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No.

Ratio
Gross profit margin

Formula
(Sales - Cost of goods sold / Sales)
x 100

Norm

Interpretation
Indicates the total margin
available to cover operating
expenses and yield a profit.

Gross profit margin

A. Liquidity Ratios:
a) Liquid assets to current debt
ratios :
Current Ratio

(Current assets / Current liabilities)

Quick Ratio

Quick Assets / Current Liabilities

1:1

It is a measure of firms
short-term
solvency.
It
represents the margin of
safety for creditors. The
higher the current ratio, the
greater the margin of safety.
(Larger the amount of current
assets in relation to current
liabilities, the more the firms
ability to meet its current
obligations) It is a test of
quantity.
It indicates rigorous test of a
firms ability to serve short
team liabilities. Thus a firm

Cash Ratio

Cash / Current Liabilities

Cash to current assets ratio

Cash / Current assets.

.5:1

with high quick ratio may


face problem if it has
doubtful and slow paying
receivables. On the other
hand a firm with lower liquid
ratio may be in a position to
pay current liabilities in time
if it has been managing its
inventories efficiently.
The
most
vigorous
and
conservative test of a firms
liquidity position.
shows the proportion of cash
in total current assets. The
higher the ratio, greater the
liquidity of a concern and vice
versa. Surplus cash will not
fetch any income.

b) Liquid assets to fixed assets


ratio :
Current assets to Fixed assets

Current assets / Fixed assets

Shows the proportion of


current assets in relation to
fixed
assets.
Higher
proportion of current assets
represents greater liquidity,
does mean payment of short
team obligations in time.
Greater proportion of fixed
assets represents strength of

Quick assets to fixed assets

Quick assets / fixed assets

Cash to fixed assets

Cash / fixed assets

Working capital to fixed assets

Working capital / fixed assets

the concern but less liquidity.


This
ratio
shows
the
proportion of quick assets in
relation to fixed assets.
Higher proportion of quick
assets represents greater
liquidity.
Shows the proportion cash to
fixed assets. Cash includes
cash in hand and bank
balance.
Shows the relationship b/w
WC & FA and nature of
industry.
This
ratio
is
generally high for retail
businesses
and
low
for
manufacturing industries.

c) Liquid Assets to Total


Assets Ratios :

Current assets to total


assets

Current assets / total assets

Liquid assets to total assets


Cash to total assets
Working capital to total assets
Loan & advances to total assets
Investment to total assets

Liquid assets / total assets


cash / total assets
Working capital / total assets
Loan & advances / total assets
Investment / total assets

This ratio indicates the assets


composition of a firm. Larger
proportion of current assets
denotes more liquidity.

It shows how much


proportion (surplus funds) of

total assets has been


invested in outside
opportunities.

II
.

B. Activity Ratio:

employed
to
evaluate
the
efficiency with which the firm
manages and utilizes its assets.

Inventory turnover Ratio

Net Sales / Inventory

Debtors turnover ratio

Net Sales / Debtors

It
shows
how
rapidly
(efficiency) the inventory is
converted into sales. A high
inventory is indicative of
efficient
management
of
inventory
because
more
quickly the inventory is sold.
A low inventory turnover
implies excessive inventory
levels than warranted by
production
and
sales
activities or a slow moving or
obsolete inventory. Relatively
high inventory turnover may
be the result of a very low
level of inventory, which
results in frequent stock outs.
It indicates the no. of times
average debtors have been
converted into cash during a
year. It measures how rapidly

Creditors turnover ratio:

Purchases / Creditors

Capital employed turnover


ratio

Net Sales / Capital Employed


Capital Employed = Net fixed
assets + current assets - current
liabilities.

the firm collects debts. High


ratios
indicate
efficient
management of credit. A low
ratio implies a very liberal
and inefficient credit and
collection performance. A
very high debtor turnover
ratio may be the outcome of
a very restrictive credit and
collection policy. Such a
policy severely curtails and
reduces the profits.
Judge the requirements of
cash
for
paying
sundry
creditors. It indicates the
number of times sundry
creditors have been paid
during a year. It shows credit
terms granted by suppliers.
High Creditors turnover ratio
implies
that
Creditors
accounts are to be settled
rapidly.
Measure the efficiency or
effectiveness with which a
firm
utilizes
its
capital
employed. It is a good
indicator
of
overall
profitability of a concern.

Net working capital turnover

Net Sales / Working Capital

Total assets turnover ratio

Net Sales / Total Assets


Total Assets = Net Fixed Assets +
Current Assets.

Fixed assets turnover ratio

Net Sales / Fixed Assets


Net fixed Assets = Fixed Assets Depreciation.

Current assets turnover ratio

Net Sales / Current Assets

Higher the ratio greater the


profitability of the concern
and vice versa.
A higher ratio is an indicator
of better utilization of current
assets and working capital
and vice - versa.
This ratio shows the firms
ability to generate sales from
all
financial
resources
committed to total assets.
Higher ratio indicates that the
firm is managing its assets
both
current
and
fixed
efficiently to maximize the
sales and vice versa.
This
ratio
shows
how
efficiently firm is utilizing its
fixed assets. Higher ratio is
indicative
of
efficient
utilization of fixed assets in
maximizing the sales by the
firm.
This ratio explains about the
amount of sales, which the
firm is able to generate from
every rupee invested in
current assets.

Quick assets turnover ratio

Net sales to cash ratio

Net Sales / Quick Assets Quick


Asses Current Assets Inventories.
Net sales / cash.

It shows how efficiently a firm


is utilizing its quick assets in
maximizing its sales.
It shows the relationship
between net sales and cash.