RATIO ANALYSIS

(Formulas)

A. LIQUIDITY RATIOS

1. Current Ratio/ Working Capital Ratio

Current Ratio = Current Assets / Current Liabilities

Where,
Current Assets = Cash in Hand + Bank Balance + Bills Receivable + Stock (Inventory) +
Short Term Investment + Outstanding Income + Marketable Securities + Prepaid Expenses
Or Current Assets = Total Assets – Fixed Assets
Or Current Assets = Working Capital + Current Liabilities
Or Current Assets = Total Liabilities – Fixed Assets
Or Current Assets = Shareholders Fund + Long Term Liabilities + Current Liabilities –
Fixed Assets
Or Current Assets = Capital Employed + Current Liabilities – Fixed Assets

Current Liabilities = Creditors + Bills Payable + Bank Overdraft + Tax Payable +

Outstanding Expense + Income in advance + Provision for tax + Short term loan + Proposed
Dividend + Unclaimed Dividend
Or Current Liabilities = Total Assets – Capital Employed
Or Current Liabilities = Total Debts – Long term debts
Or Current Liabilities = Total liabilities – Shareholders funds – long term debt
Or Current Liabilities = Current liabilities – working capital

2. Liquid Ratio/ Acid Test Ratio/ Quick Ratio

Liquid Ratio = Liquid Assets / Current Liabilities

Where,
Liquid Assets = Current Assets – Stock – Prepaid Expenses – Non- realizable portion of
Bills Receivable & Marketable Securities

B. SOLVENCY RATIOS

1. Debt-Equity Ratio

Debt- Equity Ratio = Debt or Long term Debt/ Shareholders Fund or Equity

Where,
Debt = Debentures + Long Term loans from banks & financial institutions + Public Deposit

Equity/ Shareholders Fund = Equity Share Capital + Preference Share Capital + Reserves &
Surplus + Profit & Loss A/c (Cr) + Capital Reserve + Capital Redemption Reserve +
Sinking Fund + Securities Premium + General Reserve + other reserves – fictitious assets

Fictitious Assets = Preliminary Expense + Discount on issue of shares or debentures + share

issue expenses + Profit & Loss (Dr)

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 2. Total Assets to Debt Ratio

Total Assets to Debt Ratio = Total Assets / Long term Debt

Note: Total Assets exclude fictitious assets

3. Proprietory Ratio

Proprietory Ratio = Shareholders fund or Proprietors fund/ Total Assets

C. ACTIVITY RATIOS

1. Stock Turnover Ratio/ Inventory Turnover Ratio

Stock Turnover Ratio = Cost of goods sold / Average Stock

Where,
Cost of Goods Sold (COGS) = Opening Stock + Net Purchases + Direct Expenses – Closing
Stock
Or COGS = Net Sales – Gross Profit
Average Stock = (Opening Stock + Closing Stock) / 2

Note: Sales can be used in the numerator in case COGS cannot be determined

2. Average Age of Inventory

Average Age of Inventory = 365 days or 12 months or 52 weeks / STR

3. Debtors Turnover Ratio

Debtors Turnover Ratio = Net Credit Sales / Average Debtors & B/R

Where,
Net Credit Sales = Credit Sales – Sales Return
Average Debtors & B/R = (Opening Debtors & B/R + Closing Debtors & B/R) / 2

4. Average Collection Period

Average Collection Period = 365 days or 12 months or 52 weeks / DTR

5. Fixed Assets Turnover Ratio

Fixed Assets Turnover Ratio = Net sales / Net Fixed Assets

Where,
Net Fixed Assets = Fixed Assets – Accumulated Depreciation

6. Working Capital Turnover Ratio

Working Capital Turnover Ratio = Net Sales / Net Working Capital

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 7. Creditors Turnover Ratio

Creditors Turnover Ratio = Net credit purchases/ Average accounts payable

8. Average Payment Period

Average Payment Period = 365 days or 12 months or 52 weeks / CTR

9. Current Assets Turnover Ratio

Current Assets Turnover Ratio = Net sales/ Current Assets

D. PROFITABILITY RATTIOS

1. Gross Profit Ratio

Gross Profit Ratio = (Gross Profit / Net Sales) * 100

Where,
Gross Profit = Net Sales – COGS
Net Sales = Sales – Sales Return
COGS = Opening Stock + Net Purchases + Direct Expense – Closing Stock

Direct Expenses include Carriage, Cartage, Wages, Power, Custom Duty, Freight, Octroi,
Carriage Inward etc.

2. Operating Ratio

Operating Ratio = {(COGS + Operating Expenses) / Net Sales} * 100

Where,
Operating Expenses include Office & Administration Expenses, Selling & Distribution
Expenses, Other Indirect Expenses such as Interest on short-term loan, Depreciation, Bad
Debts etc.

3. Net Profit Ratio

Net Profit Ratio = (Net Profit before tax or Net Profit after tax / Net Sales) * 100

Net Profit = Gross Profit – Operating Expense – Non- operating expenses + Non-operating
income – financial expenses

4. Return on Capital Employed/ Return On Investment

Return on Capital Employed = (Profit before interest & tax / Capital Employed) *100

Where,
Capital Employed = Net Fixed Assets + Investments + Working Capital (CA-CL)
Or Capital Employed = Share Capital (Equity & Preference) + Reserves & Surplus +
Accumulated profits + Debentures + Long term loans – Fictitious Assets

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 5. Earnings per share (EPS)

Earnings per share = Net Profit after interest & tax / No. of equity shares

6. Dividend per share (DPS)

Dividend per share = Profit distributed as Equity Dividend / No. of Equity Shares

7. Price Earning Ratio ( P/E Ratio)

Price Earning Ratio = Market Price per Share / EPS

Formulas of the Ratios covered under Project Work ONLY

1. Operating Profit Ratio

Operating Profit Ratio = (Operating Profit / Net Sales) * 100

Where,
Operating Profit = Gross Profit – Operating Expenses + Operating Income
Or Operating Profit = Net Profit + Non- operating expenses- Non-operating income

2. Return on Equity

Return on Equity = (Profit after interest & tax / Equity) * 100

Where,
Profit after interest & tax = Profit before interest & tax – interest on long term liabilities- tax
Equity = Equity Share Capital + Preference Share Capital + Reserves & Surplus + Accumulated
profits – Fictitious Assets

3. Capital Turnover Ratio

Capital Turnover Ratio = Net sales / Capital Employed

4. Interest Coverage Ratio

Interest Coverage Ratio = Profit before interest & tax/ Annual interest on debentures & long term
loans

5. Total Assets Turnover Ratio

Total Assets Turnover Ratio = Net sales/ Total Assets