RATIO ANALYSIS CLASSIFICATION

LIQUIDITY RATIO (IN PURE RATIO LIKE 1/1)

2.Quick ratio/Liquid Ratio/Acid-Test Ratio
1. Current ratio
Quick ratio is also known as Acid test or Liquid
• The objective of computing this ratio is to measure the ability of ratio. It is another ratio to test the liability of the
the firm to meet its short term liability. It compares the current concern. This ratio establishes a relationship
assets and current liabilities of the firm. This ratio is calculated between quick assets and current liabilities.. The
as under : ideal current ratio of a company is 2 : 1 main purpose of this ratio is to measure the
ability of the firm to pay its current liabilities. A
quick ratio of 1 : 1 is considered good for a
company.
Current Asset
Short-term loans and advances, Current Investments, Inventories
(excluding Loose Tools and Stores and Spares), Trade Receivables
(bills receivable and sundry debtors less provision for doubtful
debts), Cash and Cash Equivalents (cash in hand, cash at bank,
cheques/drafts in hand, etc.) Other Current Assets (prepaid
expenses, interest receivable, etc.)
Current Liabilities Liquid Assets
Short-term borrowings, Short-term provisions, Trade Payables Current Asset-Inventory-Prepaid Expenses
(bills payable and sundry creditors), Other Current Liabilities
(current maturities of long term debts, interest accrued but not
due, interest accrued and due, outstanding expenses, unclaimed
dividend, calls-in advance,etc.)
 SOLVENCY RATIO (IN PURE RATIO LIKE 1/1)
1. Debt-Equity Ratio 2. Total Assets to Debt Ratio
• It is a relationship between long-term external
equities, i.e., external debts (includes long-term It is a relationship between total assets and long-term debts
borrowings and long-term provisions) and internal of the enterprise. If less than 0.5 than asset are financed
equities (Shareholders’ Funds) of the enterprise. Ideal through equity and if more than 0.5 than by debts.
Ratio is 2:1

• Debt = Long-term Borrowings + Long-term Provisions

Or
= Total Debt – Current Liabilities
Or Debts=Same as Debt-Equity Ratio
= Capital Employed – Equity* • Total Assets Non-Current Assets: This will include:
Fixed assets (tangible and intangible assets), Non-Current
• Equity = Share Capital + Reserves & Surplus Investments, Long term Loans and Advances.
= Non-Current Assets + Working Capital$– Non Current • Current Assets: This will include:
Liabilities (Long-term Borr. + Long-term Prov.)
Or Current Investments, Inventories (including spare parts and
loose tools), Trade Receivables, Cash and Cash Equivalents,
= Total Assets – Total Debt
Short-term Loans and Advances, Other Current Assets.
 SOLVENCY RATIO………………………..
3. Proprietary Ratio 2. Interest Coverage ratio
It is a relationship between proprietor’s fund and total • It is a relationship between Net Profit before Interest and
assets.It shows the financial strength of the entity.It is Tax and Interest on Long Term Debts. It is calculated to
used to measure the proportion of totals assets ascertain the amount of profit available to cover interest
financed by Proprietors’ Funds.Higher the ratio is on long term debts. High Interest Coverage ratio Indicates
better for safety for creditors and lenders. Ideally 2:1. good financial health. Ideally 6 to 7 times

• Shareholder’s Fund • Profit before Interest and Tax= profit after tax + tax + int
Liabilities Approach: In this approach, • Interest on long term debt= interest on Debentures ,
Proprietors’ funds = Share Capital (Equity + Long Term Loans
Preference) + Reserves and Surplus.
Assets Approach: In this approach, • Note
Proprietors’ funds = Non-current Assets + Working • It is calculated in Times
Capital (i.e. Current Assets – Current Liabilities) – Non-
current Liabilities.
 ACTIVITY / TURNOVER RATIO (In Times )
1. Inventory / Stock Turnover 2. Trade Receivable/Debtors Turnover
• It is a relationship between Cost of Revenue from • It is the relationship between Credit Revenue from
Operations, i.e., Cost of Goods Sold and average Operations (i.e., Net Credit Sales) and Average Trade
inventory carried during that period. It ascertains
whether the investment in stock is appropriate and Receivables (i.e., Average of debtors and bills receivable
that only the required amount is invested in stock. of the year). Ideal ratio is 6 to 8 times & around 45 days.
Ideal ratio is 5 to 6 times.

• Debtor Collection Period

• Cost of goods sold = Opening stock(Exlcuding = 365/52/12
Stores & Loose Tools + Purchases+ Direct expenses – Trade Receivable T.O Ratio
Closing Stock
Average Trade Receivable
COGS= Revenue from operations-Gross Profit
COGS=Cost of Materials Consumed+Purchases of Stock-
in-Trade+ Changes in Inventories of Finished Goods, WIP
& Stockin-Trade+ Direct Expenses
• Average stock =
 ACTIVITY / TURNOVER RATIO……………..
3. Trade Payable/Creditors Turnover
4. Working Capital Turnover Ratio
• t is a relationship between the net credit
purchases and total payables or average • It is a relationship between working capital and revenue
payables.It identifies the number of times the from operations. It shows the number of times a unit of
creditors are turned over in relation to credit Rupee invested in working capital produces sales. Higher
purchases.Ideal Ratio is 30 to 60 days or 6 times Ratio is considered as ideal.

• Creditor Collection Period

= 365/52/12
Trade Receivable T.O Ratio

Average Trade Payable Working Capital

(Opening Creditors + Closing Creditors + Opening Current Assets-Current Liabilities
B/P +Closing B/P)
2

1. Gross Profit Ratio
• It is a relationship between the
Gross Profit and Revenue from
Operations (i.e., Net Sales). It
shows the average margin on
goods sold. Higher the better
PROFITABILITY RATIO (IN PERCENTAGE %)
2. Net Profit Ratio
• It is a relationship between Net Profit and Revenue from Operations i.e.,
Net Sales. It indicates the actual status (Financial Result) of business, as
higher the Net Profit Ratio, better the business. Ideal Ratio is 10 to 20%.
Net profit
Revenue from Operations – Cost of Revenue from Operations – Operating
Expenses – Non-Operating Expenses + Non-Operating Income – Tax.
3. Return on Capital Employed /Return on Investments

Gross Profit
• Revenue from Operations (i.e.
Net Sales)– Cost of Revenue
from Operations (COGS)
• Net Sales + closing stock -
opening stock - net purchases -
direct expenses
 PROFITABILITY RATIO…………………….
4. Operating Ratio
• It is a relationship between Operating Costs and Revenue from Operations. It helps in assessing the operational efficiency of an
entity.
 PROFITABILITY RATIO
5. Operating Profit Ratio • Other Important Formula’s
It is the relationship between Operating Profit and Revenue from
Operations i.e., Net Sales. It determines the operational 1. Earning Per Share (EPS)=
efficiency of the business. Profit after Tax-Preference Dividend
Number of Equity Shares
2. Dividend Per Share (DPS)=
Operating Profit = Gross Profit + Other Operating Income-Other
Operating Expenses Total Dividend
Or
Operating Profit = Net Profit (Before Tax)+(Non-operating
No. of Equity Shares
Expense/Losses) -(Non-Operating Incomes) 3. Price Earning Ratio=
Or
Operating Profit = Revenue from Operations -Operating Cost Market Price per share
Operating Profit = Gross Profit + Other Operating Income-Other Earning Per Share
Operating Expenses
Or
Operating Profit = Net Profit (Before Tax)+(Non-operating
Expense/Losses) -(Non-Operating Incomes)
Or
Operating Profit = Revenue from Operations -Operating Cost