TYPES OF RATIOS WITH THEIR IMPLICATIONS.

NO. RATIO FORMULA NUMERATOR DENOMINATOR SIGNIFICANCE/ INDICATOR

1 CURRENT RATIO:- Current Assets Inventories/Stocks
Current Liablilities (+) Debtors & B/R
(+) Cash & Bank
(+) Recivables / Accurals
(+) Short Term Loans
(+) Marketable Investment/
Short Term Securities.
Sundry Creditors(For Goods)
(+) Outstanding Expenses
(+) Short Term Loans &
Advances (CR.)
(+) Bank Overdraft/ Cash
Credit
(+) Provison for Taxation
(+) Proposed Dividend
(+) Unclaimed Dividend
It states the ability to repay short term
commitments promptly.
(i.e. Short term solvency).
Ideal ratio is 2:1
High ratio indicates existence
of idle current Assets.

2 Acid test or Quick Quick Assets Current Assets Current Liablilities It indicates the ability to meet immediate
Ratio:- Quick Liablilities (-) Inventories (-) Bank Overdraft liabilities. Ideal Ratio is 1.33:1
(-) Prepaid Expenses (-) Cash Credit In case of emergency crisis this ratio helps
in evaluating liablities meeting capacity.

3 Turnover Ratios:-
( a ) Inventory Turnover Cost of goods sold For Manuacturers:-
Ratio. Average stock Opening Stock of FG
(+) Cost of Production
(+) Closing Stock of FG
For Traders:-
Opening Stock of FG
(+) purchases
(-) Closing Stock of FG
It basically indicates how fast inventory is
(Opening Stock + closing stock) used/sold. High T/O ratio indicates fast
2 moving material while low ratio may mean
dead or excessive stock.
or
(Max stock + Min. stock)
2

( b ) Debtor Turnover Net Credit Sales Credit Sales Net of Returns Accounts Recivable= Debtors + It hepls in indicating the speed of collection
Ratio. Average Debtors B/R of credit sales / Debtors.
Average Acounts recivable =
1/2 ( opg. Bal. + clg. Bal)

( c ) Creditor Turnover Net Credit Purchase Credit Purchase net of Accounts Payable= Creditors + It hepls in indicating the speed of payment to
Ratio. Average Creditor returns, if any. B/P creditors.
Average Acounts Payable =
1/2 ( opg. Bal. + clg. Bal)

4 Defensive - Interval Liquid Assests Current Assets Annual cash Expenses / 365 It states the total ability to meet regualar
Ratio:- Projected daily cash (-) Inventories cash expenses = Total expenses day in day out cash expenses.
Requirement (-) Prepaid Expenses - depreciation and write offs.
5 Debt - Equity Ratio:- Debt
Equity
6 Debt to capital ratio:- Debt
Total funds
7 Coverage Ratios:
( a ) Interest Coverage EBIT
Ratio. Interest
( b ) Dividend Coverage EAT
Ratio. Preference Divivend
( c ) Total Coverage EBIT + Lease payment
Ratio Interest+ lease payments
+(preference dividend
+ installment of
principal)/(1-t)
( d ) Total cash flow EBIT+ Lease payments
coverage Ratio + Depreciation+ non cash
expenses
lease payment+interest+
(principal repayment)+(1-t)
+ (preference dividend)/(1-t)
8 Profit Margin:-
(I) Gross profit margin Gross profits * 100
sales
or
sales-cost of goods sold*100
sales
(II) Net profit margin
( a ) Operating Profit EBIT
Ratio Sales
Debt= Long term borrowed Equity= Owerner's Funds= equity It hepls in deriving reasonable relationship
funds= Debentures+ long capital+ Preference capital+ between Debt & Equity.
term loans from reserves & surplus - accumulated Its ideal ratio is 2:1
fianancial Institutions. losses.
Debt= Long term borrowed Fixed Assests + net working Its basically a indicator of use of external
funds= Debentures+ long capital funds and total capital employed in total.
term loans from ideal ratio = 67%
fianancial Institutions.
Earnings before interest Interest on Debt It hepls in indicating interest obligations. It
and tax states the ability to meet interest obligations
of the current year.should ideally be greater
than 1.
Earnings after Tax Dividend on preference Capital This ratio helps in indicating ability to pay
dividend on preference capital.
Earnings before interest Interest+ lease payments It helps in indicating the ability to meet total
and tax+ lease payment +(preference dividend obligations of the current year, should ideally
+ installment of be greater than 1.
principal)/(1-t)
EBIT+ Lease payments lease payment+interest+ Total cash flow i.e. in or out are being indicated
+ Depreciation+ non cash (principal repayment)+(1-t) with the hepl of this ratio. It hepls in indicating
expenses + (preference dividend)/(1-t) cash reserve of firm and its capibility to meet
daily cash requirements.
Gross profits * 100 sales This ratio is a idicator of basic/ gross profitability.
or sales - cost of goods sold
Earnings before interest sales This ratio is a indicator of operating performance of
and tax business.
 ( b ) Net profit Ratio EAT Earnings after Tax sales This ratio is a idicator of overall profitability.
Sales

9 Cost of goods sold Cost of goods sold * 100 [For Manuacturers:- Net sales Indicates how fast inventory is used/ sold. High ratio
Ratio:- Net sales Opening Stock of FG indicates fast moving material while low ratio may
(+) Cost of Production mean dead or excessive stock.
(+) Closing Stock of FG
For Traders:-
Opening Stock of FG
(+) purchases
(-) Closing Stock of FG]*100

10 Operating Expense Administrative Expenses + Administrative Expenses + Net sales It hepls in indicating business ability to meet its
Ratio:- Selling Expenses Selling Expenses total expenses effectively of current year.
Net sales Ideal ratio is greater than 1.

11 Administrative Expense Administrative Expenses *100 Administrative Expenses *100 Net sales It hepls in indicating business ability to meet its
Ratio:- Net sales Administrative activities expenses effectively..
Ideal ratio is greater than 1.

12 Selling Expenses Ratio:- Selling Expenses*100 Selling Expenses*100 Net sales It hepls in indicating business ability to meet its
Net sales Selling activities expenses effectively..
Ideal ratio is greater than 1.

13 Opearting Ratio:- Cost of goods sold + [For Manuacturers:- Net sales It hepls in indicating business ability to meet its
operating expenses * 100 Opening Stock of FG Operating activities expenses effectively..
Net sales (+) Cost of Production Ideal ratio is greater than 1.
(+) Closing Stock of FG
For Traders:-
Opening Stock of FG
(+) purchases
(-) Closing Stock of FG] +
operating expenses * 100

14 Financial Expenses Ratio:- Financial Expenses *100 Financial Expenses *100 Net sales It hepls in indicating business ability to meet its
Net sales Financial activities expenses effectively..
Ideal ratio is greater than 1.

15 Return on Assets:- Net Profit after Tax Earnings after Taxation Average Total Assests or Tangible It indicates Net income per ruppee of average fixed/
 Average Total Assets
Net profit after taxes + interest
Average total Assests
Net profit after taxes + interest
Average Tangible Assets
Net profit after taxes + interest
Average Fixed Assests
EAT+Interest-Tax advantage
on Interest
Average Total Assets/Tangible
Assets/Fixed Assets.
16 Return on Capital Employed:- Net Profit After Taxes
. Average total capital employed
Net Profit After Taxes+Interest
- Tax advantage on interest
Average total capital employed
Net Profit After Taxes+Interest
Average
Total Capital Employed-
Average intangible Assets
17 Return on Total Shareholders Net Profit After Taxes
Equity:- Average total Shareholders equity
18 Return on Equity Funds.:- Net Profit After Taxes - preference
dividend
Average Ordinary Shareholders
Equity or net Worth
19 Earnings Per Share ( EPS):- Net profit available to equity
shareholders
Number of ordinary share outstanidng
(+) Int. on debt funds
(+) Non Operating Adjts.
(e.g. Other income/ loss on
sale of fixed Assets etc.)
Earnings after Taxation
(+) Int. on debt funds
(+) Non Operating Adjts.
(e.g. Other income/ loss on
sale of fixed Assets etc.)
Earnings after Taxation
(+) Int. on debt funds
(+) Non Operating Adjts.
(e.g. Other income/ loss on
sale of fixed Assets etc.)
Earnings after Taxation
(+) Int. on debt funds
(+) Non Operating Adjts.
(e.g. Other income/ loss on
sale of fixed Assets etc.)
Residual earnings, i.e.
EAT -preference dividend
Assets or Fixed Assets, i.e.
(1/2 of opg + clg bal.)
Capital Employed can be computed
using- (a) Assets Route or
(b) Liability Route.
Average total Shareholders equity
Net Fixed Assets
(+) Net Working Capital
(-) External Liablities ( LongTerm)
No. of equity shares outstanding =
equity capital
face value per share
tangible/ total assests.
Overall profitability of the business on the total funds
employed can be derived easily with the help of this
Ratio,If ROCE > Interest Rate, use of debt fund is
justified.
Overall return of the business on the total
shareholders funds employed can be derived easily
with the help of this Ratio.
It indicates profitability of equity funds/ owners funds
invested in business.
It indicates return or income per share, whether or not
distributed as dividends.
20 Dividend per share ( DPS):- Net Profit after interest and preference Profits Distributed to equity No. of equity shares outstanding = This ratio basically states the amount of profits
dividend paid to ordinary shareholders Shareholders equity capital distributed per share.
Number of ordinary shares outstanding face value per share

21 Dividend Pay-out Ratio:- Total dividend to equity holders Net Profit after interest and preference Net profit available to equity It signifies the relationship between dividend
total net profit belonging to equity dividend paid to ordinary shareholders shareholders distributed and earnings earned from such dividends.
holders Number of ordinary shares outstanding Number of ordinary share outstanidng
or
Dividend per share ( DPS)
Earnings Per Share ( EPS)

22 Earning Yield:- EPS Net profit available to equity Market value of share It indicates true return on equity based on market
Market value of share shareholders value of shares.
Number of ordinary share outstanidng

23 Dividend Yield:- DPS Net Profit after interest and preference Market value of share It indicates true return on investment based on
Market value of share dividend paid to ordinary shareholders market value of shares.
Number of ordinary shares outstanding

24 Price Earning Ratio:- Market price of shares Market price of shares Net profit available to equity It indicates the relationship between market price and
EPS shareholders EPS, and the shareholders perception of the company.
Number of ordinary share outstanidng

25 Earning Power:- Net profit after taxes * sales Earnings after Taxation* sales sales * total assets It indicates the total earning power of business in terms
sales total assets (+) Int. on debt funds of sales and fixed assets.
(+) Non Operating Adjts.
(e.g. Other income/ loss on
sale of fixed Assets etc.)

26 Inventory Turnover Ratio:- Cost of goods sold [For Manuacturers:- Average Inventory = Indicates how fast inventory is used/ sold. High T/O ratio
Average Inventory Opening Stock of FG 1/2 ( opg. Bal. + clg. Bal) indicates fast moving material while low ratio may mean
(+) Cost of Production daed or excessive stock.
(+) Closing Stock of FG
For Traders:-
Opening Stock of FG
(+) purchases
(-) Closing Stock of FG]
27 Raw Material Turnover:- cost of raw materials used Openeing Stock of Raw Material 1/2 ( opg. Bal. + clg. Bal) Indicates how fast/ regularly Raw materials are used in
Average Raw Material inventory (+) Purchases production
(-) Closing Stock of Raw material.

28 Work - in - progress:- cost of goods manufactured Materials consumed 1/2 ( opg. Bal. + clg. Bal) It indicates the work - in - progress movements /
Average work in progress inventory (+) Wages production cycle.
(+) production overhead

29 Debtors Turnover:- Credit sales credit sales net of returns 1/2 ( opg. Bal. + clg. Bal) Indicates the speed of collection of credit sales / debtors.
Average Debtors + Average B/R
OR
Total Sales
Debtors + B/R

30 Average Collection Period Months (days) in a year Months (days) in a year Credit sales It states the avearge collection period of dedtors.
Debtors Turnover Average Debtors + Average B/R
OR
Total Sales
Debtors + B/R

31 Total assests Turn over:- Cost of goods sold [For Manuacturers:- 1/2 ( opg. Bal. + clg. Bal) Ability to generate sales per ruppee of total assets
Average total assests Opening Stock of FG
(+) Cost of Production
(+) Closing Stock of FG
For Traders:-
Opening Stock of FG
(+) purchases
(-) Closing Stock of FG]

32 Fixed Assets Turnover:- Cost of goods sold [For Manuacturers:- 1/2 ( opg. Bal. + clg. Bal) Ability to generate sales per ruppee of fixed assets
Average fixed assests Opening Stock of FG
(+) Cost of Production
(+) Closing Stock of FG
For Traders:-
Opening Stock of FG
(+) purchases
(-) Closing Stock of FG]

33 Capital Turnover:- Cost of goods sold [For Manuacturers:- 1/2 ( opg. Bal. + clg. Bal) Ability to generate sales per quantity of capital
Average capital employed Opening Stock of FG employed.
(+) Cost of Production
 (+) Closing Stock of FG
For Traders:-
Opening Stock of FG
(+) purchases
(-) Closing Stock of FG]

34 Current Assets Turnover:- Cost of goods sold [For Manuacturers:- 1/2 ( opg. Bal. + clg. Bal) Ability to generate sales per ruppee of current assets
Average current assests Opening Stock of FG
(+) Cost of Production
(+) Closing Stock of FG
For Traders:-
Opening Stock of FG
(+) purchases
(-) Closing Stock of FG]

35 Working Capital Turnover Ratio:- Cost of goods sold [For Manuacturers:- 1/2 ( opg. Bal. + clg. Bal) Ability to generate sales based on working capital
Net Working Capital Opening Stock of FG employment.
(+) Cost of Production
(+) Closing Stock of FG
For Traders:-
Opening Stock of FG
(+) purchases
(-) Closing Stock of FG]

DRAFTED BY: VIJAY KUMAR POPAT

ROLL NO: 54.
SECTION: SA - 1