RATIO ANALYSIS

Types of Ratio:-
Capital Structure Ratio (or)
Liquidity Ratio Profitability Ratio
Leverage Ratio (or) Solvency Ratio
 Debt Equity Ratio
 Gross Profit Ratio
 Interest Coverage Ratio
 Net Profit Ratio
 Current Ratio  Ratio of Proprietor’s funds (PF) to
 Operating Ratio
 Quick Ratio Total Assets.
 Earnings Per Share
 Super Quick  Ratio of Fixed Assets to PF
 Return on Investment
Ratio  Ratio of Current Assets to PF
 Dividend Yield
 Solvency Ratio
 Price Earnings Ratio
 Fixed Asset Ratio
Formulae for Ratios:-
1. Liquidity Ratio:-

Current Assets Current Liabilities

 Cash in Hand
 Cash at Bank
 Bills Receivable  Bank Overdraft
 Sundry Debtors  Sundry Creditors
 Marketable/Temporary  Bills Payable
1. Current Ratio = Investment/Securities  Outstanding Expenses
 Advances (Short term)  Taxes Payable
 Raw Materials/Work in  Short Term Loans
Progress/Finished Goods  Income received in advance
 Prepaid Expenses  Provision for dividends
 Short term investments  Provision for Taxation
 Accrued Income  Unearned Income
 Stock/Inventory
 Money at Call/Short Notice
2. Quick Ratio(Or)Acid
test (Or)=
Quick Assets = Current Assets – Stock Quick Liabilities= Current
(or) Liabilities- Bank Overdraft
(Or) Quick Assets= Current Assets – (C L are those liabilities which
Current Assets [Stock(Or)Inventors+ Prepaid expenses] are Payable with in the year)
Current Liabilities

Super Quick Assets includes cash in

hand, cash at bank balance and
marketable securities. Super Quick
3. Super Quick Ratio =
Assets may be computed by subtracting
Refer to the Current Liabilities
the debtors and bills receivable from the
liquid assets.
Short Term investments, marketable
securities.
2. Capital Structure Ratio or Solvency Ratio or Leverage Ratio:-

1. Debt Equity Ratio = Debt Equity

 Debentures
Or  Long Term Loans
 Mortgage Loans
 Short Term Loans
Or  Current Liabilities
(Refer in the Above)
 Equity Share Capital
 Capital Reserve
 Revenue Reserves
(To meet Operations
Expenses)
 Retained Earnings
(After Profits, the income
earned is Retained Earnings)
 Sinking Funds

2. Interest Coverage Ratio =

Share Holders Funds Total Assets

 Equity Share Capital  Fixed Assets
3. Proprietary Ratio =  Preference Share Capital  Current Assets
 Reserves  Intangible Assets
 Retained Earnings (Market Value)

Or Net Worth Fixed Assets

 Land
 Equity Share Capital +
 Building
 Preference Share Capital +
 Furniture
 Reserves –
 Machinery
 Fictitious Assets
 Long Term Investment
 Ratio of Fixed Assets to Proprietary Fund =

 Ratio of Current Assets to Proprietary Fund =

 Ratio of Proprietary Funds to Total Assets =

Total Assets: - Tangible Fixed Assets + Current Assets

4. Solvency Ratio =
Total Liabilities:- Long Term and Current Liabilities are
Included.

Long Term Funds:- Debt + Equity

Fixed Assets:- Refer in the Above
5. Fixed Asset Ratio =
Long Term Funds:- Equity Share Capital + Preference Share
Capital + Reserves and Surplus + Long Term Loans.
Fixed Assets:- Fixed Assets less Depreciation + Long Term
Investments + Shares in Subsidiaries
3. Profitability Ratios:-

 Gross Profit = Net Sales – Cost of Goods Sold

 Cost of Goods Sold = Opening Stock + Net Purchases
1. Gross Profit Ratio = +Direct Expenses – Closing Stock
 Direct Expense = All Expenses charged to trading
account

 Net Sales = Total Sales – Sales Return

 Net Purchases = Total Purchases – Purchase Return

2. Net Profit Ratio (or)  Net Profit = Gross Profit – Office Expenses + Selling
Profit Margin Ratio = & Distribution Expenses.
 Net Sales = Total Sales – Sales Return
 Net Purchases = Total Purchases – Purchase Return

 Operating Profit = Gross Profit – Operating Expenses

OP = Net Sales – (COGS + Net Operating Expenses)
COGS – Cost of Goods Sold; OP- Operating Profit
 COGS = Opening Stock + Purchases + Manufacturing
3. Operating Ratio = Expenses(or Direct Expenses) – Closing Stock
 Operating Expenses = COGS + Administrative
Expenses + Selling & Distribution Expenses
 Administrative Expenses covers all office and
COGS cancelled from the above form Management Expenses such as Salaries, Office Rent,
Insurance, director’s fee, legal expenses and so on.
 Selling & Distribution Expenses include salaries to
sales staff, advertising, travelling expenses, cost of
samples and so on.

 Net Sales = “Sale less Sales Return”

4. Return On Investment =
Net profit after tax & Interest
total investment or Share holders funds
Profitability is measured in terms of Return On Investment. The Term “Investment” may refer to
Total Assets, Capital Employed or Owners Equity.
 Net Profit = Operating Profit before Interest, Tax on
5. Return on Capital Employed Ratio = Profit & Dividends on shares.

 Capital Employed = Equity Share Capital + Preference

Share Capital + Reserves + Undistributed Profits +
Long Term Liabilities – Fictitious Assets.

6. Earnings per Share (EPS) =

7. Price Earnings Ratio =

8. Dividend Yield Ratio =