times (net operating income or
NOI / annual debt service) to ensure cash flow sufficient to cover loan payments is available on
an ongoing basis.

The interest coverage ratio (ICR) is a measure of a company's ability to meet its interest
payments. Interest coverage ratio is equal to earnings before interest and taxes (EBIT) for a time
period, often one year, divided by interest expenses for the same time period. The interest
coverage ratio is a measure of the number of times a company could make the interest payments
on its debt with its EBIT. It determines how easily a company can pay interest expenses on
outstanding debt.

Interest coverage ratio is also known as interest coverage, debt service ratio or debt service
coverage ratio.
Calculation (formula)

The interest coverage ratio is calculated by dividing a company's earnings before interest and
taxes (EBIT) by the company's interest expenses for the same period.

Interest coverage ratio = EBIT / Interest expenses

Norms and Limits

The lower the interest coverage ratio, the higher the company's debt burden and the greater the
possibility of bankruptcy or default. A lower ICR means less earnings are available to meet
interest payments and that the business is more vulnerable to increases in interest rates. When a
company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may
be questionable. An interest coverage ratio below 1.0 indicates the business is having difficulties
generating the cash necessary to pay its interest obligations (i.e. interest payments exceed its
earnings (EBIT)).

A higher ratio indicates a better financial health as it means that the company is more capable to
meeting its interest obligations from operating earnings. On the other hand, a high ICR may
suggest a company is "too safe" and is neglecting opportunities to magnify earnings through
leverage.

Capital structure ratios are very important to analyze the financial statements of any company for
the following reasons:

 Same Business Can Yield Different Returns:Investors understand that the way a
business is funded can have a lot of impact on the returns it provides. Although the total
return provided will always be the same, the way those returns are distributed amongst
investors will vary. It is for this reason that investors pay careful attention to these ratios
as they help them understand the consequences of the best and worst possible scenarios.
 Combination That Reduces Total Cost of Capital:A firm is a legal entity that has
nothing when it first begins operations. It acquires capital in the form of debt and
equity on different terms. Debt has fixed returns but sure repayments. Equity on the
other hand has uncertain returns but the probability of returns that far exceed
those of debt-holders. There is a cost attached to both debt and equity and the
purpose of an ideal capital structure is to minimize the total cost.
 Nature of Capital Employed Can Magnify Returns:The specific combination of debt
and equity employed is capable of magnifying returns (both gains and losses) for
equity investors. Therefore they have a special interest in ensuring that the capital
structure and leverage position of the firm is in control.
 Solvency of the Firm

An incorrect capital structure can mean ruin of an otherwise healthy firm. This is because, if the
firm is funded by too much debt, it has a lot of interest bills to pay. Therefore in a lean period,
the firm is likely to default on its interest obligations. The worst part is that if the firm defaults a
few times, debt holders have the right to seek legal counsel and start liquidating the firm. In such
a scenario, an otherwise healthy firm may have to sell its assets at throw away prices. Thus an
ideal capital structure is one that provides enough cushions to shareholders so that they can
leverage the debt-holders funds but it should also provide surety to debt holders of the return of
their principal and interest. Since capital structure ratios reveal these facts, analyst pay careful
attention to them.

 Liquidation of the Firm

Capital structure ratios help investors analyze what would happen to their investments in
the worst possible scenario. In case of liquidation senior debt holders have the first claim,
then junior debt holders and then in the end equity holders get paid if there is anything
left. Investors can gauge what they are likely to recover if the organization went bust
immediately.

Liquidity Ratios

S. No. RATIOS FORMULAS

1 Current Ratio Current Assets/Current Liabilities
2 Quick Ratio Liquid Assets/Current Liabilities
3 Absolute Liquid Ratio Absolute Liquid Assets/Current Liabilities

Profitability Ratios

S.
RATIOS FORMULAS
No.
1 Gross Profit Ratio Gross Profit/Net Sales X 100
2 Operating Cost Ratio Operating Cost/Net Sales X 100
3 Operating Profit ratio Operating Profit/Net Sales X 100
4 Net Profit Ratio Operating Profit/Net Sales X 100
Net Profit After Interest And Taxes/ Shareholders Funds or
5 Return on Investment Ratio
Investments X 100
Return on Capital
6 Net Profit after Taxes/ Gross Capital Employed X 100
Employed Ratio
Net Profit After Tax & Preference Dividend /No of Equity
7 Earnings Per Share Ratio
Shares
8 Dividend Pay Out Ratio Dividend Per Equity Share/Earning Per Equity Share X 100
Net Profit after Tax & Preference Dividend / No. of Equity
9 Earning Per Equity Share
Share
10 Dividend Yield Ratio Dividend Per Share/ Market Value Per Share X 100
Market Price Per Share Equity Share/ Earning Per Share X
11 Price Earnings Ratio
100
Net Profit to Net Worth
12 Net Profit after Taxes / Shareholders Net Worth X 100
Ratio

Working Capital Ratios

S.No. RATIOS FORMULAS
1 Inventory Ratio Net Sales / Inventory
2 Debtors Turnover Ratio Total Sales / Account Receivables
Receivables x Months or days in a year / Net Credit Sales for
3 Debt Collection Ratio
the year
4 Creditors Turnover Ratio Net Credit Purchases / Average Accounts Payable
5 Average Payment Period Average Trade Creditors / Net Credit Purchases X 100
Working Capital Turnover
6 Net Sales / Working Capital
Ratio
7 Fixed Assets Turnover Ratio Cost of goods Sold / Total Fixed Assets
8 Capital Turnover Ratio Cost of Sales / Capital Employed

Capital Structure Ratios

S. No. RATIOS FORMULAS

1 Debt Equity Ratio Total Long Term Debts / Shareholders Fund
2 Proprietary Ratio Shareholders Fund/ Total Assets
3 Capital Gearing ratio Equity Share Capital / Fixed Interest Bearing Funds
4 Debt Service Ratio Net profit Before Interest & Taxes / Fixed Interest Charges

Overall Profitability Ratio

S. No. RATIOS FORMULAS

1 Overall Profit Ability Ratio Net Profit / Total Assets