RATIO ANALYSIS

1.) PROFITABLE RATIO

a.) GROSS PROFIT RATIO
Company A has a total sales of P250,000, sales returns of P20,000, and P210,000 of
COGS. Compute the Gross Profit Ratio;
FORMULA:
Gross profit
GROSS PROFIT RATIO = x 100
Net Sales
NET SALES = total sales – sales returns
GROSS PROFIT = Net sales – COGS

SOLUTION:
NET SALES = 250,000 – 20,000
= 230,000
GROSS PROFIT = 230,000 – 210,000
= 20,000
20,000
GROSS PROFIT RATIO = x 100
230,000
= 8.69 / 9%

b.) NET PROFIT RATIO

Given the Company’s Net sales P300,000 and Net profit of P30,000. Compute the net
profit ratio;
FORMULA:
Net profit
NET PROFIT RATIO = x 100
Net Sales

SOLUTION:
30,000
NET PROFIT RATIO = x 100
300,000
= 10%
 c.) OPERATING RATIO
Given the company’s P100,000 Cost of good sold , Operating expense of P25,000, and
Net sales of P160,000. Compute the Operating ratio;
FORMULA:
COGS + Operating expense
OPERATING RATIO = x 100
Net Sales
SOLUTION:
100,000 + 25,000
OPERATING RATIO = x 100
160,000
= 78.125 / 78%

d.) NET WORTH

Suppose net income in an organization is P30,000 where as shareholder’s investments or
funds are P300,000. Compute the Net Worth;
FORMULA:
Net Profit
NET WORTH = x 100
Shareholder’s fund
SOLUTION:
30,000
NET WORTH = x 100
300,000
= 10%

e.) RETURN ON EQUITY CAPITAL

Given the Company’s Equity share capital: P600,000, 7% of Preference share capital:
P350,000, Taxation rate: 25% of net profit before tax: P300,000.
Compute the Return on Equity Capital;
FORMULA:
Net Profit after tax – Preference Dividend
RETURN ON EQUITY CAPITAL = x 100
Equity share capital
SOLUTION:
NET PROFIT AFTER TAX = 300,000 X 0.25 = 75,000
= 300,000 - 75,000
= 225,000
PREFERENCE DIVIDEND = 350,000 X 0.07 = 24,500

Net Profit after tax – Preference Dividend

RETURN ON EQUITY CAPITAL = x 100
Equity share capital

225,000 – 24,500
= x 100
600,000
= 33.42 / 33%

f.) DIVIDEND YIELD RATIO

If the company declares dividend at 10% on its shares, each having a paid up value of
6.00 market value of 14.50. Compute the dividend yield ratio;
FORMULA:
Dividend Per Share
DIVIDEND YIELD RATIO = x 100
Market Value Per Share
DIVIDEND PER SHARE = % on share / 100 x Paid up value
SOLUTION:
DIVIDEND PER SHARE = 10 / 100 x 6
= 0.60
0.60
DIVIDEND YIELD RATIO = x 100
14.50
= 4.14 / 4%

g.) DIVIDEND PAYOUT RATIO

If the company has dividend per equity share of P0.50 and Earnings per share of P2.
What is the Dividend Yield Ratio;
FORMULA:
Dividend per Equity Share
DIVIDEND PAYOUT RATIO = x 100
Earnings per Share
SOLUTION:
0.50
DIVIDEND PAYOUT RATIO = x 100
2
= 25%
 h.) PRICE EARNINGS RATIO
The market price of a share is P25 and earning per share is P5. Compute the Price
earning ratio;

FORMULA:
Market price per equity share
PRICE EARNING RATIO =
Earnings per Share

SOLUTION:
25
DIVIDEND PAYOUT RATIO =
5
= P5

2.) LIQUIDITY RATIOS

a.) CURRENT RATIO
The company’s Current assets are P800,000 and total current liabilities are P200,000.
Compute the company’s Current ratio;
FORMULA:
Current Assets
CURRENT RATIO =
Current Liabilities
SOLUTION:
800,000
CURRENT RATIO =
200,000
= 4:1

b.) LIQUID RATIO

Given the following; Compute the company’s Liquid Ratio:
Cash P100; Accounts Receivable P740; Inventory P910; Marketable Securities P810.
Accounts Payable P360; Notes Payable P510; Accrued Expenses P85; Tax payable P560.
FORMULA:
Liquid Assets
CURRENT RATIO =
Current Liabilities
LIQUID ASSETS = Cash + Accounts Receivable + Marketable Securities
CURRENT LIABILITIES = Accounts Payable + Notes Payable + Accrued Expenses +
Tax payable
SOLUTION:
LIQUID ASSETS = 100 + 740 + 810 = 1,650
CURRENT LIABILITIES =360 + 510 + 85 + 560 = 1,515
1,650
CURRENT RATIO =
1,515
= 1.09 : 1

3.) ACTIVITY RATIOS

a.) INVENTORY TURNOVER RATIO
The cost of goods sold is 600,000. The beginning inventory is 100,000 and the ending
inventory is 180,000. Compute the Inventory Turnover Ratio.
FORMULA:
COGS
INVENTORY TURNOVER RATIO =
Average Inventory
AVERAGE INVENTORY = Beg. Inv. + End. Inv. / 2
SOLUTION:
AVERAGE INVENTORY = 100,000 + 180,000 = 280,000
= 280,000 / 2
= 140,00
600,000
INVENTORY TURNOVER RATIO =
140,000
= 4.29 TIMES

b.) AVERAGE COLLECTION PERIOD

Using the example in receivable turnover which gives a result of 6 times. Compute the
Average collection period;
FORMULA:
360 days
AVERAGE COLLECTION PERIOD =
Receivable Turnover

SOLUTION:
360 days
AVERAGE COLLECTION PERIOD =
6 times
= 60 days

c.) PAYABLE TURNOVER RATIO

 Suppose the Purchases in company is P460,000, Purchases Returns P45,000, Accounts
Payable beginning P75,000 and Accounts Payable ending P95,000.
Compute the Payable Turnover Ratio;
FORMULA:
Net Credit Purchases
PAYABLE TURNOVER RATIO =
Average Trade Creditors
NET CREDIT PURCHASES = Purchases - Purchases Returns
AVERAGE TRADE CREDITORS = A/P Beg. + A/P End. / 2

SOLUTION:
NET CREDIT PURCHASES = 460,000 – 45,000 = 415,000
AVERAGE TRADE CREDITORS = 75,000 + 95,000 = 170,000
= 170,000 / 2
= 85,000
415,000
PAYABLE TURNOVER RATIO =
85,000
= 4.88 TIMES

d.) WORKING CAPITAL TURNOVER RATIO

Company ABC declared Cost of Sales worth P350,000 and Net Working Capital of
P25,000. Compute the Working Capital Turnover Ratio;
FORMULA:
Cost of Sales
WORKING CAPITAL TURNOVER RATIO =
Net Working Capital
SOLUTION:
350,000
WORKING CAPITAL TURNOVER RATIO =
25,000
= 14 TIMES

e.) FIXED ASSETS TURNOVER RATIO

 Given the company’s land P1,500,000; Building (net) P 600,000; Equipment (net)
P350,000; Cost of Sales P360,000. Solve the Fixed Assets Turnover Ratio;
FORMULA:
Net Fixed Assets
FIXED ASSETS TURNOVER RATIO =
Cost Of Sales
SOLUTION:
(1,500,000 + 600,000 + 350,000) / 2
FIXED ASSETS TURNOVER RATIO =
360,000
= 1,225,000 / 360,000
= 3.40 TIMES

4.) LONG TERM SOLVENCY

a.) DEBT-TO-EQUITY RATIO
From the following figures calculate debt to equity ratio;
Equity Share Capital – 700,000
Capital reserve – 200,000
Retained earnings - 100,000
Bonds Payable – 300,000
Mortgage Payable – 100,000
Accounts Payable – 200,000
FORMULA:
Total Liabilities
DEBT-TO- EQUITY RATIO =
Total Shareholders Equity
TOTAL LIABILITIES = Bonds Payable + Mortgage Payable + Accounts Payable
TOTAL SHAREHOLDERS EQUITY = Equity Share Capital + Capital reserve + Retained
earnings
SOLUTION:
TOTAL LIABILITIES = 300,000 + 100,000 + 200,000 = 600,000
TOTAL SHAREHOLDERS EQUITY = 700,000 + 200,000 + 100,000 = 1,000,000

600,000
DEBT-TO- EQUITY RATIO =
1,000,000
= 0.6 : 1

b.) PROPRIETARY RATIO

 The company declares shareholder equity of P1,000,000 and Total asset of P500,000.
Solve the Proprietary Ratio;
FORMULA:
Shareholders Equity
PROPRIETARY RATIO =
Total Assets
SOLUTION:
1,000,000
PROPRIETARY RATIO =
500,000
=2:1

c.) FIXED ASSETS TO PROPRIETORS’ FUND

Suppose the depreciated book value of fixed assets is P21,000 and proprietors’ funds are
P30,000. Solve the Fixed assets to proprietors’ fund;
FORMULA:
Fixed Assets
FIXED ASSETS TO PROPRIETORS’ FUND =
Proprietors’ Fund
SOLUTION:
21,000
FIXED ASSETS TO PROPRIETORS’ FUND =
30,000
= 0.7 or 0.7 : 1

d.) CURRENT ASSETS TO PROPRIETORS’ FUNDS

The company’s current assets is P15,000 and the proprietors’ funds are P110,000 . What
would be their Current Assets to Proprietor’s Funds?
FORMULA:
Current Assets
CURRENT ASSETS TO PROPRIETORS’ FUNDS =
Proprietors’ Funds
SOLUTION:
15,000
CURRENT ASSETS TO PROPRIETORS’ FUND =
110,000
= 0.136 or 14%