TYPES OF RATIOS:

1. Liquidity ratios
2. Leverage ratios
3. Activity ratios
4. Profitability ratios
5. Market ratios
1. LIQUIDITY RATIO:
current assets
1. Current /working capital/banker ratio =
current liabilities
Ratio = 2:1
liquid∨quick assets
2. Quick/acid test/ liquid/near money ratio =
current liabilities
Liquid asset = current asset – (inventories + prepaid expense)
Ratio = 1:1
absolute liquid assets
3. Absolute liquid/cash position/cash ratio =
current liabilities
Absolute liquid asset = marketable securities or short-term securities + cash in hand +
cash at bank
Ratio = 1:2 or 0.5:1

2. LEVERAGE/ SOLVENCY RATIO:

I. Structural ratio
II. Coverage ratio
I. Structural ratio
a. Debt equity/external-internal/security ratio:
long term debt
1. Long term/debt equity ratio =
equity
Long term debt = debentures + mortgages + all long-term loans
Equity = equity share capital + preference share capital +
reserves/surplus – preliminary expense
total debt (long+ short term)
2. Total debt equity ratio =
equity
Short term debt = current liabilities
Ratio = 1:1
 shareholders fund
b. Proprietary/equity/net worth ratio: =
total assets
Ratio = 0.5:1 (50%) or above
total assets
c. Solvency ratio =
total debt
total assets = current asset + non-current or fixed asset
total debt = total outside liabilities (long term and current liabilities)
Ratio = >1
¿ asset after dep .
d. Fixed asset to net worth/proprietary fund ratio =
proprietary fund /networth
proprietary fund/net worth = eq. share capital + pref. share capital +
reserves/surplus + undistributed profit – accumulated losses
Ratio = 1:1
¿ asset after dep .
e. Fixed asset ratio = × 100
long term funds
long term fund/capital employed = (fixed + current asset + investment) –
current liabilities
= share capital (eq. + pref.) + reserve/surplus + long term liabilities
Ratio = 1:1 or 100%
¿ income bearing funds
f. Capital gearing ratio =
equity∨shareholders fund
pref , share capital+ debentures+ long term loans
=
eq . share capital+reserves /surplus
II. Coverage/leverage ratio:
profit before I ∧T
a. Interest coverage ratio =
amt . of I
Ratio = 6 to 7 times
EAT
b. Dividend coverage ratio =
pref . dividend
Ratio = 2 times or more

3. ACTIVITY / EFFICIENCY/ PERFORMANCE/ ASSET UTILISATION

RATIO:
cost of goods sold
a. Inventory or stock turnover ratio =
avg . stock
 Cost of goods sold = opening stock + purchase + direct exp. (including wages)
- closing stock
= sales - gross profit
= sales – gross loss
= net sales (sales – sales return)
opening+closing stock
avg. stock =
2
Ratio = 8 times
no . of days∨months∈ a year
Stock velocity/ stock turnover period =
stock turnover ratio
avg . stock
direct formula = ×no . of days∨months of a year
cost of goods sold
net credit sales
b. Debtors turnover/ receivable turnover ratio =
avg . debtors+ avg . billsreceivable
net credit sales = gross credit sales – sales – sales return
gross credit = total sales – cash sales
opening+closing debtors
avg. debtors =
2
opening+closing bills receivable
avg. bills receivable =
2
Ratio = 7 times (45 days)
365∨12
Avg. collection period/ debtors velocity =
debtors turnover ratio
avg . debtor
=
credit sales per day [i . e , net credit sales/ 365]
avg debtors
= ×365∨12
net credit sales
net credit purchase
c. Creditors turnover/ payable turnover ratio =
avg . creditors+ avg . bills payable
net credit purchase = total credit purchase– purchase return
total credit purchase = total purchase – cash purchase
opening+closing creditors
avg. creditors =
2
opening+closing bills payable
avg. bills payable =
2
Ratio = 7 times (45 days)
 365∨12
Avg. payment period =
creditors turnover ratio
avg . creditors (including bill payable)
=
credit purchase per day [i. e ,net credit purchase /365]
avg creditors (including bills payable)
= ×365∨12
net credit purchase
net sales
d. Working capital turnover ratio =
working capital
net sales = total sales – sales return
total sales = cash sales + credit sales
working capital = current assets – current liabilities
Ratio = 7 or 8 times
net sales
e. Fixed asset turnover ratio = asset ¿
net ¿
net sales = total sales [gross sales] – sales return
total sales = cash sales + credit sales
net fixed asset = total fixed asset – depreciation
Ratio = 4 or 5 times
4. PROFITABILITY RATIO:
I. Profitability ratio based on sales
II. Profitability ratio based on investment
I. Profitability ratio based on sales:
gross profit
a. Gross profit ratio = × 100
net sales
gross profit = net sales – cost of goods sold
cost of goods sold = opening stock + purchase less return + direct expense
(including wages) – closing stock
net sales = gross sales – sales return
Ratio = 20 to 25%
operating cost
b. Operating ratio = × 100
net sales
operating cost = cost of goods sold + operating expense
Ratio = 75 to 85%
c. Expense ratio:
 cost of goods sold
 Cost of goods sold ratio = ×100
net sales
office∧administration exp .
 Office and administrative ratio = ×100
net sales
selling∧distributionexp .
 Selling and distribution exp. Ratio = ×100
net sales
finance exp .
 Finance exp. Ratio = ×100
net sales
operating profit
d. Operating profit ratio = × 100
net sales
operating profit = net sales – cost of goods sold – operating expense
= gross profit – operating expense
= net profit + non-operating exp. And interest on loans and debentures – non
operating incomes
Ratio = 15 and above
net profit
e. Net profit ratio = × 100
net sales
PBT
= × 100
net sales
PAT
= × 100
net sales
Net profit = operating net profit (gross profit) + non-operating income – non
operating exp.
Ratio = 5 to 10%
II. Profitability ratio based on investment:
a. Return on investment (ROI)/ rate of return/ return on capital employed
profit before I ∧T
= × 100
capital employed
PBIT = gross profit – operating expense
= net profit + I and T
Gross capital employed = fixed asset + current asset
Net capital employed = fixed asset + current asset – current liabilities
= share capital + reserves + deb. + other long-term loans
Ratio = 15%
net profit after T ∧pref . dividend
b. Return on equity capital = ×100
eq . shareholder fund
eq. shareholders fund = eq. capital + reserve + surplus
 net profit after T ∧I
c. Return on shareholders fund = × 100
shareholder fund
shareholders fund/ net worth = pref. capital + eq. capital + reserve/surplus (net
profit) – accumulated losses – fetish assets
net profit after T ∧pref . dividend (available¿ eq holders)
d. EPS = ×100
no . of eq . shares
¿
f. DPS = dividen d paid ¿ eq . shareholders no . of eq . shares × 100

g. Dividend payout ratio (D/P ratio) =

dividend paid ¿ eq . holders ¿ eq . shareholders ¿ ×100
net profit belonging ¿
DPS
=
EPS
market price per share
h. Price earning ratio (P/E ratio) = × 100
EPS