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IMPORTANT RATIOS:

S DETAILS OF RATIO FORMULA COMPOSITION Important Points. REMARK


N
A LIQUIDITY/SHORT
TREM STABILITY.
1 Current Ratio(CR) CA(Current Assets CA(Current Assets) CL (Current For every Rs.1 current
----------------- Liabilities) Liabilities, current assets
CL (Current Stock Raw material Crs. For Goods should be Rs. 2/-.
Liabilities) Work in Progress Crs. For Exps. ------------------------------
(O/S salary) -------
Standard Norm For Stock - Fini. Goods Bills Payables CA has direct relation
Current Ratio- 2:1 Drs+Bills Receivables. Pro. Bad-Debts with CR.( Increase in
Adv. To Suppliers Pro. Taxation. CA increases CR)
Bank /Cash CL has inverse relation
with CR. ( Increase in
Current Asset = Assets to be realized CL decreases CR)
within 1yr. Measures margin of
safety to creditors.
Current Liability = Liability to be paid
within 1yr.

2 WORKING CA-CL • Absolute measure of firm’s Working Capital = (CA- Gross Working Capital means Total
CAPITAL(WC) liquidity. CL). Current Assets.
/Net Current Asset CA has direct relation
with WC.( Increase in
CA increases WC)
CL has inverse relation
with WC. ( Increase in
CL decreases WC).
3 Net Working Capital to WC/SALES • WC has direct relation to
sales Ratio sales.
• Increase in sales needs
increase in WC.
4 Quick /Liquid Ratio. (CA-stock-Prepaid) • Prepaid=adv. To supplier. Ability to pay current Increase in Liquid Ratio indicates
(Acid Test Ratio) -------------------- • Standard Norm for Liquid Liabilities. Increase in Current Ratio. However,
(CL) Ratio- 1:1. Increase in Current Ratio not necessarily
• CA –( Stock +Prepaid) also indicates Increase in Liquid Ratio.
called Liquid Assets, Quick However,
Assets.
5 Fixed Assets to Current Total FA
Assets Ratio Total CA
B LONG TERM
STABILITY/
LEAVERAGE
RATIOS.
1 Debt/Equity Ratio Long-Term-Debts Long-Term-Debts (LTD)=SL+USL. Standard Norm For
Pure Equity SL= Secured Loans. Debt Equity Ratio- 2:1
USL=Unsecured Loans
Pure Equity=((Capital +Reserve &
Surpluses.)-
Misc.Exp.To The Extent Not Written
Off.)
2 Times Interest Earned EBIT(OP) EBIT=Earnings Before Interest & Tax. Ability to meet fixed
(TIE) / Interest Coverage -------------------- (Operating Profit) interest obligations.
Ratio TOTAL INTREST.

3 DEBT SERVICE COP Cash Operating Profit (COP) Shows ability to Serve Financial institute normally satisfied with
MARGIN(DSM) ----------------------- =Net Profit + Tax +(Non Cash Exps.) Principle portion of its DSCR in the range of 1.6 to 2 times.
Debt Service Coverage CL-PI + Interest on Debt. long term debt & lease
Ratio (DSCR)
CL=current liabilities Principle Debt
+Interest on Debt.
4 Operating Leverage Contribution Contribution means Gross Margin (OL) measures , (OL) can be explained in simple math’s
(OL) ----------------------- (OP)= (Contribution-OP.EXP) a) Effects of changes in as under
Operating Profit Quantity produced /sold Operating Profit (OP)----
(OP) upon EBIT of company, Contribution
b) Business Risk To get Rs 1 (OP) How much
c) Effects of contribution(OL)
Production
Planning

5 Financial Leverage Operating Profit (FL) measures, (FL) can be explained in same as (OL)
(FL) (OP). a) Effects of changes in mathematical formula.
------------------ EBIT
OP after interest upon EPS of
company,
b) Change in Mix of
debt &
equity in capital
structure of
company.
c) Financial Risk of
the
Firm
6 Combined Leverage : Contribution Combined Leverage
----------------------- measures,
Operating Profit Total Risk of Company
(OP)
Alternatively-
((OL)* (FL) )
C PROFITABILITY
RATIOS:
1 Gross Profit Ratio Gross Profit
(G/P Ratio) ----------------* 100
Total Net Sales.
2 Net Profit Ratio Profit After Tax
(N/P ratio) (PAT)
--------------------*
100
Total Net Sales
3 Operating Ratio (OR)/ Total Operating Measure of the operating efficiency of
Expense Ratio Exp. the firm.
-----------------------
Total Net Sales.
4 Return On Investment Profit After Tax CE=FA +INV+ WC Overall all effectiveness Other variants of this ratios are,
(ROI) (PAT) FA=Fixed Assets. of Management, in Return On Assets=(PAT/Total Assets)
------------------ WC=Working Capital. generating
Capital Employed CE is also known as Net Tangible Profits from resources. • Total assets for this purpose FA
(CE) Asset. + WC (but excludes
fictious,intangible assets,
CE is also known as Net Tangible obsolete stocks, doubtful debts).
Worth. Return On Ordinary share holders
----------------------------------------------- Equity=(PAT-Preference Dividend)
CE= CAPITAL + R & S + SL + --------------------------------
USL-(MISC. EXP). Pure Capital Employed
R&S=Reserves & Surpluses.
SL= Secured Loans.
USL=Unsecured Loans.
MISC. EXP= Misc.Exp.To The Extent
Not Written Off.)
4 ACTIVITY RATIOS: COMMON IMPORTANT POINTS
(Efficiency ACTIVITY RATIOS,
Ratios/Asset Utilization
Ratios)
1 Accounts Receivable Total Net Credit Indicates quality of receivables & how 1) Any turnover ratio the sales figure in
Turnover (ART) Sales Successfully the firms collect the same. numerator relevant item (e.g.
----------------------- Bad Debts are not deducted from Debtor, stock, fixed Asset ----- etc)in
Total Av. Debtors debtors as it will result in higher Denominator.
debtors turnover.
Net Credit sales = Credit sales- Sales
Returns
Av. Debtors =( Op Drs + Cl. Drs)/2
2 Inventory Turnover (IT) Cost Of Goods Cost Of Goods Sold (i) How Finished Goods 2) If specific formula is given in the
Sold = (Op.St + purch + Direct.Exp.- Cl. stock moving or problem for turnover ratio then put note to
----------------------- Stk) otherwise. that effect.
Av. Stock Av. Stk = (op.stk + cl.stk)/2 (ii)It indicates 3) High ratio indicates an efficient and
possibility of inventory effective utilization of an asset.
of obsolescence.
3 Fixed Asset Turnover Total Sales. * Total Asset (Excluding fictitious Indication To The
(FAT): ----------------------- asset) Extent Company Is
---- Using Its Plant &
* (Total Fixed Machinery.
Asset.)
E MARKET RATIOS:
1 Earning Per (PAT - Preference Measure the amount earnings available
Share(EPS): Dividend) To Eq. shareholders.
----------------------- Higher EPS Have +Ve impact On
(No. Of Eq. Market Price Of Shares.
Shares.)

2 DIVIDEND PER Cash Dividend


SHARE (DPS): -----------------------
(No. Of Eq.
Shares.)
3 Dividend Pay-Out Ratio: DPS/EPS
4 Book Value Per Share Capital Employed (CE) = (Net Tangible Asset/Worth)
(BVPS) : (CE)
-----------------------
(No. Of Eq.Shares)
5 Price/Earning Ratio: Market Price Of EPS means Earning Per Share. Useful in financial
(P/E) Ratio Share Forecasting.
----------------------- Helps in knowing
(EPS.) whether shares of the
company are over or
under valued.
6 Dividend Yield : (DY) Dividend Per
Share.
-----------------------
Market Price Of
Share.
F MISC. RATIOS:
1 No. Days Of Inventory: Av. Stock Value (i) If you divide Cost Of Goods Sold
(Age Of Stock- Finish --------------------- by 365 Days, you will get Age Of
Goods) (Cost Of Inventory in days.
Goods/365 Days) (ii) If you divide Cost Of Goods Sold
by 12 months, you will get Age Of
Inventory in months.

2 No. Of Days Credit To Av. Debtor (i) If you divide Credit Sales by 365
Debtors (Customers): ----------------- Days, you will get Age Of Debtor in
(Age Of Debtors) (Credit sales / 365 days.
days ) (ii) If you divide Credit Sales by 12
months, you will get Age Of Debtor in
months.

3 No. Days Of Credit By Av. Creditor


Creditors (Suppliers): ----------------------
(Age Of Creditors) (Credit
Purchases) / 365
days.
4 Operating Cycle ( F1+F2)-(F3). Operating Cycle can be
described as
1) From Cash you
Purchase Raw Materials,
2) Raw Materials passed
through production
Process which creates
Work In Progress
(WIP).
3) WIP gets converted in
Finished Goods .
4) Finished Goods ,on
sales
gets converted into
Debtors.
5) Debtors once realized
gets converted into cash.
6) From Cash you
Purchase Raw Materials
and the Operating Cycle
continues…..

5 Efficiency Ratio Activity Ratio


Capacity Ratio
6 Defensive Interval Liquid Assets PDCR=(Projected Cash Operating
Ratio Projected Daily Expenses)/365 Days
cash requirements.
(PDCR)
7 Dividend Coverage PAT PAT = Profit After Tax.
Ratio ---------------
Preference
Dividend

8 Capital Gearing Ratio ( Eq capital + Highly geared Trading On Equity in simple terms
reserves) company means if returns in business
means it’s are much more than
-------------------- capital
carrying fixed Bank rate of interest , it is better
( Pf Shares + rate of interest to borrow from bank &
Debentur or dividend is financial institutes
es+ more than
debts) equity capital. On the strength of current Equity
rather than to issue more
equity shares thereby

Diluting EPS and controlling intrest


in the company.