Compute and interpret Liquidity ratios, Activity ratios, Solvency ratios and Profitability ratios:

1. Liquidity ratios:

Formula Values Interpretation

Current Ratio Current assets / Current Liabilities
Quick Ratio (Current Asset – Inventory) / Current Liabilities
Cash Ratios Cash and cash equivalents / Current Liabilities
3.13 The Current Ratio measures the
company’s ability to pay off its current
liabilities with its current assets within
one year. The higher the ratios, the better
the company’s liquidity position. Here the
ratio is 3.13 is a good ratio indicating the
company can meet its short-term debt.
2.20 Quick Ratio measures a company’s ability
to meet its short-term debt with its most
liquid assets and therefore excludes
inventories. Here the ratio of 2.20
indicates that the company is in good
position to meet its short-term debts with
quick assets.
0.02 This ratio calculates the company’s ability
to repay its short-term debt with cash or
near cash resources such as easily
marketable securities. Here the ratio of
0.02 is poor and indicates that the
company doesn’t have enough cash to
meet its debt.

2. Activity Ratios:

Formula Values Interpretation

Inventory Turnover Cost of goods sold / Average Inventory 1.55 This ratio measures how fast a company
Ratio is able to convert its inventory into sales.
The ratio of 1.55 shows that ITC slow in
converting its inventory into sales.
Asset turnover ratio Net Sales / total asset 0.66 This ratio measures how efficient a
company is in using its assets too
generate sales. The ratio of 0.66 is poor
and ITC should use its assets more
efficiently.
Equity Turnover Ratio Sales / Shareholder’s Equity 39.42 This ratio measures the proportion of a
company’s sales to its stockholders’
equity. It determines the efficiency with
which the company is using its equity to
 generate revenue. The ratio of 39.42
indicates a good ratio.

3. Solvency Ratios:

Formula Values Interpretation

Debt to equity Long term debt / total equity 0.00 This ratio indicates how much financing is
ratio done through long term debt with respect
to total equity. Long term debt to equity
ratio of 0 states that company doesn’t
depend on debt financing.
Proprietary ratio Total equity / total assets 0.82 This ratio is the proportion of total assets
of a business that is funded by the
proprietors. Here 82 % funds of the
business are financed by the proprietors.
Debt to equity Total debt / total equity 0.00 This ratio indicates how much financing is
ratio done through debt with respect to total
equity. Long term debt to equity ratio of 0
states that company doesn’t depend on
debt financing.
Interest EBIT / Interest expenses 2.40 This ratio measures how easily a company
coverage ratio can pay interest on its outstanding debt.
The ratio of 2.40 indicates that the
company has good revenue and can meet
its current interest payments and
obligations.

4. Profitability Ratios:

Formula Values Interpretation

Gross margin Gross margin / net sales 35.37 This ratio shows how much a company is
ratio earning, considering the needed costs to
produce its gods and services. The gross
margin ratio of 35.37 shows that the
company is earning profit after deducting
its costs.
Net Profit Net income / net sales 28.65 This shows how profitable a company is
margin after all its expenses. Net profit margin of
28.65 shows that the company generates
enough profit to lead the market.
Earnings per Net income / no of shares outstanding 10.59 This shows a company’s profit per
share outstanding share of stock.

5. Investment ratios:

Formula Values Interpretation

Return on Investments (Net Profit + Interest) / (Capital Share + 10.54 This ratio shows how much return the
(ROI) Long term debt) company is getting on its investments.
Return on Equity (ROE) Net Profit / Shareholder’s fund 21.18 This ratio shows how much the
shareholders are getting in return of their
investments.
Return on Assets (ROA) (Net Profit + Interest) / Total Assets 18.20 This ratio shows how much profit we are
able generate on the total assets of the
company.