MTI

Ratio Analysis:

PROFITABILITY RATIOS:

1. ROSF(Return on shareholder’s funds)= PAT – Preference Dividend *100

Ordinary share capital + Reserves
2. ROCE(Return on Capital Employed) =
Operating profit (EBIT) * 100
Ordinary share capital + Reserves + non-current liabilities

Capital Employed= Ordinary share capital + Reserves + non-current liabilities

Or
Capital Employed= Total liabilities – current liabilities

3. Operating Profit Ratio= Operating Profit (EBIT) *100

Sales revenue

If operational expenses rise more than sales, the operating profit ratio will decline.

4. Gross Profit Ratio = Gross Profit *100

Net Sales
Gross Profit= Net Sales – COGS (cost of goods sold)
COGS (cost of goods sold) = opening stock + purchase-closing stock

A poor gross profit ratio may be due to fall in selling price or rise in cost of materials, or both.

5. Net Profit Ratio= Net Profit(PAT) *100

Net Sales
6. Return on Assets = Net Profit (PAT) * 100
Average Total Assets
7. Return on Equity = Net Profit *100
Average Total Equity

(ANSWER OF ALL PROFITABILITY RATIOS WILL BE EXPRESSED AS %)

LIQUIDITY (SHORT TERM SOLVENCY RATIOS) RATIOS:

8. Current Ratio = Current Assets

Current Liabilities

• The ideal ratio is 2 times

• The ideal benchmark for the current ratio is $2:$1 where there are two dollars of current assets
(CA) to cover $1 of current liabilities (CL). The acceptable benchmark is $1: $1 but a ratio below
 $1CA:$1CL represents liquidity riskiness as there are insufficient current assets to cover $1 of
current liabilities.

9. Quick Ratio(Acid Test Ratio) = Current Assets – Inventory – Prepayments

Current Liabilities – Bank Overdraft

= Current assets – inventory

Current Liabilities

The minimum acceptable Quick Ratio is 1 times or 1:1

(ANSWER OF THESE 2 RATIOS ARE EXPRESSED AS TIMES e.g. 3 times, 5 times etc. or in ratio
CA:CL 1.5:1 etc)
10. Working Capital = Current assets – Current Liabilities

Activity Ratios (Asset Management Ratios):

11. Asset Turnover = Net Sales

Average Total Assets

(ANSWER IS EXPRESSED AS TIMES)

12. Inventory Turnover = Cost of Goods Sold

Average Ending Inventory

(ANSWER IS EXPRESSED AS TIMES)

13. Average inventory turnover period = Average inventories held *365

Cost of sales (or COGS)

(ANSWER IS EXPRESSED ASDAYS e.g. 66 DAYS, 75 DAYS)

(Average inventory turnover period indicates the duration after which the inventory is
turned over (sold). E.g. an inventory bought today will be sold after 66 days if the Average
inventory turnover period is 66 days. The lower the turnover period the better it is for the
business. Lower inventory turnover period indicates that the inventory bought is sold
quickly, which is good for the business)

14. Average settlement period for trade receivables =

Also called as
Average Collection Period
= Average trade receivables (or average debtors) *365

Total credit sales

(ANSWER IS EXPRESSED ASDAYS e.g. 66 DAYS, 75 DAYS)

(Lower average settlement period or collection period is good for the company. It shows that the
funds are not tied up with customers. The company is collecting cash quickly from the credit
customers)

15. Average settlement period for trade payables =

Also called as
Average Payment Period = Average trade payables (or average creditors) *365

Total credit purchase

(ANSWER IS EXPRESSED ASDAYS e.g. 66 DAYS, 75 DAYS)

(Higher average settlement period or payment period is good for the company to some
extent. It means company is using the money of supplier or is getting interest free credit
(money). But stretching it too far can damage the goodwill of the company.)

16. Sales revenue to capital employed = sales

Capital employed

Capital employed= Ordinary share capital + Reserves + non-current liabilities

(Higher ratio is proffered. Higher ratio indicates that assets are being used more productively.
But a very high ratio is not good for the company, it means that the company is not having
sufficient assets to sustain the level of sales (called as over trading on its assets))

17. Sales revenue per employee= Sales

No. of Employee
Higher ratio is good, it indicates that the company is having high productivity(sales) for
each employee.
[ROCE (alternate formula)
= operating profit ratio * sales revenue to capital employed ratio]

Financial Structure or Capitalisation Ratios

18. Debt/Equity ratio = Debt / Equity

19. Debt/Total Assets ratio = Debt *100
Total Assets
20. Equity ratio = Equity *100
Total Assets
 21. Times Interest Earned Ratio = Earnings before Interest and Tax

Interest

Also called interest coverage ratio

= EBIT
Interest

(ANSWER IS EXPRESSED AS TIMES e.g. 3 times, 5 times )

22. Gearing Ratio

= Long Term (non current) Liabilities *100
Ordinary share capital + Reserves+ Long Term (non current) Liabilities

Market Test Ratios

23. Earnings per share = Net Profit after tax
Number of issued ordinary shares
Answer is expressed in Rs. Or $ (currency) /share e.g. Rs. 45 per share

24. Dividends per share = Dividends

Number of issued ordinary shares

Answer is expressed in Rs. Or $ (currency) /share e.g. Rs. 45 per share

25. Dividend payout ratio = Dividends per share *100

Earnings per share
(Answer is expressed in %)
26. Price Earnings ratio(P/E) = Market price per share
Earnings per share
High P/E ratio indicates that the market (share market) has confidence on the future
prospects (profitability) of the company, and so the market is willing to pay for the share
of the company more money than the real (intrinsic) value of the share of the company.

e.g. If the company has invested in new markets, products which will become big products in
near future( e.g. Galaxy smart phone of Samsung) the investors(Market) may be willing to buy
the share of the company for more than its actual value today; because the success of the new
product will generate more profits for the company. This will increase the share price very fast
and the person who already holds the share can sell the share and generate heavy profits.
Cost Volume Profit Analysis (Break Even Point Analysis)

1. Variable cost per unit = Total variable cost

Number of units
2. Contribution per unit = Selling Price per unit – Variable cost per unit
3. Total Contribution = Contribution per unit * No. of units

4. Contribution Margin Ratio= Contribution per unit *100

Selling price per unit

5. Breakeven point(units) = Fixed cost

Contribution per unit
6. Breakeven point (Rs.) = BEP(Units) * Selling price per unit

Or = Fixed cost
Contribution margin ratio

7. Sales required to achieve a target profit = Fixed cost + Desired Profit

Contribution per unit
**Operating Gearing: Activities with high fixed cost are said to have high operating
gearing. For such activities increase in sales results in more than proportionate increase in
profit. e.g. if sales increase by 10%, profits may increase by 35%. Similarly decrease in
sales may result in more than proportionate decrease in profits. If sales decrease by 12%,
profits may decrease by 45%.

8. BEP(Units) for multi product firm = Fixed cost

Weighted contribution margin ratio
9. Weighted contribution margin ratio= C1W1 + C2W2 +C3W3
C1 = contribution margin ratio of product1
W1 = proportion of sales of product1 in total sales
C2 = contribution margin ratio of product2
W2 = proportion of sales of product2 in total sales
C2 = contribution margin ratio of product3
W2 = proportion of sales of product3 in total sales

OR
 Weighted contribution margin ratio = Total contribution from all products *100
Total sales of all products
10. Margin of safety = Total sales- Breakeven point sales
11. Margin of safety ratio = Margin of Safety *100
Total Sales