Chap 2 - Ratio Analysis

Page 1
INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .1
2 RATIO
MATERIAL
ANALYSIS
1. OBJECTIVE OF RATIO
1. To determine Liquidity (Short-term Solvency) (i.e., ability of the enterprise to

meet its short-term obligations as and when they become due).
2. To determine Long-term Solvency (i.e., ability of the enterprise to pay the
interest regularly and to repay the principal on maturity or in pre-determined
instalments at due dates).
3. To determine Operating Efficiency with which Resources are utilised in
generating Revenue
4. To determine Profitability with respect to Revenue from Operations and
Investment
5. To compare Intra Firm Position (i.e., Evaluating the Financial Position and
Performance of thesame enterprise over a period of time) and to identify the strong
and week areas (if any) and to take the necessary corrective action.
6. To compare Inter Firm Position (i.e., Evaluating the Relative Financial Position
and Performance of the enterprise in the industry) and to identify the strong and
week areas r(if any) and to take the necessary corrective action.
Costing by Raj Awate – Amazing journey of logic and concept

Page 2
2. CLASSIFICATION OF RATIO BASED ON POSITION
1. Income These ratios are calculated on the basis of Income Statement

Statement Ratios Items.
Example: Gross Profit Ratio, Operating Profit Ratio, Net Profit
Ratio
2. Position These ratios are calculated on the basis of Position Statement
Statement Ratios (i.e. Balance Sheet) Items.
Example: Current Ratio, Quick Ratio, Debt-Equity Ratio,
3. Composite These ratios are calculated on the basis of Items of both the
Ratios Income Statement and Position Statement.
Example: Inventory Turnover Ratio, Debtors Turnover Ratio,
Creditors Turnover Ratio, Return on Investment
3. CLASSFICATION OF RATIO BASED ON FUNCTION
Classification of Ratios
1. Liquidity Ratios
2. Solvency Ratios
3. Activity Ratios
4. Profitability Ratios

Page 3
SUMMARY CHART

Page 4

Page 5
4. LIQUIDITY RATIO
The terms 'liquidity' and 'short-term solvency' are used synonymously.

Liquidity or short-term solvency means ability of the business to pay its short-term
liabilities.
Various Liquidity Ratios are:

(a) Current Ratio
(b) Quick Ratio or Acid test Ratio
(c) Cash Ratio or Absolute Liquidity Ratio
(d) Basic Defense Interval or Interval Measure Ratios
(e) Net Working Capital Ratio
(a) Current Ratio:

Current Assets
Current Ratio = Current Liabilities
Current Assets = Inventories + Sundry Debtors + Cash and Bank Balances

+ Receivables/ Accruals + Loans and Advances + Disposable Investments + Any other
current assets.
Current Liabilities = Creditors for goods and services + Short-term Loans +

Bank Overdraft + Cash Credit + Outstanding Expenses + Provision for Taxation +
Proposed Dividend + Unclaimed Dividend + Any other current liabilities.
(b) Quick Ratios: T

Quick Assets
Quick Ratio or Acid Test Ratio = Current Liabilities
Quick Assets = Current Assets - Inventories Current Liabilities = As mentioned under

Current Ratio.
(c) Cash Ratio/ Absolute Liquidity Ratio:
The cash ratio measures the absolute liquidity of the business. This ratio considers
only the absolute liquidity available with the firm.
Cash and Bank balances + Marketable Securities
Cash Ratio = Current Liabilities
Cash and Bank balances + Current Investments
= Current Liabilities
Page 6
5. LONG TERM SOLVENCY OR LEVERAGE RATIO
The leverage ratios may be defined as those financial ratios which measure
the long term stability and structure of the firm. These ratios indicate the mix of
funds provided by owners and lenders and assure the lenders of the long term
funds with regard to:
(i) Periodic payment of interest during the period of the loan and
(ii) Repayment of principal amount on maturity.
Leverage ratios are of two types:

1. Capital Structure Ratios
(a) Equity Ratio
(b) Debt Ratio
(c) Debt to Equity Ratio
(d) Debt to Total Assets Ratio
(e) Capital Gearing Ratio
(f) Proprietary Ratio
2. Coverage Ratios
(a) Debt-Service Coverage Ratio (DSCR)
(b) Interest Coverage Ratio
(c) Preference Dividend Coverage Ratio
(d) Fixed Charges Coverage Ratio

Page 7
Shareholders′ Equity
(a) Equity Ratio: Equity Ratio = Capital Employed
Total outside liabilities Total Debt

(b) Debt Ratio: Debt Ratio = Total Debt + Net worth or Net Assets
This ratio is used to analyse the long-term solvency of a firm.
(c) Debt to Equity Ratio:

Total Outside Liabilities Total Debt∗ Long−term Debt∗∗
Debt to Equity Ratio = = Shareholders′ Equity or = Shareholders′ equity
Shareholders′ Equity
The shareholders' equity is equity and preference share capital + post

accumulated profits (excluding fictitious assets etc).
Total Outside Liabilities

(d) Debt to Total Assets Ratio: = Total Assets
(e) Capital Gearing Ratio: In addition to debt-equity ratio, sometimes capital gearing
ratio is also calculated to show the proportion of fixed interest (dividend) bearing capital
to funds belonging to equity shareholders i.e. equity funds or net worth.
(Preference Share Capital + Debentures + Other Borrowed funds)
Capital Gearing Ratio = (Equity Share Capital + Reserves & 𝑆𝑢𝑟𝑝𝑙𝑢𝑠 − 𝐿𝑜𝑠𝑠𝑒𝑠)
Proprietary Fund
(f) Proprietary Ratio: = Total Assets
Proprietary fund includes Equity Share Capital + Preference Share Capital + Reserve
& Surplus. Total assets exclude fictitious assets and losses.

Page 8
(a) Debt Service Coverage Ratio (DSCR): Lenders are interested in debt service
coverage to judge the firm's ability to pay off current interest and instalments.
Earnings available for debt services
Debt Service Coverage Ratio = Interest + Instalments
Earnings before interest and taxes (EBIT)

(b) Interest Coverage Ratio: = Interest
Net Profit⁄Earning after taxes (EAT)

(c) Preference Dividend Coverage Ratio: =
Preference dividend liability
6. ACTIVITY RATIO
Activity Ratio/ Efficiency Ratio/ Performance Ratio/ Turnover Ratio

These ratios are employed to evaluate the efficiency with which the firm manages and
utilises its assets. For this reason, they are often called 'Asset management ratios'. T
Activity Ratio/ Efficiency Ratio/ Performance Ratio/ Turnover Ratio:
(a) Total Assets Turnover Ratio
(b) Fixed Assets Turnover Ratio
(c) Capital Turnover Ratio
(d) Current Assets Turnover Ratio
(e) Working Capital Turnover Ratio
(i) Inventory/ Stock Turnover Ratio
(ii) Receivables (Debtors) Turnover Ratio
(iii) Payables (Creditors) Turnover Ratio.
These ratios are usually calculated with reference to sales/cost of goods sold and are
expressed in terms of rate or times.

Page 9
Asset Turnover Ratios:

Sales⁄Cost of Goods Sold
Total Asset Turnover Ratio = Total Assets
Fixed Assets Turnover Ratio = Fixed Assets

Capital Turnover Ratio/ Net Asset Turnover Ratio: = Net Assets

Working Capital Turnover Ratio:= Working Capital
Cost of Goods Sold⁄Sales

Inventory/ Stock Turnover Ratio: = Average Inventory∗
Raw Material Consumed

Raw Material Inventory Turnover Ratio = Average Raw Material Stock
Credit Sales
Receivables (Debtors) Turnover Ratio:= Average Accounts Receivable
12 months⁄52 weeks⁄360 days
Receivable Velocity/ Average Collection Period = = DTR
Annual Net Credit Purchases

Creditors Turnover Ratio = Average Accounts Payables

Page 10
7. PROFITABILITY RATIOS
The profitability ratios measure the profitability or the operational efficiency of the firm.
These ratios reflect the final results of business operations.
1. Profitability Ratios based on Sales
(a) Gross Profit Ratio
(b) Net Profit Ratio
(c) Operating Profit Ratio
(d) Expenses Ratio
2. Profitability Ratios related to Overall Return on Assets/ Investments
(a) Return on Investments (ROI)
(i) Return on Assets (ROA)
(ii) Return of Capital Employed (ROCE)
(iii) Return on Equity (ROE)
3. Profitability Ratios required for Analysis from Owner's Point of View
(a) Earnings per Share (EPS)
(b) Dividend per Share (DPS)
(c) Dividend Payout Ratio (DP)
4. Profitability Ratios related to Market/ Valuation/ Investors
(a) Price Earnings (P/E) Ratio
(b) Dividend and Earning Yield
(c) Market Value/ Book Value per Share (MV/BV)
(d) Q Ratio

Page 11
8. PROFITABILITY RATIO BASED ON SALES
Gross Profit
Gross Profit Ratio = × 100
Sales
Net Profit Earnings after taxes (EAT)

Net Profit Ratio = ×100 or ×100
Sales Sales
Operating Profit Earnings before interest and taxes (EBIT)

Operating Profit Ratio = × 100 = × 100
Sales Sales
Where,
Operating Profit = Sales - Cost of Goods Sold(COGS) – Expenses
Expenses Ratio:
COGS
(i) Cost of Goods Sold (COGS) Ratio = × 100
Sales
Administrative exp.+ Selling & 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
(ii) Operating Expenses Ratio = × 100
Sales
COGS + Operating expenses
(iii) Operating Ratio = × 100
Sales
9. PROFITABILITY RATIO BASED ON RATURN ON ASSETS
Return on Investment (ROI): ROI is the most important ratio of all. It is the percentage
of return on funds invested in the business by its owners. In short, this ratio tells the
owner whether or not all the effort put into the business has been worthwhile. It
compares earnings/ returns/ profit with the investment in the company. The ROI is
calculated as follows:
𝐑𝐞𝐭𝐮𝐫𝐧⁄𝐏𝐫𝐨𝐟𝐢𝐭⁄𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬
Return on Investment = ×100
𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭
𝐑𝐞𝐭𝐮𝐫𝐧⁄𝐏𝐫𝐨𝐟𝐢𝐭⁄𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬 𝐒𝐚𝐥𝐞𝐬
= × 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭
𝐒𝐚𝐥𝐞𝐬
So, ROI = Profitability Ratio × Investment Turnover Ratio.

The concept of investment varies and accordingly there are three broad categories of
ROI i.e.
(i) Return on Assets (ROA),
(ii) Return on Capital Employed (ROCE) and
(iii) Return on Equity (ROE).
Page 12
(i) Return on Assets (ROA):

Net Profit after taxes Net Profit after taxes Net Profit after taxes
ROA = Average Total Assets or Average Tangible Assets or Average Fixed Assets
(ii) Return on Capital Employed (ROCE):

It is another variation of ROI. The ROCE is calculated as follows:
Earnings before interest and taxes(EBIT)
ROCE (Pre-tax) = × 100
Capital Employed
EBIT(1 − t)
ROCE (Post-tax) = Capital Employed × 100
(iii) Return on Equity (ROE):

Return on Equity measures the profitability of equity funds invested in the firm. This
ratio reveals how profitably of the owners' funds have been utilised by the firm.
Net Profit after taxes−Preference dividend (if any)
ROE = Net worth × 100
equity shareholders′ fund
Return on Equity using the Du Pont Model:

(i) Profitability/Net Profit Margin margin in a bid to attract higher sales.
Profitability Profit Sales
= Net Income ÷ Revenue
Net profit margin
(ii) Investment Turnover/Asset Turnover/Capital Turnover:

= Sales/Revenue ÷ Investment/Assets/Capital
(iii) Equity Multiplier: I
Equity Multiplier = Investment/Assets/Capital ÷ Shareholders' Equity

Page 13
10. PROFITABILITY RATIO FROM OWNER POINT OF VIEW
Net profit available to equity shareholders

(a) Earnings per Share (EPS): Number of equity shares outstanding
Total Dividend paid to equity shareholders

(b) Dividend per Share (DPS): = Number of equity shares outstanding
Dividend per equity share(DPS)
(c) Dividend Payout Ratio (DP): = Earning per Share (EPS)
Profitability Ratios related to market/ valuation/ Investors

These ratios involve measures that consider the market value of the company's
shares. Frequently share prices data are punched with the accounting data to
generate new set of information. These are (a) Price- Earnings Ratio, (b) Dividend
Yield, (c) Market Value/ Book Value per share, (d) Q Ratio.
Market Price per Share(MPS)

Price-Earnings per Share (P/E Ratio) = Earning per Share(EPS)

Page 14
11. USERS
USERS AND OBJECTIVE OF FINANCIAL ANALYSIS

Financial Statement analysis is useful to various shareholders to obtain the derived
information about the firm
Sl.No. Users Objectives Ratios used in general
1. Shareholders Being owners of the • Mainly Profitability Ratio

organisation they are [In particular Earning per
interested to know about share (EPS), Dividend per
profitability and growth of the share (DPS), Price
organization Earnings (P/E), Dividend
Payout ratio (DP)]
2. Investors They are interested to know • Profitability Ratios

overall financial health of the • Capital structure Ratios
organisation particularly
future perspective of the • Solvency Ratios
organisations. • Turnover Ratios
3. Lenders They will keep an eye on • Coverage Ratios

the safety perspective of • Solvency Ratios
their money lended to the
organisation • Turnover Ratios
• Profitability Ratios
4. Creditors They are interested to • Liquidity Ratios

know liability position of • Short term solvency
the organisation Ratios/ Liquidity Ratios
particularly in short term.
Creditors would like to
know whether the
organisation will be able to
pay the amount on due
date.
5. Employees They will be interested to • Liquidity Ratios

know the overall financial
• Long terms solvency
wealth of the organisation Ratios
and compare it with
competitor company. • Profitability Ratios

Page 15
• Return of investment
6. Regulator / They will analyse the • Profitability Ratios

Government financial statements to
determine taxations and
other details payable to the
government.
7. Managers:-
(a) Production They are interested to • Input output Ratio

Managers know various data • Raw material
regarding input output, consumption.
production quantities etc.
(b) Sales Data related to quantities • Turnover ratios

Managers of sales for various years, (basically receivable
other associated figures turnover ratio)
and produced future sales • Expenses Ratios
figure will be an area of
interest for them
(c) Financial They are interested to • Profitability Ratios

Manager know various ratios for (particularly related to
their future predictions of Return on investment)
financial requirement. • Turnover ratios
• Capital Structure Ratios
(d) Chief They will try to find the • All Ratios

entire perspective of the
Executives/
company, starting from
General Sales, Finance, Inventory,
Manager Human resources,
Production etc.
8. Different

Page 16
Industry
(a) Telecom Finance Manager /Analyst • Ratio related to 'call'

will calculate ratios of their • Revenue and expenses
company and compare it per customer
with Industry norms.
(b) Bank • Loan to deposit Ratios
• Operating expenses
and income ratios
(c) Hotel • Room occupancy ratio

• Bed occupancy Ratios
• Passenger -kilometre
• Operating cost - per
passenger kilometre.

Page 17
QUESTION 1 :
The following are the summarized profit & loss A/C of Hind products ltd. for the year
ending 31st march 2009 and the balance sheet as on that date.
Profit & loss A/C
To opening stock 99,500 By sales (Credit) 8, 50,000
To purchases 5, 45,250 By closing stock 1, 49,000
To incidental 14,250
expenses
To gross profit 3, 40,000
9, 99,000 9, 99,000
To operating 1, 95,000 By gross profit 3, 40,000

expenses
To non operating 4,000 By non operating 9, 000
expenses incomes
To net profit 1, 50,000
3, 49,000 3, 49,000
Balance sheet
Liabilities Rs. Assets Rs.
Share capital 2,000 2,00,000 Land and building 1,50,000
equity share of Rs. 10
each
Reserves 90,000 Plant and machinery 80,000
Other current liabilities 90,000 Stock in trade 1,49,000
Profit and loss a/c 60,000 Sundry debtors 41,000
Bills payable 40,000 Cash and bank balance 30,000
Bills receivable 30,000
4,80,000 4,80,000
From the above statements you are required to calculate the following ratios:
(1) Gross profit ratio.
(2) Net profit ratio.
(3) Operating profit ratio.
(4) Operating ratio.
(5) Return on capital employed.
(6) Net profit to fixed assets ratio.
(7) Stock turnover ratio.
(8) Receivable turnover ratio.
(9) Creditors’ turnover ratio.
(10) Sales to working capital.
(11) Sales to fixed assets.
(12) Sales to capital employed.
(13) Turnover on total assets.
Page 18
Additional information:
Average receivables Rs. 85,000
Average payables Rs. 80,000
Solution :
(1) Gross profit ratio.
(2) Net profit ratio.
(3) Operating profit ratio.
(4) Operating ratio.
(5) Return on capital employed.
(6) Net profit to fixed assets ratio.
(7) Stock turnover ratio.
(8) Receivable turnover ratio.
(9) Creditors’ turnover ratio.
(10) Sales to working capital.
(11) Sales to fixed assets.
(12) Sales to capital employed.
(13) Turnover on total assets.

Page 19
QUESTION 2 :
JKL Ltd. has the following balance sheet as on March 31st 2009 and March 31st 2008.
(Rs. In lakhs)
Balance sheet march 31st 2009 march 31st 2008
Sources of funds
Shareholders fund 2377 1472
Loan funds 3570 3083
------ -------
5947 4555
------ -------
Application of funds
Fixed assets 3466 2900
Cash and bank 489 470
Debtors 1495 1168
Stock 2867 2407
Other current assets 1567 1404
Less: current liabilities 3937 3794
------ -------
5947 4555
------ -------
The income statement of the ABHISHEK ltd. for the year ended is as follows:
(Rs. In lakhs)
Income statement march 31st 2009 march 31st 2008
Sales 22165 13882
Less: cost of goods sold 20860 12544
------- --------
Gross profit 1305 1338
Less: selling and admin expenses 1135 752
------- ---------
EBIT 170 586
Interest 113 105
------- ----------
PBT 57 481
Tax 23 192
------- ----------
PAT 34 289
------- ----------
Required: calculate for the year 2008-09:
(1) Return on investment.
(2) Return on equity.
Page 20
Solution :
(1) Return on investment.
(2) Return on equity.
QUESTION 3 :
Andy Company’s equity shares are being traded in the market at Rs.54 per share with
a price earning ratio of 9 . The company’s dividend payout is 72 % .It has 1,00,000
equity share of 10 each and no preference shares .Book value per share is Rs.42
calculate:
(i) Earning per share
(ii) Net Income
(iii) Dividend yield ; and
(iv) Return on equity
Solution :

Page 21
QUESTION 4 :
From the following information provided by Jolly ltd. You are required to prepare the
balance sheet
Current ratio 2.5
Liquidity ratio 1.5
Proprietary ratio (FA / proprietars fund) 0.75
Working capital Rs. 6,00,000
Reserve & Surplus Rs. 4,00,000
Bank overdraft Rs. 1,00,000
There is no long term loan or fictitious assets you are also required to show
the necessary working notes
Ans :
Balance sheet
Liabilities Rs Assets Rs
Share capital Fixed asset
Reserve & surplus
Current asset :
Current liability :
Creditors Debtors
Bank overdraft stock
Working note :
1. Current ratio with working capital :

current asset
Current ratio = current liability
CA
= CL
Working capital = current asset – current liability

=
=
CL = CA =
Quick asset
2. Quick ratio = quick liability

Page 22
= -------------
Debtors =
Stock =
FA
3. Proprietary ratio = proprieter,s fund
*note : proprieter’s fund = owners fund = share capital + R & S

= FA + CA - CL
FA
Proprietary ratio = proprieter,s fund
FA
= FA+CA−CL
= ----------------
FA =

Page 23
QUESTION 5 :
Following information are available from the books of smart project ltd.
Debtors velocity 3 months
Stock velocity 6 months
Creditors velocity 2 months
Gross profit ratio 20%
Gross profit for the year ended 31st March 1999 was Rs. 5,00,000 stock on 31st
March 1999 was Rs. 20,000 more than what it was at the beginning of the year
bills receivable & bills payable were Rs. 60,000 & Rs. 36,667 respectively
You are required to calculate the value of (i) sales (ii) sundry debtors (iii)
sundry creditors & (iv) closing stock & also prepare a note for the finance
director on the overall impact of the results
Ans :
a ) Gross profit ratio = ( GP / sales )
=
Sales =
Cost of sales = sales – gross profit =
* Note : always use all turnover ratio after value of sales
𝟏𝟐 𝒎𝒐𝒏𝒕𝒉𝒔
a) Debt collection period ( debtors velocity ) = 𝑫𝑻𝑹
= ---------
DTR = times
𝐜𝐫𝐞𝐝𝐢𝐭 𝐬𝐚𝐥𝐞𝐬
DTR =
𝐚𝐯𝐞𝐫𝐚𝐠𝐞 𝐝𝐞𝐛𝐭𝐨𝐫𝐬
= ---------------
Average Debtors =
Sundry debtors =
c) Stock turnover ratio =
= ----------------------
Average stock =
Opening stock =
Page 24
Closing stock =
Average stock = (opening + closing )/2
= -------------------------
Opening = closing =
d )*Note : when creditors velocity is given always prepare trading account to

find purchase then use CTR to find creditors.
Trading a/c
Opening stock sales
Purchase Closing stock
Gross profit
𝟏𝟐 𝐦𝐨𝐧𝐭𝐡𝐬
Creditors velocity = 𝐂𝐓𝐑
= ---------
CTR = times
𝐜𝐫𝐞𝐝𝐢𝐭 𝐩𝐮𝐫𝐜𝐡𝐚𝐬𝐞
CTR = 𝐚𝐯𝐞𝐫𝐚𝐠𝐞 𝐜𝐫𝐞𝐝𝐢𝐭𝐨𝐫𝐬
= ---------------
creditors =

Chap 2 - Ratio Analysis

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Chap 2 - Ratio Analysis

Încărcat de

Drepturi de autor:

Formate disponibile

Page 1

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .1

1. To determine Liquidity (Short-term Solvency) (i.e., ability of the enterprise to

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .2

2. CLASSIFICATION OF RATIO BASED ON POSITION

1. Income These ratios are calculated on the basis of Income Statement

3. CLASSFICATION OF RATIO BASED ON FUNCTION

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .3

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .4

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .5

The terms 'liquidity' and 'short-term solvency' are used synonymously.

Various Liquidity Ratios are:

(a) Current Ratio:

Current Assets = Inventories + Sundry Debtors + Cash and Bank Balances

Current Liabilities = Creditors for goods and services + Short-term Loans +

(b) Quick Ratios: T

Quick Assets = Current Assets - Inventories Current Liabilities = As mentioned under

(c) Cash Ratio/ Absolute Liquidity Ratio:

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .6

5. LONG TERM SOLVENCY OR LEVERAGE RATIO

Leverage ratios are of two types:

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .7

Total outside liabilities Total Debt

This ratio is used to analyse the long-term solvency of a firm.

(c) Debt to Equity Ratio:

The shareholders' equity is equity and preference share capital + post

Total Outside Liabilities

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .8

Earnings before interest and taxes (EBIT)

Net Profit⁄Earning after taxes (EAT)

Activity Ratio/ Efficiency Ratio/ Performance Ratio/ Turnover Ratio

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .9

Asset Turnover Ratios:

Sales⁄Cost of Goods Sold

Sales⁄Cost of Goods Sold

Cost of Goods Sold⁄Sales

Raw Material Consumed

Annual Net Credit Purchases

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .10

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .11

8. PROFITABILITY RATIO BASED ON SALES

Net Profit Earnings after taxes (EAT)

Operating Profit Earnings before interest and taxes (EBIT)

9. PROFITABILITY RATIO BASED ON RATURN ON ASSETS

So, ROI = Profitability Ratio × Investment Turnover Ratio.

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .12

(i) Return on Assets (ROA):

(ii) Return on Capital Employed (ROCE):

(iii) Return on Equity (ROE):

Return on Equity using the Du Pont Model:

(ii) Investment Turnover/Asset Turnover/Capital Turnover:

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .13

10. PROFITABILITY RATIO FROM OWNER POINT OF VIEW