Higher ration means firm is safe for the lenders and the firm
can pay its interests out of their earnings
Proprietary ratio/Finance leverage ratio: Shareholders fund *
100/Total Assets
Similar to debt equity ratio
3. Operating efficiency ratio: How well you are using your resource to
generate sales
Inventory turnover ratio: Sales/inventory
Higher ratio indicates lower inventory used to get higher
sales signal of efficient utilization of inventory
Inventory holding ratio: 365/Inventory turnover ratio
Low ration indicates low holding period lesser investment in
inventory- efficient utilization of inventory
Average collection period: Trade receivables * 365/ Sales
Lesser period- quick and efficient collection lesser
investment in W.C- better fund management
Extremely less period compared to competitors can drive
away customers- decline of sales
Asset turnover Ratio: Net revenue from Operations/ Total Assets
o High ratio- better utilization of assets- less asset and high
sales
Capital Turnover Ratio:
o Net revenue from Operations/(Shareholders fund + Long term
liability)
o High ratio- better utilization of funds
4. Profitability ratios: How well your sales is converting into bottom line
Net Profitability Margin: Profit after tax *100/ Revenue from
operations
o Overall profit criteria- higher ratio better it is
Operating profit margin: Operating profit *100/ Revenue from
operations
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