Ratio Analysis

Prepared By: Prof. Divya Agrawal

Types of ratio analysis
1. Liquidity ratio

2. Profitability ratio

3. Activity ratio

4. leverage ratio
Liquidity ratio

• These are those assets which are easily convertible into cash in order
to meet the liabilities as and when arising.

• It helps to meet day to days problems of financial management

consist of highly.
List of liquid Assets

• Cash in Hand • Stocks

• Cash in Bank • Marketable Securities

• Cash Equivalents • Accounts Receivable

• Accrued Income • Certificates of Deposit

• Promissory Notes

• Government Bonds
 Types of liquid assets
• Quick Ratio

• The quick ratio is a measure of a company's ability to meet its short-term

obligations using its most liquid assets (near cash or quick assets). Quick assets
include those current assets that presumably can be quickly converted to cash
at close to their book values.

Quick ratio = (Cash + Accounts receivable + Marketable securities) /

Current liabilities
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• Current Ratio

• Current ratio is balance-sheet financial performance measure of

company liquidity. Current ratio indicates a company's ability to meet
short-term debt obligations. The current ratio measures whether or not
a firm has enough resources to pay its debts over the next 12 months.

The current ratio = Current Assets / Current Liabilities

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• Cash Ratio

• Cash ratio (also called cash asset ratio) is the ratio of a company's cash

and cash equivalent assets to its total liabilities. Cash ratio is a
refinement of quick ratio and indicates the extent to which readily
available funds can pay off current liabilities.

Cash ratio = Cash and cash equivalents / Current Liabilities

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• Acid-Test Ratio

• The term “Acid-test ratio” is also known as quick ratio. The most basic definition of acid-
test ratio is that, “it measures current (short term) liquidity and position of the company”.
To do the analysis accountants weight current assets of the company against the current
liabilities which result in the ratio that highlights the liquidity of the company.

• Net Working Capital

Net working capital (NWC) = current assets minus current liabilities

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• Working capital

Current Assets - Current Liabilities

Profitability ratio

• Profitability ratios measure a company’s ability to generate earnings

relative to sales, assets and equity. These ratios assess the ability of a
company to generate earnings, profits and cash flows relative to
relative to some metric, often the amount of money invested. They
highlight how effectively the profitability of a company is being
managed.
Types of profitability ratio

• Cash return on capital invested (CROCI)

Cash Return on Capital Invested = EBITDA / Capital Invested

• Earnings Before Interest and After Taxes(EBIAT)

Earnings Before Interest and After Taxes = Revenue - Operating

Expenses + Non-operating expenses
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• Earning retention ratio

(Total Net Profit / Number of Total share) - (Dividend / Share)

• Earning before interest tax depreciation and amortization

EBITDA = Revenue – Expenses (excluding tax, interest,

depreciation, amortization)
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• Gross profit margin

Gross profit margin = Gross profit / Revenue 

• Net profit margin

Net profit margin = Profit (after tax) / Revenue

• Return on Assets (ROA)

ROA = Net Income after tax / Total assets (or Average Total assets)
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• Return on average capital employed

ROACE = EBIT / (Average Total Assets - Average Current Liabilities)

• Revenue per Employee

Revenue per Employee = Sales Revenue / Number of Employees

 Activity Ratio
• Inventory turnover Ratio

• It measures how many times a company has sold and replaced its
inventory during a certain period of time.

• Receivable turnover Ratio

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• Payable Turnover Ratio

• It measures the number of times, on average, the accounts payable

are paid during a period

• Working Capital turnover Ratio

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• Fixed turnover Ratio
efficiency with which a company uses its fixed assets to generate its
sales revenue

• Capital turnover Ratio

Shaw's the relationship between sales and capital employed it is used
to mange its efficiency
net sales / capital employed
 Leverage ratio

• Debt Equity Ratio

• debt to equity ratio expresses the relationship between external

equity (liabilities) and internal equity (stockholder’s equity), it is also
known as “external-internal equity ratio”.
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• Total debt ratio
Total debt to total assets. A ratio is greater than 1 saws the more
liability of company
Total debt/ total assets
10/5 = 2 Moet liability
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• Fixed payment coverage Ratio
Firms ability to pay all of its fixed charges and expenses.
EBIT+ fixed charges before tax
fixed charges before tax + interest

• Cash flow coverage ratio

This ratio saws the financial obligation of company are covered by its
earning
operating cash flow/ total debt
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• Financial leverage Ratio
Measures the overall debt of the company
total debt/ shareholders equity

• Interest coverage Ratio

How easily company pay interest
EBIT/ Interest expenses
Capital gaining ratio
Analyzing capital structure means measuring the relationship between the funds provided by common stockholders and
the funds provided by those who receive a periodic interest or dividend at a fixed rate.