Ratio

Naveen Rohatgi-9867451833 SYBMS- Management accounting
MEANING
A ratio shows the relationship between two numbers. Accounting ratio shows the relationship between
two accounting figures. Ratio analysis is the process of computing and presenting the relationships
between the items in the financial statement. It is an important tool of financial analysis, because it helps
to study the financial performance and position of a concern.
Classification of ratios based on function

1. Liquidity Ratios: show the relationship between the current assets and current liabilities of the
concern. Examples are Liquid ratio and Current ratio.
2. Leverage Ratios: show the relationship between proprietor’s funds and debts used in financing
the assets of the concern. Examples are Capital gearing ratio, Debt-Equity ratio and Proprietary ratio.
These are also known as Solvency ratios.
3. Activity Ratios (also known as Turnover ratios or Productivity ratios) show the relationship
between the sales and the assets. Examples are Stock turnover ratio, Debtors turnover ratio etc.
4. Profitability ratio show the relationship between Profits and sales; for example, Operating
ratio, gross profit ratio, Operating net profit ratio, Expenses ratios etc.; or Profits and investments; for
example, Return Return on capital employed., Return on investments, Return on equity capital etc.
5. Coverage ratios show the relationship between the profit on one hand and the claims of
outsiders (dividend, interest etc.) to be paid out of such profits. Examples are Dividend payout ratio and
Debt services ratio.
Profit and loss account Ratio:

GROSS PROFIT RATIO
Meaning
This ratio compares gross profit with net sales. It is usually expressed in the form of percentage.
Formula
Gross profit = Gross Profit x 100
Net Sales
Function/Purpose
Gross profit is a profitability ratio, which shows the relationship between profits and sales. This ratio
helps to judge (i) how efficient the concern is in managing its production, purchase, selling and inventory;
(ii) how good its control is over the direct costs; (iii) how productive the concern is; and (iv) how much
amount is left to meet other expenses and earn net profit.
OPERATING RATIO
The real opportunity for success lies within the person and not in the job . 1
Meaning
Operating ratio expresses the relationship between total operating costs and net sales. It is expressed by
way of percentage .
Formula
Operating Ratio = Cost of Goods Sold + Operating Expenses x 100
Net Sales
Function/Purpose
Operating ratio indicates cost of operations. Its purpose is to measure and to ascertain the efficiency of the
management as regards operations. This ratio helps to judge (i) how efficient the concern is in controlling
its costs of production, administration, selling expenses; and (iv) how much amount out of sales revenue is
used up in carrying out the operations of the concern.
EXPENSES RATIO
Meaning
This ratio expresses the relationship between each item of expenditure and sales. It is expressed as a
percentage. Total of all Expenses ratios will be equal to operating ratio.
Formula
Expense Ratio = Expenditure x 100
Net Sales
e.g.
Cost of goods Sold ( Factory cost) = COGS × 100

Net sales
Administrative Expenses Ratio = Administrative Expenses x 100

Net Sales
Finance expenses= Finance expenses *100

Net sales
Selling Expenses Ratio = Selling Expenses x 100

Net Sales
OPERATING PROFIT RATIO
Meaning
Operating profit ratio indicates the relationship between Operating profit and the sales.
Formula
Operating Profit = Operating Profit x 100 =
Net Sales
Components
Operating profit [OP] =
1. Gross Profit
2. Less: Operating expense [OE]
Function/Purpose
Operating profit ratio is a profitability ratio, which shows the relationship between profits and sales. It
indicates profits from operations. This ratio helps to judge (i) how efficient the concern is in managing
all its operations of production, purchase, inventory, administration, selling, distribution etc.; and (ii)
how much amount is left to meet non-operating expenses and earn net profits.
NET PROFIT RATIO
Meaning
Net profit ratio indicates the relationship between net profit and the sales. It is usually
expressed in the form of a percentage.
Net Profit = Net Profit x 100

Net Sales
Balance Sheet Ratio
CURRENT RATIO
Meaning
This ratio compares the current assets with the current liabilities. It is expressed in the form of a pure ratio
e.g. 2:1
Formula
Current Ratio = Current Assets = CA
Current Liabilities CL
Function/Purpose
Current ratio is a liquidity/solvency ratio which indicates the ability of the concern to meet its short-term
liabilities. It measures the short term solvency of the concern. It is used by a creditor to judge the safely
margin available and to decide the amount and the terms of the credit. The standard ratio is 2: 1.
LIQUID RATIO
Meaning
Liquid ratio compares the quick assets with the quick liabilities. It is measures the immediate
solvency position of the company. It is also known as Quick ratio or Acid test ratio.
Formula
Liquid ratio = Quick Assets = QA
Quick Liabilities QL
Note: QA=Current Assets less Closing Stock less Prepayment
QL=Current Liabilities less Bank Overdraft less income received in advance
Note 1: Stock is excluded because it is uncertain as to when and how much it will realize.
Prepayment (pre-paid expenses, advances etc) are excluded because they cannot be converted into
cash.
Note 2: Bank overdraft is excluded because it is almost with bank and not required to be paid back
is full as long as the concern exists.
STOCK TO WORKING CAPITAL RATIO

Meaning
Formula:
Stock *100
Working capital
This ratio shows the relationship between the closing stock and the working capital. It helps to judge the
quantum of inventories in relation to the working capital of the business. It is expressed as a percentage. It
is also known as Inventory Working Capital Ratio.
If the stock to working capital is 70%. It means 70% of the working capital is blocked in assets and 30% is
blocked in other current assets.
PROPRIETORY RATIO
Meaning
Proprietory ratio compares proprietor’s funds with total assets. It is usually expressed in the form of
percentage.
Formula
Proprietory Ratio = Proprietors’ Funds or Shareholder’s Equity X 100 = PF X 100
Total Assets TA
Components
Proprietor’s Funds [PF] will include
1. Paid up Equity capital (EC)
2. Reserves & Surplus (RS) including capital reserves, revenue reserves, P & L a/c Cr.
Balance.
Less: Accumulated losses (i.e. P & L a/c Dr. Balance)

Less: Fictitious Assets like Miscellaneous Expenditure not written off.
3. Paid up Preference Capital (PC)
Thus, PF = EC + RS + PC –Misc Exp
Function/Purpose
Proprietory ratio is a solvency ratio which indicates (i) the long term solvency; and (ii) the extent
of funds invested by the owners in relation to total funds employed in the business (i.e.
capitalization).
DEBT – EQUITY RATIO

Meaning
This ratio compares the long-term debt with shareholders’ funds. It is usually expressed as a pure ratio.
Formula
Debt = Borrowed Funds = BF

Equity Proprietors’ Funds PF
Purpose/Function
Debt –equity ratio is a solvency ratio which indicates the proportion of debt and equity in financing of the
assets of the concern. Debt-equity ratio shows the (i) margin of safety for long term creditors; and (ii) the
balance between debt and equity (i.e. capitalization). If the debt equity ratio is 2.5: 1, it indicates that for
every 2.5 obtained from debt, the company has obtained Re 1 from the shareholder
CAPITAL GEARING RATIO

Meaning
The Capital Gearing ratio shows the relationship between two types of capital viz (i) Funds not bearing
fixed rate of interest and dividend- Equity capital including reserves less fictitious asset . and (ii) . Funds
and dividend bearing fixed rate of interest Preference capital and Long Term Borrowing. This is also
known as ‘Capital Structure ratio’. When the ratio is more than 1, the company is said to highly geared
and when the ratio is less than 1 the company lowly geared.
Formula= Funds bearing fixed rate of interest and dividend
Funds not bearing fixed rate of interest and dividend
Preference Share capital + Debenture + Long term Bank loan + Public deposit
Equity share capital + Reserves and Surplus – Misc expenditure
Combined Ratio:
RETURN ON CAPITAL EMPLOYED

Meaning
This ratio measures the relationship between net profit (before interest and tax) and the
capital employed to earn it. It is expressed as a percentage . This ratio is also known as
‘Return on Investment’ [ROI]
Formula
Return on Capital Employed = Profit (before Interest, Tax) x 100
Capital Employed
Components
Profit (before Interest, Tax) [PBIT] =
1. Profit before interest on long term borrowing tax & dividends.
2. Less abnormal, non-recurring items.
Capital Employed (CE) =

1 Equity capital
2. Add. Preference capital + Reserves & Surplus
3. Add. Long term Borrowings (Terms loans + Debentures)
4. Less : Fictitious assets like Miscellaneous Expenses not written off
5. Less : Profit & loss A/c. Dr. Balance (loss).
Note : Capital employed may be taken to mean Assets Employed, in which case,
Capital Employed [CE] can also be computed as

1. Fixed Assets (Less depreciation) ( including investments)
2. Add : Current Assets
3. Less : Current Liabilities
4. Exclude Fictitious assets.
Function / Purpose
Return on capital employed ratio is a profitability ratio, which shows the relationship
between profits and investments. Its purpose is to measure the overall profitability from the
total funds made available by the owners and lenders. This ratio helps to judge how efficient
the concern is in managing the funds at its disposal.
RETURN ON PROPRIETORS’ FUNDS

Meaning
This ratio measures the relationship between net profit (after interest and tax) and the
proprietors’ capital. It is usually expressed as a percentage. It is also known as Return on
Proprietor’s Equity or Return on Net Worth
Formula
Return on Proprietor’s Funds = Net Profit (after Tax) x 100 = NPAT x 100
Proprietor’s Funds PF
RETURN ON EQUITY SHAREHOLDER FUND

Meaning
This ratio measures the relationship between net profit (after interest, tax and preference
dividend) and the equity shareholders funds. It is usually expressed as a percentage.
Formula
Return on Equity Capital = NPAT – Prefrence dividend X 100 =

Equity Shareholder’s Funds
Components :
Equity shareholders’ Funds [EF] =

Equity capital [EC]
Reserves and Surplus [RS]
Less: Fictitious assets like Miscellaneous Expenses not written off
Less: Profit& Loss A/c Dr. Balance(loss)
DEBTORS TURNOVER
Meaning
This ratio shows the relationship between net credit sales and average trade debtors .It is
expressed as a times. Actual debtors turnover ratio of 6 times indicates that debtors turnover
6 times during the year
Formula
Debtors Turnover = Net Credit Sales

Avg Accounts Receivable + Avg Bills receivable
Debtors Velocity (Debt Collection Period)
Debtors velocity means the period (months or days) taken by the debtors for settlement of
their bills. It shows the number of days for which credit sales remain outstanding
= 365 days/ 12 months
Debtors Turnover Ratio
Function / Purpose
Debtors turnover ratio is a turnover ratio, which shows the relationship between credit
sales and debtors. Its purpose is to (I) calculate the speed with which debtors get settled on
an average during the year; (ii) calculate the debtors velocity to indicate the period of credit
allowed to average debtor; and (iii) judge how efficiently the debtors are managed.
CREDITORS TURNOVER RATIO
Meaning
Creditors turnover ratio shows the relationship between the net credit purchases and the
average trade creditors. Actual debtors turnover ratio of 6 times indicates that debtors
turnover 6 times during the year
Formula
Creditors Turnover = Credit Purchases = Net Credit Purchases

Accounts Payable Avg Creditors + Avg Bills Payable
Creditors Velocity (Debt Payment Period)
Creditors velocity means the period (months or days) taken by the concern to pay off its
creditors.
Credit Period Enjoyed = 365 days or 12 months

Creditors Turnover
Function / Purpose
Creditors turnover ratio is a turnover ratio, which shows the relationship between credit
purchases and creditors. Its purpose is to (i) calculate the speed with which creditors are
paid off on an average during the year; (ii) calculate the creditors velocity to indicate he
period taken by the average creditor to be paid off; and (iii) judge how efficiently the
creditors are managed.
STOCK TURNOVER RATIO

Stock turnover ratio shows the relationship between the cost of goods sold and the average
stock. This ratio is normally expressed as a ‘rate’
Formula
A. Stock Turnover Ratio = Cost of Goods Sold

Average Stock
Function/ Purpose
Stock turnover ratio is an activity ratio, which shows the relationship between sales and
stock. Its purpose is to (i) calculate the speed at which stock is being turned over into sales;
(ii) calculate the stock velocity to indicate he period taken by the average stock to be sold
out; and (iii) judge how efficiently the stocks are managed and utilized to generate sales.
Actual Ratio
For example, a Stock turnover ratio of 8, indicates that the stock is being turned into sales 8
times during the year. The Inventory cycle makes 8 rounds during the year. It also helps to
work out the Stock Holding Period (stock velocity). If the Stock turnover is 8 times, the
Stock Holding Period is 1.5 months (12 months / Stock turnover ratio = 12 / 8). This
indicates that it takes 1.5 months for the stock to be sold out. Stock velocity shows the
duration of the inventory cycle.
Interest Coverage Ratio:
This ratio indicates sufficiency or deficiency of earnings to pay interest falling due within the
period covered under profits.
Interest coverage Ratio= NPBIT

Interest
DEBT SERVICE COVERAGE RATIO
Note : Debt Service Coverage Ratio (which deals with the capacity to pay interest as well as
loan installment) is different from Debt Service Ratio
Meaning
Debt Service Coverage Ratio shows the relationship between net profits and interest +
installments payable on loans. It is expressed as a pure number. Debt Service means the
payment of interest + installments on loans. Coverage means the availability of profits for
debt servicing.
Formula
Debt Service Coverage Ratio = Net profit + Depreciation + Interest on Term loan
Interest + Installment due on loans
Function / Purpose
Debt Service Coverage Ratio (DSCR) is a type of coverage ratio. A coverage ratio shows the
relationship between the profit and the claims of outsiders to be paid out of such profits. The
purpose of DSCR is to measure the debt-servicing capacity of the company.
DIVIDEND PAYOUT RATIO
Meaning
Dividend Payout Ratio shows the relationship between the dividend paid to equity
shareholders out of the profits available to the equity shareholders. It shows how much
percentage of earnings are given as dividend
Formula
Dividend payout ratio = Dividend per share x 100
Earning per share
EARNING PER SHARE:
EPS= NPAT- Preference dividend

No of Equity shares
Earning per share is most widely used financial data. Higher the ratio indicates that the
company may pay dividend at a higher rate. It shows how much percentage of earnings are
given as dividend
Price –Earning ratio (P/E ratio) : This ratio is the market price of shares expressed as
multiple of Earning per share:
P/E ratio: Market price per share

Earnings per share
This ratio indicates the market price is how many times as the earning, A higher P/E ratio is
good. Investor should invest in the company having low P/E ratio
Dividend yield ratio Market price per share

Earning per share
It means the dividend is how percentage of market price per share
ADVANTAGES OF RATIO ANALYSIS

Advantages :
• Useful in analysis of financial statements. Ratio analysis is the most

important tool available for analysing the financial statements i.e. Profit
and Loss Account and Balance Sheet. Such analysis is made not only by
the management but also by outside parties like bankers, creditors, investors
etc.
• Useful in improving future performance. Ratio analysis indicates the
weak spots of the business. This helps management in overcoming such
weaknesses and improving the overall performance of the business in future.
• Useful in inter-firm comparison. Comparison of the performance of one
firm with another can be made only when absolute data is converted into
comparable ratios. If A firm is earning a net profit of Rs. 50,000 while
another firm B is earning Rs. 1.00,000, it does not necessarily mean that
firm B is better off unless this profit figure is converted into a ratio and then
compared.
• Useful in judging the efficiency of a business. As stated earlier,
accounting ratios help in judging the efficiency of a business. Liquidity,
solvency, profitability etc. of a business can be easily evaluated with the
help of various accounting ratios like current ratio, liquid ratio, debt-
equity ratio, net profit ratio, etc. Such an evaluation enables the
management to judge the operating efficiency of the various aspects of the
business.
• Useful in simplifying accounting figures. Complex accounting data
presented in Profit and Loss Account and Balance Sheet is simplified,
summarised and systematised with the help of ratio analysis so as to
make it easily understandable. For example, gross profit ratio, net
profit ratio, operating ratio etc. give a more easily understandable picture of
the profitability of a business than the
• Absolute figures.
Limitations of Ratio Analysis

Ratio analysis is a very useful technique. But one should be aware of its
limitations as well. The following limitations should be kept in mind white making
use of ratio analysis in interpreting the financial statements.
1. Reliability of ratios depends upon the correctness of the basic data.
Ratios obviously will be only as reliable as the basic data on which they are
based. If the balance sheet or profit and loss account figures are themselves
unreliable, it will be a mistake to put any reliance on the ratios worked out on the
basis of that Balance Sheet or Profit and Loss Account.
1. An individual ratio may by itself be meaningless. Except in a few
cases, an accounting ratio may by itself be meaningless and acquires significance
only when compared with relevant ratios of other firms or of the previous years. In
fact, ratios yield their best advantage on comparison with other similar firms; also if
ratios for a year are compared with ratios in the previous years, it will be a useful
exercise. Comparison is the essential requirement for using ratios for interpreting a
given situation in a firm or industry.
2. Ratios are not always comparable. When the ratios of two firms are
being compared, it should be remembered that different firms may follow different
accounting practices. For example, one firm may charge depreciation on straight
line basis and the other on diminishing value. Similarly, different firms may adopt
different methods of stock valuation. Such differences will not make some of the
accounting ratios strictly comparable. However, use of accounting standards makes
ratio comparable.
1. Ratios sometimes give a misleading picture. One company produces
500 units in one year and 1,000 units the next year; the progress is 100%.
Another firm produces 4,000 units in one year and 5,000 in the next year, the
progress is 25%. The second firm will appear to be less active than the first
firm, if only the rate of increase or ratio is compared. It will be much more
useful if absolute figures are also compared along with rate of increase—unless
the firms being compared are equal in all respects. In fact, one should be
extremely careful while comparing the results of one firm with those of
another firm if the two figures differ in any significant manner, say in
size, location, degree of automation or mechanisation.
2. Ratios ignore qualitative factors. Ratios are as a matter of fact, tools of
quantitative analysis. It ignores qualitative factors which sometimes are equally
or rather more important than the quantitative factors. As a result of this,
conclusions from ratio analysis may be distorted. For example, despite the
fact that credit may be granted to a customer on the basis of information
regarding the financial position of business as disclosed by certain ratios, but
the grant of credit ultimately depends upon the credit standing, reputation
and managerial ability of the customer, which cannot be expressed in the
form of ratios.
3. Change in price levels makes ratio analysis ineffective. Changes in price
levels often make comparison of figures for a number of years difficult. For
example, the ratio of sales to fixed assets in 2003 would be much higher
than in 1995 due to rising prices because fixed assets are stilt being
expressed on the basis of cost incurred a number of years ago while sates are
being expressed at their current prices.
2. There is no single standard for comparison. Ratios of a company have
meaning only when they are compared with some standard ratios. Circumstances
differ from firm to firm and the nature of each industry is different. Therefore, the
standards will differ for each industry and the circumstances of each firm will have
to be kept in mind. It is difficult to find out a proper basis of comparison.
Therefore, the performance of one industry may not be properly comparable with
that of another. Usually it is recommended that ratios should be compared with the
average of the industry. But the industry averages are not easily available.
3. Ratios based on past financial statements are no indicators of

future. Accounting ratios are calculated on the basis of financial
statements of past years. Ratios thus indicate what has happened in
the past. Since past is quite different from what is likely to happen in
future, it is difficult to use ratios for forecasting purposes. The financial
analyst is more interested in what will happen in future. The management of a
company has information about the company's future plans and, policies and
is, therefore, able to predict future to a certain extent. But an outsider
analyst has to rely only on the past ratios which may not necessarily
reflect the firms future financial position and performance.
COMPUTATION OF RATIOS
Q1) Following is the Balance Sheet of Ranbaxy ltd. as on 31st March 2010. You are
required to convert the same in Vertical formats and. calculate the following ratios: 1)
Current Ratio 2) Liquid Ratio, 3) Stock to Working Capital Ratio, 4) Proprietary Ratio, 5)
Capital Gearing Ratio, 6) Debt Equity Ratio
Liabilities Rs. Assets Rs.
Equity Share Capital (Rs. 10 2,00,000 Land & Bldg at WDV 1,00,000
each) Plant & Mach at WDV 1,20,000
10% Preference Share Capital 1,00,000 Long Term Investments 90,000
General Reserve 2,00,000 Capital WIP 75,000
12% Debentures 1,00,000 Inventories 2,00,000
Accounts Payable 1,60,000 Book Debts (last year Rs. 2,00,000
Bank Overdraft 1,00,000 1,80,000)
Acceptances given 75,000 Current Investments 50,000
Income received in Advance 25,000 Prepaid Exp 10,000
Provision for Taxation 40,000 Cash at Bank 40,000
Advance Tax 30,000
Bills Receivable 75,000
Underwriting Commission 10,000
( To the extent not w/off)
10,00,00 10,00,000
0
Q.2) The following is the Profit & Loss A/c. of Reliance ltd. for the year ended 31st March
2010. You are required to convert the same in a suitable form for analysis and calculate the
following ratios:
1) Gross Profit Ratio, 2) Operating Ratio, 3) Operating Expense Ratio, 4) Operating Profit
Ratio; 5) Net Profit Ratio.
Particulars Rs. Particulars Rs.
To Opening Stock 1,50,000 By Sales (10% cash) 20,00,000
To Purchases 10,50,00 Less: Returns 2,00,000
To Factory Expenses 0 18,00,000
To Gross Profit 4,50,000 By Closing Stock 2,00,000
3,50,000
20,00,00 20,00,000
0
To Administrative Expenses 1,20,000 By Gross Profit 3,50,000

To Rent 30,000 By Bad Debts Recovery 50,000
To Interest paid on Debentures 12,000 By Dividend/ Int. received 25,000
To Selling Expenses 15,000 By Miscellaneous Income 75,000
To Bad debts 10,000
To Depreciation 30,000
To Loss by fire 40,000
To Provision for Tax 1,21,500
To Net Profit 1,21,500
5,00,000 5,00,000
To Proposed Equity Dividend 50,000 By Net Profit 1,21,500
To Dividend on Preference 10,000
Share
To Transfer to General Reserve 61,500
1,21,500 1,21,500
The Companies shares are quoted on stock exchange at Rs 44.60
From the financial statements given above (Q.1 & Q.2) you are required to calculate the
following ratios:
Overall Profitability Ratios: 1) Return on Capital Employed, 2) Return on Shareholders

fund, 3) Return on Equity Shareholders fund.
Turnover Ratios: 1) Stock Turnover ratio, 2) Debtors Turnover ratio & Debtors Velocity,
3) Creditors Turnover ratio & Creditors Velocity, 4) Fixed Asset Turnover Ratio, 5) Total
Asset Turnover ratio .6) Working Capital Turnover ratio.
Ratios related to Equity Shares: 1) Earning Per Share (EPS), 2) Price Earning Ratio (P/E
ratio), 3) Dividend Per Share (DPS), 4) Dividend Payout Ratio (D/P ratio), 5) Dividend
Yield Ratio.
Coverage Ratio: 1) Interest Coverage Ratio, 2) Dividend Coverage Ratio (for Preference
Shares) 3) Interest coverage ratio 4) Debt service coverage ratio
Illustration 3:
Convert the balance sheet into vertical form of rock land and calculate the following ratios
(a) Current ratio (b) Quick ratio (c) Proprietary ratio (d) Debt to equity
(e) stock to working capital (f) capital gearing
Balance Sheet as on 31st March, 2004

Equity Share Capital 1,00,000 Cash in Hand 2,000
6% Preference Share Capital 1,00,000 Cash at Bank 10,000
7% Debentures 40,000 Bills Receivable 30,000
8% Public De-posits 20,000 Debtors 70,000
Bank Overdraft 40,000 Stock 40,000
Creditors 60,000 Advances 20,000
Unpaid Dividend 10,000 Furniture 30,000
Outstanding Expenses 7,000 Machinery 1,00,000
Reserves 1,50,000 Land & Building 2,20,000
Provision for Tax 20,000 Goodwill 30,000
Profit & Loss Account 20,000 Preliminary Expenses 10,000
Call in Arrears in Equity Shares 5,000
5,67,000 5,67,000
Q.4) The following is the Profit & Loss A/c. of Sun Ltd. for the year ended 31st March
2009. You are required to convert the same in a suitable form for analysis and calculate the
following ratios:
1) Gross Profit Ratio, 2) Net profit ratio 3) Operating Ratio, 4) Operating Ratio, 5)
Operating expense Ratio;
Profit and loss account for the year ended March 31, 2009
To opening stock 44,000 By sales 2,10,000
To purchases 84,000 By closing stock 46,000
To wages 40,000
To Factory expenses 32,000
To Administrative expense 8,000
To selling expenses 6,000
To managerial Remuneration 2,000
To Transfer to Reserve 2,000
To income tax 22,000
To proposed dividend 6,000
To Bal c/d 10,000
2,56,000
The Companies shares are quoted on stock exchange at Rs 50 peer share
From the financial statements given above (Q.1 & Q.2) you are required to calculate the
following ratios:
Overall Profitability Ratios: 1) Return on Capital Employed, 2) Return on Shareholders

fund, 3) Return on equity Capital, 4) Return on Equity Shareholders fund.
Turnover Ratios: 1) Stock Turnover ratio, 2) Debtors Turnover ratio & Debtors Velocity,
3) Creditors Turnover ratio & Creditors Velocity, 4) Fixed Asset Turnover Ratio, 5) Total
Asset Turnover ratio .6) Working Capital Turnover ratio.
Ratios related to Equity Shares: 1) Earning Per Share (EPS), 2) Price Earning Ratio (P/E
ratio), 3) Dividend Per Share (DPS), 4) Dividend Payout Ratio (D/P ratio), 5) Dividend
Yield Ratio.
Coverage Ratio: 1) Interest Coverage Ratio, 2) Dividend Coverage Ratio (for Preference
Shares) 3) Interest coverage ratio 4) Debt service coverage ratio
Q.5) From the following information calculate Current ratio, quick ratio Creditor’s
Turnover ratio and Average Credit Sales of Munna Ltd. and Circuit Ltd.
Particulars M Ltd. C Ltd.
Stock 8,00,000 1,00,000
Debtors 1,70,000 I,40,000
Cash 30,000 60,000
Trade Creditors 2,80,000 1,50,000
Bills Payable 20,000 10,000
Bank Overdraft 40,000 30,000
Creditors for Expenses 60,000 10,000
Total Purchases 9,30,000 6,60,000
Cash Purchases 30,000 20,000
Credit to Debtors 3 months 3 months
Q.6) The summarised final accounts of two companies are as follows :--
Capital & A Ltd. B Ltd. Assets A Ltd. B Ltd.
Liabilities Rs. Rs. Rs. Rs.
Share Capital 88,000 88,000 Fixed Assets 1,21,000 96,000
Reserves 42,900 35,200 Current Assets 1,25,000 1,03,400
8% Debentures 22,000 22,000
Current Liabilities 93,500 93,500
2,46,400 2,00,200 2,46,000 2,00,200
Revenue Statement for the year
Rs. Rs.
Sales 3,30,000 2,64,000
Less: Cost of Sales 2,37,600 1,98,000
Gross Profit 92,400 66,000
Less: Operating Exp 63,800 44,000
Operating Profit 28,600 22,000
Less: Income Tax 12,100 9,240
Net profit 16,500 12,760
Less: Dividend 8,800 6,600
Retained Earnings 7,700 6,160
From the above data calculate following ratios rid comment:
1) Proprietary Ratio 2) Operating Ratio 3) Gross Profit ratio 4) Capital Gearing ratio
and 5) Return on Proprietor’s Equity.
Q.7) The following are the extracts from the financial statements of M/s Dr Reddy Ltd., as
on 31st March 2001 and 2002 respectively:
31.3.2001 31.3.2002
Stock (Rs. 20,000 on 31-3-2000) 10,000 25,000
Debtors (Rs.15, 000 on 3 1-3-2000) 20,000 20,300
Bills Receivable (Rs, 8, 000 on 31-3-2000) 10,000 5,000
Advances 2,000 -
Cash in hand 18,000 15,000
Creditors 25,000 30,000
Bills Payable 15,000 20,000
Bank Overdraft - 2,000
9% Debentures 5,00,000 5,00,000
Sales of the year 3,50,000 3,00,000
Gross Profit 70,000 50,000
You are required to compute for both the previous years:
(i) Current Ratio; (ii) Liquid Ratio; (iii) Stock Turnover Ratio; (iv) Number of days
outstanding of debtor ; v) Stock Working Capital Ratio and comment.
.
Q8) Calculate from the following details furnished by pardeshi ltd
a) Current ratio
b) Liquid ratio
c) Credit turnover and average credit period
d) Debtors turnover ratio and Average credit period
e) Stock turnover ratio
Stock –Rs 1,00,000

Debtors-Rs 1,40,000
Cash –Rs 60,000
Creditors –Rs 1,60,000
Bank overdraft-Rs 30,000
Outstanding expenses- Rs 10,000
Total purchases-Rs 6,60,000
Cash purchases –Rs 20,000
Gross profit-331/3 %
Q9) Blow are extracts of Financial statement of M/s. KIRAN LTD.
Particulars 31-3-2004
Rs.
Stock ……… 2,60,000
Debtors ……… 1,00,000
Cash ……… 1,40,000
Bills Receivable ……… 1,00,000
Creditors ……… 1,00,000
Bank Balance (Cr.) ……… 30,000
Outstanding Expenses ……… 10,000
Bills Payable ……… 50,000
Total Purchases ……… 8,00,000
Cash Purchases ……… 2,00,000
Cash Sales ……… 3,00,000
Credit sales ……… 12,00,000
………
………
From the above find out the following Ratios and give your comment for the year ended
31-3-2004 : 1) Current Ration 2) Liquid Ratio 3) Debtors Turn Over Ration and Age of
Debtor. 4) Creditors Turn Over Ratio and age of creditors.
Q.10) The following data of Tata Ltd. is available for the year ending 31/03/2002.
Particulars Rs. (In Lacs)
Share Capital
20,00,000 Equity shares of Rs 10 each 200.00
General Reserve 150.00
Investment Allowance Reserve 50.00
Proposed Dividends 10.00
Provision for Tax 84.00
15% Long term loan 300.00
Profit before tax 140.00
Calculate the following ratios from above (i) return on Capital Employed, (ii) Return on
Net worth or shareholders funds.
Q11)The Capital of ABC Ltd. consists of 9% Preference Shares of Rs. 10 each, Rs.
3,00,000, Equity Shares of Rs. 10 each, Rs. 8,00,000. The profit after tax is Rs 2,70,000,
Equity Dividend is 20% and market price of Equity Shares Rs. 40. You are required to
calculate following ratios and comment on them, (a) Dividend Yield, (b) Preference &
Equity Dividend Cover, (c) Earnings Per Share and (d) Price-Earnings Ratio.
Q12): Following information is available relating to Beena Ltd. and Meena Ltd:
( Rs in lacs)
Beena Ltd. Meena Ltd.
Equity share capital (Rs. 10) 200 250
12% preference shares 80 100
Profit after tax 50 70
Proposed dividend 35 40
Market price per share Rs. 25 Rs. 35
You are required to calculate: (i) Earning per share. (ii) P/E Ra (iii) Dividend
Payout Ratio. (iv) Return on Equity Shares.As an analyst, advice the investor which of the
two companies is investing.
Q13) :M/s. Green a Blue Ltd. has presented its financial information for year 2006 as
follows:
Balance Sheet on 31st March, 2006
Liabilities Amount Assets Amount
Rs. Rs.
Share Capital 12,00,000 Fixed Assets 28,60,000
Reserves and 8,00,000 Stock in Hand 19,80,000
Surplus
12 % Long Term 22,70,000 S. Debtors 16,50,000
Debt
Current Liabilities 23,50,000 Cash and Bank Balance 1,30,000
Total 66,20,000 Total 66,20,000
Income Statement for the ended 31st March, 2006
Amount Rs.
Net Sales 1,02,00,000
Cost of Goods Sold 79,20,000
Selling and Administrative Expenses 15,45,600
Net Profit before tax 7,34,400
(1) Tax Rate is 30%. Company's Capital is, divided in 1,20,000 shares of Rs. 10
each
(2) Company has declared dividend @ 25%
(3) Market Price of the share is Rs. 50
You are required to evaluate investment in Company on the basis of:
(i) Dividend Yield.
(ii) EPS.
(iii) P/E ratio.
(iv) ROCE
Q14)Following information is available relating to A Ltd. and B Ltd

Particulars A Ltd. B Ltd.
(Rs. in (Rs. in Lakhs)
Lakhs)
Equity Share Capital (Rs. 10) 200 250
10% Preference Share Capital 80 100
15% Debentures 20 60
Profit before Interest and Taxes 60 80
Proposed Dividend 20 25
Provision for tax 17 21
Market Price per share Rs. 50 Rs. 60
You are required to calculate (i) EPS, (ii) P/E Ratio, (iii) Dividend Payout Ratio, (iv)
Dividend yield and advise which company's share is worth investing.
Q15:Veena Ltd has presented its financial information for the year ended 31st March 2007:
Earnings before interest and tax Rs 8,00,000

1,00,000 Equity shares of Rs 10 Rs 10,00,000
each
10% Debenture Rs 15,00,000
Reserves and surplus Rs 5,00,000
Provision for tax 30%
Proposed dividend 20%
Market price per share Rs 32
Calculate (1) EPS (2) P/E ratio (3) Book value per share (4) Dividend yield ratio . Advise
The investor
Q16) Based on the following information of the financial ratios, prepare Balance Sheet of
Star Enterprises Ltd. as on December 31st 2002. Explain your working and assumptions.
Current Ratio 2.5
Liquidity Ratio 1.5
Net Working Capital Rs. 6,00,000
Stock Turnover Ratio 5
Ratio of Gross Profit to Sales 20%
Turnover Ratio to Net Fixed Assets (COGS / FA) 2
Average Debt Collection Period 2.4 months
Fixed Assets to Net Worth 0.80
Long – Term Debt to Capital and Reserve 7/25
Q17)From the following information, prepare a summarized balance sheet as at March 31,
2009
Current ratio- 1.75

Liquid ratio- 1.25
Stock turnover ratio (cost of sales/ closing stock) 9
Gross profit ratio 0.25
Debt collection period 1,5 months
Reserves and surplus to capital 0.2
Turnover of fixed assets (COGS/FA) 1.2
Capital gearing ratio 0.5
Fixed assets to net worth 1.25
Sales for the year 12,00,000
Q.18) Consider the following statements: - (Assume there is no bank overdraft)

1. The current ratio of Busy Ltd. is 4.5:1 and liquid ratio is 3:1. Inventory is Rs.
6,00,000. Calculate the current liabilities.
2. Total current liabilities of Beta Ltd. are Rs. 10,00,000 and acid test ratio is 3:1.
Inventory is Rs. 5,00,000. Find out the current assets and compute the current ratio.
3. Inventory of Delta Ltd. is Rs. 6,00,000. Total liquid asset are rs. 24,00,000 and
liquid ratio is 2:1. Work out the current ratio.
4. Liquid ratio of Alpha Ltd. is 2.5 : 1 Inventory is Rs. 12,00,000 Current ratio is 4:1.
Find out the current liabilities.
Q19) A company has a current ratio of 2.5:1 Liquid ratio of 1.5:1 current liabilities are Rs.
1,00,000. Give effect of each of the following transactions on each of the following
transactions on each of these ratios.
1. Purchases of Material Rs.50,000 on credit.
2. Sale of goods Rs 1,00,000 on credit
3. Purchase of machinery worth Rs 1,00,000 by making cheque payment of
Rs.25,000 and balance by long-term loan.
4. Hirthik accepts a bill of Rs 40,000 due from him for purchase of goods on
credit.
Q20 )Roshan ltd has made plans for next year. It is estimated that company will employ
total asset of Rs 8,00,000, 50% of the assets being financed by borrowed capital at an
interest rate of 16% per year. The direct cost for the year are estimated at Rs 80,000. The
goods will be sold to the customers at 150% of direct costs. Income tax is assumed to 50%.
You are required to calculate (a) net profit margin (b) Return on assets (c) Asset turnover
(d) return on equity.
Q21) Palam manufacturing and electrical Ltd. Sells the goods on cash as well as credit. The
following particulars are extracted from their books of accounts for the calendar year 2010.
Explain the debt collection period.
Particulars Rs
Total Gross sales 2,00,0000
Cash sales included in the above 40,000
Sales return from credit sales 14,000
Total debtor for sales as on 31-12-2010 18,000
Bill receivable as on 31-03-2010 4,000
Provision for bad debts as on 31-12-2010 2,000
Total creditor 20,000
Q22) Following Financial statements of “JAY Ltd.” are given to you. Preference Dividend
was’ Rs. 4,800. Equity
Dividend was Rs. 19,000. Market price of the share is Rs 20. Rearrange them into vertical
form and compute all possible ratios:(Balance sheet, profit and loss account and combined
ratio)
Trading and Profit and Loss A/c for the year ended 31-3-2001
Particulars Rs. Particulars Rs.
To Opening Stock 45,000 By Sales 4,00,000
To Purchase less returns 2,20,000 By Closing Stock 95,000
To Wages 1,00,000 By Non-operating Income 12,000
To Salaries 40,000
To Office Rent 17,000
To Interest 3,000
To Non-operating Expenses 2,000
To Advertisement 6,000
To Transport on Sales 4,000
To Net Profit 50,000
To Income Tax 20,000
5,07,000 5,07,000
Balance Sheet as on 31-3-2001
12% Preference Share Capital 40,000 Fixed Assets:
Equity Share Capital 1,90,000 Original Cost 2,30,000
Capital Reserve 15,000 Less : Depreciation 40,000 1,90,000
General Reserve 45,000 Investments (Short Term) 50,000
P & L A/c 10,000 Stock 95,000
10% Debentures 30,000 Debtors 85,000
Bank Loan 15,000 Pre-paid Expenses 20,000
Creditors 70,000
Bills Payables 5,000
Bank Overdraft 20,000
4,40,000 4,40,000
Q24) Find out the missing figures in the following Income Statement and Balance Sheet of
M/s. Anil Starch Ltd for the year ended 31-3-2004 and re-write the statements. Income
Statement
Share Capital 5,00,000 Fixed Assets ?
General Reserve 3,00,000 Stock ?
Loans ? Debtors ?
Sundry Creditors 6,00,000 Bank Balance ?
Cash ?
? ?
Additional Information:
(1) Debt Equity Ratio 1.25:1.00
(2) Gross Profit Ratio 30%
(3) Net Profit 20% of Gross profit
(4) Total Assets Turnover 2 times
(5) Average collection period 1 month
(6) Liquid Ratio 1: 1 -
(7) Current Ratio is 2
(8) Bank Balance is 7 times the cash in hand.

Ratio

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Naveen Rohatgi-9867451833 SYBMS- Management accounting

Classification of ratios based on function

Profit and loss account Ratio:

Cost of goods Sold ( Factory cost) = COGS × 100

Administrative Expenses Ratio = Administrative Expenses x 100

Finance expenses= Finance expenses *100

Selling Expenses Ratio = Selling Expenses x 100

OPERATING PROFIT RATIO

NET PROFIT RATIO

Net Profit = Net Profit x 100

Balance Sheet Ratio

STOCK TO WORKING CAPITAL RATIO

Less: Accumulated losses (i.e. P & L a/c Dr. Balance)

DEBT – EQUITY RATIO

Debt = Borrowed Funds = BF

CAPITAL GEARING RATIO

RETURN ON CAPITAL EMPLOYED

Capital Employed (CE) =

Capital Employed [CE] can also be computed as

RETURN ON PROPRIETORS’ FUNDS

RETURN ON EQUITY SHAREHOLDER FUND

Return on Equity Capital = NPAT – Prefrence dividend X 100 =

Equity shareholders’ Funds [EF] =

Debtors Turnover = Net Credit Sales

Debtors Velocity (Debt Collection Period)

CREDITORS TURNOVER RATIO

Creditors Turnover = Credit Purchases = Net Credit Purchases

Creditors Velocity (Debt Payment Period)

Credit Period Enjoyed = 365 days or 12 months

STOCK TURNOVER RATIO

A. Stock Turnover Ratio = Cost of Goods Sold

Interest Coverage Ratio:

Interest coverage Ratio= NPBIT

DEBT SERVICE COVERAGE RATIO

DIVIDEND PAYOUT RATIO

EARNING PER SHARE:

EPS= NPAT- Preference dividend

P/E ratio: Market price per share

Dividend yield ratio Market price per share

It means the dividend is how percentage of market price per share

ADVANTAGES OF RATIO ANALYSIS

• Useful in analysis of financial statements. Ratio analysis is the most

Limitations of Ratio Analysis

3. Ratios based on past financial statements are no indicators of

To Administrative Expenses 1,20,000 By Gross Profit 3,50,000

Overall Profitability Ratios: 1) Return on Capital Employed, 2) Return on Shareholders

Liabilities Rs. Assets Rs.

Overall Profitability Ratios: 1) Return on Capital Employed, 2) Return on Shareholders

Q8) Calculate from the following details furnished by pardeshi ltd

Stock –Rs 1,00,000

Q9) Blow are extracts of Financial statement of M/s. KIRAN LTD.

Q14)Following information is available relating to A Ltd. and B Ltd

Earnings before interest and tax Rs 8,00,000

Current ratio- 1.75

Q.18) Consider the following statements: - (Assume there is no bank overdraft)

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