TYPES OF RATIO

SUBMITTED TO : PROF. SHIKHA MEHTA

 TYPES OF RATIO
LIQUIDITY SOLVENCY ACTIVITY PROFITABILITY
RATIO RATIO RATIO RATIO

Debt to Equity Inventory Gross Profit

Ratio turnover ratio Ratio
Current
Ratio
Total Asset to Debtor Turnover
Debt ratio Operating Profit
Ratio

Proprietary ratio Creditor Operating Profit

Quick
Turnover Ratio
Ratio
Ratio
Net Profit
Interest Ratio
Coverage Ratio Working
Capital
Turnover Ratio
Return on
investment
 LIQUIDITY RATIO
 Those ratios which are computed to evaluate the
capability of the entity to meet its short term
liabilities.

Current Quick
Ratio Ratio
 1.Current Ratio
 Is a relationship of Current Asset and Current
Liabilities
 It is computed to assess the short term financial

position of the enterprise.

 CR is an indicator of the enterprise’s ability to meet its

short term financial obligation.

 Ideal Ratio 2:1. current asset should be current liability.

Current Assets
Current Ratio = Current Liabilities
From the following, compute current ratio:
Trade receivable 1,00,000 bills payable 20,000
Prepaid expenses 10,000 sundry creditors 40,000
Cash and cash equivalents 30,000 debentures 2,00,000
Short term investments 20,000 inventories 40,000
Machinery 7,000 expenses payable 40,000

SOLUTION:
Current Ratio = current assets = 2,00,000 = 2:1
current liabilities 1,00,000

Current Assets = Trade Receivables + Prepaid Expenses + Cash and Cash

Equivalents + short term investments + Inventories
= 1,00,000+10,000+30,000+20,000+40,000 =2,00,000
Current liabilities = trade payables ( Bills Payable + sundry Creditors )+ Expenses
Payable
=20,000+40,000+40,000 =1,00,000
2.Liquid/Acid Test/ Quick Ratio
 It gives a relationship of LIQUID ASSETS with
CURRENT LIABILITIES.
 It is computed to access the short term liquidity (debt

paying capacity) of the enterprise.

 Liquid Assets are the assets which are either in the

form of cash and cash equivalents or can be converted

into cash within a very short period. Thus it does not
include INVENTORIES and PREPAID EXPENSES.
 Ideal Quick Ratio = 1:1

quick Ratio = Quick Assets

Current liabilities
 SOLVENCY RATIO
 Are the ratio which show the ability of the enterprise to
meet its long term liabilities.

 1. Debt to Equity Ratio

 2.Total Asset To Debt Ratio
 3. Proprietary Ratio
 4. Interest Coverage Ratio
 1.Debt To Equity Ratio
 It is computed to access the long term financial soundness of the
enterprise.

 The ratio express the relationship between external equities, (i.e

external debt) and internal equities (i.e shareholder’s fund) of the
enterprise.

 External equities/ External debts are the liabilities of the enterprise to

the outsider. Ex. Long term borrowings and the long term provisions.
Shown as non current liabilities in liabilities part of balance sheet.

 It also indicate the extent to which the enterprise depends

on external funds for its business.
 Debt to Equity Ratio shows the relative proportion of
shareholder’s fund and debt. i.e capital contributed by long term
lenders and shareholders, used to finance company’s operation.

 2:1 is considered as an appropriate Ratio.

 High DTE Ratio means enterprise depending more on

borrowings or debts as compared to shareholder’s fund . In
effect external equity are at higher risk.

 Low DTE Ratio means enterprise depending more on

shareholder’s fund than external equalities. In effect, external
equities are lower risk and have higher safely.
 Debt to Equity ratio = Debts
Equity(shareholder’s fund )
Debt = Long term borrowings + long term provisions
or
Debt = Total Debt – current Liabilities
Equity/shareholder’s fund = share capital + Reserve and
Surplus
or
= Non current Assets ( tangible assets + intangible assets + Non current
trade investment + long term loans and advances)+ working capital –
Non current liabilities ( long term borrowings + long term provisions)
or
= Total Assets- Total Debts
working Capital = Current Assets- Current liabilities
 2.Total Assets To Debt Ratio
 It establishes relationship between total assets and total long
term debts of the enterprise.

Total Assets to Debt Ratio= Total Assets

Debt
 3. Proprietary Ratio
 It establishes the relationship between proprietor’s funds and
Total Assets.

Proprietary Ratio = shareholder’s Fund

Total Assets
Shareholder’s fund = share capital+Reserve and Surplus
 4.Interest Coverage Ratio
 The ratio establishes the relationship between Net profit
before interest and tax and interest on long term debts.

Interest coverage Ratio = profit before interest and tax

Interest on long term Debt

= ....times.
 ACTIVITY RATIO
 Measures how well the resources been used by enterprise.

 It measures the effectiveness with which the enterprise use is

available resources.

 This ratio means better use of capital/resources which in

turn, means better profitability ratio.
 1.Inventory/stock Turnover Ratio
 It measures how many times an enterprise sells and replaces
its inventory, i.e how many times the inventory was
converted into sales during the period.

 it establishes the relationship between cost of revenue from

the operation, i.e cost of goods sold and average inventory
carried during that period
Inventory turnover ratio= cost of goods sold
average stock

COGS = Revenue from operations – Gross Profit

= Revenue from operations + Gross Loss
 2.Trade Receivables/ Debtor’s Turnover
Ratio
 This ratio establishes the relationship between credit revenue
from operations. i.e debtors and bill receivable of year.

DTR = Net Credit Sales

Average Trade Receivable

Average Collection Period = Days/Months in a year

DTR
 3.Creditors Turnover Ratio
 This ratio shows the speed with which payments are made to
the supplier for purchase made from them.
 This shows the relationship between Net credit Purchase and

total payables or Average Payables.

Creditors Turnover Ratio = Net Credit Purchases

Average payables

Average credit Period = Months/Days in a year

Creditors turnover ratio
 4.Working Capital Turnover Ratio
 It shows the relationship between working capital and
Revenue From Operations or Net sales.
 It shows the number of times a unit of rupee invested in

working capital produce sales.

Working Capital Turnover Ratio = Net sales

Working capital
or = cost of goods sold
working capital
working capital = Current assets – Current liablities
 Profitability Ratio
 Efficiency of business is measured by profitability.
 Accounting ratio measuring the profitability is known as

profitability Ratio.
 Important profitability ratios are :

Gross Profit Ratio Operating Profit Ratio

Net Profit Ratio Operating Ratio

ROI /ROCE Ratio

1.Gross Profit Ratio
 It establishes the relationship of Gross Profit and
Revenue from Operations. i.e Net sale of an
enterprise.

GP Ratio= Gross Profit * 100

Revenue from Operations,
Net sales
2.Net Profit Ratio
 It establishes the relationship between Net Profit and
Revenue from Operations, Net Sales
 It shows the percentage of Net Profit earned on

Revenue from Operation.

N.P Ratio= Net Profit After Tax * 100

Revenue from Operations
 3.Operationg Profit Ratio
 It measures the relationship between operating Profit and
Revenue from Operations , Net Sales.

O.P Ratio = Operating Profit * 100

Revenue from Operations

operating profit = gross profit+ other operating income

- other operating expenses
operating profit = Net profit ( before tax )+ Non
operating expenses- Non operating
incomes
 4.Operating Ratio
 It establishes the relationship between Operating Costs and
Revenue from Operations, Net Sales.
 Operating Cost = COGS + Operating Expenses

Operating ratio = cost of Revenue from operation+

operating expenses *100
Revenue from Operations( Net Sales)

Operating cost *100

Revenue from Operations ( Net sales)
 Important Note
 Operating profit ratio and Operating ratio are
complementary to each other and thus, if one of the two ratios
is deducted from 100, another ratio is obtained.

Operating Ratio + Operating Profit

Ratio = 100
5. Return On Investment/ Return on
Capital Employed Ratio
 It shows the relationship of profit ( profit before tax
and interest ) with Capital Employed

ROI = Net Profit before interest, tax * 100

Capital Employed
Any Question ?
Thank You