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# 1. CURRENT RATIO: Current ratio may be defined as a relationship between current assets and current liabilities.

This ratio, also known as working capital ratio, is a measure of general liquidity and is most widely used to make the analysis of a short-term financial position or liquidity of a firm. It is calculated by dividing the total of current assets by total of the current liabilities. Thus, Current Assets Current ratio = --------------------------Current liabilities The two basic components of this ratio are: current assets and current liabilities a. Current Assets: Which mean the assets which are held for their conversion into cash with in a ear and include in followings: Cash in hand, Cash at bank, marketable securities short-term, shortterm Investments Bills Receivable, Sundry Debtors, Stocks, Work-in-Process, Prepaid Expenses. b. Current Liabilities: Which mean the liabilities which are expected to be matured within a year and include the following: Bills payable, Sundry creditors, Short-term advances, Outstanding expenses / Accrued expenses, Income-tax payable, Dividends Payable, Bank Overdraft (if not a permanent arrangement). This ratio is usually expressed as a pure ratio that is 2:1. The current ratio measures the quantity of current Assets and not their quality. ii. Quick Ratio:Quick ratio, also known as Acid Test or liquid Ratio, is a more rigorous test of liquidity than the current ratio the term 'Liquidity' refers to the ability of a firm to pay its short-term obligations as and when they become due. The two determinants of current ratio, as a measure of liquidity, are current assets and current liabilities. Current assets include inventories and prepaid expenses which are not easily convertible into cash with in a short period. Quick ratio may be defined as the relationship between quick/Liquid assets and current or liquid liabilities. Asset is said to be liquid if it can be converted into cash with in a short period without loss of value.

In that sense, cash in hand and cash at bank are the most liquid assets. The formula for calculating quick ratio is: Quick assets Quick ratio = --------------------------Current liabilities Sometimes, bank overdraft is not included in current liabilities while calculating quick or acid test ratio, on the argument that bank overdraft is generally a permanent way of financing and is not subject to be called on demand. Quick assets: Which mean those CA which can be converted into cash immediately or at a short notes without a loss of value and include the following: Cash in hand, cash at bank, Bills receivables, Sundry Debtors, Marketable Securities, Temporary Investments. Current Liabilities:Outstanding or Accrued expenses, Bills payable, sundry creditors, shortterm advances [payable shortly] Income-tax payable, Dividends payable, Bank overdraft.

The ideal quick ratio is 1:1 this ratio has a great importance to banks and financial institutions but not for trading and manufacturing concerns. Absolute Liquid Ratio:Although receivables, debtors and bills receivable are generally more liquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time. Hence, some authorities are of the opinion that absolute liquid ratio should also be calculated together with current ratio and acid test ratio so as to exclude even receivables from the current assets and find out the absolute liquid asset. Absolute liquid assets Absolute Liquid Ratio = --------------------------------------------Current liabilities Absolute Liquid Ratio:It includes cash in hand, cash at bank, marketable, securities or temporary investments. The acceptable norm for this ratio is 50% or 5:lor l:2that is worth absolute liquid assets are considered adequate to pay Rs 2 worth current liabilities in time as all; the creditors are not expected to demand cash at the same time and then cash may also be realized form debtors and inventories. EFFICIENCY/ACTIVITY RATIOS: Funds are invested in various assets in a business to make sales and earn profits. The efficiency with which assets are managed directly affect the volume of sales. The better the management of assets, the larger is the amount of sales and the profits; Activity ratios

measure the efficiency or effectiveness with which a firm manages its resources or assets. These ratios are also called TURNOVER RATIOS because they indicate the speed with which assets are converted or turned over into sales. 1. Inventory/Stock Turnover Ratio:-Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirement so the business. But the level of inventory should neither be too high nor too low. Inventory turnover ratio also know as stock velocity is normally calculated as sales/Average inventory or cost of goods sold/average inventory. It would indicate whether inventory has been efficiently used or not. The purpose is to see whether only the required minimum funds have been locked up in inventory. I.T.R. indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. The formula for calculating I.T.R. is: Cost of Goods Sold Inventory Turnover Ratio = Average Inventory at cost = ---------------------------------Average Inventory at cost Opening stock + closing stock 2. Debtors Turnover Ratio :A Concern may sell goods on cash as well as on credit. Credit is one of the important elements of sales promotion. The debtor's turnover ratio is a test of the liquidity of the debtors of a firm . This ratio indicates the velocity of debt collection of a firm. It indicates the number of times average debtors (Receivables) are turned over during a year, thus: Debtors (Receivables) Turnover Ratio = Annual Net credit Sales ---------------------------Average Trade debtors = No of times Trade debtors = Sundry Debtors +Bills Receivables & Accounts Receivables. Average Trade debtors = Opening Trade debtor +Closing Trade Debtors --------------------------------------------------------------2 But when the information about opening and closing balance of trade debtors and credit sales is not available, then the Debtors Turnover Ratio can be calculated by Debtors Turnover Ratio = Total Sales ----------------------

Debtors Current Asset Turnover Ratio :This ratio attempts to measure the utilization and effectiveness of the use of current assets. It is the ratio between cost of sales or sales and current assets. Current Assets Turnover Ratio = Net Sales -----------------------Current Assets ratio is very significant for non-manufacturing concern or for the concerns using lesser amount of fixed assets. Adequate light may be thrown on the basis of this ratio on the efficiency in the use of current assets or state of over-investment and under-investment in current assents. It may be pointed out that over or under-investment in current assets may indirectly effect the solvency position of the concern also. 4. Fixed Assets Turnover Ratio :This ratio gives an idea about adequate investment or over-investment or underinvestment in fixed assets. As a rule, over investments in unprofitable fixed assets should be avoided to the possible extent. Under investment is also equally bad affecting unfavorably the operating costs and consequently the profit. This ratio assumes added significance in the case of manufacturing concern. An increase in this ratio is in indicator of efficiency in work performance and a decrease in this ratio speaks of unwise and improper investment in fixed assets. Fixed Assets Turnover Ratio = Net Sales ----------------------Fixed Assets This ratio is usually expressed as 'n' number of times. Total Assets Turnover Ratio: This ratio establishes a relationship between total assets of the concern and sales of the concern. Total assets are taken at the value shown at the end of the year as a whole. Net Sales Total Assets Turnover Ratio = ----------------------Total Assets Creditors Turnover Ratio:The analysis for creditors turnover ratio is basically the same as that of debtors turnover ratio except that in place of trade debtors, the trade creditors are taken as one of the components of the ratio and in place of average daily sales ,

average daily purchases are taken as the other Component of the ratio. Same as debtors turnover ratio, creditors turnover ratio can be calculated in two forms. Net Credit Purchases Creditors Turnover Ratio = -------------------------------Average Trade Creditors III. Solvency Ratios:The term 'Solvency' refers to the ability of a concern to meet its long term obligations. The long -term indebtedness of a firm includes debenture holders, financial institution providing medium and long-term loans and other creditors selling goods on installment basis. l.Debt to Total Capital Ratio:This ratio is a variation of the debt equity ratio and gives the similar indications as the debt equity ratio. In this ratio the outside long term liabilities are related to the total capitalization of the firm. This ratio computed as follows: Total Debt Debt to total capital Ratio = -------------------------Capital Employed Where Capital Employed =Share Capital + Reserves and Surplus +Undistributed profits Long term Loans -Fictitious Assets -Non -business Assets. 2. Debt Equity Ratio:This ratio establishes a relationship between the long term debts and share holders funds. It to be measure the relative proportion of debt and equity in financing the assets of a firm. It is calculated as follows: Long Term Debt Debt equity Ratio = ------------------------------Share holders funds Where Long term Debt =Debentures, Bonds, Long term Loans from Financial Institutions. 3.Proprietory Ratio:This ratio establishes the relationship between share holders funds and total assets of the firm. The ratio of proprietary funds to total funds is an important ratio for determining long-term solvency of a firm. The components of this ratio are share holders funds and total assets. Share Holders Funds Proprietary ratio = ------------------------------Total Assets

Shareholder's funds:The share holders funds are equity share capital, preference share capital, undistributed profits, reserves and surplus out of this amount, accumulated losses should be deducted. Total Assets:The total assets on the other hand denote total resources of the concern. IV.PROFITABILITY RATIOS:Profit earning is the main objective of the business concern. At the same time, it is the effort of every concern to earn maximum profit not only in absolute but also in relative to the terms, that is profit should be maximum in relation to the capital employed and entrepreneurial risks. An ability to earn maximum use of availability. The status of profitability depends on the quantum of sales, nature of casts and proper use of financial resources. Many ratios are being used in such a type of analysis. 1. 2. 3. 4. 5. Gross Profit Ratio Operating Profit Ratio Net Profit Ratio Operating Expense Ratio \

1.Gross Profit Ratio: Gross profit ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. Thus, it is calculated by Gross Profit x 100 Gross Profit Ratio = 2. Operating profit Ratio : ----------------------------Net sales The operating profit ratio shows the percentage of pure profit earned on every one rupee of sales made. It is computed as follows: Operating Profit x 100 Operating Profit Ratio = 3. ----------------------------Net Sales Net Profit Ratio ;Net profit ratio establishes a relationship between net profit after tax and net sales. And indicates the efficiency of the management in manufacturing, selling, administrating and other activities of the firm. This ratio is the overall measure of firms profitability and is calculated as: Net Profit after tax x 100 Net Profit Ratio= -----------------------------

Net Sale 4. Operating Expense Ratio:This ratio express the relationship between the operating expense (administrative expenses + Selling expenses) and the sales. It may be computed as follows: Operating Expenses x 100 Operating expenses Ratio = ----------------------------Net sales 6) Ratio of Current Assets to proprietors funds:The ratio is calculated by dividing the total of current assets by the amount of share holders funds. Ratio of CURRENT ASETS = CURRENT ASSETS / SHARE HOLDERS FUNDS To PROPRIETOR'S FUNDS 7) Ratio of Fixed Assets to Funded debts: The ratio measures the relationship between fixed assets and the funded debt and is a very useful to the long-term creditors the ratio can be calculated as below RATIO OF FIXED ASSETS = FIXED ASSETS / FUNDED DEBT 8) RATIO OF CURRENT LIABILITIES TO PROPRIOTORS FUNDS:The Ratio of current liabilities to proprietors funds establishes the relationship between current liabilities and the proprietors funds and indicates the amount of long-term funds raised by the proprietors against short-term borrowings. RATIO OF CURRENT LIABILITIES TO PROPRIETORS FUNDS = CURRENT LIABILITIES / SHARE HOLDERS FUNDS

CURRENT RATIO= CURRENT ASSETS / CURRENT LIABILITIES. ABSOLUTE LIQUID RATIO=ABSOLUTE LIQUID ASSETS / CURRENT LIABILITIES. RATIO=QUICK ASSETS / CURRENT LIABILITIES. DEBT EQUITY RATIO = LONG TERM DEBT / NET WORTH. PROPRIETARY RATIO = SHARE HOLDERS FUNDS / TOTAL ASSETS. NET PROFIT RATIO = NET PROFIT AFTER TAX X 100 / SALES.

OPERATING RATIO = OPERATING COST X 100 / SALES . OPERATINGCOST = COST OF GOODS SOLD + OPERATING EXPENSES. INVENTORY TURNOVER RATIO = COST OF GOODS SOLD / AVERAGE INVENTORY. COST OF GOODS SOLD = MINIMIZING & MANUFACTURING EXPENSES + ACCRETION DESERTION TO STOCK INCOME.

CAPITAL GEAERING RATIO = SECURED LOANS + UNSECURED LOANS/ EQUITY SHARE HOLDERS FUNDS

GROSS PROFIT = NET SALES - COST OF GOODS SOLD NET SALES = SALES EXCISE DUTy