Académique Documents
Professionnel Documents
Culture Documents
A) Traditional Classification
1. Revenue Statement ratios :The Ratios computed o the basis of the items taken from the revenue statement. i
.e. Profit & Loss Account. Eg. Net Profit Ratio.
2. Balance Sheet Ratios :When two items or group of items appearing in the balance sheet are compared the
ratios so obtained is a Balance sheet ratio. Eg. Current Ratio
3. Composite Ratios :A ratio showing relationship between one item taken from balance Sheet and anoth
er taken from Profit and loss Account is a composite ratio or a combined ratio k
nown as Balance sheet and revenue statement ratio. Eg. Return on capital Employe
d ratio.
B) Functional Classification
1. Liquidity Ratios :This ratios indicate the position of liquidity . They are computed to ascertain
whether the company is capable of meeting its short term obligations from the sh
ort term resources.
(a) Current Ratio
(b) Liquidity Ratio
(c ) Acid-Test Ratio
2. Profitability Ratios :The ratios that are designed to indicate the profitability of the business are g
rouped into the category of profitability ratios.
(a) Gross Profit Ratio
(b) Net Profit Ratio
(c ) Expenses Ratio
(d) Operating Ratio
(e) Return On Capital Employed Ratio
(f) Return on Share holders Funds
(g) Return On Investment
(h) Return on Equity Share holders Funds
(i) Earnings Per Share
3. Leverage Ratios :The Composition of capital of business and the proportion of owners Capital pro
vided by the outsiders are reflected by leverage Ratios.
(a) Proprietary Ratio
(b) Debt Equity Ratio
(c) Capital Gearing Ratio
(d) Long term Funds To Fixed Assets Ratio
(e) Coverage ratios
(1) Interest Coverage ratio
(2) Total Coverage Ratio
4. Activity Or Efficiency Ratios :These are the ratios showing the effectiveness with the resources of the busines
Current Assets
Current Liabilities
= Cash Balance + Bank Balance + Stock + Debtors + Bills
Receivable + Prepaid Expense + Investments
readily
Convertible into cash + Loans And Advances
+ Non Trading
Investments + Prepaid Expense + Accrued In
come
Current Liabilities= Creditors + Bills Payable + Bank Overdraft + Unclaimed
Dividend + Provision For Taxation + Propo
sed Dividend +
Outstanding Expense
Ideal Ratio :- 1.33 : 1
2.) Liquid Ratio =
Liquid Assets
Liquid Liabilities
Where,
Liquid Assets
= Current Assets
Stock in Trade
Bank Overdraft
Quick Assets
Liquid Liabilities
Where ,
Quick Assets = Cash Balance + Bank Balance + readily Marketable
Securities
( Does Not Include debtors and S
tock )
Ideal Ratio 0.5 : 1
( It is also known as Absolute Liquidi
ty Ratio)
Profitability Ratios
1.) Gross Profit ratio =
Gross Profit
? 100
Sales
Where,
Gross Profit = Sales
? 100
Net Sales
Where,
COGS = Opening Stock + Purchase + Purchase Expense
Closing Stock
Expenses
?
Sales
100
Administrative Expense
Financial Expense
?
?
100
100
Sales
4.) Net Profit ratio =
Net Profit
? 100
Sales
Where ,
Generally for computing the net profit ratio only operating profit is consider.
Non-Operating income and non operating expenses are excluded such
as income from investment, loss on sale of fix asset etc. In short only profit
and loss from operating activity that is from main activity is computed.
Profitability Ratios Based on Investment
5.) Return On Investment
00
Net Profit
Total Investment
Where,
Total Investment = Working Capital + Non Current Assets (Fixed Asset)
Here Total investment includes all assets Except Fictitious Assets are not inclu
ded in fixed Asset.
6.) Return On Capital Employed =
100
Net Profit
?
Capital Employed
Where,
Capital Employed = Share Capital + Reserves + Long Term Loan
Net Profit
?
Share Holders Fu
nd
Where,
Share Holders Fund = Share Capital (Equity + Preference) + Reserves
Net Profit = Profit After Tax (PAT)
8.) Return on Equity Shareholders Fund =
? 100
Net Profit
Preference Dividend
O
Net Profit
Preference Dividend
Pa
Preference Dividend
Number of Equity Shares
Leverage Ratios
1.) Proprietary Ratio = Capital =
Proprietor s Fund
nd
If Without Percentage Then Remove 100 from the Computed value.
Where,
? 100
Total Fu
Here Only Long term Debts are consider for computation such as Debenture + Long
term Liabilities + Loans.
3.) Total Debt Equity Ratio =
Total Debt
Share Holders Fund / Owner
s Fund
Here Total Liabilities are consider such as long term + short term.
4.) Gearing Ratio =
Where ,
Long Term Funds = Share Capital + Reserves + Long Term Liability
Ideal Ratio 1 : 1 or higher.
6.) Coverage Ratios :(a) Interest Coverage Ratio = Profit Before Interest And Tax ( EBIT )
Interest
The Higher the ratio, the more sound is the financial position of the company.
(b) Total Coverage Ratio =
The Higher the ratio, the more sound is the financial position of the company.
Where ,
Average Stock = Opening Stock + Closing Stock
2
Note :(a) If details About the Monthly stock are provided then average stock will be c
omputed on monthly basis which will give a better turnover ratio.
(b) If COGS is not available the ratio will be computed on sales basis that is t
ake sales in place of COGS and in place of average stock take closing stock.
(c) Higher the ratio the more profitable the business would be.
2.) Debtors Velocity Or Debtors Ratio =
? 365/360
Credit Sales
360 / 365
Credit Sales
Average Debtors
Average Debtors = Opening Debtors & Bills Receivable + Closing Debtors & Bills R
eceivable
2
? 365/360
Average Daily Purchase / Credit Purc
hase
Where ,
Average Daily Purchase =
Credit Purchase
360 / 365
Credit Purchase
Average Creditors
Average Debtors = Opening Debtors & Bills Receivable + Closing Debtors & Bills R
eceivable
2
7.) Creditors Ratio =
360 / 365
Creditors Turnover
Sales
Fixed Assets
Sales
Total Assets
pal + Interest
Where,
Profit = Profit After Tax + Depreciation and other Non cash Adjustments+
Interest
Payable On Loan
Ratio Analysis By Ankit Jain
Sho