This document discusses various financial ratios used to analyze a firm's financial statements. It covers liquidity ratios like current and quick ratios, activity ratios like inventory, debtors, and creditors turnover ratios, capital structure ratios like debt-equity ratio and interest coverage ratio, and profitability ratios like gross profit ratio, net profit ratio, operating ratio, return on investment, earnings per share, dividend yield, and price-earnings ratio. These ratios are calculated using figures from a company's balance sheet and income statement and help evaluate its operational efficiency and financial health.

1. B.PRATHYUSHA,
ASSISTANT PROFESSOR,
VNRVJIET.

2.  It refers to the systematic use of ratios to
interpret the financial statements in terms of
the operating performance and financial
position of a firm.
 It involves comparison for meaningful
interpretation of the financial statements

3. 1. Liquidity ratios
2. Activity ratios
3. Capital structure ratios
4. Profitability ratios

4.  It measures the ability of the firm to meet its
short-term obligations.( capacity to pay
current liabilities as and when they fall due)
 Liquidity ratios can be classified in to two
types:
 Current Ratio/ Working Capital Ratio
 Quick Ratio/ Acid Test Ratio

5.  It measures the short-term solvency of the
firm.
 Current ratio = Current Assets
Current Liabilities
 The firm is comfortable when current ratio is
2:1

6.  It measures the firms ability to convert its
current assets into cash in order to meet its
current liabilities.
 Quick ratio= Quick assets
Current liabilities
 Where Quick Assets=Current assets-(Stock+
prepaid expenses)
 The standard for this ratio 1:1

7.  Activity ratios are with which a firm manages
it current assets.
 To judge the effectiveness of asset use the
following turnover ratios can be calculated:
 Inventory Turnover Ratio
 Debtors Turnover Ratio
 Creditors Turnover Ratio

8.  This ratio indicates the number of times the inventory
has been converted into sales during the period.
 The higher the ratio the better is the performance of
the firm in selling its stocks.
 Inventory Turnover Ratio= Cost of goods sold
Average inventory/stock
 Cost of goods sold= Sales- gross profit
 Average inventory= Opening stock+ closing stock
2
 Inventory holding period= 365 days
Inventory turnover ratio

9.  It shows how quickly the firm is in a position to collect it
debts.
 Debtors Turnover Ratio= Credit Sales
Average Debtors
 Credit Sales refer to goods sold on credit
 Average Debtors = Opening and closing balances of Debtors
2
 Higher the ratio the firm is efficient in collecting its debts.
 Debt Collection Period refers to time taken to collect the
debts.
 Debt Collection Period= 365 days
Debtors turnover ratio

10.  It indicates the number of times creditors have been paid
during a year.
 Creditors Turnover Ratio = Credit purchases
Average Creditors
 Average Creditors = Opening and closing balances of
Creditors
2
 Creditors Payment period = 365 days
Creditors Turnover Ratio

11.  Solvency means the ability of the business to
repay its outside liabilities.
 The term solvency ratios has been used to
mean financial position of the business.
 Most commonly used capital structure ratios:
 Debt-Equity Ratio
 Interest Coverage Ratio
 Ratio of Proprietors’ funds to total assets
 Ratio of Fixed Assets to Proprietors’ Funds
 Ratio of Current Assets to Proprietors’ Funds

12.  This is used to measure the firms obligations to
creditors in relation to the owners funds.
 Debt-Equity Ratio= Debt
Equity
(or) Outsiders funds
Insiders/ Shareholders funds
 The yardstick for this ratio is 1:1

13.  This is used to judge the firms capacity to pay the
interest on debt it borrows.
 Higher the ratio ,better it is.
 Interest coverage ratio= Net profit before interest
and taxes.
Fixed Interest Charges.

14.  This establishes the relationship between
proprietors’ funds and the total assets.
 Total assets include only tangible assets plus
current assets.
 Ratio of Proprietors’ Fund to Total Assets
= Proprietors Funds x 100
Total Assets
 This ratio is further explained in a finer way by
considering the volume of fixed assets and current
assets to the proprietors’ funds separately.

15.  RATIO OF FIXED ASSETS TO PROPRIETORS FUNDS =
Fixed Assets x 100
Proprietors’ funds
 RATIO OF CURRENT ASSETS TO PROPRIETORS FUNDS
= Current Assets x 100
Proprietors’ funds

16.  Profitability refers to the ability of the business to
earn profit.
 It shows the efficiency of business. Profitability has
direct link with sales.
 The profitability of the business can be measured
with the following ratios.
 Gross Profit Ratio
 Net Profit Ratio
 Operating Ratio
 Return on Investment (ROI)
 Return on capital employed
 Return on Equity
 Earnings per share (EPS)
 Dividend Yield
 Price/Earnings Ratio (P/E ratio)
 Earning power

17.  GROSS PROFIT RATIO:
 Gross profit ratio = (Gross Profit/sales) X 100
 Gross Profit is the difference between the net sales
and the cost of goods sold.
 NET PROFIT RATIO:
 Net Profit Ratio = (Net Profit after Taxes/ Net sales)
X 100
 OPERATING RATIO:
 Operating Ratio=(Operating Expenses/Net sales)X100
 Operating Expenses= Cost of goods sold+
Administrative expenses+ Selling and Distribution
Expenses
 Net Sales= Sales –Sales Returns

18.  RETURN ON INVESTMENT (ROI)
 ROI= Net Profit After Taxes/ Total Investment
 Important ratios under this head:
 Return on Capital Employed (R0CE)
ROCE= Adjusted Net Profits/ Capital Employed
 Return on equity (ROE)
ROE= Net profits- dividends payable to preference
shareholders
Equity Share Capital

19.  EARNINGS PER SHARE ( EPS)
EPS= Net Profit after taxes/ Number of shares
outstanding
 DIVIDEND YIELD(DY)
DY= Nominal or face value of the share x % Dividend
Cost or Market price of the Share per annum
 PRICE/ EARNINGS RATIO
Price Earnings Ratio= Market Price per share
Earnings per share
 EARNING POWER
Earning power= return on investment
=Net Profit Margin x Investment turnover
Earning Power= Net profit after taxes x Sales
Sales Total Capital