SUBMITTED BY:

SUBMITTED TO:

MS. ROHIT KUMAR SINGH

MFM-3

MS. SHIKHA GUPTA

CC- FMS

FINANCIAL RATIOS

Liquidity Measurement Ratios: Current Ratio

The current ratio is a popular financial ratio used to test a
company's liquidity (also referred to as its current or working
capital position) by deriving the proportion of current assets available to
cover current liabilities.
The concept behind this ratio is to ascertain whether a company's shortterm assets (cash, cash equivalents, marketable securities, receivables
and inventory) are readily available to pay off its short-term liabilities
(notes payable, current portion of term debt, payables, accrued expenses
and taxes). In theory, the higher the current ratio, the better.
Formula:

Liquidity Measurement Ratios: Quick Ratio

The quick ratio - aka the quick assets ratio or the acid-test ratio - is a
liquidity indicator that further refines the current ratio by measuring the
amount of the most liquid current assets there are to cover current
liabilities. The quick ratio is more conservative than the current ratio
because it excludes inventory and other current assets, which are more
difficult to turn into cash. Therefore, a higher ratio means a more liquid
current position.
Formula:

Liquidity Measurement Ratios: Cash Ratio

The cash ratio is an indicator of a company's liquidity that further refines
both the current ratio and the quick ratio by measuring the amount of
cash, cash equivalents or invested funds there are in current assets to
cover current liabilities.
Formula:

Liquidity Measurement Ratios: Cash Conversion Cycle

This liquidity metric expresses the length of time (in days) that a company
uses to sell inventory, collect receivables and pay its accounts payable.
The cash conversion cycle (CCC) measures the number of days a
company's cash is tied up in the the production and sales process of its
operations and the benefit it gets from payment terms from its creditors.
The shorter this cycle, the more liquid the company's working capital
position is. The CCC is also known as the "cash" or "operating" cycle.
Formula:

ACTIVITY RATIO
Receivables Turnover Ratio
An accounting measure used to quantify a firm's effectiveness in
extending credit and in collecting debts on that credit. The receivables
turnover ratio is an activity ratio measuring how efficiently a firm uses
its assets.
Receivables turnover ratio can be calculated by dividing the net value of
credit sales during a given period by the average accounts
receivable during the same period. Average accounts receivable can be
calculated by adding the value of accounts receivable at the beginning of
the desired period to their value at the end of the period and dividing the
sum by two.
The method for calculating receivables turnover ratio can be represented
with the following formula:

'Acid-Test Ratio'

The acid-test ratio is a strong indicator of whether a firm has sufficient

short-term assets to cover its immediate liabilities. Commonly known as
the quick ratio, this metric is more robust than the current ratio, also
known as the working capital ratio, since it ignores illiquid assets such
as inventory.
Calculated by:

'Debt Ratio'
A financial ratio that measures the extent of a companys or
consumers leverage. The debt ratio is defined as the ratio of total longterm and short-term debt to total assets, expressed as a decimal or
percentage. It can be interpreted as the proportion of a companys assets
that are financed by debt.

Profitability Ratios

Gross Profit Ratio

Gross profit ratio as a percentage of revenue from operations is computed
to have an idea about gross margin. It is computed as follows: Gross Profit
Ratio = Gross Profit/Net Revenue of Operations 100

Operating Ratio
It is computed to analyse cost of operation in relation to revenue from
operations. It is calculated as follows: Operating Ratio = (Cost of Revenue
from Operations + Operating Expenses)/ Net Revenue from Operations
100

Operating Profit Ratio

It is calculated to reveal operating margin. It may be computed directly or
as a residual of operating ratio. Operating Profit Ratio = 100 Operating
Ratio Alternatively, it is calculated as under: Operating Profit Ratio =

Operating Profit/ Revenue from Operations 100 Where Operating Profit

= Revenue from Operations Operating Cost

Net Profit Ratio

Net profit ratio is based on all inclusive concept of profit. It relates
revenue from operations to net profit after operational as well as nonoperational expenses and incomes. It is calculated as under: Net Profit
Ratio = Net profit/Revenue from Operations 100