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1. ‘Statement of Profit and Loss Ratios: A ratio of two variables from the
statement of profit and loss is known as statement of profit and loss
ratio. For example, ratio of gross profit to revenue from operations is
known as gross profit ratio. It is calculated using both figures from
the statement of profit and loss.
2. Balance Sheet Ratios: In case both variables are from the balance
sheet, it is classified as balance sheet ratios. For example, ratio of
current assets to current liabilities known as current ratio. It is
calculated using both figures from balance sheet.
3. Composite Ratios: If a ratio is computed with one variable from the
statement of profit and loss and another variable from the balance
sheet, it is called composite ratio. For example, ratio of credit revenue
from operations to trade receivables (known as trade receivables
turnover ratio) is calculated using one figure from the statement of
profit and loss (credit revenue from operations) and another figure
(trade receivables) from the balance sheet.
where:
Shareholders’ Funds (Equity) = Share capital + Reserves and Surplus +
Money received against share warrants
Non-current liabilities
Working Capital = Current Assets – Current Liabilities
The Debt to capital employed ratio refers to the ratio of long-term debt to the
total of external and internal funds (capital employed or net assets). It is
computed as follows:
Debt to Capital Employed Ratio = Long-term Debt/Capital Employed (or Net Assets)
The higher ratio indicates that assets have been mainly financed by owners
funds and the long-term loans is adequately covered by assets.
It is better to take the net assets (capital employed) instead of total assets for
computing this ratio also. It is observed that in that case, the ratio is the
reciprocal of the debt to capital employed ratio.
Significance: This ratio primarily indicates the rate of external funds in financing
the assets and the extent of coverage of their debts are covered by assets.