TYPES OF RATIOS WITH THEIR IMPLICATIONS.

NO. 1

RATIO

FORMULA
Current Assets Current Liablilities

NUMERATOR
Inventories/Stocks (+) Debtors & B/R (+) Cash & Bank (+) Recivables / Accurals (+) Short Term Loans (+) Marketable Investment/ Short Term Securities.

DENOMINATOR
Sundry Creditors(For Goods) (+) Outstanding Expenses (+) Short Term Loans & Advances (CR.) (+) Bank Overdraft/ Cash Credit (+) Provison for Taxation (+) Proposed Dividend (+) Unclaimed Dividend

CURRENT RATIO:-

Acid test or Quick Ratio:-

Quick Assets Quick Liablilities

Current Assets (-) Inventories (-) Prepaid Expenses

Current Liablilities (-) Bank Overdraft (-) Cash Credit

Turnover Ratios:( a ) Inventory Turnover Ratio.

Cost of goods sold Average stock

For Manuacturers:Opening Stock of FG (+) Cost of Production (+) Closing Stock of FG For Traders:Opening Stock of FG (+) purchases (-) Closing Stock of FG (Max stock + Min. stock) 2 or (Opening Stock + closing stock) 2

( b ) Debtor Turnover Ratio.

Net Credit Sales Average Debtors

Credit Sales Net of Returns

Accounts Recivable= Debtors + B/R Average Acounts recivable = 1/2 ( opg. Bal. + clg. Bal)

( c ) Creditor Turnover Ratio.

Net Credit Purchase Average Creditor

Credit Purchase net of returns, if any.

Accounts Payable= Creditors + B/P Average Acounts Payable = 1/2 ( opg. Bal. + clg. Bal)

Defensive - Interval Ratio:-

Liquid Assests Projected daily cash Requirement

Current Assets (-) Inventories (-) Prepaid Expenses

Annual cash Expenses / 365 cash expenses = Total expenses - depreciation and write offs.

Debt - Equity Ratio:-

Debt

Debt= Long term borrowed

Equity= Owerner's Funds= equity

Equity

funds= Debentures+ long term loans from fianancial Institutions.

capital+ Preference capital+ reserves & surplus - accumulated losses.

Debt to capital ratio:-

Debt Total funds

Debt= Long term borrowed funds= Debentures+ long term loans from fianancial Institutions.

Fixed Assests + net working capital

Coverage Ratios: ( a ) Interest Coverage Ratio.

EBIT Interest

Earnings before interest and tax

Interest on Debt

( b ) Dividend Coverage Ratio. ( c ) Total Coverage Ratio

EAT Preference Divivend

Earnings after Tax

Dividend on preference Capital

EBIT + Lease payment Interest+ lease payments +(preference dividend + installment of principal)/(1-t)

Earnings before interest and tax+ lease payment

Interest+ lease payments +(preference dividend + installment of principal)/(1-t)

( d ) Total cash flow coverage Ratio

EBIT+ Lease payments + Depreciation+ non cash expenses lease payment+interest+ (principal repayment)+(1-t) + (preference dividend)/(1-t)

EBIT+ Lease payments + Depreciation+ non cash expenses

lease payment+interest+ (principal repayment)+(1-t) + (preference dividend)/(1-t)

Profit Margin:(I) Gross profit margin

Gross profits * 100 sales or sales-cost of goods sold*100 sales

Gross profits * 100 or sales - cost of goods sold

sales

(II) Net profit margin ( a ) Operating Profit Ratio ( b ) Net profit Ratio

EBIT Sales

Earnings before interest and tax

sales

EAT

Earnings after Tax

sales

Sales

Cost of goods sold Ratio:-

Cost of goods sold * 100 Net sales

[For Manuacturers:Opening Stock of FG (+) Cost of Production (+) Closing Stock of FG For Traders:Opening Stock of FG (+) purchases (-) Closing Stock of FG]*100

Net sales

10

Operating Expense Ratio:-

Administrative Expenses + Selling Expenses Net sales

Administrative Expenses + Selling Expenses

Net sales

11

Administrative Expense Ratio:-

Administrative Expenses *100 Net sales

Administrative Expenses *100

Net sales

12

Selling Expenses Ratio:-

Selling Expenses*100 Net sales

Selling Expenses*100

Net sales

13

Opearting Ratio:-

Cost of goods sold + operating expenses * 100 Net sales

[For Manuacturers:Opening Stock of FG (+) Cost of Production (+) Closing Stock of FG For Traders:Opening Stock of FG (+) purchases (-) Closing Stock of FG] + operating expenses * 100

Net sales

14

Financial Expenses Ratio:-

Financial Expenses *100 Net sales

Financial Expenses *100

Net sales

15

Return on Assets:-

Net Profit after Tax Average Total Assets

Earnings after Taxation (+) Int. on debt funds (+) Non Operating Adjts.

Average Total Assests or Tangible Assets or Fixed Assets, i.e. (1/2 of opg + clg bal.)

Net profit after taxes + interest

(e.g. Other income/ loss on

Average total Assests

sale of fixed Assets etc.)

Net profit after taxes + interest Average Tangible Assets

Net profit after taxes + interest Average Fixed Assests

EAT+Interest-Tax advantage on Interest Average Total Assets/Tangible Assets/Fixed Assets.

16

Return on Capital Employed:.

Net Profit After Taxes Average total capital employed

Earnings after Taxation (+) Int. on debt funds (+) Non Operating Adjts.

Capital Employed can be computed using- (a) Assets Route or (b) Liability Route.

Net Profit After Taxes+Interest - Tax advantage on interest Average total capital employed

(e.g. Other income/ loss on sale of fixed Assets etc.)

Net Profit After Taxes+Interest Average Total Capital EmployedAverage intangible Assets

17

Return on Total Shareholders Equity:-

Net Profit After Taxes Average total Shareholders equity

Earnings after Taxation (+) Int. on debt funds (+) Non Operating Adjts. (e.g. Other income/ loss on sale of fixed Assets etc.)

Average total Shareholders equity

18

Return on Equity Funds.:-

Net Profit After Taxes - preference dividend Average Ordinary Shareholders Equity or net Worth

Earnings after Taxation (+) Int. on debt funds (+) Non Operating Adjts. (e.g. Other income/ loss on sale of fixed Assets etc.)

Net Fixed Assets (+) Net Working Capital (-) External Liablities ( LongTerm)

19

Earnings Per Share ( EPS):-

Net profit available to equity shareholders Number of ordinary share outstanidng

Residual earnings, i.e. EAT -preference dividend

No. of equity shares outstanding = equity capital face value per share

20

Dividend per share ( DPS):-

Net Profit after interest and preference

Profits Distributed to equity

No. of equity shares outstanding = equity capital

dividend paid to ordinary shareholders Shareholders

Number of ordinary shares outstanding

face value per share

21

Dividend Pay-out Ratio:-

Total dividend to equity holders total net profit belonging to equity holders or Dividend per share ( DPS) Earnings Per Share ( EPS)

Net Profit after interest and preference dividend paid to ordinary shareholders Number of ordinary shares outstanding

Net profit available to equity shareholders Number of ordinary share outstanidng

22

Earning Yield:-

EPS Market value of share

Net profit available to equity shareholders Number of ordinary share outstanidng

Market value of share

23

Dividend Yield:-

DPS Market value of share

Net Profit after interest and preference dividend paid to ordinary shareholders Number of ordinary shares outstanding

Market value of share

24

Price Earning Ratio:-

Market price of shares EPS

Market price of shares

Net profit available to equity shareholders Number of ordinary share outstanidng

25

Earning Power:-

Net profit after taxes * sales sales total assets

Earnings after Taxation* sales (+) Int. on debt funds (+) Non Operating Adjts. (e.g. Other income/ loss on sale of fixed Assets etc.)

sales

total assets

26

Inventory Turnover Ratio:-

Cost of goods sold Average Inventory

[For Manuacturers:Opening Stock of FG (+) Cost of Production (+) Closing Stock of FG For Traders:Opening Stock of FG (+) purchases (-) Closing Stock of FG]

Average Inventory = 1/2 ( opg. Bal. + clg. Bal)

27

Raw Material Turnover:-

cost of raw materials used Average Raw Material inventory

Openeing Stock of Raw Material (+) Purchases (-) Closing Stock of Raw material.

1/2 ( opg. Bal. + clg. Bal)

28

Work - in - progress:-

cost of goods manufactured Average work in progress inventory

Materials consumed (+) Wages (+) production overhead

1/2 ( opg. Bal. + clg. Bal)

29

Debtors Turnover:-

Credit sales Average Debtors + Average B/R OR Total Sales Debtors + B/R

credit sales net of returns

1/2 ( opg. Bal. + clg. Bal)

30

Average Collection Period

Months (days) in a year Debtors Turnover

Months (days) in a year

Credit sales Average Debtors + Average B/R OR Total Sales Debtors + B/R

31

Total assests Turn over:-

Cost of goods sold Average total assests

[For Manuacturers:Opening Stock of FG (+) Cost of Production (+) Closing Stock of FG For Traders:Opening Stock of FG (+) purchases (-) Closing Stock of FG]

1/2 ( opg. Bal. + clg. Bal)

32

Fixed Assets Turnover:-

Cost of goods sold Average fixed assests

[For Manuacturers:Opening Stock of FG (+) Cost of Production (+) Closing Stock of FG For Traders:Opening Stock of FG (+) purchases (-) Closing Stock of FG]

1/2 ( opg. Bal. + clg. Bal)

33

Capital Turnover:-

Cost of goods sold Average capital employed

[For Manuacturers:Opening Stock of FG (+) Cost of Production (+) Closing Stock of FG For Traders:Opening Stock of FG (+) purchases (-) Closing Stock of FG]

1/2 ( opg. Bal. + clg. Bal)

34

Current Assets Turnover:-

Cost of goods sold Average current assests

[For Manuacturers:Opening Stock of FG (+) Cost of Production (+) Closing Stock of FG For Traders:Opening Stock of FG (+) purchases (-) Closing Stock of FG]

1/2 ( opg. Bal. + clg. Bal)

35

Working Capital Turnover Ratio:-

Cost of goods sold Net Working Capital

[For Manuacturers:Opening Stock of FG (+) Cost of Production (+) Closing Stock of FG For Traders:Opening Stock of FG (+) purchases (-) Closing Stock of FG]

1/2 ( opg. Bal. + clg. Bal)

DRAFTED BY: ROLL NO: SECTION:

VIJAY KUMAR POPAT 54. SA - 1

TYPES OF RATIOS WITH THEIR IMPLICATIONS.

SIGNIFICANCE/ INDICATOR
It states the ability to repay short term commitments promptly. (i.e. Short term solvency). Ideal ratio is 2:1 High ratio indicates existence of idle current Assets.

It indicates the ability to meet immediate liabilities. Ideal Ratio is 1.33:1 In case of emergency crisis this ratio helps in evaluating liablities meeting capacity.

It basically indicates how fast inventory is used/sold. High T/O ratio indicates fast moving material while low ratio may mean dead or excessive stock.

It hepls in indicating the speed of collection of credit sales / Debtors.

It hepls in indicating the speed of payment to creditors.

It states the total ability to meet regualar day in day out cash expenses.

It hepls in deriving reasonable relationship

between Debt & Equity. Its ideal ratio is 2:1

Its basically a indicator of use of external funds and total capital employed in total. ideal ratio = 67%

It hepls in indicating interest obligations. It states the ability to meet interest obligations of the current year.should ideally be greater than 1.

This ratio helps in indicating ability to pay dividend on preference capital.

It helps in indicating the ability to meet total obligations of the current year, should ideally be greater than 1.

Total cash flow i.e. in or out are being indicated with the hepl of this ratio. It hepls in indicating cash reserve of firm and its capibility to meet daily cash requirements.

This ratio is a idicator of basic/ gross profitability.

This ratio is a indicator of operating performance of business.

This ratio is a idicator of overall profitability.

Indicates how fast inventory is used/ sold. High ratio indicates fast moving material while low ratio may mean dead or excessive stock.

It hepls in indicating business ability to meet its total expenses effectively of current year. Ideal ratio is greater than 1.

It hepls in indicating business ability to meet its Administrative activities expenses effectively.. Ideal ratio is greater than 1.

It hepls in indicating business ability to meet its Selling activities expenses effectively.. Ideal ratio is greater than 1.

It hepls in indicating business ability to meet its Operating activities expenses effectively.. Ideal ratio is greater than 1.

It hepls in indicating business ability to meet its Financial activities expenses effectively.. Ideal ratio is greater than 1.

It indicates Net income per ruppee of average fixed/ tangible/ total assests.

Overall profitability of the business on the total funds employed can be derived easily with the help of this Ratio,If ROCE > Interest Rate, use of debt fund is justified.

Overall return of the business on the total shareholders funds employed can be derived easily with the help of this Ratio.

It indicates profitability of equity funds/ owners funds invested in business.

It indicates return or income per share, whether or not distributed as dividends.

This ratio basically states the amount of profits distributed per share.

It signifies the relationship between dividend distributed and earnings earned from such dividends.

It indicates true return on equity based on market value of shares.

It indicates true return on investment based on market value of shares.

It indicates the relationship between market price and EPS, and the shareholders perception of the company.

It indicates the total earning power of business in terms of sales and fixed assets.

Indicates how fast inventory is used/ sold. High T/O ratio indicates fast moving material while low ratio may mean daed or excessive stock.

Indicates how fast/ regularly Raw materials are used in production

It indicates the work - in - progress movements / production cycle.

Indicates the speed of collection of credit sales / debtors.

It states the avearge collection period of dedtors.

Ability to generate sales per ruppee of total assets

Ability to generate sales per ruppee of fixed assets

Ability to generate sales per quantity of capital employed.

Ability to generate sales per ruppee of current assets

Ability to generate sales based on working capital employment.