SL No Description

A LIQUIDITY RATIOS
1 Current Ratio
2 Quick Ratio or Acid test Ratio
3 Absolute Cash Ratio
4 Interval Measure
B CAPITAL STRUCTRE RATIOS
1 Equity to Total Funds Ratios
2 Debt Equity Ratio
3 Capital Gearing Ratio
4 Fixed Asset to Long Term Fund Ratio
5 Proprietary Ratios
C COVERAGE RATIOS
1 Debt Service Coverage Ratio
2 Interest Coverage Ratio
3 Preference Dividend Coverage Ratio
D TURNOVER RATIOS
1 Capital Turnover Ratio
2 Fixed Asset Turnover Ratio
3 Working Capital Turnover Ratio
4 Finished Goods or Stock Turnover ratio
5 WIP Turnover Ratio
6 Debtors Turnover ratio
7 Creditors Turnover ratio
E PROFITABILITY RATOS BASED ON SALES
1 Gross Profit ratio
2 Operating profit Ratio
3 Net profit Ratio
4 Contribution Sales Ratio
F PROFITABILITY RATOS OWNERS VIEW POINT
1
Return on investment (ROI) or return on capital
employed
2 Return on Equity
3 Earnings Per Share
4 Dividend Per Share
5 Return On Assets
Link
Current_Ratio
Quick_Ratio_or__Acid_test_Ratio
Absolute_Cash_Ratio
Interval_Measure
Equity_to_Total_Funds_Ratios
Debt_Equity_Ratio
Capital_Gearing_Ratio
Fixed_Asset_to_Long_Term_Fund_Ratio
Proprietary_Ratios
Debt_Service_Coverage_Ratio
Interest_Coverage_Ratio
Preference_Dividend_Coverage_Ratio
Capital_Turnover_Ratio
Fixed_Asset_Turnover_Ratio
Working_Capital_Turnover_Ratio
Finished_Goods_or_Stock_Turnover_ratio
WIP_Turnover_Ratio
Debtors_Turnover_ratio
Creditors_Turnover_ratio
Gross_Profit_ratio
Operating_profit_Ratio
Net_profit_Ratio
Contribution_Sales_Ratio
Return_on_investment__ROI__or_return_on_capital_employed
Return_on_Equity
Earnings_Per_Share
Dividend_Per_Share
Return_On_Assets
No Ratio Formula Numerator Denominator
1 Current Ratio
Current Assets
Current Liabilities
Inventories
+ Debtors
+Cash & Bank
+Receivables/Accruals
+Short term Loans
+Marketable Investments
Sundry Creditors (For Goods)
+Outstanding Expenses
+Short Term Loans & advances
+Bank Overdraft/ Cash Credit
+Provisio for Taxation
+Proposed or Unclaimed Dividend
2
Quick Ratio or
Acid test Ratio
Quick Assets
Quick Liabilities
Current Assets
Less: Inventories
Less Prepaid Expenses
Current Liabilities
Less : Bank Overdraft
Less Cash Credit
3 Absolute Cash Ratio
(Cash + Marketable securuties)
Current Liabilities
Cash In Hand
+Balance at Bank
+Marketable securuties &
short Term investments
Sundry Creditors (For Goods)
+Outstanding Expenses
+Short Term Loans & advances
+Bank Overdraft/ Cash Credit
+Provisio for Taxation
+Proposed or Unclaimed Dividend
4 Interval Measure
Quick Assets
Cash Expenses per Day
Current Assets
Less: Inventories
Less Prepaid Expenses
Annual Cash Expenses
365
Cash expenses=Total expenses
Less Depreciaton and write offs
No Ratio Formula Numerator Denominator
1
Equity to Total Funds
Ratios
Share Holders Fund
Total Funds
Equity Share Capital
+Preference Share Capital
+Reserves and Surplus
Less Accumulated Losses
Total Long term Funds employed in
business =Debts+Equity
A. LIQUIDITY RATIOS - SHORT TERM SOLVENCY
B. CAPITAL STRUCTRE RATIOS-INDICATOR OF FINANCING TECHNIQUES AND LONG TERM SOLVENCY
2 Debt Equity Ratio
Debt
Equity
Long term borrowed funds, ie
Debentures,Long term loans
from institutions
Equity Share Capital
+ Preference Share Capital
+Reserves and Surplus
Less Accumulated losses if any
3 Capital Gearing Ratio
Fixed Charge Bearing Capital
Equity share holders Funds
Preference Share Capital
+Debentures
+ Long Term Loans
Equity Share Capital
+ Reserves and Surplus
Less Accumulated Losses if any
4
Fixed Asset to Long
Term Fund Ratio
Fixed Assets
Long Term Funds
Net Fixed Assets ie
Gross Block
Less Depreciation
Share Holders Fund
+ Debt Funds (Numerator
1+Numerator 2 as in 1 & 20
5 Proprietary Ratios
Proprietary Funds
Total Assets
Equity Share Capital
+ Preference Share Capital
+Reserves & Surplus
Less Accumulated Reserves
Net Fixed Assets
+ Total Current Assets
(Only tangiable Assets will be
included)
No Ratio Formula Numerator Denominator
1
Debt Service
Coverage Ratio
Earnings for Debt service
(Interest + Instalment)
Net Profit after Taxation
+ Taxation
+ Interest on Debt Funds
+ Non Cash Operating
expense
+ Non Operating Adjustments
Interest on Debt
+ Instalment of Debt
(Principal Repaid)
C. COVERAGE RATIOS - ABILITY TO SERVE FIXED LIABILITIES
2
Asset Coverage
Ratio
Assets
Total debt outstanding
(B.V of total Assets -
Intangible Assets) - (Current
Liabilities - ST debt
obligations)
Total debt outstanding
3
Interest Coverage
Ratio
Earnings before Interest & Tax
Interest
Sales
Less variable cost
Less Fixed Cost(excluding
Int)
or
EAT+Tax+ Interest
Interest on debt Fund
3
Preference Dividend
Coverage Ratio
Earnings after Tax
Preference Dividend
EAT
Dividend on Preference Share
Capital
No Ratio Formula Numerator Denominator
1
Capital Turnover
Ratio
Sales
Capital Employed
Sales net of returns
Equity share Capital
+ Preference Share Capital
+Reserves & Surplus
+ Debentures
+ Long Term Loans
Less Accumulated Losses
2
Fixed Asset Turnover
Ratio
Turnover
Fixed Assets
Sales Net of returns Net Fixed Assets
3
Working Capital
Turnover Ratio
Turnover
Net Working Capital
Sales Net of returns
Current Assets Less Current
liabilities
D. TURNOVER / ACTIVITY / PERFORMANCE RATIOS
4
Finished Goods or
Stock Turnover ratio
Cost of Goods Sold
Average Stock
For Manufacturers
Opening Stock
+Cost fo production
less Closing stock
For Traders
Opening Stock
+ Purchases
Less Closing stock
Opening Stock +Closing Stock
2
Maximum Stock + Minimum Stock
2
5 WIP Turnover Ratio
Factory Cost
Average stock o WIP
Materials +wages+Production
OH
Opening WIP+Closing WIP
2
6
Debtors Turnover
ratio
Credit Sales
Average Accounts receivable
Credit Sales net of returns
AR= Debtors+ BR
Average AR=
Opening Bal+Closing Bal
2
7
Creditors Turnover
ratio
Credit Purchases
Average Accounts payable
Credit Purchases Net of
returns if any
AP= Creditors+ BP
Average AP=
Opening Bal+Closing Bal
2
No Ratio Formula Numerator Denominator
1 Gross Profit ratio
Gross profit
Sales
Gross profit As per trading
Account
sales net of returns
2 Operating profit Ratio
Operating profit
Sales
Sales Less Cost of sales
or
Net profit
Add Non operating expenses
Less Non operating Incomes
sales net of returns
E. PROFITABILITY RATOS BASED ON SALES
3 Net profit Ratio
Net profit
Sales
Net profit sales net of returns
4
Contribution Sales
Ratio
Contribution
Sales
Sales less Variable costs sales net of returns
No Ratio Formula Numerator Denominator
1
Return on investment
(ROI) or return on
capital employed
Total Earnings
Total capital Employed
Profit After Taxes
Add : Taxation
Add : Interest
Add: Non Trading Expenses
Add: Non Operating incomes
like rents,interest and
dividends
Asset Route:
Net fixed assets (Including
intangiable assets like patents,but
not fictitiious assets miscellaneous
expenditure not w/off)
+Net Working Capital
Liability Route
Equity Share Capital
+Prefence share capital
+reserves & Surplus
+Debentures and long term Loans
Less Accumulated Losses
Less Non trade Investments
2 Return on Equity
Earnings After Tax
Net Worth
Profit After Taxes
Net Fixed Assets
+Net working Capital
Less External Liabilites(Long Term)
3 Earnings Per Share
(PAT-Preference Dividend)
Number of Equity Shares
Profit After Taxes
Less Preference Dividend
Number of Equity shares
Outstanding=
Equity Share Capital
Face value per share
F. PROFITABILITY RATOS OWNERS VIEW POINT
4 Dividend Per Share
Dividend
Number of Equity Shares
Profit distributed to equity
share holders
Number of Equity shares
Outstanding=
Equity Share Capital
Face value per share
5 Return On Assets
Net Profit after Taxes
Average Total Assets
Net Profit After Taxes 1/2 of Opening and Closing Balance
Significance
Ability to repay short term
commitmnets prompltly. Ideal ratio is
2:1.High ratio indicates existence of
idle current assets
Ability to meet immediate
liabilities.Ideal ratio is 1.33:1
Availibility of cash to meet short term
commitments
Ability to meet regular cash
expenses
Significance
Indicates long term solvency; mode
of financing; extend of own funds
used in operations
A. LIQUIDITY RATIOS - SHORT TERM SOLVENCY
B. CAPITAL STRUCTRE RATIOS-INDICATOR OF FINANCING TECHNIQUES AND LONG TERM SOLVENCY
Indicates relationship between debt
& Equity, Ideal ratio is 2:1
Shows Proportion of fixed charge
(dividend or interest) bearing capital
to equity funds, the extend of
advantage or leverage enjoyed by
equity share holders
shows proprtion of Fixed Assets
finanaced by by long term funds.
Indicats the financing approach
followd by the
firm.conservative,matching or
aggressive; idea ratio is less than 1
Shows extend of owners fund
utilised in financing assets
Significance
Indicates extend of current earnings
available for meeting commitments
and outflow towards interest and
instalments; Ideal ratio must be
between 2 to 3 times
C. COVERAGE RATIOS - ABILITY TO SERVE FIXED LIABILITIES
Indicates ability to meet interest
obligations of the current year.
Should be generally greater than 1
Indicates ability to meet interest
obligations of the current year.
Should be generally greater than 1
Indicates ability to pay dividend on
preference share capital
Significance
Ability to generate sales per rupee of
long term investment. The higher
the turnover ratio the better is
Ability to generate sales per rupee of
Fixed Asset
Ability to generate sales per rupee of
Fixed Assets
D. TURNOVER / ACTIVITY / PERFORMANCE RATIOS
Indicates how fast inventory is used
/ Sold
A higher turnover ratio generally
indicates fast moving material while
low ratio may mean dead or
excessive stock.
Indicates the WIP movement
/Produaction cycle.
Indicates speed of collection of
credit sales
Indicates Velocity of debt payment
Significance
Indicator of basic profitability
Indicator of Operating performance
of businesss
E. PROFITABILITY RATOS BASED ON SALES
Indicator of overall profitabillity
Indicator of profitability in marginal
costing
Significance
Overall profitability of the business
for the capital employed; indicates
the return on the total capital
employed.
Comparison of ROCE with rate of
interest of debt leads to financial
leverage. If ROCE> Interest rate,
use of debt funds is justified
Profitability of Equity funds invested
in the business
Return or income per share,
whether or not distributed as
dividends
F. PROFITABILITY RATOS OWNERS VIEW POINT
Amounts of dividend distributed per
share
Net Income per rupee of average
fixed assets
Financial ratio analysis has come a long way. The US stock market and the businesses in USA
are superb because of the transparency offered to investors.
It is not perfect, but compared to the rest of the world, the access to financial statements
and thus the variety of financial ratios that you can crunch is world class.
With that, I want to go through20 balance sheet ratiosto help you determine the financial
health of a company. These balance sheet ratios can be applied to both the public and
private sector.
You will note that most of these balance sheet ratios are basic, which makes it easy to
calculation. Simple ratios and ideas are often the best, overlooked and forgotten.
Now, lets get started on the balance sheet ratios refresher.
A Refresher on Balance Sheet Ratios
The Balance Sheet
Solvency Ratios
Solvency Ratios are quick and easy to calculate and easy to interpret.
The objective is to see whether a company has enough cash, assets and low debt to continue
operations without running into financial trouble.
Quick Ratio
Quick Ratio = (Current Assets Inventories) / Current Liabilities
The quick ratio measures a companys ability to meet its short-term obligations with its most
liquid assets. The higher the quick ratio,thebetter the position of thecompany.
Current Ratio
Current Ratio= Current Assets / Current Liabilities
An even simpler variant to the quick ratio and is used to determine the companys ability to
pay back its short term liabilities. Youll see this balance sheet ratio everywhere.
If the ratio is below 1, it raises a warning sign as to whether the company is able to pay its
short term obligations when due. It doesnt mean the company will go bankrupt, but is
something that has to be looked at. If a company has a low current ratio year after year, it
could be a characteristic of the industry where companies operate and high debt levels.
Debt/Equity Ratios
Total Debt/Equity Ratio =Total Liabilities / Shareholders Equity
Long Term Debt/Equity Ratio =Long Term Debt / Shareholders Equity
Short Term Debt/Equity Ratio =Short Term Debt / Shareholders Equity
There are different variations of the debt to equity ratios, but the objective of these financial
ratios is to determine how a company has been financing its growth.
A high ratio means that the company has been growing due to debt. Not all debt is bad, but
if the number is exceedingly high, remember that the company has to pay off the loan as
well as interest payments.
An important factor to consider then is to determine whether the returns generated from
the debt exceeds the cost of debt (i.e. interest).
Activity Ratios
Activity financial ratios measure how well a company is able to convert its assets in the
balance sheet into cash or sales. By analyzing the activity ratios, you can see how efficient
and well run a company is.
These financial metrics arent just for the company, but also measures the people behind the
business and how well they are running the show.
Days Sales Outstanding (DSO)
Days Sales Outstanding= (Receivables/ Revenue) x 365
Cash is king and a business capable of converting its receivables into cash quickly is a great
sign of health and efficiency.
A lowDSO number means that it takes a company fewer days to collect its accounts
receivable.A high DSO numbershows that a company is sellingits product to customers on
credit and taking longer to collectmoney.
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Days Inventory Outstanding (DIO)
Days Inventory Outstanding= (Inventory / COGS) x 365
This financial ratio is used to measure the average number of days a company holds
inventory before selling it.
This ratio is industry specific and should be used to compare competitors. A company like
Boeing will have vastly different DIO than a company like Amazon where inventory turnover
is high.
Days Payable Outstanding (DPO)
Days Payable Outstanding= (Accounts Payable / COGS) x 365
Days Payable Outstanding shows the time in days a business has to pay back its creditors. On
the flip side, it also shows how long the company can utilize the cash before paying it back.
The longer a company can delay payments, the better.
Cash Conversion Cycle
Cash Conversion Cycle = DIO + DSO DPO
Putting DIO, DSO and DPO together, you get the cash conversion cycle.
Theentire cash conversion cycle is a measure of management effectiveness. The lower the
better, and a great way to compare competitors.
Turnover Ratios
Receivables Turnover = Revenue / Average Accounts Receivables
The receivables turnover ratio is one that is categorized as an activity ratio because it
measures the companys effectiveness in collecting its credit sales.
Inventory Turnover = COGS / Average of Inventory
Inventory is money. It costs money to buy, it costs money to just hold it because it takes up
a lot of overhead if it isnt cleared out. You waste shelf space, the product gets old and it may
have to be sold at a fraction of the price just to get rid of it.
Inventory turnover is important for companies with physical products and is best used to
compare against peers. After all, the inventory turnover for a retailer like Wal-Mart is going
to be very different to a car company like Ford.
Average Age of Inventory (Days)
Average Age of Inventory =Average of Inventory / Revenue
Average age of inventory is just the inverse of Inventory Turnover.
Ive separated the two because it is easier to visualize the inventory age in days. Lets say
that the inventory turnover for Safeway is 10. But it just makes it easier to visualize the
inventory when it is described as 36.5 days instead of a turnover ratio of 10.
Intangibles to Book Value Ratio
This balance sheet metric is helpful in checking the quality, as well as the health.
Unless a company holds a lot of valuable intellectual property or well known brands, I like to
see intangibles kept low. This is a simple balance sheet analysis to show how of the company
is built on intangibles.
Intangibles to Book Value = Intangibles / Book Value
Inventory to Sales Ratio
Inventory to Sales = Inventory / Revenue
A rather simple and less used ratio. It is mostly useful when you track it year over year or
every quarter.
The objective is to see how inventory is being managed as it will signal potential problems
with cash flow.
An increase in the inventory to sales ratio can indicate that
your investment in inventory is growing more rapidly than sales
or sales are dropping
Vice versa, if the inventory to sales ratio drops, it could mean that
your investment in inventory is shrinking in relation to sales
sales are increasing
This is a high level balance sheet ratio but it will point you in the right direction when you
need to dive deeper into inventory trends.
Capital Structure Ratios
Capital structure is looking at the companys debt and equity. The following ratios all help to
show you how much a company is using debt to run the business.
These are easy balance sheet ratios to understand and offer a quick check for red flags.
LT-Debt as % of Invested Capital = Long Term Debt / Invested Capital
ST-Debt as % of Invested Capital =Short Term Debt / Invested Capital
where Invested Capital = Shareholders Equity + Total Liabilities Current Liabilities Excess
Cash
Debt to Equity Ratios
Watch how these ratios have trended in order to understand whether the company is in a
difficult situation or not. If a company operates on high leverage and has maintained a high
debt ratio, it is not as alarming as a company with a low debt ratio suddenly showing a spike
in the debt ratio.
LT-Debt to Total Debt = Long Term Debt / Total Debt
The long term debt ratio is an indicator that the company does not have enough cash to run
future operations. Look into the deal for the debt, what the interest payments are, what
level of operation the company has to achieve in order to remain within the debt covenant.
ST-Debt to Total Debt =Short Term Debt / Total Debt
If the short term debt ratio is high, this is a big warning sign. The debt payment is coming due
and has to be re-negotiated or paid off with a new loan.
There are situations where a high short term debt ratio will cause high levels of uncertainty
and the stock to sell off.
Total Liabilities to Total Assets = Total Liabilities / Total Assets
A broad ratio to show the level of liabilities on the balance sheet compared to the assets.
Price to Working Capital = Price / Working Capital per Share
where Working Capital = Current Assets Current Liabilities
Working capital is the absolute lifeblood of a company. Most fast growing and successful
businesses die due to a lack of working capital. Thats why most companies went public in
the first place; to get more working capital from the public market.
A high working capital ratio shows whether the business can continue to operate without
troubles.
For retailers, you would want subtract inventory from the working capital equation to get a
better picture.
Read more:http://www.oldschoolvalue.com/blog/valuation-methods/balance-sheet-ratios/#ixzz36Oy8z9EF
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