Ratio Analysis

Meaning of Ratio Analysis

It is a:
Technique of analysis and interpretation
Only a means to better understand the
financial strength and weakness.
 Steps for Ratio Analysis
Selection of relevant data based on the objective of analysis

Calculation of appropriate ratios

Compare the Ratios

Interpretation of the Ratios

 Types of Ratios

Ratios

Capital Activity/
Liquidity Profitability
structure Turnover
Ratio Ratio
Ratio Ratio

Based on Based on
Sales Invst.
 Liquidity Ratio
Current Ratio = Current Assets
Current Liabilities
Where,
Current Assets = Cash (in hand)+ Cash (at Bank)
+ Debtors + B/R + Stock + Prepaid Exp + Short
term invst. + W.I.P.

Current Liabilities = O/s Exp. + B/P + Crs. + Bank

o/d + IT payable + Div. payable + short term
loan
Ideal ratio = (2:1)
Contd………
 Liquidity Ratio
Acid test Ratio = Quick Assets
Current Liabilities
Where

Quick Assets = Current Assets – Stock –

Prepaid Exp
OR
Cash (in hand)+ Cash (at Bank) + Debtors + B/R
+ Short term invst.
 Capital Structure Ratio
Debt-Equity Ratio = Debt
Equity
OR
Long term Loan
Sh. Holders’ Fund
Where,
Debt/ Long term Loan = Debentures + Mortgage Loan +
Loan for more than 5 years
 Capital Structure Ratio
Proprietor Ratio = Share Holder’s Fund
Total Fund
Where,
Shareholders’ Fund = Equity share Capital + Preference Share
capital + Reserve and Surplus + P &L.

Total Fund = Total Debt + Shareholders’ Fund

 Capital Structure Ratio
Debt to total fund Ratio = Share Holder’s Fund
Total Fund
Where,
Debt/ Long term Loan = Debentures + Mortgage Loan + Loan for more
than 5 years

Total Fund = Total Debt + Shareholders’ Fund

 Activity Ratio
Stock Turnover Ratio= COGS
Avg. Stock
Where,
COGS = Cost of goods sold = Opening stock + Purchases – Closing
Stock

Avg. Stock = Opening Stock + Closing Stock

2
 Activity Ratio
Debtors Turnover Ratio= Net credit Sales
Avg. Debtors
Where,
Net Credit Sales = Total Sales – Cash Sales – Sales return

Average Debtors = Opening Debtors + Closing Debtors

2

Debt Collection Period = 12 or 365

DTR
(in months or days respectively)
 Activity Ratio
Creditors Turnover Ratio= Net credit Purchases
Avg. Creditors
where,
Net Credit Purchases = Total Purchases – Cash Purchases –
Purchase return

Average Creditors = Opening Creditors + Closing creditors

2

Debt Payment Period = 12 or 365

CTR
(in months or days respectively)
 Profitability Ratio (Based on Sales)
Gross Profit Ratio = Gross Profit
Net Sales
Where,
Gross Profit = Net Sales – COGS

Net Profit Ratio = Net Profit

Net Sales
where,
Net Profit = Gross Profit – Non-operating Expenses
 Profitability Ratio (Based on Sales)
Operating Ratio = Operating Expense
Net Sales
Where,
Operating Expense = All Direct Expenses

Operating Profit Ratio = Operating Profit

Net Sales
Where,
Operating Profit = Gross Profit – other direct expenses
 Profitability Ratio (Based on Investment)
Return on Capital Employed =EBIT
Avg. Cap Employed
Where

Avg. Cap. Employed= Opening + Closing

2
OR
= Closing – ½ C. Yr Profits after tax
= Opening + ½ C. Yr. Profit after tax
Capital Employed= Equity share capital + Preference
share capital + all reserves + P&L + Long term
Loan – Fictitious Assets
Profitability Ratio (Based on Investment)
Return on Shareholders’ Fund:
Return on total shareholders’ fund =
N.P after interest and tax * 100
Total shareholders’ Fund

Return on Equity shareholders’ Fund=

Net profit after interest and tax * 100
Equity shareholders’ Fund
Profitability Ratio (Based on Investment)
Earning per share (EPS) =
Net profit- Div. on preference share
Number of Equity shares

Dividend per share =

Div paid to equity shareholder
Number of Equity shares
Profitability Ratio (Based on Investment)
Dividend pay out ratio =
Dividend per share
Earning Per Share
QUESTION