Is The Process Of Computing And Presenting The

Relationships Between The Items In The Financial

Statement.

A
N FORMS / MODES OF EXPRESSIONS
R A
A L PURE
RATIO
PERCENTAGE
RATIO
TIMES/ RATE
RATIO
PERIOD
RATIO
AMOUNT
RATIO
T Y • Numerator & • Multiplied by 100 • Relationship
Denominator and resultant figure expressed in
• Expressed in
form of period
• Resultant figure
expressed in
I S
form
• Taking
expressed
percentage
in times
• Eg. 8 times stock
i.e. days/ weeks/
months
rupees
• Eg. Rs 10/-
Denominator • Eg. 10% has turned into •
O
Eg. 2 months
I as 1
• Eg. 1.5:1
sales in a year

s
 Classification
of Ratios based
on Function

Liquidity Leverage Activity Profitability Coverage

Ratio Ratio Ratio Ratios Ratio
Stock
Capital Operating Dividend
Liquid ratio turnover
gearing ratio ratio payout ratio
ratio

Debtors
Debt-equity Gross profit Debt service
Current ratio turnover
ratio ratio ratio
ratio

Proprietory
ratio
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 1. Balance Sheet 2. Revenue 3. Composite Ratio
Ratio Statement Ratio • Debtors Turnover Ratio
• Current Ratio • Gross Profit Ratio • Creditors Turnover Ratio
• Quick Ratio • Net Profit Ratio • Return on Capital Employed
• Proprietory Ratio • Operating Profit Ratio • Return on Proprietor’s Fund
• Return on Equity Capital
• Debt Equity Ratio • Operating Ratio
• Dividend Payout Ratio
• Capital Gearing Ratio • Expense Ratio • Debt Service Coverage Ratio
• Stock – Working • Stock Turnover Ratio
Capital Ratio

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 1. BALANCE SHEET RATIOS

Stock to
Proprietory Debt Equity Capital
Current Ratio Quick Ratio Ratio Working
Ratio Gearing Ratio
Capital Ratio

Long Term Leverage, Prop. of WC

Short Term Immediate
Financial Capital Structure trading on equity blocked in
Solvency Solvency
Solvency Inventories

‘Capital ‘Inventory
‘Working Capital ‘Liquid Ratio’, ’Net Worth
BF, PF Structure Ratio’ Working Capital
Ratio’ ‘Acid Test Ratio’ Ratio’
Ratio’

Standard 65% Lowly or Highly Standard 100%

Standard 2:1 Standard 1:1 Idly standard 2:1 geared
to 75% or less

CGR = Funds
PR = PF / TA * DE = BF/PF or fixed rate / SWC = CST /
CR = CA / CL QR = QA / QL Funds not fixed
100 D/E WC
rate
Higher than std. Lower std
Higher than std. Higher than std. Low -geared < 1, Lower than std.
good solvency satisfactory for
good liquidity good liquidity High-geared >1 the better
position creditors

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1. Current Ratio = Current Assets = CA
Current Liabilities CL

2. Quick Ratio/Acid Test/ Liquid = Quick Assets =

Quick Liabilities
QA
QL 1.
3. Proprietary Ratio/Net Worth –
= Proprietors’ Funds x 100 = PF x100
BALANCE
SHEET
Total Assets or Total Liabilities TA

Proprietors’ Fund (PF) will include……..

•Paid up Equity capital (EC)
•Paid-up Preference Capital (PC) RATIOS
•Reserves & Surplus (RS)
•Less: Fictitious assets or Losses
Thus, PF = EC+PC+RS- Fict. Assets

Total Assets (TA) will include …..

• Fixed Assets + Investments + Current Assets
4. Debt Equity Ratio = Debt or Borrowed Funds = D or BF
Equity Proprietors’ Funds E PF
BF= Debentures, Loans
PF = EC+PC+R&S- Fict. Asst

5. Capital Gearing Ratio = 1.

= Capital Entitled to Fixed Rate of Interest or Dividend = PC + BF
Capital not Entitled to Fixed Rate of Interest or Dividend EF
BALANCE
SHEET
Components:
Capital entitled to fixed interest or dividend….
Preference capital (PC), Debentures, Long term loans i.e. Borrowed Funds
(BF)
RATIOS
Capital not entitled to fixed interest or dividend….
Equity Capital (EC)
Reserves & Surplus (RS)
continued…
Less: Fictitious Assets or Losses.
Thus, EC+RS-Fict. Assets

6. Stock To Working Capital Ratio = Closing Stock x 100 = CST x 100

Working Capital WC
1. Gross Profit Ratio = Gross Profit x 100 = GP x 100
Net Sales S
(Gross Profit = Sales – COGS)

2. Net Profit Ratio = Net Profit (before tax) x 100 = NPBT x 100 2.
REVENUE
Net Sales S
(Operating Net Profit + Non-operating Income – Non Operating Expense)

3. Operating Profit Ratio = Operating Profit x 100 = OP x 100

STATEMENT
Net Sales
(Gross Profit – Operating Expenses)
S
RATIOS
4. Operating Ratio -
= Cost of Goods Sold + Operating Expenses x 100 = COGS + OE x 100
Net Sales S

(OE = office/administrative, selling/distribution & finance expenses)

5. Expense Ratio = Expenditure x 100 = E x 100
Net Sales S

a. Administration Expense Ratio = Administration Expenses x 100

Net Sales
2.
b. Selling & Distribution Expense Ratio -
= Selling & Distribution Expenses x 100 REVENUE
. Net Sales
STATEMENT
c. Finance Expense Ratio = Finance Expenses x 100
Net Sales RATIOS
continued …
6. Stock Turnover Ratio = Cost of Goods Sold = COGS
Average Stock AS

Average Stock = Opening Stock + Closing Stock

2
3. Composite RATIOS
1. Debtors Turnover Ratio -
= Credit Sales = CRS
Debtors + Bills Receivable DR + BR

Note: Debtors and Bills Receivable may be taken at the average of the opening and closing
amounts. If the details are not available, only the closing balance may be considered.

Debtors Velocity ( Debt Collection Period) =

Debtors + Bills Receivable or 12 mths /365 days or 365 x Avg. Debtors
Daily Credit Sales Debtors Turnover Ratio Credit Sales

• The speed with which debtors get settled on

1. Debtors an average during the year.
Turnover Ratio • Calculate the debtors velocity to indicate the
period of credit allowed to an average debtor.

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2. Creditors Turnover Ratio -
3. Composite RATIOS continued..
= Credit Purchases = CRP
. Creditors + Bills Payable CD + BP

Note: Creditors ,may be taken at the average of the opening and closing amounts. If the
details are not available, only the closing balance may be considered.

Credit Purchases = Gross Credit Purchases less Returns. If details of credit purchases are
not available, COGS (Cost of Goods Sold) amount is used.

Creditors Velocity ( Debt Payment Period) -

Credit Period enjoyed = 365 x Avg. Creditors or 12 months /365 days
Credit Purchases Creditors Turnover

or Creditors + B.P.
Daily Credit Purchases
• The speed with which creditors are paid off on
an average during the year.
2. Creditors
• Calculate the creditors velocity to indicate the
Turnover Ratio period taken by the average creditor to be paid
off.
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 3. Composite RATIOS continued..
3. Return on Capital Employed -
= Net Profit (before Interest &Tax) x 100 = PBIT x 100
Total Funds Employed or Total Net Assets CE

• This ratio indicates the profit or return on

3. Return on capital employed
Capital Employed • This ratio is also referred as “Return on
Investment (ROI)”.

4. Return on Proprietor’s Funds = Net Profit (after tax) x 100 = NPAT x 100
Proprietor’s Funds PF

4. Return on • This ratio shows the earning power of the funds

invested by the proprietors.
Proprietor’s • This ratio is also referred as ‘Return on Proprietor’s
Fund Equity’ / ‘Return on Net Worth’..

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 3. Composite RATIOS continued..
5. Return on Equity Capital -
= Profit available to Equity Shareholders x 100 = PAES x 100
Equity Shareholders’ Fund EF
PAES = Profit after interest, tax and preference dividend.
(PAES = NPAT – PD)
EF = EC + RS – Fict. Assets

5. Return on • This ratio indicates the profit or return on

Equity Capital Paid up Equity Capital.

6. Dividend Payout Ratio -

= Dividend paid to Equity Shareholders x 100 = ED x 100
Profit available to Equity Shareholders PAES

6. Dividend • It measures the relationship between earnings

Payout belonging to the ordinary shareholders and the
Ratio dividend paid to them.

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 3. Composite RATIOS continued..
7. Debt Service Coverage Ratio -
= Cash profits available for debt servicing
Interest + Installments due on loans
Cash profits available for debt servicing…
A. Net Profit after interest and tax (NPAT)
B. Add: (i) Non-cash debits to P/L a/c (depreciation, goodwill w/o, deferred
revenue expenses w/o , loss on sale of fixed assets, etc.(ii) Interest on loan
C. Cash profits for debt servicing

Interest means interest on long term loans during the year.

Installments means installments due on long term loans during the year.
• This ratio shows relationship between net profits
and interest + installments payable on loans.
7. Debt Service • Debt Service means the payment of interests +
Coverage Ratio installments on loans.
• Coverage means the availability of profits for
debt servicing.

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