This document discusses various types of financial ratios used in ratio analysis. It defines ratio analysis as a technique used to interpret financial statements and help with decision making. It then covers different types of ratios including liquidity ratios, activity ratios, solvency ratios, profitability ratios, market test ratios, and leverage ratios. For each type of ratio, it provides examples of specific ratios calculated like current ratio, inventory turnover ratio, debt-to-equity ratio, return on equity, and capital gearing ratio. It also explains how to calculate and interpret each ratio.

1. RATIO ANALYSIS
RICHARD B. MAGBATOC

2. Meaning of Ratio
A ratio is a simple arithmetical expression of
the relationship of one number to another.
Also it can be expressed as ;
ratio is one number expressed in terms of
another and can be worked out by dividing
one number into the another.

3. RATIO ANALYSIS
Ratio analysis is a
technique of analysis
and interpretation of
financial statements
for helping in
decision making.

4. INTERPRETATION
• Single absolute ratio
• Group of ratios
• Historical comparison
• Inter firm comparison

5. USES OR SIGNIFICANCE
• Managerial uses
- help in decision making
- financial forecasting and planning
- help in coordination
- help in control
• Utility to shareholder
• Utility to creditors
• Utility to employees

6. LIMITATION
• Limited use of single ratio
• Lack of adequate standard
• Change of accounting procedure
• Personal bias
• Uncomparable

7. CLASSIFICATION
OF
RATIOS

8. LIQUIDITY
RATIOS
SOLVENCY
RATIOS
ACTIVITY RATIOS PROFITABILITY
RATIOS
CURRENT
RATIO
DEBT-EQUITY
RATIO
INVENTORY
TURNOVER RATIO
(A)IN
RELATION TO
SALES
(B)IN RELATION TO
INVESTMENT
LIQUID
RATIO
DEBT TO TOTAL
CAPITAL RATIO
DEBTORS TURNOVER
RATIO
GROSS PROFIT
RATIO
RETURN ON
INVESTMENT
CASH RATIO INTEREST
COVERAGE
CREDITORS
TURNOVER RATIO
OPERATING
RATIO
RETURN ON
CAPITAL
CASH FLOW FIXED ASSET
TURNOVER RATIO
OPERATING
PROFIT RATIO
RETURN ON EQUITY
CAPITAL
CAPITAL GEARING TOTAL ASSET
TURNOVER RATIO
NET PROFIT
RATIO
RETURN ON TOTAL
RESOURCES
WORKING CAPITAL
TURNOVER RATIO
EXPENSE RATIO EARNING PRICE
RATIO
CAPITAL EMPLOYED
TURNOVER RATIO
PRICE EARNING
RATIO

9. (1.) LIQUIDITY RATIOS
Liquidity refers to the ability of the concern to
meet its current obligation as and when
these become due.
To measure the liquidity of the firm following
ratios are calculated:
 Current ratio
 Quick or acid test or liquidity ratio
 Cash ratio

10. a) CURRENT RATIO/CRUDE
RATIO
Relationship between current asset and current
liability.
CURRENT RATIO = CURRENT ASSET
CURRENT LIABILITY
• Rule of thumb

11. b) QUICK /ACID
TEST/LIQUID RATIO
It is more rigorous test of liquidity than the
current ratio. It is the relationship between
liquid asset and quick asset and current
liabilities.
QUICK RATIO = LIQUID ASSET
CURRENT LIABILITIES
 Rule of thumb 1:1

12. c) CASH RATIO OR ABSOLUTE
LIQUID RATIO
CASH RATIO = ABSOLUTE LIQUID ASSET
CURRENT LIABILITIES

13. (2.) EFFICIENCY/ACTIVITY/ASSET
MANAGEMENT RATIO
These ratio is calculated to measure the efficiency
with which the resources of the firm have been
employed. These ratio are also called turnover ratio
because they indicate the speed with which asset
are being turn over into sales. Following are the
ratios covered under this :
STOCK TURNOVER RATIO
DEBTORS TURNOVER RATIO
CREDITORS TURNOVER RATIO
WORKING CAPITAL TURNOVER RATIO

14. a) INVENTORY/STOCK
TURNOVER RATIO
It indicates the number of times the stock has
been turned over during the period and
evaluates the efficiency with which the firm is
able to manage its inventory.
INVENTORY TURNOVER = COST OF GOOD SOLD
RATIO AVERAGE INVENTORY
-INVENTORY CONVERSION=DAYS IN A YEAR
PERIOD INVENTORY T/O RATIO

15. b) DEBTORS TURNOVER
RATIO
Trade debtors are expected to be converted into cash
within a short period and are included in current
asset . hence the liquidity position of a concern to
pay its short term obligation in time depends upon
the quality of its trade debtors.
DEBTORS TUROVER =NET CREDIT ANNUAL SALES
RATIO AVERAGE TRADE DEBTORS
AVERAGE COLLECTION=NO.OF WORKING DAYS
PERIOD DEBTORS TURNOVER RATIO

16. c) CREDITORS TURNOVER
RATIO
The ratio indicates the velocity with which the
creditors are turned over in relation to
purchases.
CREDITORS = NET CREDIT ANNUAL PURCHASES
TURNOVER AVERAGE TRADE CREDITORS
RATIO
AVERAGE PAYMENT =NO. OF WORKING DAYS
PERIOD CREDITORS T/O RATIO

17. d) WORKING CAPITAL
TURNOVER RATIO
It indicates the velocity of the utilisation of the
net working capital and the efficiency with
which working capital is being used by a firm.
WORKING CAPITAL = COST OF SALES
TURNOVER RATIO AVERAGE WORKING CAPITAL

18. (3.) SOLVENCY RATIOS
Solvency refers to the ability of the concern to
meet its long term obligation. Long term
solvency ratios indicate the firm ability to
meet the fixed interest and cost and
repayment schedule associated with its long
term borrowing.

19. It is calculated to measure the relative claims of
outsiders and owners against firms asset.
DEBT-EQUITY =
RATIO
OUTSIDERS FUNDS
SHAREHOLDERS FUNDS
a) DEBT-EQUITY RATIO

20. b) FUNDED DEBT TO TOTAL
CAPITALISATION RATIO
It establishes a link between the long term fund
raised from outsider and total long term funds
available in the business.
FUNDED DEBT X 100
TOTAL CAPITALISATION
FUNDED DEBT TO =
TOTAL
CAPITALISATION
RATIO

21. c) PROPRIETORY OR EQUITY
RATIO
This ratio establishes the relationship between
shareholder funds to total asset of the firm.
PROPRIETORY = SHAREHOLDERS FUND
RATIO TOTAL ASSETS

22. d) SOLVENCY RATIO
It is a small variant of equity ratio and can be
calculated as 100 – equity ratio. It indicates
the relationship between total liabilities to
outsiders to total asset of the firm.
SOLVENCY = TOTAL LIABILITIES TO OUTSIDERS
RATIO TOTAL ASSET

23. e) FIXED ASSET TO NET
WORTH RATIO
FIXED ASSET TO =
NET WORTH RATIO
FIXED ASSET(after dep.)
SHAREHOLDER FUNDS
f) FIXED ASSET RATIO
FIXED ASSET =
RATIO
FIXED ASSET(after dep.)
TOTAL LONG TERM FUNDS

24. g) CURRENT ASSET TO
PROPRIETOR RATIO
CURRENT ASSET TO = CURRENT ASSET X 100
PROPRIETOR RATIO SHAREHOLDER FUND

25. h) DEBT SERVICE OR
INTEREST COVERAGE RATIO
INTEREST COVERAGE = EBIT
RATIO FIXED INTEREST CHARGES

26. (4.) PROFITABILITY RATIOS
(4.1. General)
a) GROSS PROFIT = GROSS PROFIT X 100
RATIO NET SALES
b) NET PROFIT = NET PROFIT AFTER TAX X 100
RATIO NET SALES

27. X 100
c) OPERATING = OPERATING COST
RATIO NET SALES
d) OPERATING PROFIT =OPERATING PROFIT x100
RATIO NET SALES

28. e) CASH PROFIT = CASH PROFIT X 100
RATIO NET SALES
Where cash profit = net profit + dep.
f) EXPENSE =PARTICULAR EXPENSE X 100
RATIO NET SALES

29. (4.2.) FOR INVESTMENT
ANALYSIS
a) RETURN ON SHAREHOLDER
INVESTMENT/NET WORTH
RETURN ON SHAREHOLDER = EAIT
INVESTMENT SHAREHOLDER FUND
b) RETURN ON EQUITY CAPITAL
RETURN =
ON EQUITY
NET PROFIT AFTER TAX-PREF. DIV.
EQUITY SHARE CAPITAL(paid up)

30. c) EARNING PER SHARE
EPS = NET PROFIT AFTER TAX – PREF. DIV.
NO. OF EQUITY SHARES

31. (5.) MARKET TEST RATIO OR
VALUATION RATIOS
• DIVIDEND YIELD RATIO= DIV PER EQ.SH.
MARKET VALUE PER SH.
• DIVIDEND PAY-OUT RATIO= DIV. PER EQ. SH.
EPS
• PRICE EARNING RATIO= MARKET PRICE PER EQ.SH.
EPS
• EARNING YIELD RATIO= EPS X 100
MARKET PRICE PER SHARE

32. (6.) LEVERAGES RATIO
• CAPITAL GEARING RATIO
= EQ. SH. CAPITAL+ RESERVES & SURPLUS
PREF CAP + LONG TERM DEBT (bearing fixed interest)
• FINANCIAL LEVERAGE
= EBIT
EARNING BEFORE INTEREST AND TAX AND PREF DIV

33. • OPERATING LEVERAGE
= CONTRIBUTION (= SALES –VARIABLE COST)
EBIT
• COMBINED LEVERAGE
= FINANCIAL LEVERAGE X OPERATING LEVERAGE

34. THANK YOU…