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Ratio - Basics: Liquidity Ratios (Short Term Solvency Ratios)

This document defines and explains various financial ratios used to analyze the financial performance and position of a business. It discusses liquidity ratios, profitability ratios, expenses ratios, turnover ratios, and capital structure ratios. Key ratios include current ratio, return on equity, debt-to-equity ratio, inventory turnover, and earnings per share. Financial ratios are calculated using figures from a company's income statement and balance sheet to evaluate aspects like liquidity, profitability, expenses, asset use, debt levels, and returns.

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Avijash Shrivastava
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80 views

Ratio - Basics: Liquidity Ratios (Short Term Solvency Ratios)

This document defines and explains various financial ratios used to analyze the financial performance and position of a business. It discusses liquidity ratios, profitability ratios, expenses ratios, turnover ratios, and capital structure ratios. Key ratios include current ratio, return on equity, debt-to-equity ratio, inventory turnover, and earnings per share. Financial ratios are calculated using figures from a company's income statement and balance sheet to evaluate aspects like liquidity, profitability, expenses, asset use, debt levels, and returns.

Uploaded by

Avijash Shrivastava
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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[Type text]

RATIO - BASICS

Gross profit = Sales Cost of goods sold

Operating profit = GP Operating Expenses


= Profit after operating expenses but before Interest and tax.

Operating Expenses = Administration Expenses + Selling and distribution expenses,


Interest on short term loans etc.

Capital employed = Share holders fund + Long term borrowings-Prelim expenses


Or = Fixed assets + Working capital

Share holders fund (or) Proprietary fund (or) Owners fund (or) Net worth = Equity
share + Preference share + Reserves and surplus P & L a/c Preliminary Expenses.

Equity shareholders funds = Shareholder funds Preference Share capital

Long term liability = Secured loan + unsecured loan + Debentures.

Total asset = Total assets as per Balance sheet Preliminary expenses.

Total liability = Long term liability + Current liability (or) short term liability

Long term fund = Total asset Current liability or


Share holders funds + long term loan funds.

Working capital = Current asset Current liability

Accounts Receivable = Debtors + Bills receivable

Accounts payable = Creditors + Bills Payable

Current Assets = Stock + Debtors + Bills Receivable + Cash + Bank Balances +


Prepaid expenses + accrued income

Quick Asset = Current Asset Stock & Prepaid expenses


Current Liability = Creditors + Bills payable + Bank OD + Outstanding Expenses

Quick Liability = Current liability Cash credit, Bank borrowings, OD

Liquidity Ratios (Short term Solvency Ratios): -

1) Current ratio = Current asset


Current Liability
2) Liquid Ratio =

Quick Assets
Current Liabilities

3) Quick ratio or Acid Test ratio = Quick Asset


Quick liability
(1)

[Type text]
D) Profitability Ratios : 1) Gross Profit Ratio = Gross Profit
Sales
2) Net Profit Ratio = Net Profit
Sales

* 100

* 100

3) Operating Profit ratio = Operating profit


Sales

* 100

4) Return to shareholders = Net profit after interest and tax


Share holders fund
5) Return on Net Worth = Return on Net worth
Net worth

* 100

6) Return on capital employed (or) Return on investment = Return (EBIT)


Capital Employed
7) Expenses Ratios :a) Direct expenses Ratios : i) Raw material consumed
* 100
Sales
ii) Wages
* 100
Sales
iii) Production Expenses * 100
Sales
b) Indirect expenses Ratios : i) Administrative Expenses
* 100
Sales
ii) Selling Expenses * 100
Sales
iii) Distribution Expenses
* 100
Sales
iv) Finance Charge
* 100
Sales
8) Earnings per share = Net profit after interest and tax Dividend on Preference shares
Number of equity shares
9) Price earning ratio = Market price per equity share
Earning per share
10) Pay out ratio = Dividend per equity share
Earning per equity share

* 100

(2)

[Type text]
11) Dividend yield ratio = Dividend per share
Market price per share

* 100

12) Fixed charges coverage ratio = Net profit before interest and tax
Interest charges
13) Interest coverage ratio = Earning before interest and tax
Interest charges
14) Fixed dividend coverage ratio =

Net profit
.
Annual Preference dividend

15) Over all profitability ratio = Operating profit


Capital employed
16) Productivity of assets employed =

* 100

Net profit
* 100
Total tangible asset

17) Retained earning ratio = Retained earnings * 100


Total earnings (NP)

F) Turnover Ratios (Activity Ratios): 1) Assets turnover =

Sales
Total assets

2) Fixed assets turnover =

Sales
Fixed assets

3) Working capital turnover =

(in times)

[Number of times fixed assets has


turned into sales]

Sales
Working capital

(in times)

4) Inventory turnover = Cost of goods sold


(For finished goods) Average inventory
5) Debtors turnover (or) Average collection period =

Credit sales
Average accounts receivable

(or) = Average accounts receivable * 365


Credit sales
6) Creditors turnover (or) Average payment period

Credit purchases
Average accounts payable

(or) = Average accounts Payable * 365


Credit Purchases
(3)

(in times)

(in days)

(in times)

(in days)

[Type text]

(4)

[Type text]
7) Inventory Turnover (for WIP) = Cost of production
Average Inventory (for WIP)
8) Inventory Turnover (for Raw material) =

10) Inventory Holding Period =

Raw material consumed


(in times)
Average inventory (for raw material)

365
.
Inventory turnover ratio

11) Capital Turnover ratio = Cost of sales


Capital employed

= Debt
Equity
= Long term debt
Long term fund

(in days)

(in times)

Capital structure ratios (Long-term Solvency Ratios): 1) Debt-equity ratio


(or) Leverage ratio

(in times)

= External Equity
Internal Equity
= Share holders fund
Long term fund

2) Proprietary ratio = Proprietary fund


Total Assets
3) Total Liability to Net worth ratio = Total Liabilities
Net worth
4) Capital gearing ratio = Preference share capital + Debentures + Long Term Debt
Equity shareholders funds

(5)

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