CLASSIFICATION OF RATIO Type Standard Norm For Investors For Company

PROFITABILITY RATIOS:(expressed in %) Gross Profit Ratio

Operating Ratio

Expenses Ratio Operating Profit Ratio Net Profit Ratio

Return on Capital Employed Return on Shareholders' Fund Return on Equity Shareholders' Fund

Return on Total Assets

Ratios(Market Test):

Earning Per Share

Price Earning Ratio

Payout Ratio Retained Earnings Ratio

Dividend Yield Ratio

COVERAGE RATIOS: (expressed in times)

Fixed Interest Cover

Fixed Dividend Cover

Debt Service Coverage Ratio


Capital Turnover Ratio

Fixed Asset Turnover Ratio

Working Capital Turnover Ratio

Total Asset Turnover Ratio

2 times

Stock Turnover Ratio

Debtors Turnover Ratio

Creditors Turnover Ratio


LIQUIDITY RATIOS: Working Capital Ratio OR Current Ratio 1:01 2:01

Liquid/Acid test/Quick Ratio


Absolute Liquidity/Super Quick Ratio


Cash to fund expenditure for operations

Defensive Internal Ratio Ratio of inventory to working capital STABILITY RATIOS: Fixed Asset Ratio



Ratio of Current Assets to Fixed Assets 2:01

Debt Equity Ratio

Debt Equity Ratio


Proprietary Ratio

1:03 >1 means highly geared.

Capital Gearing Ratio

<1 means low geared. 1 means evenly geared.


Operating Leverage Ratio

Financial Leverage Ratio

ROI > the cost of debt capital, it is said to have favourable financial leverage and viceversa.

CLASSIFICATION OF RATIOS Interpretation These ratios are calculated to enlighten the end results of business activitieswhich is the sole-criterion of the overall efficiency of a business concern. Higher the ratio, the better it is. Lower the ratio,the better it is.Higher the ratio,the less favourable it is because it would have a smaller margin of operating profit for the payment od dividend and creation of reserves. Lower the ratio,the better it is. Higher the ratio, the better it is. Higher the ratio, the better it is because it gives idea of improved efficiency of the concern Higher the ratio, the better it is.It is the overall profitability ratio which reflects the overall efficiency with which the capital is used. Higher the ratio, the better it is.It shows the extent to which the profitability objective is achieved. This ratio measures the percentage of net profit to equity shareholders' funds.Higher the ratio,the better it is. It measures the PAT against the amount invested in total assets to ascertain whether the assets are being utilized properly or not.Higher the ratio, the better it is. It helps in determining the market price of equity shares of the company and also in estimating the company's capacity to pay dividend to the equity shareholders. It indicates the market value of every rupee earning in the firm and is compared with industry average.High ratio indicates the share is overvalued and viceversa. It indicates as to what proportion of EPS has been used for paying dividend and what has been retained for ploughing back. Complementary to the Payout Ratio

It is concerned with the investors who are interested in dividend income.Higher the ratio, the better it is. These ratios indicate the extent to which the interests of the persons entitled to get a fixed return or a scheduled repayment as per agreed terms are safe.The higher the Cover, the better it is. It measures the ability of the concern to service the debt.It indicates whether the business would earn sufficient profits to pay periodically the interest charges.The higher the ratio, the better it is. It is important for pref.shareholder's entitled to get dividend at a fixed rate in priority to other shareholders. It is calculated to know the ability of a company to make payment of principal amounts on time.The higher the ratio, the better it is. These ratios are very important for a concern to judge how well the facilities at the disposal of the concern are being used. It shows the efficiency of the capital employed in the business.The higher the ratio, the greater are the profits and viceversa. This ratio measures the efficiency of assets use.The higher the ratio, the better it is. It shows the number of times Working Capital is turned over in a stated period.The higher the ratio, lower is the investment in working capital and the greater are the profits.A low ratio indicates that working capiital is not efficiently utilised. A high ratio is an indicator of overtrading of total assets while a low reveals idle capacity. It denotes the speed at which the inventory is converted into sales and thereby contributing for the profits of the concern.Higher the ratio, the better it is.

It indiactes the number of times on the average the receivable are turnover in each year.Higher the ratio, more is the efficient management of debtors. It gives the average credit period enjoyed from the creditors.A low ratio indicates that creditors are not paid in time.While a high ratio gives an idea that the business is not taking full advantage of credit period allowed by the creditors. These ratios are calculated to judge the financial position of the concern from long-term as well as short-term solvency point of view. It studies the liquidity position the concerns. Ideal ratio for the concern is 2:1, if it is more than 2,for the concern it is indicator of idle funds. It shows the firm's ability to meet current liabilities with its most liquid assets.It is always wise to keep the liquid assets equal to the current liabilities. this ratio gives an idea about the absolute liquidity of a concern, by excluding both receivables and inventories from current assets. This ratio measures the real lliquidity position of the concern.It explains the concern's ability to meet the operating expenditure from their cash balances. It examines the firm's liquidity position in terms of its ability to meet projected daily expenditure for operations.Higher the ratio, better it is. From a sound point of view, inventory should not exceed working capital. This ratio gives an idea as to what part of the capital employed has been used in purchasing the fixed asset for the concern. An increase in the ratio, accompanied by increase in profit, indicate the business is expanding. It measures the extent of equity covering the debt.It is used to measure the relative proportions of outsiders' funds and Shareholders' funds.It is also known as external-internal equity ratio.

It measures the extent of equity covering the debt.It is used to measure the relative proportions of outsiders' funds and Shareholders' funds.It is also known as external-internal equity ratio. A variant of debt equity ratio, which shows the relationship between shareholders' funds and total tangible assets.

It establishes the relationship between the fixed interest bearing securities and equity shares of a company.

This ratio explain the extent to which the debt is employed in the capital structure of the concerns. It occurs when with fixed costs the percentage change in profits due to change in sales volume is greater than the percentage change in sales volume.The lower the ratio, the better it is. When a firm procures debt capital to finance its needs, it is said to have financial leverage.It tells us about the extent of change in EBT due to change in EBIT

OF RATIOS Calculation

Gross Profit/Net Sales* 100

COGS+Operating Expenses/Net Sales*100

Expenses/Net Sales *100 Operating Profit/Net Sales*100 Net Profit after Tax/Net Sales*100

Operating Profit/Capital Employed*100

Net Profit after Interest & Tax/Shareholders' Fund*100

Net Profit after Interest,Tax& Pref.dividend/EquityShareholders' Fund

Net Profit after Tax/Total Assets*100

Net Profit after Tax and Pref.Dividend/Number of Equity Shares

Market Price per Equity Shares/Earning Per Share

Dividend per Equity Share/Earning Per Share Retained Earnings/Total Earnings*100

Dividend per share/Market price per share*100

Net profit before interest and tax/Interest Charges

Net Profit before interest and tax/Pref.Dividend

Net profit before interest and tax/interest+Principal payment instalment/1-tax rate

Sales/Capital Employed

Sales/Net Fixed Assets

Sales/Net Working Capital

Net Sales/Total Assets

COGS/Avg Stock held during the period

Net Credit Sales/Average Debtors

Credit Purchases/Average Accounts Payable

Current Assets/Current Liabilities

Quick Assets/Current Liabilities

Cash in hand & at bank+short term marketable securities/Current Liabilities

Cash & Bank Balances/Fund Expenditure for Operations

Quick Assets/Projected Daily Cash Requirements

Inventory/Working Capital

Fixed Asset/Capital Employed

Current Asset/Fixed Asset Long-term debts/Shareholders' fund

Long-term debts/Shareholders' fund+Long-term Debts

Shareholders' Fund/Total Tangible Assets

Fixed Interest bearing securities/Equity shareholders' fund

Marginal Contribution/Earnings before Interest & Tax

Earnings before interest and tax/Earnings before tax