Prepared by

Syed Basit HussainRATIO ANAYLSIS

B.com II

(a) Profitability Analysis (b) Financial Position Analysis (c) Performance Analysis Profitability Ration Financial Position Management Ratio

Short Term General Profitability 1) G.P Ratio 2) N.P Ratio 3) Operating Profit Ratio 4) Operating /Cost Ratio 5) Particular Expense Ratio

Long Term Overall Profitability Ration

Short Term

1) Return on Share holder investment 2) Return on Share holder Equity 3) E.P.S (Earning per share) 4) Return on Gross Capital employed 5) Return on Net Capital employed 6) Dividend yield Ratio 7) Dividend payout Ratio 8) Price earning ratio

Long Term 1) Debt-Equity Ratio 2) Proprietary Ratio 3) Fixed assets Ratio 4) Long-term debt to 1) Current Ratio shareholder Fund 2) Quick/Liquid/Acid 5) Fixed asset network ratio Test Ratio 6) Debt service Ratio 3) Absolute liquid ratio 7) Capital gearing Ratio 1) Stock turnover Ratio 2) Debtors turnover Ratio 3) Creditors turnover 4) Average age of Inventory 5) Average age of Debtors 6) Average age of Creditors 7) Working Capital turnover Ratio

Formulas: Profitability Ratio
Short Term 1) Gross Profit Ratio = G.P/Sales x100=% → % of G.P to Sales ↑ is better 2) Net Profit Ratio = N.P/Sales x100=% → % of N.P to Sales ↑ is better 3) Operating Profit Ratio = Operating Profit/Sales x100=% ratio of operating profit to sales ↑ is better Operating profit= Sales -C.G.S –operating Exp Operating profit= Sales –Operating Cost Operating Cost= C.G.S +operating Exp. Operating profit= G.P –Operating Exp. Operating profit= N.P +Other income –other expenses 4) Operating Ratio = Operating Cost/Sales x100= % → % of operating cost to sales ↓ is better 5) Particular Expense ratio =Particular Exp/Sales x100 =% ratio of any expense to sales ↓ is better Long-Term (overall profitability ratios) 1) Return on Shareholder’s Investment= N.P after I & Tax/shareholders Fund x100=% Return on Shareholder’s Fund (share cap +all reserves & surplus –any losses) Net Worth
2)

3)

Return on Shareholder’s Equity =N.P after I & Tax –preference dividend/ordinary Equity sh.cap x100 Earning per share(E.P.S) = N.P after I & Tax –preference dividend./no. of ordinary shares=Rs/shar

4) Dividend yield Ratio 5) Dividend payout Ratio 6) Price Earning Ratio
7) Return on Total sources Ratio 8) Return on Capital Employed

= Dividend per share/M.V per share = Dividend per share/E.P.S = M.V per share/E.P.S

= N.P after I & Tax/Total assets =N.P before I & Tax/total capital employed x100 Capital employed= fixed assets+ current assets –current liabilities OR capital employed =Share capital +reserves +Debentures –preliminary Expenses

Financial Position Ratios
Short term
1) Current Ratio/working capital ratio = Current Assets/current Liabilities What is the amount to current asset to payoff current liabilities 2) Liquid/Quick/acid test Ratio = Liquid/Quick assets/Current liabilities
Liquid Assets= current Assets –Stocks –Prepaid Expenses. 3) Absolute Liquid Ratio = Absolute liquid assets/Current liabilities Absolute liquid assets= Cash +Bank, investment

Standard 2:1
Standard 1.5:1 Standard 1:1

Long-Term 1) Debt-Equity Ratio = long term debt/Equity (S.H funds) 2) Total Debt Equity Ratio = Total Debt/Equity (S.H funds) 3) Proprietary/Equity Ratio = Shareholder’s fund/total assets 4) Fixed assets to net worth ratio= Fixed assets (after depreciation)/Net worth (S.H funds) 5) Fixed Assets Ratio = Fixed assets (after Depreciation)/ total long term fund Total long term fund= (share holder fund+ long term debts) 6) Current Assets to Proprietary = Current assets/ share holders fund Ratio 7) Debt Service Ratio or = N.P before I & Tax/Fixed Interest Charges (times) Interest coverage Ratio or Banker Ratio 8) Capital Gearing Ratio = Equity /Fixed interest bearing securities (times) 9) Fixed Assets Turnover ratio = C.G.S/ave.fixed assets

Management Ratios/Efficiency Ratios/Solvency Ratios
1) Stock Turnover Ratio 2) Average Turnover Ratio 3) Debtors turnover Ratio 4) Debtors collection period Ave. age of debtors 5) Creditors turnover Ratio 6) Creditors payment Period Ave. age of Creditors 7) Working Capital turnover ratio Extras: = C.G.S/Average Stock = No. of days in an year/Stock Turnover = Net Credit Sales/Ave. Debtors Average debtors= Op.debtors+Clo.debtors/2 = No. of days in an year/ Debtors turnover ratio Days Answer in Times Days Times

= Net. Cr. Purchases/Ave.Creditors Times = No. of days in an year/Creditors turnover Days = C.G.S/Net working Capital Net working capital =Current assets –current liabilities

C.G.S = Sales –G.P Sales = C.G.S + G.P G.P = Sales –C.G.S C.G.S = Opening Stock +Purchases +Direct Expenses –Closing Stock Operating expenses = selling, distribution, administrative and general charges, provision for doubtful debts, depreciation Net Profit= Operating profit +other income –other expenses

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