Ratio Analysis

A) Traditional Classification
1. Revenue Statement ratios :The Ratios computed o the basis of the items taken from the revenue statement. i
.e. Profit & Loss Account. Eg. Net Profit Ratio.
2. Balance Sheet Ratios :When two items or group of items appearing in the balance sheet are compared the
ratios so obtained is a Balance sheet ratio. Eg. Current Ratio
3. Composite Ratios :A ratio showing relationship between one item taken from balance Sheet and anoth
er taken from Profit and loss Account is a composite ratio or a combined ratio k
nown as Balance sheet and revenue statement ratio. Eg. Return on capital Employe
d ratio.
B) Functional Classification
1. Liquidity Ratios :This ratios indicate the position of liquidity . They are computed to ascertain
whether the company is capable of meeting its short term obligations from the sh
ort term resources.
(a) Current Ratio
(b) Liquidity Ratio
(c ) Acid-Test Ratio
2. Profitability Ratios :The ratios that are designed to indicate the profitability of the business are g
rouped into the category of profitability ratios.
(a) Gross Profit Ratio
(b) Net Profit Ratio
(c ) Expenses Ratio
(d) Operating Ratio
(e) Return On Capital Employed Ratio
(f) Return on Share holders Funds
(g) Return On Investment
(h) Return on Equity Share holders Funds
(i) Earnings Per Share
3. Leverage Ratios :The Composition of capital of business and the proportion of owners Capital pro
vided by the outsiders are reflected by leverage Ratios.
(a) Proprietary Ratio
(b) Debt Equity Ratio
(c) Capital Gearing Ratio
(d) Long term Funds To Fixed Assets Ratio
(e) Coverage ratios
(1) Interest Coverage ratio
(2) Total Coverage Ratio
4. Activity Or Efficiency Ratios :These are the ratios showing the effectiveness with the resources of the busines

s are employed. It signifies the efficiency of the management .

(a) Stock Turnover Ratio
(b) Debtors Ratio Or Debtors Velocity Ratio
(c) Debtors Turnover Ratio
(d) Creditors Ratio Or Creditors Velocity Ratio
(e) Fixed Assets Turnover Ratio
(f) Total Assets Turnover ratio
(g) Debt Service Coverage Ratio
Liquidity Ratios
1.) Current Ratio =
Where,
Current Assets

Current Assets
Current Liabilities
= Cash Balance + Bank Balance + Stock + Debtors + Bills
Receivable + Prepaid Expense + Investments

readily
Convertible into cash + Loans And Advances
+ Non Trading
Investments + Prepaid Expense + Accrued In
come
Current Liabilities= Creditors + Bills Payable + Bank Overdraft + Unclaimed
Dividend + Provision For Taxation + Propo
sed Dividend +
Outstanding Expense
Ideal Ratio :- 1.33 : 1
2.) Liquid Ratio =

Liquid Assets
Liquid Liabilities

Where,
Liquid Assets

= Current Assets

Stock in Trade

Liquid Liabilities = Current Liabilities

Bank Overdraft

3.) Acid Test Ratio Or Quick Ratio =

Quick Assets

Liquid Liabilities
Where ,
Quick Assets = Cash Balance + Bank Balance + readily Marketable
Securities
( Does Not Include debtors and S
tock )
Ideal Ratio 0.5 : 1
( It is also known as Absolute Liquidi
ty Ratio)
Profitability Ratios
1.) Gross Profit ratio =

Gross Profit

? 100
Sales

Where,
Gross Profit = Sales

COGS (Cost Of Goods Sold)

2.) Operating Ratio = =

COGS + Operating Expense

? 100
Net Sales

Where,
COGS = Opening Stock + Purchase + Purchase Expense

Closing Stock

Operating Expense = Administrative Exp. + Interest Exp. + Selling Exp.

3.) Expense Ratio =

Expenses

(a) Administrative Expense Ratio =

Sales

?
Sales

100

(b) Financial Expense Ratio =

Sales

Administrative Expense
Financial Expense

( c) Selling - Distribution Expense Ratio =

e
? 100

?
?

100
100

Selling - Distribution Expens

Sales
4.) Net Profit ratio =

Net Profit

? 100
Sales

Where ,
Generally for computing the net profit ratio only operating profit is consider.
Non-Operating income and non operating expenses are excluded such
as income from investment, loss on sale of fix asset etc. In short only profit
and loss from operating activity that is from main activity is computed.
Profitability Ratios Based on Investment
5.) Return On Investment
00

Net Profit

Total Investment
Where,
Total Investment = Working Capital + Non Current Assets (Fixed Asset)
Here Total investment includes all assets Except Fictitious Assets are not inclu
ded in fixed Asset.
6.) Return On Capital Employed =
100

Net Profit

?
Capital Employed

Where,
Capital Employed = Share Capital + Reserves + Long Term Loan

Net Profit = Earnings Before Interest And Tax ( EBIT )

7.) Return On Capital Employed =

100

Net Profit

?
Share Holders Fu

nd
Where,
Share Holders Fund = Share Capital (Equity + Preference) + Reserves
Net Profit = Profit After Tax (PAT)
8.) Return on Equity Shareholders Fund =
? 100

Net Profit

Preference Dividend
O

rdinary Share Capital + Free Reserves

Where,
Share Holders Fund = Share Capital ( equity + Preference ) + Reserves
Net Profit = Profit After Tax (PAT)
9.) Return on Equity Share Capital =
? 100

Net Profit

Preference Dividend
Pa

id Up Equity Share Capital

Where,
In this ratio Computation Only Paid up Equity Share Capital in taken and free re
serves or profit is not added.
10.) Earnings Per Share = Net Profit After Tax

Preference Dividend
Number of Equity Shares

Leverage Ratios
1.) Proprietary Ratio = Capital =

Proprietor s Fund

nd
If Without Percentage Then Remove 100 from the Computed value.
Where,

? 100
Total Fu

Proprietor s Fund = Paid Up Share Capital + Free Reserves

Total Funds = Total Assets
2.) Debt Equity Ratio =

Long Term Liabilities

Share Holders Fund / Owners Fund

Here Only Long term Debts are consider for computation such as Debenture + Long
term Liabilities + Loans.
3.) Total Debt Equity Ratio =

Total Debt
Share Holders Fund / Owner

s Fund
Here Total Liabilities are consider such as long term + short term.
4.) Gearing Ratio =

Fixed Interest And Dividend Bearing Capital

Ordinary Capital

5.) Long Term Funds To Fixed Assets Ratio =

Long Term Funds

Fixed Assets

Where ,
Long Term Funds = Share Capital + Reserves + Long Term Liability
Ideal Ratio 1 : 1 or higher.
6.) Coverage Ratios :(a) Interest Coverage Ratio = Profit Before Interest And Tax ( EBIT )
Interest
The Higher the ratio, the more sound is the financial position of the company.
(b) Total Coverage Ratio =

Profit Before Interest And Tax ( EBIT )

Interest + Dividend + Installment

The Higher the ratio, the more sound is the financial position of the company.

Activity Or Effeciency Ratios

1.) Stock Turnover Ratio =

Cost Of Goods Sold ( COGS )

Average Stock

Where ,
Average Stock = Opening Stock + Closing Stock
2
Note :(a) If details About the Monthly stock are provided then average stock will be c
omputed on monthly basis which will give a better turnover ratio.
(b) If COGS is not available the ratio will be computed on sales basis that is t
ake sales in place of COGS and in place of average stock take closing stock.
(c) Higher the ratio the more profitable the business would be.
2.) Debtors Velocity Or Debtors Ratio =
? 365/360

Debtors + Bills Receivable

Average Daily Sales

Where ,
Average Daily Sales =

Credit Sales
360 / 365

Here the answer will be in days/ month.

The higher the ratio the bad the position because it indicates the poor collecti
on policy of the business.

3.) Debtors Turnover Ratio =

Credit Sales
Average Debtors

Average Debtors = Opening Debtors & Bills Receivable + Closing Debtors & Bills R
eceivable
2

4.) Creditors Ratio =

Creditors + Bills Payable

? 365/360
Average Daily Purchase / Credit Purc
hase
Where ,
Average Daily Purchase =

Credit Purchase
360 / 365

5.) Creditors Velocity

Creditors + Bills Payable

? 365/360
Annual Purchase

As per New Syllabus Creditors Turnover Is Calculated as under

6.) Creditors Turnover Ratio =

Credit Purchase
Average Creditors

Average Debtors = Opening Debtors & Bills Receivable + Closing Debtors & Bills R
eceivable
2
7.) Creditors Ratio =

360 / 365
Creditors Turnover

8.) Fixed Assets Turnover =

Sales
Fixed Assets

9.) Total Assets Turnover =

Sales
Total Assets

10.) Debt Service Coverage Ratio =

Profit Available For Debt Payment

Installment of Princi

pal + Interest
Where,
Profit = Profit After Tax + Depreciation and other Non cash Adjustments+
Interest
Payable On Loan
Ratio Analysis By Ankit Jain
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