Ratio Analysis

i) Liquidity Ratios ii) Solvency Ratios iii) Profitability Ratios and iv) Activity Ratios.

Liquidity Ratios
a) Current Ratio: The current ratio is arrived at by dividing current assets by current liabilities. Current Assets Current Liabilities

b) Quick or Acid Test Ratio:

Current Assets-(Inventory + Prepaid Expenses) Current Liabilities Bank Borrowings.

c) Working Capital Turnover Ratio: Net Sales Net Working Capital

Solvency Ratios
Total Tangible Assets Total Outside Liabilities
a) Debt Equity Ratio:
Term Liabilities Net Worth Intagible Assets b) Total Indebtedness Ratio: Total Outside Liabilities (long term + Current) Net Worth Intagible Assets. c) Proprietary Ratio: Capital or shareholders Funds Total Tangible Assets

d) Fixed Assets Coverage Ratio:

Fixed Assets (after depreciation) Long Term Loans secured by these Assets. e) Debt Service Coverage Ratio: Profit after Tax + Depreciation + Interest on Term Loan and Deferred Credit Repayment (All Installments to be paid) + Interest on Term Loan and Deferred Credit.

Profitability
a) Gross Profit Ratio: Gross Profit Net Sales (Multiplied by 100) b) Operating Ratio: Cost of Goods sold + Operating Expenses Net Sales (multiplied by 100)

c) Operating Profit Ratio:

Operating Profit Net Sales (multiplied by 100)

d) Net Profit Ratio:

Net Profit Before Tax Net Sales (multiplied by 100) e) Return on Investment Ratio: Net Profit After Tax Net Sales (multiplied by 100)

Operating Profit
Capital Employed (multiplied by 100)

Activity Ratios
a) Inventory Turnover Ratio: Cost of Goods Sold Average Inventory
b) Inventory Sales Ratio: Inventory Net Sales (multiplied by 100)

c) Fixed Assets Turnover Ratio: Annual Sales Total Fixed Assets d) Debtors Turnover Ratio: Sundry Debtors + Bills Receivables Total Credit Sales (multiplied by 100) e) Creditors Turnover Ratio: Sundry Creditors = Bills Payables Total Credit Purchases. (multiplied by 100)

Limitations of Ratios
1. 2. 3. 4. 5. 6. 7. Reliability and Accuracy: Window Dressing: Different systems of Accounting: Economic Conditions: Managerial Competence: Comparison: Standardisation:

Thank You!!!