Ratio by mudassar

Ratio analysisRatio analysis
 Is a method or process by which theIs a method or process by which the
relationship of items or groups of items in therelationship of items or groups of items in the
financial statements are computed, andfinancial statements are computed, and
presented.presented.
 Is an important tool of financial analysis.Is an important tool of financial analysis.
 Is used to interpret the financial statements soIs used to interpret the financial statements so
that the strengths and weaknesses of a firm, itsthat the strengths and weaknesses of a firm, its
historical performance and current financialhistorical performance and current financial
condition can be determined.condition can be determined.

RatioRatio
 ‘‘A mathematical yardstick that measuresA mathematical yardstick that measures
the relationship between two figures orthe relationship between two figures or
groups of figures which are related togroups of figures which are related to
each other and are mutually inter-each other and are mutually inter-
dependent’.dependent’.
 It can be expressed as a pure ratio,It can be expressed as a pure ratio,
percentage, or as a ratepercentage, or as a rate

Words of cautionWords of caution
 A ratio is not an end in itself. They are only aA ratio is not an end in itself. They are only a
means to get to know the financial position ofmeans to get to know the financial position of
an enterprise.an enterprise.
 Computing ratios does not add any informationComputing ratios does not add any information
to the available figures.to the available figures.
 It only reveals the relationship in a moreIt only reveals the relationship in a more
meaningful way so as to enable us to drawmeaningful way so as to enable us to draw
conclusions there from.conclusions there from.

Utility of RatiosUtility of Ratios
 Accounting ratios are very useful inAccounting ratios are very useful in
assessing the financial position andassessing the financial position and
profitability of an enterprise.profitability of an enterprise.
 However its utility lies in comparison ofHowever its utility lies in comparison of
the ratios.the ratios.

Utility of RatiosUtility of Ratios
 Comparison may be in any one of the followingComparison may be in any one of the following
forms:forms:
 For the same enterprise over a number of yearsFor the same enterprise over a number of years
 For two enterprises in the same industryFor two enterprises in the same industry
 For one enterprise against the industry as a wholeFor one enterprise against the industry as a whole
 For one enterprise against a pre-determined standardFor one enterprise against a pre-determined standard
 For inter-segment comparison within the sameFor inter-segment comparison within the same
organisationorganisation

Classification of RatiosClassification of Ratios
Ratios can be broadly classified into four groupsRatios can be broadly classified into four groups
namely:namely:
 Liquidity ratiosLiquidity ratios
 Capital structure/leverage ratiosCapital structure/leverage ratios
 Profitability ratiosProfitability ratios
 Activity ratiosActivity ratios

Liquidity ratiosLiquidity ratios
These ratios analyse the short-term financialThese ratios analyse the short-term financial
position of a firm and indicate the ability of the firmposition of a firm and indicate the ability of the firm
to meet its short-term commitments (currentto meet its short-term commitments (current
liabilities) out of its short-term resources (currentliabilities) out of its short-term resources (current
assets).assets).
These are also known as ‘solvency ratios’. TheThese are also known as ‘solvency ratios’. The
ratios which indicate the liquidity of a firm are:ratios which indicate the liquidity of a firm are:
 Current ratioCurrent ratio
 Liquidity ratio or Quick ratio or acid test ratioLiquidity ratio or Quick ratio or acid test ratio

Current ratioCurrent ratio
It is calculated by dividing current assets byIt is calculated by dividing current assets by
current liabilities.current liabilities.
Current ratio =Current ratio = Current assetsCurrent assets wherewhere
Current liabilitiesCurrent liabilities
Conventionally a current ratio of 2:1 isConventionally a current ratio of 2:1 is
considered satisfactoryconsidered satisfactory

CURRENT ASSETSCURRENT ASSETS
include –include –
Inventories of raw material, WIP, finished goods,Inventories of raw material, WIP, finished goods,
stores and spares,stores and spares,
sundry debtors/receivables,sundry debtors/receivables,
short term loans deposits and advances,short term loans deposits and advances,
cash in hand and bank,cash in hand and bank,
prepaid expenses,prepaid expenses,
incomes receivables andincomes receivables and
marketable investments and short term securitiesmarketable investments and short term securities..

CURRENT LIABILITIESCURRENT LIABILITIES
include –include –
sundry creditors/bills payable,sundry creditors/bills payable,
outstanding expenses,outstanding expenses,
unclaimed dividend,unclaimed dividend,
advances received,advances received,
incomes received in advance,incomes received in advance,
provision for taxation,provision for taxation,
proposed dividend,proposed dividend,
instalments of loans payable within 12 months,instalments of loans payable within 12 months,
bank overdraft and cash creditbank overdraft and cash credit

Quick Ratio or Acid Test RatioQuick Ratio or Acid Test Ratio
This is a ratio between quick current assets and currentThis is a ratio between quick current assets and current
liabilities (alternatively quick liabilities).liabilities (alternatively quick liabilities).
It is calculated by dividing quick current assets byIt is calculated by dividing quick current assets by
current liabilities (quick current liabilities)current liabilities (quick current liabilities)
Quick ratio =Quick ratio = quick assetsquick assets wherewhere
Current liabilities/(quick liabilities)Current liabilities/(quick liabilities)
Conventionally a quick ratio of 1:1 is consideredConventionally a quick ratio of 1:1 is considered
satisfactory.satisfactory.

QUICK ASSETS & QUICKQUICK ASSETS & QUICK
LIABILITIESLIABILITIES
QUICK ASSETSQUICK ASSETS are current assets (as statedare current assets (as stated
earlier)earlier)
less prepaid expenses and inventories.less prepaid expenses and inventories.
QUICK LIABILITIESQUICK LIABILITIES are current liabilities (asare current liabilities (as
stated earlier)stated earlier)
less bank overdraft and incomes received inless bank overdraft and incomes received in
advance.advance.

Capital structure/ leverage ratiosCapital structure/ leverage ratios
These ratios indicate the long term solvencyThese ratios indicate the long term solvency
of a firm and indicate the ability of the firmof a firm and indicate the ability of the firm
to meet its long-term commitment withto meet its long-term commitment with
respect torespect to
(i)(i) repayment of principal on maturity or inrepayment of principal on maturity or in
predetermined instalments at due dates andpredetermined instalments at due dates and
(ii)(ii) periodic payment of interest during theperiodic payment of interest during the
period of the loan.period of the loan.

Capital structure/ leverage ratiosCapital structure/ leverage ratios
The different ratios are:The different ratios are:
 Debt equity ratioDebt equity ratio
 Proprietary ratioProprietary ratio
 Debt to total capital ratioDebt to total capital ratio
 Interest coverage ratioInterest coverage ratio
 Debt service coverage ratioDebt service coverage ratio

Debt equity ratioDebt equity ratio
This ratio indicates the relative proportion of debt andThis ratio indicates the relative proportion of debt and
equity in financing the assets of the firm. It isequity in financing the assets of the firm. It is
calculated by dividing long-term debt by shareholder’scalculated by dividing long-term debt by shareholder’s
funds.funds.
Debt equity ratio =Debt equity ratio = long-term debtslong-term debts wherewhere
Shareholders fundsShareholders funds
Generally, financial institutions favour a ratio of 2:1Generally, financial institutions favour a ratio of 2:1..
However this standard should be applied having regardHowever this standard should be applied having regard
to size and type and nature of business and the degree ofto size and type and nature of business and the degree of
risk involved.risk involved.

LONG-TERM FUNDSLONG-TERM FUNDS are long-term loans whetherare long-term loans whether
secured or unsecured like – debentures, bonds, loanssecured or unsecured like – debentures, bonds, loans
from financial institutions etc.from financial institutions etc.
SHAREHOLDER’S FUNDSSHAREHOLDER’S FUNDS are equity shareare equity share
capital plus preference share capital plus reserves andcapital plus preference share capital plus reserves and
surplus minus fictitious assets (eg. Preliminarysurplus minus fictitious assets (eg. Preliminary
expenses, past accumulated losses, discount on issueexpenses, past accumulated losses, discount on issue
of shares etc.)of shares etc.)

Proprietary ratioProprietary ratio
This ratio indicates the general financial strength of theThis ratio indicates the general financial strength of the
firm and the long- term solvency of the business.firm and the long- term solvency of the business.
This ratio is calculated by dividing proprietor’s funds byThis ratio is calculated by dividing proprietor’s funds by
total funds.total funds.
Proprietary ratio =Proprietary ratio = proprietor’s fundsproprietor’s funds wherewhere
Total funds/assetsTotal funds/assets
As a rough guide a 65% to 75% proprietary ratio isAs a rough guide a 65% to 75% proprietary ratio is
advisableadvisable

PROPRIETOR’S FUNDSPROPRIETOR’S FUNDS are same asare same as
explained in shareholder’s fundsexplained in shareholder’s funds
TOTAL FUNDSTOTAL FUNDS are all fixed assets and allare all fixed assets and all
current assets.current assets.
Alternatively it can be calculated asAlternatively it can be calculated as
proprietor’s funds plus long-term funds plusproprietor’s funds plus long-term funds plus
current liabilities.current liabilities.

Debt to total capital ratioDebt to total capital ratio
In this ratio the outside liabilities are related toIn this ratio the outside liabilities are related to
the total capitalisation of the firm. It indicatesthe total capitalisation of the firm. It indicates
what proportion of the permanent capital of thewhat proportion of the permanent capital of the
firm is in the form of long-term debt.firm is in the form of long-term debt.
Debt to total capital ratio =Debt to total capital ratio =long- term debtlong- term debt
Shareholder’s funds + long- term debtShareholder’s funds + long- term debt
Conventionally a ratio of 2/3 is consideredConventionally a ratio of 2/3 is considered
satisfactorysatisfactory..

Interest coverage ratioInterest coverage ratio
This ratio measures the debt servicing capacity of a firmThis ratio measures the debt servicing capacity of a firm
in so far as the fixed interest on long-term loan isin so far as the fixed interest on long-term loan is
concerned. It shows how many times the interestconcerned. It shows how many times the interest
charges are covered by EBIT out of which they will becharges are covered by EBIT out of which they will be
paid.paid.
Interest coverage ratio =Interest coverage ratio = EBITEBIT
InterestInterest
A ratio of 6 to 7 times is considered satisfactoryA ratio of 6 to 7 times is considered satisfactory..
Higher the ratio greater the ability of the firm to payHigher the ratio greater the ability of the firm to pay
interest out of its profits. But too high a ratio mayinterest out of its profits. But too high a ratio may
imply lesser use of debt and/or very efficient operationsimply lesser use of debt and/or very efficient operations

Debt service coverage ratioDebt service coverage ratio
This is a more comprehensive measure to compute theThis is a more comprehensive measure to compute the
debt servicing capacity of a firm. It shows how manydebt servicing capacity of a firm. It shows how many
times the total debt service obligations consisting oftimes the total debt service obligations consisting of
interest and repayment of principal in instalments areinterest and repayment of principal in instalments are
covered by the total operating funds after payment ofcovered by the total operating funds after payment of
tax.tax.
Debt service coverage ratio =Debt service coverage ratio =
EAT+ interest + depreciation + other non-cash expEAT+ interest + depreciation + other non-cash exp
Interest + principal instalmentInterest + principal instalment
EAT is earnings after tax.EAT is earnings after tax.
Generally financial institutions consider 2:1 as aGenerally financial institutions consider 2:1 as a
satisfactory ratiosatisfactory ratio..

Profitability ratiosProfitability ratios
These ratios measure the operating efficiency ofThese ratios measure the operating efficiency of
the firm and its ability to ensure adequate returnsthe firm and its ability to ensure adequate returns
to its shareholders.to its shareholders.
The profitability of a firm can be measured by itsThe profitability of a firm can be measured by its
profitability ratios.profitability ratios.
Further the profitability ratios can be determinedFurther the profitability ratios can be determined
(i) in relation to sales and(i) in relation to sales and
(ii) in relation to investments(ii) in relation to investments

Profitability ratios in relation to sales:Profitability ratios in relation to sales:
 gross profit margingross profit margin
 Net profit marginNet profit margin
 Expenses ratioExpenses ratio

Profitability ratios in relation to investmentsProfitability ratios in relation to investments
 Return on assets (ROA)Return on assets (ROA)
 Return on capital employed (ROCE)Return on capital employed (ROCE)
 Return on shareholder’s equity (ROE)Return on shareholder’s equity (ROE)
 Earnings per share (EPS)Earnings per share (EPS)
 Dividend per share (DPS)Dividend per share (DPS)
 Dividend payout ratio (D/P)Dividend payout ratio (D/P)
 Price earning ratio (P/E)Price earning ratio (P/E)

Gross profit marginGross profit margin
This ratio is calculated by dividing grossThis ratio is calculated by dividing gross
profit by sales. It is expressed as a percentage.profit by sales. It is expressed as a percentage.
Gross profit is the result of relationshipGross profit is the result of relationship
between prices, sales volume and costs.between prices, sales volume and costs.
Gross profit margin =Gross profit margin = gross profitgross profit x 100x 100
Net salesNet sales

Gross profit marginGross profit margin
 A firm should have a reasonable gross profitA firm should have a reasonable gross profit
margin to ensure coverage of its operatingmargin to ensure coverage of its operating
expenses and ensure adequate return to theexpenses and ensure adequate return to the
owners of the business ie. the shareholders.owners of the business ie. the shareholders.
 To judge whether the ratio is satisfactory orTo judge whether the ratio is satisfactory or
not, it should be compared with the firm’snot, it should be compared with the firm’s
past ratios or with the ratio of similar firms inpast ratios or with the ratio of similar firms in
the same industry or with the industry average.the same industry or with the industry average.

Net profit marginNet profit margin
This ratio is calculated by dividing net profit byThis ratio is calculated by dividing net profit by
sales. It is expressed as a percentage.sales. It is expressed as a percentage.
This ratio is indicative of the firm’s ability toThis ratio is indicative of the firm’s ability to
leave a margin of reasonable compensation toleave a margin of reasonable compensation to
the owners for providing capital, after meetingthe owners for providing capital, after meeting
the cost of production, operating charges and thethe cost of production, operating charges and the
cost of borrowed funds.cost of borrowed funds.
Net profit margin =Net profit margin =
net profit after interest and taxnet profit after interest and tax x 100x 100
Net salesNet sales

Net profit marginNet profit margin
Another variant of net profit margin is operatingAnother variant of net profit margin is operating
profit margin which is calculated as:profit margin which is calculated as:
Operating profit margin =Operating profit margin =
net profit before interest and taxnet profit before interest and tax x 100x 100
Net salesNet sales
Higher the ratio, greater is the capacity of theHigher the ratio, greater is the capacity of the
firm to withstand adverse economic conditionsfirm to withstand adverse economic conditions
and vice versaand vice versa

Expenses ratioExpenses ratio
These ratios are calculated by dividing the various expenses byThese ratios are calculated by dividing the various expenses by
sales. The variants of expenses ratios are:sales. The variants of expenses ratios are:
Material consumed ratio =Material consumed ratio = Material consumedMaterial consumed x 100x 100
Net salesNet sales
Manufacturing expenses ratio =Manufacturing expenses ratio = manufacturing expensesmanufacturing expenses xx
100100
Net salesNet sales
Administration expenses ratio =Administration expenses ratio = administration expensesadministration expenses x 100x 100
Net salesNet sales
Selling expenses ratio =Selling expenses ratio = Selling expensesSelling expenses x 100x 100
Net salesNet sales
Operating ratio =Operating ratio = cost of goods sold plus operating expensescost of goods sold plus operating expenses xx
100100
Net salesNet sales
Financial expense ratio =Financial expense ratio = financial expensesfinancial expenses x 100x 100
Net salesNet sales

Expenses ratioExpenses ratio
The expenses ratios should be compared overThe expenses ratios should be compared over
a period of time with the industry average asa period of time with the industry average as
well as with the ratios of firms of similar type.well as with the ratios of firms of similar type.
A low expenses ratio is favourable.A low expenses ratio is favourable.
The implication of a high ratio is that only aThe implication of a high ratio is that only a
small percentage share of sales is available forsmall percentage share of sales is available for
meeting financial liabilities like interest, tax,meeting financial liabilities like interest, tax,
dividend etc.dividend etc.

Return on assets (ROA)Return on assets (ROA)
This ratio measures the profitability of the total funds ofThis ratio measures the profitability of the total funds of
a firm. It measures the relationship between net profitsa firm. It measures the relationship between net profits
and total assets. The objective is to find out howand total assets. The objective is to find out how
efficiently the total assets have been used by theefficiently the total assets have been used by the
management.management.
Return on assets =Return on assets =
net profit after taxes plus interestnet profit after taxes plus interest x 100x 100
Total assetsTotal assets
Total assets exclude fictitious assets. As the total assetsTotal assets exclude fictitious assets. As the total assets
at the beginning of the year and end of the year may notat the beginning of the year and end of the year may not
be the same, average total assets may be used as thebe the same, average total assets may be used as the
denominator.denominator.

Return on capital employed (ROCE)Return on capital employed (ROCE)
This ratio measures the relationship between net profit andThis ratio measures the relationship between net profit and
capital employed. It indicates how efficiently the long-termcapital employed. It indicates how efficiently the long-term
funds of owners and creditors are being used.funds of owners and creditors are being used.
Return on capital employed =Return on capital employed =
net profit after taxes plus interestnet profit after taxes plus interest x 100x 100
Capital employedCapital employed
CAPITAL EMPLOYEDCAPITAL EMPLOYED denotes shareholders funds and long-denotes shareholders funds and long-
term borrowings.term borrowings.
To have a fair representation of the capital employed, averageTo have a fair representation of the capital employed, average
capital employed may be used as the denominator.capital employed may be used as the denominator.

Return on shareholders equityReturn on shareholders equity
This ratio measures the relationship of profits toThis ratio measures the relationship of profits to
owner’s funds. Shareholders fall into twoowner’s funds. Shareholders fall into two
groups i.e. preference shareholders and equitygroups i.e. preference shareholders and equity
shareholders. So the variants of return onshareholders. So the variants of return on
shareholders equity areshareholders equity are
Return on total shareholder’s equity =Return on total shareholder’s equity =
net profits after taxesnet profits after taxes x 100x 100
Total shareholders equityTotal shareholders equity
..

 TOTAL SHAREHOLDER’S EQUITYTOTAL SHAREHOLDER’S EQUITY
includes preference share capital plus equityincludes preference share capital plus equity
share capital plus reserves and surplus lessshare capital plus reserves and surplus less
accumulated losses and fictitious assets. Toaccumulated losses and fictitious assets. To
have a fair representation of the totalhave a fair representation of the total
shareholders funds, average total shareholdersshareholders funds, average total shareholders
funds may be used as the denominatorfunds may be used as the denominator

Return on ordinary shareholders equity =Return on ordinary shareholders equity =
net profit after taxes – pref. dividendnet profit after taxes – pref. dividend x 100x 100
Ordinary shareholders equity or netOrdinary shareholders equity or net
worthworth
ORDINARY SHAREHOLDERS EQUITYORDINARY SHAREHOLDERS EQUITY
OR NET WORTHOR NET WORTH includes equity share capitalincludes equity share capital
plus reserves and surplus minus fictitious assets.plus reserves and surplus minus fictitious assets.

Earnings per share (EPS)Earnings per share (EPS)
This ratio measures the profit available to theThis ratio measures the profit available to the
equity shareholders on a per share basis. Thisequity shareholders on a per share basis. This
ratio is calculated by dividing net profit availableratio is calculated by dividing net profit available
to equity shareholders by the number of equityto equity shareholders by the number of equity
shares.shares.
Earnings per share =Earnings per share =
net profit after tax – preference dividendnet profit after tax – preference dividend
Number of equity sharesNumber of equity shares

Dividend per share (DPS)Dividend per share (DPS)
This ratio shows the dividend paid to theThis ratio shows the dividend paid to the
shareholder on a per share basis. This is a bettershareholder on a per share basis. This is a better
indicator than the EPS as it shows the amount ofindicator than the EPS as it shows the amount of
dividend received by the ordinary shareholders,dividend received by the ordinary shareholders,
while EPS merely shows theoretically how muchwhile EPS merely shows theoretically how much
belongs to the ordinary shareholdersbelongs to the ordinary shareholders
Dividend per share =Dividend per share =
Dividend paid to ordinary shareholdersDividend paid to ordinary shareholders
Number of equity sharesNumber of equity shares

Dividend payout ratio (D/P)Dividend payout ratio (D/P)
This ratio measures the relationship between theThis ratio measures the relationship between the
earnings belonging to the ordinary shareholders and theearnings belonging to the ordinary shareholders and the
dividend paid to them.dividend paid to them.
Dividend pay out ratio =Dividend pay out ratio =
total dividend paid to ordinary shareholderstotal dividend paid to ordinary shareholders x 100x 100
Net profit after tax –preference dividendNet profit after tax –preference dividend
OROR
Dividend pay out ratio =Dividend pay out ratio = Dividend per shareDividend per share x 100x 100
Earnings per shareEarnings per share

Price earning ratio (P/E)Price earning ratio (P/E)
This ratio is computed by dividing the marketThis ratio is computed by dividing the market
price of the shares by the earnings per share. Itprice of the shares by the earnings per share. It
measures the expectations of the investors andmeasures the expectations of the investors and
market appraisal of the performance of the firm.market appraisal of the performance of the firm.
Price earning ratio =Price earning ratio = market price per sharemarket price per share
Earnings per shareEarnings per share

Activity ratiosActivity ratios
These ratios are also called efficiency ratios / assetThese ratios are also called efficiency ratios / asset
utilization ratios or turnover ratios. These ratiosutilization ratios or turnover ratios. These ratios
show the relationship between sales and variousshow the relationship between sales and various
assets of a firm. The various ratios under this groupassets of a firm. The various ratios under this group
are:are:
 Inventory/stock turnover ratioInventory/stock turnover ratio
 Debtors turnover ratio and average collectionDebtors turnover ratio and average collection
periodperiod
 Asset turnover ratioAsset turnover ratio
 Creditors turnover ratio and average creditCreditors turnover ratio and average credit
periodperiod

Inventory /stock turnover ratioInventory /stock turnover ratio
This ratio indicates the number of times inventory isThis ratio indicates the number of times inventory is
replaced during the year. It measures the relationshipreplaced during the year. It measures the relationship
between cost of goods sold and the inventory level.between cost of goods sold and the inventory level.
There are two approaches for calculating this ratio,There are two approaches for calculating this ratio,
namely:namely:
Inventory turnover ratio =Inventory turnover ratio = cost of goods soldcost of goods sold
Average stockAverage stock
AVERAGE STOCKAVERAGE STOCK can be calculated ascan be calculated as
Opening stock + closing stockOpening stock + closing stock
22
AlternativelyAlternatively
Inventory turnover ratio =Inventory turnover ratio = salessales__________________
Closing inventoryClosing inventory

Inventory /stock turnover ratioInventory /stock turnover ratio
A firm should have neither too high nor tooA firm should have neither too high nor too
low inventory turnover ratio. Too high a ratiolow inventory turnover ratio. Too high a ratio
may indicate very low level of inventory and amay indicate very low level of inventory and a
danger of being out of stock and incurring highdanger of being out of stock and incurring high
‘stock out cost’. On the contrary too low a‘stock out cost’. On the contrary too low a
ratio is indicative of excessive inventoryratio is indicative of excessive inventory
entailing excessive carrying cost.entailing excessive carrying cost.

Debtors turnover ratio and averageDebtors turnover ratio and average
collection periodcollection period
This ratio is a test of the liquidity of the debtorsThis ratio is a test of the liquidity of the debtors
of a firm. It shows the relationship betweenof a firm. It shows the relationship between
credit sales and debtors.credit sales and debtors.
Debtors turnover ratio =Debtors turnover ratio =
Credit salesCredit sales
Average Debtors and bills receivablesAverage Debtors and bills receivables
Average collection period =Average collection period =
Months/days in a yearMonths/days in a year
Debtors turnoverDebtors turnover

Debtors turnover ratio and averageDebtors turnover ratio and average
collection periodcollection period
These ratios are indicative of the efficiency ofThese ratios are indicative of the efficiency of
the trade credit management. A high turnoverthe trade credit management. A high turnover
ratio and shorter collection period indicateratio and shorter collection period indicate
prompt payment by the debtor. On theprompt payment by the debtor. On the
contrary low turnover ratio and longercontrary low turnover ratio and longer
collection period indicates delayed paymentscollection period indicates delayed payments
by the debtor.by the debtor.
In general a high debtor turnover ratio andIn general a high debtor turnover ratio and
short collection period is preferableshort collection period is preferable..

Asset turnover ratioAsset turnover ratio
Depending on the different concepts of assets employed, thereDepending on the different concepts of assets employed, there
areare
many variants of this ratio. These ratios measure the efficiencymany variants of this ratio. These ratios measure the efficiency
of a firm in managing and utilising its assets.of a firm in managing and utilising its assets.
Total asset turnover ratio =Total asset turnover ratio = sales/cost of goods soldsales/cost of goods sold
Average total assetsAverage total assets
Fixed asset turnover ratio =Fixed asset turnover ratio = sales/cost of goods soldsales/cost of goods sold
Average fixed assetsAverage fixed assets
Capital turnover ratio =Capital turnover ratio = sales/cost of goods soldsales/cost of goods sold
Average capital employedAverage capital employed
Working capital turnover ratio =Working capital turnover ratio = sales/cost of goods soldsales/cost of goods sold
Net working capitalNet working capital

Asset turnover ratioAsset turnover ratio
Higher ratios are indicative of efficientHigher ratios are indicative of efficient
management and utilisation of resources whilemanagement and utilisation of resources while
low ratios are indicative of under-utilisation oflow ratios are indicative of under-utilisation of
resources and presence of idle capacity.resources and presence of idle capacity.

Creditors turnover ratio and averageCreditors turnover ratio and average
credit periodcredit period
This ratio shows the speed with which paymentsThis ratio shows the speed with which payments
are made to the suppliers for purchases madeare made to the suppliers for purchases made
from them. It shows the relationship betweenfrom them. It shows the relationship between
credit purchases and average creditors.credit purchases and average creditors.
Creditors turnover ratio =Creditors turnover ratio =
credit purchasescredit purchases
Average creditors & bills payablesAverage creditors & bills payables
Average credit period =Average credit period = months/days in a yearmonths/days in a year
Creditors turnover ratioCreditors turnover ratio

Creditors turnover ratio and averageCreditors turnover ratio and average
credit periodcredit period
Higher creditors turnover ratio and short creditHigher creditors turnover ratio and short credit
period signifies that the creditors are beingperiod signifies that the creditors are being
paid promptly and it enhances thepaid promptly and it enhances the
creditworthiness of the firm.creditworthiness of the firm.

Ratio by mudassar

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