V--tlassil/cation or Types ol Ratios

l
q, ·) Lir;uidity Ratios (Shor :-term solven cy) Liquid ity ratios shows
(t rr,eet its short- term financ ial obliga tions. The two ratios includ
the ability e enterp rise to
ed in this catego ry are
(a) curren t Ratio or &i>orlcing Capita l Ratio
Curren t Ratio = Curren t Assets
Curren t Liabilit ies
• Current Assets = Curre nt Invest ments + Inventories (Exclu ding stores and spares and
loose tools) + Trade Receivables (Net of provision for doubt
ful
debts ) + Cash and Cash Equivalents + Short -term Loans
and
Advances + Other Curre nt Assets
• Current Liabilities = Short -term Borrow ings + Trade Payab
les + Other Curre nt Liabili ties
+ Short -term Provisions
(b) Lir;uid Ratio or t§1uiclc Ratio or Acid Tert Ratio
. .d R . Liquid Assets or tfluick Assets
L ,qw at,o =
Curren t Liabilit ies
• tfluick Assets = Curre nt Asset s - Invent ories - Prepaid Expen
ses
• Current Liobillties As per Curre nt Ratio
(ii) Solvency Ratios (Long -term solven cy) Solve ncy ratios are
calcul ated to Judge the long-t erm
financ ial positio n of the business. The ratios in this catego ry are
(a) l>ebt to Er;ultg Ratio

't>ebt to Equity P..atio 't>ebt (Lon9- term debts)

=
Equity (Share holder s' funds)
• l>ebt = Long- term Borrowings (i.e. debentures, mortgage,
public depos its) + Long- term
Provisions
• Shoreholders' Funds = Share Capita l , Reserves and Surplu
s
or
= Non-c urrent Asset s (Prop erty, plant and equip ment+
Intang ible
assets + Non-c urrent invest ments + Long- term loans and
advan ces) + INorking Capita l* - Non-c urren t Liabili ties (Long
-
term borrow ings + Long- term provis ions)
"'£.Jorkin9 Capita l = Curren t
Assets - Curren t Liabilit ies
(b) Total Assets to l>ebt Ratio
.
Total Assets to 't>ebt Ratio Total Assets
= b
Long- term 't>e ts
• Total Assets = Non-c urrent Assets (Prope rty, plant and
equip ment + Intang ible assets
+ Non-c urrent inves tment s+ Long- term loans and advan ces)
+ Curre nt
Assets [Curre nt invest ments + Invent ories (Inclu ding stores
and spares
and loose tools) + Trade receivables + Cash and cash equiva
lents +
Short -term loans and advan ces] + Other Curre nt Assets
• l>ebt = Long- term Borrow ings + Long- term Provisions
(c) Proprletar!J Ratio
Proprie tors' Funds or Shareholders'
Propri etary Ratio = - - - - - - - - - - - - -Funds
--
Total Assets
• Shareholders' Funds = Share Capita l + Reserves and Surplu
s
• Total Assets as per Total Assets to l>ebt Ratio
(d) Intere st Coverage Ratio
Net Profit before Intere st and Tax
Intere st Coverage Ratio = - - - - - - - - - - - - - - - ... Times
Intere st
• Net Prollt belore l"tere st o"d To,c = Profit a~er Tax··+
~·f'a;/+7nteresi
 (e) 'l>ebt to Capital Emploged Ratio

l>ebt to Capital employed Ratio = Long-term l>ebt

Capital employed ( or Net Asset s)
• 'l>ebt = Lon g-te rm Borrowings + Lon
g-te rm Provisions
• Capitol Emploged = Lon g-te rm l>eb
t + Shareholders' Funds
(iii) Activitg/Per.Pormor1ce/rurr1ov
er Ratios Acti
vity /Tur nov er ratios show how effic
is using its assets to generate ient ly a compahy
sales. The ratios in this category
(a) lnventorg Turnover Ratio are ••
Inventory T,urn over Rat,o
. = Cost of Re1enue from Operatio
_ _ _ _ _ _ _ ____.,e__ _ns _ i.e.
__ Cos
_t _
of _
C,oo
_ds_
Sold .
_ = ...... Time
Average I nventorg s
• Cost ol Revenue .Prom Operotior1s
= Opening Inventory (Excluding stores and spar
es and
loose tool s) +Ne t Purchases + l>ire
ct Expenses -
Closing Inve ntor y (Excluding stores
and spares
and loose tool s)
or
= Revenue from Operations - C,ros
s Prof it
or
= Cost of Materials Consumed +
Purchases of Stock-in-trade
+ Change in Inventories of Finis
hed C,oods, INIP and
Stoc k-in -trad e + Dire ct Expenses
•if dire ct expenses _are not given, ·
assume it to be nil.
• Average Inventory or Stock - Opening Inve ntor y+ Closing Inventor
y
(b) Trade Receivables Turnover Ratio 2
T' d R
, ra e ece,.va bles T'
, urnover Rat.10 = -
Net Credit ReJenue from Operations
------------
Average Trade Receivables - ..... Times
• Net Credit Revenue how, Operatio
ns = Credit revenue from operations
- Sales return
or
= Revenue from operations - Cash revenue from oper
ations.
Opening receivables (deb tors + bills
receivables)
+ Closing receivables (debtors + hills
• Average Trade Receivables= receivables)
1·-· -·-
2
i l>ebt Collection Period or Average Col
I lection Period
It is dete rmin ed as follows

Deb t Collection Period = 36S

Trade Re ceivahles or Debtors, Turn = Number of l>ays
over Ratio
or Deb t Collection Period = 12
,
·---· --- Trade Re ceivables or l>ebtors Turnover Ratio = Number of Months ii
(c) Trade Pagables Turnover Ratio
. ,_
Trade Payables Turnover Ratio = Net Credit Purcnases
A T
verage ra de p,ayables • - ... Times
. Net Credit Purchases = Net Purc
hases - Cash Purchases
Opening Payables (cre dito rs+ bills
payable)
+ Closing Payables (creditors + bills
• Average Trade Payables = payable)
,·- -·- 2
~ Average Pagment Period or Average -·-·- ·,
ltge ol Pagables
! Aver ,
! Average Payment Per iod= _ _age Trade Payables
__:~--- '
Net Credit Purchase-s- x Number of Mon ths/ Day s in a Year~
'
Months (or days ) in a Year
! or
I - Trade Payables or Creditors Turnover
Ratio
 (d} '4)orldng Capit al Turnover Ratio
l,,Jorking Capita l Turnover Ratio = Revenue from Operations (Net sales} _
1,,Jorki·ng Capital ..... Times
• i.Jorldng Capit al = Current Assets - Current Liabil
ities
(e) Fixed Asset Turnover Ratio
Fixed Asset , urnov er Rat.10 = -
Net Revenue from Operations
T
----------
Net Fixed Assets
(f) Net Asset/Capital Employed Turnover Ratio
Net Asset Turnover Ratio = Revenue from Operations
Capital Employed
C} Proli tabili ty Ratios These ratios measure the profit abilit
y of a business. Profit abilit y ratios help
,v in assessing the overall efficie ncy of the business.
The ratios in this category are
G) Lross Profit Ratio qross Profit R t· =
0 '<f a 10 - - - - -qross
--- Profit
------ X 100 _
- ...... cd
'"/0
Revenue from Operations (Net sales)
• ~ross Profi t = Revenue from Operations - Cost of Revenue from Operations
(b) Operating Ratio (Oper ating cost ratio)
Operating Ratio = -Operating Cost x JOO = ....... %
Revenue from Operations (Net sales)
Cost of Revenue from Operations + Operating Expenses
or Opera ting Ratio = - - - - - - - - - - - - - - - - - - - - x 100
Revenue from Operations (Net sales)
• Operating Cost = Cost of materials consumed + Purch
ases of stock -in-tra de + Changes in
inventories of finish ed goods, work- in-pro gress and stock
-in-tr ade
+ Employees bene fits expenses + l>epreciation and amor tisatio n
expenses + Other expenses ( Other than non-o perat ing
expenses)
• Cost of Revenue how, Operations =Asp er inven
tory turno ver ratio
• Operating Expenses = Employees Bene fit Expenses
+ Other Expenses ( Othe r than
non-o perat ing expenses) + (l>epreciation and amor tisatio
n
expenses)
or Office expenses, admin istrat ive expenses, sellin g and
distri butio n
expenses, employees bene fit expenses, depreciation and
amor tisatio n expenses.
(c) Operating Profit Ratio
Operating Profi t Ratio = - - - - Opera ting Profit
- - - - - - - - - - x JOO = ....... %
Revenue from Operations (Net sales )
• Operating Profi t = Net Profit (befo re tax) + Non-o
perat ing Expenses· - Non-o perat ing
Incom e'° or 4ross Profit + Other Operating Incom e -
Othe r
Operating Expenses
*Non- opera ting Expenses = Intere st on Long -term Borro
wings + Loss on Sale of Property,
Plant and Equip ment and Intan gible Asset s
or Non-c urren t Assets
••Non-o perat in Intere st Received on Inves tmen ts + Profi t on Sale
of Property,
Plant and Equipment and Intan gible Assets
or Non-c urren t Assets

(d) Net Profi t Ratio Net Profit Ratio = - - .-- -

Net Profit after Tax •
- - - - - - - - - x JOO
Revenue from = ....... %
Operations (Net sales )
• Net Profi t = Revenue from Operations - Cost of Reven
ue from Operations - Operating
expen ses- Non-o perat ing expenses + Non-o perat ing incom
e + Tax
(e) Return on Investments (Ro i) or Ret
urn on Ca pit al Employed
Ne t Pro fit before Interest, Tax and Pre
Re tur n on Inv est me nt (R oi) = ference l>ividend
Capital Employed
x JOO
= ....... %
. Capitol Emploged (Li ab iliti es Ap
pro ach ) = Share Ca pita l + Reserves
an d Surplus + /
Lo ng -te rm Borrowings + Lo ng -te rm
(As set s Ap pro ach ) = No n-c urr en t Provisibn
Assets (Ta ngi ble assets + Int ang ible
ass ets ) +
No n-c urr en t Inv est me nts + Lo ng -te
rm Loans an d Advances + l,Jorking
Ca pita l
ltJorking Ca pita l = Cu rre nt Assets -
Cu rre nt Lia bili tie s
(As sum e tha t aJI no n-c urr en t inv est
me nts are tra de inv est me nts ).
(In ter es t on no n-t rad e inv est me nts
sho uld he deducted fro m pro fit bef
div ide nd) . ore inte res t, tax and