Ratios at a glance:

Ratio Formula Interpretation and benchmark

Current Ratio Current Assets Ability to meet current liabilities
Current Liabilities Higher the ratio better the liquidity
(1.33 is desirable) Shortfall indicates diversion of short
term fund.
Solvency Net Tangible assets Ability to repay debt from assets.
Ratio Total Outside Liabilities Higher the ratio betters the solvency.
Debt-Equity TDE= Total Outside Coverage of outside liabilities to own
Ratio Liab./Tangible Net worth/ fund. Lower the ratio higher the safety.
Equity
DE = Term Liabilities /
T. N. W.
Assets Coverage Net Block of Fixed Assets Extent to which FA covers Term
Liabilities.
Ratio Term Liability
More than 1 is desirable.
Debt-Service PAT + Dep. + Int. on Loan Debt Servicing Ability
Coverage Ratio Instal. of TL + Int. on Loan To work out repayment schedule is
desirable.
Inventory Turn Net Sales Efficiency of Inventory Management
over Ratio OR Holding Period of Inventory.
Inventory
Inventory Inventory x 365
(No. of days) Cost of goods sold
Debtor turnover Average O/S Debtors x 365 Credit policy of the unit/ firm.
Ratio (No of Average Period of the credit extended.
Credit Sales
Days)
Creditor Average O/S Creditors x 365 Ability to get goods on credit.
Ability to repay
Turnover Ratio Credit Purchase
(No. of days)
Assets Net Sales Efficient use of assets
turnover ratio. Net Operating Assets means FA + CA +
Net Operating Assets
Non CA- Investments.
Must have increasing trend.
Gross Profit Gross profit X 100 Margin available after meeting
Margin manufacturing cost.
Net Sales
Efficiency of Production and Pricing.
Net profit Net Profit After tax X 100 Net Profit margin on business.
Margin Overall efficiency of the unit.
Net Sales
Earning left for Dividend.
Dividend per Total distributable profit to Total dividend payable to per shares
shares Equity holders
No of equity shares
Return on Equity Equity Earning Measures profitability on Equity
Equity Earning=PAT–Preference
Net Worth
Dividends.
Price earnings Market Price of the share Price earning on present market value.
Ratio Earnings Per share
Break Even Fixed Cost BEP of the Unit.
analysis Unit sales price- Unit variable High BEP is risky
BEP in Qty. cost. Contribution of Profit to meet Fixed
Fixed Cost x Sales cost of the Unit.
BEP in Value Sales- Variable Cost Sales Means net Sales.
(Contribution)

Margin of Safety Sales Value - BEP Sales % of variance sustainable by the unit.
MOS Cushion available in case of variance.
Actual Sales
PAT = Profit after Tax, FA = Fixed Assets, BEP = Break Even Point,
MOS = Margin of Safety.