Ratio

LIQUIDITY RATIOS

a) Current Ratio = Current Assets / Current Liabilities

As a conventional rule, a current ratio of 2:1 is considered satisfactory

b) Quick Ratio = Liquid Assets* /Current Liabilities

*inventories and prepaid expenses are excluded

Liquid ratio of 1:1 is, normally, considered satisfactory

a) Cash Ratio = Cash & Bank + Short-term Securities/ Current Liabilities

Cash ratio of 1:2 is considered acceptable

LEVERAGE RATIOS

a) Debt-Equity Ratio = Total Debt / Net Worth* or Long-term Debt /Net Worth*

* Net Worth = Equity Share Capital + Preference Share Capital + Reserves and
Surplus

Total debt to net worth of 1:1 is considered satisfactory, as a thumb rule.

b) Total Debt Ratio = Total Debt /Total Assets = Long Term Debts + Current
liabilities /Total Assets

A higher ratio is a threat to the solvency of the firm. A lower ratio is an indication that
the firm may be missing the available opportunities to improve profitability.

c) Interest coverage ratio = EBDIT / Interest

ACTIVITY RATIOS

a) Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory at Cost

Average inventory = Opening Stock + Closing Stock / 2

Cost of Goods Sold = Opening Stock + Purchases – Closing Stock

= Net Sales – Gross Profit

 b) Days of Inventory Holdings = 360 / Inventory Turnover ratio

c) Debtors Turnover Ratio = Credit Sales / Average Debtors

d) Collection Period = 360* / Debtors' Turnover Ratio

e) Total Assets Turnover Ratio: = Sales /Total Assets

f) Total Assets Turnover Ratio: = Sales / Total Assets

g) Creditors’ Turnover Ratio = Credit Purchases / Average Trade Creditors +

Average Bills Payable

h) Payment Period = 360 / Creditors' Turnover Ratio

PROFITABILITY RATIOS

Profitability Ratios Based on Sales

a) Gross Profit Ratio = Sales–Cost of Goods Sold / sales

= Gross Profit / Sales

b) Net Profit Ratio = Profit After Tax / Sales

c) Operating Expenses Ratio = Operating Expense / Sales

Profitability Ratios Based on Investment

1) Return on Investment

a) ROI = EBIT / Total Assets

2) Return on Capital Employed

ROCE = EBIT / Capital Employed

Capital Employed = Net Worth + Long-term Borrowings

 OR

= Net Fixed Assets + Current Assets – Current Liabilities

ROCE = EBIT(1–T) / Capital Employed

The above ratio indicates the overall efficiency of business, after tax.

3 ) Return on Equity = Profit after Tax – Preference Dividend / Equity Shareholders'

funds

4 ) Earnings per Equity Share

EPS = Net Profit After Tax – Preference Dividend / Number of Equity Shares Outstanding

The total wealth of a shareholder, before and after bonus issue, immediately, remains the
same.

5 ) Dividends per Share (DPS):

DPS = Total Dividend Distributed to Equity Shareholders / Number of Equity

Shares Outstanding

6 ) Dividend Pay-out Ratio or Pay-out Ratio

Pay-out Ratio = Dividend per Equity Share / Earnings per Equity Share

7) Dividend Yield Ratio

Dividend Yield Ratio = Dividend per Equity Share /Market Value per Equity
Share

8) Price Earnings Ratio

Price Earnings Ratio = Market Price per Equity Share / Earning per Equity
Share

9) Capital Gearing Ratio

Capital Gearing Ratio = (Preference Share Capital + Debentures + Long-term

Loan) / (Equity Share Capital + Reserves and Surplus)

10) Proprietary Ratio = Shareholders’ Funds / Total Assets

11) Operating Profit Ratio = Op. Profit / Net Sales

12. Debtors Ratio = Debtors + Bills receivable / Credit sales

13. Creditors Ratio = Creditors + Bills payable / Credit Purchase

** If credit purchase could not find out at that point Cost of Goods sold consider Credit purchase

14. Rate of Return on Capital Employed = EBIT / Capital employed

Where CE = Eq Sh. Cap. + Pref. Sh. Cap. + Reserves & Surplus + Debenture + Long Term Loan –
Fictitious Assets

15. Rate of Return on Share holders Fund = PAT / SHF

Where SHF = Eq. Sh. Cap. + Pref. Sh. Cap. + Reserves & Surplus – Fictitious Assets

16.0 Rate of return on Equity Shareholders Fund = PAT – Pref. Div. / ESHF

ESHF = Eq. Sh. Cap. + Reserves & Surplus –Fictitious Assets