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1. Description of the Ratio
1. CurTent Ratio
2. Liquid Ratio/Acid Test
Ratio/Quick Ratio
1. Debt to Equity Ratio
Total Asset to Debt Ratio
Formula
Current Assets
Current Liabilities
Liquid Assets or Quick Assets
Current Liabilities
Debt
Equity (Shareholders' Funds)
Table Showing Summary of
Accounting, Ratios
Total A_sets
Debt
|
Significanre
LIQUIDITY RATIOS
This ratio shows short term financial
soundness of the busines5. Higher
ratio means better capacity to meet
its current obligation The ideal current
rotto is 2:l. In case it is very high it
shows the idleness of funds
Liquid ratio is a fairly stringent
measure of liquidity. It is based on
those current assets which are highly
liquid, i.e., can be converted into Cash
and Cash Equivalents quickly. Quick
ratio of 1 :1is considered as ideal.
Higher the quick ratio better the
short-term financial position
n SOLVENCY RATIOS
This ratio assesses the long-term
financial position and soundness of
enterprises. In general, lower the debt
to equity ratio hiqher the degree of
protectlon enjoyedbythe lenders.
This ratio measures the safetymargin
available to lenders of long-term
debts. It measurestheextenttowhich
debt is being covered by assets.
HawExpresed
Pure
Pure
Pure
Pure Ratio.
e.g., 2:1
Remar
Current Assets Current Investments inventories
Ecuding Stores and spares and Loose
Toolsi - Trade Raceivables Net of
Proviin fcr Drastful Detts) Cash and
Cash Evalents Shorterm Loans
and Adrances -Other Current Assets
Current LIabilities = Shot-temBocwngs - Trade Payabies
Other Current Liabilities - Short-tem
Provisions.
Qusck Assets =Current Assets -Imvetones- Precaid Expenses
Current Liabilities hae ame meaning as in Current Ratio
Debt Long-term Borrowings, e, debentures mortgage.
public deposits) Long-term Provisions
Shareholders' Funds =Share Capital +Reserves and Surplus
Or
Non-current Assets (Tangible Assets + Intangibie Assets
Non-current Investments +Long-term Loans and Advances)
+Working Capital - Non-current Liabilities (Long-term
Borrowings +Long-term Provisions).
Working Capital = Current Assets -Current Liabilities
Total Assets =Non-current Assets (Tangible Assets +Intangible
Assets + Non-current Investments + Long-term Loans and
Advances)+CurrentAssets(Currentinvestments+inventories
(including Stores and Spares and Loose Tools) +Trade
Receivables + Cash and Cash Equivalents + Short-term Loans
and Advances + Other Current Assets]
Debt Long-term Borrowings + Long-term Provisions
Analysisof
Financial
CBSE

2. 3. Proprletary Ratio
4. Interest Coverage Ratio
1. Inventory
Turnover Ratio
2. Trade Receivables
Turnover Ratio
3. Trade Payables
Turnover Ratio
4 Working Capital Turnover
Ratio
Shareholders Funds o
Proprietor Funds
Total Assets
Profit beforelnterest and Tax
Interest on Long-term Debt
Cost of Revenue from
Operations (Cost
fGoods Sold)
Average Inventory
Credit Revenue from
Operations
Average Trade Receivables
Net Credit Purchases
Average Trade Payables
This ratio shows how many times the
interest charges are covered by the
profits available to pay interest Higher
the ratio, more secure the lender is in
respectof payment of interest regularty.
III. ACTIVITY RATIoS/TURNOVER RATIOS
This ratio shows the extent to which total
assets have been financed by the
proprietor. Higher the ratio. higher the
satisfaction of lenders and cteditors.
Revenue from Operations
Work1ngCapital
Thisratio measures how fast Inventory is
moving and generating sales Higherthe
ratio, more efficient management of
inventories andvice versa
This ratio shows eficiency in the
collection of ainount due from trade
receivables Higher the ratio, better it is
since it indicates that debts are being
collected more quickly
I shows the number of times the
Creditors are turned over in relation to
purchases. Ahigh turnover ratio or
shorter payment period shows the
availability of less ctedit or yearly
payments
This ratio shows the number of times
working captal has been employed in
the proess of carrying on business.
Higher the ratio. better the efficency in
the utlisation of working capital
Fraction
Times
Times
imes
Times
Times
Sharehokders Funds, Share Capital Reserves and Surpus
Total Awets has the emeaning as in Iotal Assets to Deta Raty
Profit before Interest and Tax Profit after Tax Tax lnterest
Average lnventory
Opening Inventory +Closing Inventory
Trade Receivables means debtors plus bills receivable. Provision
for Doubtful Debts is not deducted.
Average Trade Receivables =(Opening Debtors
Opening Bills Recelvable) +(Closing Debtors +
Closing Bills Receivable)
2
Trade Payables means creditors plus bills payable.
Average Trade Payables (Opening Creditors +
Opening Bills Payable) +(Closing Creditors
+Closing BilsPayable)
Working Capital Cunent Assets- Cuent Llabilities
Current Assets and Current Liabilities have same
meaning as in Current Ratio

3. 1. Gross Profit Ratio
2. Operating Ratio
3. Operating Proft Ratio
4 Net Profit Ratio
Return on Investment
or Return on Capital
Enployd
Gross Profit
Revenue from Operations
Cost of Revenue from Operations
|+OperatingExpenses
Revenue frorm Operations
Operating Profit
Revenuefrom Operations
Net Profit after Tax
Revenue from Operations
Profit before Interest
Tax and Dividend
Capital Employed
K100
100
x100
x100
IV PROFITABILITY RATIOS
This ratio indicates the relationship
between gross profit and net sales.
Higher the Ratio, lower the çost of
goods sotd
This ratio is calculated to assess
the operational efficiency of the
x100siness.Adecline in the operating
ratio, is better because it means
higher margin, and thus, more
profit.
The objective of computing this
ratio is to determinethe operational
efficiency of management
tindicates overall efficiency of the
business. Higher the net profit
ratio,better thebusiness
It assesses the overallperformance
of the enterprise. It measures, how
efficientty the resources entrusted
to the business are used
% Gtoss Profit = Revenue from Operations -Cost of Revenue trom Operations
LOoenino inventy (excluding Stores and Spares and Lo0se Tools) + Net
Purchases +DirectExpenses -Closing Inventory (excluding Stores and Spares
and Loose Tools)
Cost of Materials Consumed + Purchases of Stockin-Trade +cChange in
Inventories of Finished Goods, WiP and Stock-in-Trade +Direct Expenses
Itdirect expenses ore not given, assume it to be nil
Cost of Revenue from Operations
Or
Opening inventory(excluding StoresandSpares and Loose Tools) +Net Purchases
+ Direct Expenses - ClosingInventory(excluding Stores and Spares and Loose
Tools)
Cost of Materials Consumed + Purchases of Stock-inTrade +Change in Inwen
tories of Finished Goods,WIP and Stock-in Trade +Ditect Expenses
Or
Revenue from Operations - Gross Profit
Direct Expenses arenot given, assume it to be nil.
Operating Expenses =
tmpoyber han
Non-operating Expenses)
+DepreclationandAmortisation
Revenue from Operations Sales -Sales Return
Operating Profit
Net Profit (Before Tax) + Non-operating Expenses -Non-operating Income
Non-operating Income
Or
Gross Profit Operating Income -Operating Expenses
80
Interest on Longterm Borrowings +Loss on Sale ol
lnterest teceved on investments +Profit on Sale of
Fixed Assets or Non-current Assets
$ Net Profit after Tax = Gross Profit + Other Income - indirect Expenses
Assume that all Non-current Investments are Trade Investments)
ax
Capital Employed Liabilities Approoch: Share Capital + Reserves and Surplus
" Long-term Borrowings +Long-term Provisions
Assets Approach. Non Current Assets (Tangible Assets Intang1ble Assets)
-Non-current investments +Long term Loans and Advances) +Working Capital
lnterest on Non trade Investments should be deducted from Poe bukare
interet, Ta and Dividend
Non operating Expenses
Woring Capital Curent Assets -Current Liabilities

4. Average CollectionPeriod
ACP Formula
Average Collection Period =
Average Collection Period =
Daysin Period xAverage Accounts Receivables g
Average Credit Sales Per Day
365 Days
Accounts Receivable Turnover Ratio
educba.com

5. Payout RatioFormula
Payout Ratio
Payout Ratio
Total Dividends
Net Income
Dividends Per Share
EPS

6. Earnings Per
Share (EPS)
Net Income - Preferred Dividends
Weighted Average Number
of Shares Outstanding

7. Net IncomeFormula
There are two ways to calculate your net income.
1 FULL METHOD
Revenue - Cost of Goods Sold Expenses = Net Income
SIMPLIFIED METHOD
Gross Income - Expenses = Net Income
bench co

8. (10) Price Earning Ratio
This ratio highlights he earning per share reflected by market share. Price Earning Ratio establishes
the relationship between the marketprice ofan equity share and the eaming perequity share. This ratio
helps to find out whether the equity shares ofacompany are undervalued ornot. This ratio is also uscful
in financial forecasting. This ratio is calculated as :
Price Earming Ratio
Market Price Per Equity Share
Earning Per Share

9. usaion: 5
You are given the following infomation:
Ratio Anaysis
Solution:
Cash in Hand
Cash at Bank
Sundry Debtors
Sock
Bills Payable
Bills Receivable
Sundry Creditors
Outstanding Expenses
Prepaid Expenscs
Dividend Payable
Land and Building
Goodwill
(a) Current Ratio
CurTent Amets :
Cash in Hand
Cash at Bank
Sundry Debtors
Siock
Bills Receivable
Prepaid Expenses
Total Current Assets
Current Lablides :
Bills Payablc
Sundry Creditors
Outstanding Expenses
Dividend Payable
Total Current Liabilities
Calculate: (a) Current Ratio (b) Liquid Ratio (c) Absolute Liquidity Ratio
Current Ratio
(b) Liquid Ratio
Liquid Assets
Liquid Ratio
(c) Absolae Liquid Ratio =
Absolute Liquid Asscts
Rs.
10,000
15,000
75,000
60,000
25,000
30,000
40,000
20,000
10,000
15,000
2,00,000
1.00,000
Current Assets
Current Liabilities
10,000
Rs.
15,000
75,000
60,000
30,000
10,000
R& 2,00,000
25,000
40,000
Rs.
20,000
15,000
I,00,000
Rs 2,00,000
Rs 1.00,000
2 times (or) 2:1
Liquid Assets
Current Liabilities
Current Assets -(Sock anddPrepaid Expenses)
Rs. 2,00,000 - (60,000 + 10,000)
1.30,000
Rs. 2,00,000-70,000
Rs. 1,30,000
1,00,000
1.3 times (or) 1:3:1
Absolute Liquid Assets
Current Liabilities
Cash in hand + Cash at Bank
+ Marketable Securities
Rs. 10,000 + 15,000 + Nil
241

10. llustration: 6
Solution:
Given :
Current Ratio
Liquid Ratio
Working Capital
Calculate : (1) Current Assets (2) Curent Liabilities (3) Liquid Assets and (4) Stock.
Working Capital
Current Ratio
Calculation of current assets and current liabilities
Working Capital
Working Capital
Working Capital (Given)
(4) Current Assets
(2) Current Lablllies
.. l6
(3) Caleulation of Liquid Assets:
Liquid Ratio (Given)
Liquid Ratio
14
Liquid Assets
(4) Calculation of Stock :
2.6
14
Lquid Assets
Stock
Rs. L,10,000
Current Assets -Curent Liabilities
Current Assets : Current Linbilities
Current Assets
Current Liabilities
(or)
2.6 - 1
Curent Assets -Current Liabilities
1.6
1,10,000
1,10,000
1,10,000
1,10,000
14
Liquid Assets
Current Liabilitics
Liquid Assets
Rs. 68,750
68750 x 14
Rs. 96,250
2.6
2.6:1
1.6
Rs. 82,500
Rs. 1,78,750
Current Assets -(Stock +Prepaid Expeases)
Rs. 1,78.750 - Rs 96,250
=Rs. 68,750
Curent Assets-Liquid Assets

11. Calculate Gross Profit Ratio from the following figures :
Solution:
Sales
Sales Rcturn
Closing Stock
Opening Stock
Purchases
Gross Profit Ratio
Net Sales
Gross Profit
Cost of goods sold
Gross Profit
Gross Profit Ratio
Rs.
5,00,000
50,000
35,000
70,000
3,50,000
Gross Profit
Net Sales
Sales - Sales Return
Rs. S,00,000- 50,000
Rs. 4,50,000
x 100
Sales -Cost of Goods Sold
Opening Stock + Purchase -Closing Stock
Rs. 70,000 +3,50,000- 35,000
Rs. 4,20,000- 35,000 Rs. 3,85,000
Rs. 450,000- 3,85,000 = Rs. 65,000
65,000
4,50,000
14.44 %
x 100

12. Illustration: 8
Solution:
Find out Operating Ratio :
Cost of goods sold
Office and Administrative Expenses
Selling and Distribution Expenses
Sales
Sales Returm
Operating Ratio
Operating Cost
Operating Ratio
Operating Cost
Net Sales
Rs. 4,50,000
Rs. 6,00,000- 20,000
Rs. 5,80,000
4,50,000
X 100
5,80,000
Cost of goods sold + Administrative Expenses
+Selling and Distribution Expenses
77.58 %
Rs. 4,00,000
Rs. 4,00,000 + 30,000+ 20,000
x 100
Rs. 30,000
Rs. 20,000
Rs. 6,00,000
Rs. 20,(XX0

13. Ilustratioa: 9
Prom the following information given below, you are required to calculate Operating Profit Ratio :
Solution:
Gross Sales
Sales Return
Opening Stock
Closing Sock
Purchascs
Ofice and Administrative Expenses
Selling and Distribution Expenses
Operating Profit Ratio
Operating Profit
Net Sales
Total Operating Cost
Cost of Goods sold
Total Operating Expenses
Operating Profit
Operating Profit Ratio
Operating Profit
Net Sales
Rs. 6,00,000
Rs.
6,50,000
Rs. 1,05,000
50,000
1,05,000
25,000
6,00,000
30,000
4,10,000
Net Sales - Total Operating Cost
Gross Sales - Sales Return
17.5
Rs. 6,50,000 - 50,000
50,000
40,000
Cost of Goods Sold + Office and Administrative
Expenses +Selling and Distribution Expenses
Opening Stock +Purchase - Closing Stock
Rs. 25,000 + 4,10,000- 30,000
Rs. 4,05,000
Rs. 4,05,000 + 50,000 + 40,000
Rs. 4,95,000
X 100
Net Sales - Total Operating Expenses
Rs. 6,00,000 - 4,95,000
x 100