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A ratio:-
It is the mathematical relationship between two
quantities in the form of a fraction or percentage.
• Leverage Ratios
• Liquidity Ratios
• Profitability Ratios
4. Other ratios
LIQUIDITY RATIOS
MEANING:-
It measures the ability of a firm to meet its short
term obligations & reflects the short term
financial solvency of firm.
Classification:-
5. Current ratio
6. Acid-test ratio
LIQUIDITY RATIOS
Current ratio:-
It is the ratio of total current
assets to total current liabilities.
Formula:-
current assets
Current ratio =
current liabilities
LIQUIDITY RATIOS
Acid-test ratio:-
It measures the firm’s ability to
convert its current assets quickly into cash in
order to meet its current liabilities. Hence also
known as Quick ratio.
Formula:
Quick assets
Acid-test ratio =
current liabilities
Leverage ratios
Meaning:-
It is defined as financial ratio which
throws light on long term solvency of a firm with
regards to the following two aspects:-
Debt-equity ratio:-
It indicates the relationship between
borrowed funds and owners capital.
Formula:-
Total debt
D/E ratio =
Shareholders equity
Leverage ratios
Capital gearing ratio:-
It indicates the relationship between equity
funds and fixed income bearing funds.
Formula:-
Equity funds
CGR =
Fixed income bearing funds
Leverage ratios
Interest coverage ratio:-
It measures the debt servicing capacity of
the firm. It is determined by dividing the EBIT by
the fixed interest charges.
Formula:-
EBIT
Interest coverage ratio =
Interest
Leverage ratios
Debt service coverage ratio:-
It computes the debt service capacity of a
business firm. In general 2:1 is considered as
satisfactory ratio.
Formula:-
EAT+Interest+Depreciation+OA
DSCR = Installment
Profitability ratios
Meaning:-
These ratios tell us whether a business is
making profits - and if so whether at an
acceptable rate.
Formula:-
EBIT
Operating profit ratio =
Net Sales
Profitability ratios
Gross profit ratio:-
It refers to ability of the business to consistently
control its production costs or to manage the
margins its makes on products its buys and sells.
Formula:-
Gross Profit
Gross profit margin =
Sales
Profitability ratios
Return on capital employed:-
It measures the profits related to return
on capital employed. The term capital employed
refers to long term funds supplied by lenders
and owners of the firm.
Formula:-
EBIT
ROCE =
Average total capital employed
Other Ratios
Earning per share:-
It measures the profit available to the equity
shareholders on a share. It is calculated by
dividing the profits available to the equity
shareholders by the number of outstanding
shares.
Formula:-