Dr. D.

Y PATIL DEPARTMENT OF BUSINESS

MANAGEMENT
PADMASHREE Dr. D.Y. PATIL UNIVERSITY

Ratio analysis & Its Advantages & Disadvantages

SUBMITTED TO: - SUBMITTED BY: -

Professor Roopali Patil Sonal Chitte MBA – IB –
29
It’s a tool which enables the banker or
lender to arrive at the following factors :
 Liquidity position
 Profitability
 Solvency
 Financial Stability
 Quality of the Management
 Safety & Security of the loans & advances
to be or already been provided
As Percentage - such as 25% or
50% . For example if net profit is
Rs.25,000/- and the sales is Rs.1,00,000/-
then the net profit can be said to be 25%
of the sales.
 As Proportion - The above figures may
be expressed in terms of the relationship
between net profit to sales as 1 : 4.
 As Pure Number /Times - The same can
also be expressed in an alternatively way
such as the sale is 4 times of the net profit
or profit is 1/4th of the sales.
 Balance Sheet P&L Ratio or Balance Sheet
Ratio Income/Revenue and Profit & Loss
Statement Ratio Ratio

Financial Ratio Operating Ratio Composite Ratio

Current Ratio Gross Profit Ratio Fixed Asset
Quick Asset Ratio Operating Ratio Turnover Ratio,
Proprietary Ratio Expense Ratio Return on Total
Debt Equity Ratio Net profit Ratio Resources Ratio,
Stock Turnover Ratio Return on Own
Funds Ratio,
Earning per Share
Ratio, Debtors’
Turnover Ratio,
 LIABILITIES ASSETS
NET WORTH/EQUITY/OWNED FUNDS FIXED ASSETS : LAND & BUILDING,
Share Capital/Partner’s Capital/Paid upPLANT & MACHINERIES
Capital/ Owners Funds Original Value Less Depreciation
Reserves ( General, Capital, Revaluation &Net Value or Book Value or Written down value
Other Reserves)
Credit Balance in P&L A/c
LONG TERM LIABILITIES/BORROWEDNON CURRENT ASSETS
FUNDS : Term Loans (Banks & Institutions) Investments in quoted shares & securities
Debentures/Bonds, Unsecured Loans, FixedOld stocks or old/disputed book debts
Deposits, Other Long Term Liabilities Long Term Security Deposits
Other Misc. assets which are not current or
fixed in nature
CURRENT LIABILTIES CURRENT ASSETS : Cash & Bank Balance,
Bank Working Capital Limits such asMarketable/quoted Govt. or other securities,
CC/OD/Bills/Export Credit Book Debts/Sundry Debtors, Bills Receivables,
Sundry /Trade Creditors/Creditors/BillsStocks & inventory (RM,SIP,FG) Stores &
Payable, Short duration loans or deposits Spares, Advance Payment of Taxes, Prepaid
Expenses payable & provisions against variousexpenses, Loans and Advances recoverable
items within 12 months
INTANGIBLE ASSETS
Patent, Goodwill, Debit balance in P&L A/c,
Preliminary or Preoperative expenses
 Liabilities have Credit balance and Assets have Debit balance
 Current Liabilities are those which have either become due for payment or shall fall
due for payment within 12 months from the date of Balance Sheet
 Current Assets are those which undergo change in their shape/form within 12 months.
These are also called Working Capital or Gross Working Capital
 Net Worth & Long Term Liabilities are also called Long Term Sources of Funds
 Current Liabilities are known as Short Term Sources of Funds
 Long Term Liabilities & Short Term Liabilities are also called Outside Liabilities
 Current Assets are Short Term Use of Funds
 Assets other than Current Assets are Long Term Use of Funds
 Installments of Term Loan Payable in 12 months are to be taken as Current Liability only
for Calculation of Current Ratio & Quick Ratio.
 If there is profit it shall become part of Net Worth under the head Reserves and if there
is loss it will become part of Intangible Assets
 Investments in Govt. Securities to be treated current only if these are marketable and
due. Investments in other securities are to be treated Current if they are quoted.
Investments in allied/associate/sister units or firms to be treated as Non-current.
 Bonus Shares as issued by capitalization of General reserves and as such do not affect
the Net Worth. With Rights Issue, change takes place in Net Worth and Current Ratio.
1. Current Ratio : It is the relationship between the current assets and
current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern are
Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will
be : Rs.4,00,000/Rs.2,00,000 = 2 : 1
The ideal Current Ratio preferred by Banks is 1.33 : 1

2. Net Working Capital : This is worked out as surplus of Long Term

Sources over Long Tern Uses, alternatively it is the difference of
Current Assets and Current Liabilities.
NWC = Current Assets – Current Liabilities
3. ACID TEST or QUICK RATIO : It is the ratio between
Quick Current Assets and Current Liabilities.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6

months + Quickly realizable securities such as Govt. Securities or
quickly marketable/quoted shares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets/Current

Liabilities

Example :
Cash 50,000
Debtors 1,00,000
Inventories 1,50,000 Current Liabilities
1,00,000
Total Current Assets 3,00,000

Current Ratio => 3,00,000/1,00,000

= 3:1
Quick Ratio => 1,50,000/1,00,000
4. DEBT EQUITY RATIO : It is the relationship between
borrower’s fund (Debt) and Owner’s Capital (Equity).

Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less

Intangible Assets

For instance, if the Firm is having the following :

Capital = Rs. 200 Lacs

Free Reserves & Surplus = Rs. 300 Lacs
Long Term Loans/Liabilities = Rs. 800 Lacs

Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1

5. PROPRIETARY RATIO : This ratio indicates the extent
to which Tangible Assets are financed by Owner’s Fund.
Proprietary Ratio = (Tangible Net Worth/Total
Tangible Assets) x 100
The ratio will be 100% when there is no Borrowing for
purchasing of Assets.

6. GROSS PROFIT RATIO : By comparing Gross Profit

percentage to Net Sales we can arrive at the Gross Profit
Ratio which indicates the manufacturing efficiency as well as
the pricing policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales )

x 100

Alternatively , since Gross Profit is equal to Sales minus

Cost of Goods Sold, it can also be interpreted as below :

Gross Profit Ratio = [ (Sales – Cost of goods

sold)/ Net Sales] x 100
7. OPERATING PROFIT RATIO :

It is expressed as => (Operating Profit / Net

Sales ) x 100

Higher the ratio indicates operational efficiency

8. NET PROFIT RATIO :

It is expressed as => ( Net Profit / Net Sales )

x 100

It measures overall profitability.

 9. STOCK/INVENTORY TURNOVER RATIO :

(Average Inventory/Sales) x 365 for days

(Average Inventory/Sales) x 52 for weeks
(Average Inventory/Sales) x 12 for
months

Average Inventory or Stocks = (Opening

Stock + Closing Stock)

-----------------------------------------

2
 10. DEBTORS TURNOVER RATIO : This is also
called Debtors Velocity or Average Collection Period or
Period of Credit given .

(Average Debtors/Sales ) x 365 for days

(52 for weeks &
12 for months)

11. ASSET TRUNOVER RATIO : Net

Sales/Tangible Assets

12. FIXED ASSET TURNOVER RATIO : Net

Sales /Fixed Assets

13. CURRENT ASSET TURNOVER RATIO : Net

Sales / Current Assets

14. CREDITORS TURNOVER RATIO : This is also

called Creditors Velocity Ratio, which determines the
15. RETRUN ON ASSETS : Net Profit after
Taxes/Total Assets

16. RETRUN ON CAPITAL EMPLOYED :

( Net Profit before Interest & Tax / Average

Capital Employed) x 100

Average Capital Employed is the average of the

equity share capital and long term funds
provided by the owners and the creditors of the firm
at the beginning and end of the accounting period.
 Composite Ratio

17. RETRUN ON EQUITY CAPITAL (ROE) :

Net Profit after Taxes / Tangible
Net Worth

18.EARNING PER SHARE : EPS indicates the

quantum of net profit of the year that would be
ranking for dividend for each share of the company
being held by the equity share holders.

Net profit after Taxes and Preference

Dividend/ No. of Equity Shares

19. PRICE EARNING RATIO : PE Ratio indicates the

number of times the Earning Per Share is covered
by its market price.
20. DEBT SERVICE COVERAGE RATIO : This ratio is
one of the most important one which indicates the
ability of an enterprise to meet its liabilities by way
of payment of installments of Term Loans and
Interest thereon from out of the cash accruals and
forms the basis for fixation of the repayment
schedule in respect of the Term Loans raised for a
project. (The Ideal DSCR Ratio is considered to be
2)

PAT + Depr. + Annual Interest on Long

Term Loans & Liabilities

--------------------------------------------------------------
-------------------
Annual interest on Long Term Loans &
Liabilities + Annual Installments payable on