This document provides definitions and formulas for various financial ratios used in ratio analysis. It includes ratios that measure liquidity (current ratio, quick ratio, etc.), activity (inventory turnover, accounts receivable turnover, etc.), debt (debt-equity ratio, long-term debt ratio, etc.), profitability (gross profit margin, net profit margin, return on assets, etc.), and market ratios (price-earnings ratio, market-to-book ratio, dividend yield). Formulas are given for key ratios along with standard benchmarks. Current assets, current liabilities, and components of equity and debt are defined for calculating various leverage and return ratios.

1. Md. Sahabul Hasan
BBA (Finance), DU
Cell: 01677269758
Financial Ratio Analysis Formula (Abridged Version)
A. Liquidity Ratios:
1. Current Ratio = Current Assets / Current Liabilities
Std.= 2:1
Current Assets (cash and others easily convertible into cash within 1 year or less): Cash at hand, marketable
securities or readily realizable investments, bills receivables, sundry debtors (net), inventories, work in
progress, prepaid expenses, banks balance, a/c receivables, short term investments, earned revenues
(accrued), stock in trade, treasury bills (t- bills).
Current Liabilities (obligations which are payable within a short period of tie generally one year): outstanding
expenses, bills/notes payable, sundry creditors, a/c payables, bank overdraft, accrued expenses, short term
advances(loan), income tax payable/ tax provision, (proposed) dividend payable, interest payables, unearned
revenues/ advance receipts.
2. Quick Ratio/Acid test ratio/Liquid Ratio= Quick assets / (Current Liabilities –*Bank o/d) Std.= 1:1
Quick assets: Current assets- inventories & prepaid expenses
3. Working Capital Ratio =Working Capital/Current Liabilities
Std.= 2:1
Working Capital= Current assets- Current Liabilities
4. Absolute Liquid Ratio = Absolute Liquid Assets / Current Liabilities
Std.= 0.5:1
Absolute Liquid Assets: cash, bank balance and marketable securities
B. Activity Ratios:
1. Inventory Turnover= Cost of goods sold/Average inventory
“Or” = Net Sales / Inventory
2. Average collection period/Days sales outstanding = Accounts receivables / Average sales per day
“Or”= 360/Debtors turnover ratio
Average sales per day= Net Credit sales/360
3. Debtors/Ac. Receivables turnover=Net Credit Sales/Average acc. receivables + notes receivables
Average acc. receivables + notes receivables= (Beginning A/R+ Ending A/R)/2
4. Creditors / Acc. Payables turnover= Net credit purchase/Average creditors + notes payables
5. Average payment period = A/c payables/ average purchase per day
“Or”= 360/Creditors turnover ratio
Average purchase per day =Net Credit Purchase/360
6. Total assets turnover = Net Sales/Total net assets
Total net assets = Total assets- Fictitious assets (i.e. Preliminary expense, Discount on share and debenture,
Debit balance on profit and loss a/c, Underwriter’s commission)
7. Fixed assets turnover = Net sales/ Total net fixed assets
Total net fixed assets: Total assets-Current assets- Fictitious assets
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2. C. Proportion of Debt (Balance Sheet) Ratios:
1. Debt-Equity Ratio: Total long term debt/Total Equity
Total long term debt= Debentures, bonds, mortgages, Long term loan, Industrial loan
Total equity/shareholders fund= Paid up equity share capital, preference share capital, capital reserves,
revenue reserves, and reserves , reserves for contingencies, undistributed profit, sinking fund-(Accumulated
losses, deferred expenses, preliminary expenses and other fictitious assets)
2. Long term debt- Total capital ratio= Total long term debt/Total long term capital
Total long term capital/invested capital=Total long term debt, Shareholders equity, preferred stock
3. Proprietary or Equity Ratio = Shareholders funds / Total Assets
4. Debt Ratio = Total Liabilities (CL+LTL)/ Total assets
5. Interest Coverage Ratio/Times Int. Earned = Earnings before Interest & Tax / Fixed Interest Charges
6. Capital Gearing Ratio = Fixed Interest Bearing Funds/ Equity Share Capital
Fixed Interest Bearing Funds= Debentures, bonds, mortgages, Long term loan, Industrial loan & preferred Equity
D. Profitability Ratios:
1. Gross profit margin= (Sales-Cost of goods sold)/Sales
2. Net profit margin= Net profit (income)/Sales
3. Operating profit margin= operating profit (EBIT)/Sales
Operating profit=Gross profit-SG&A expenses
4. Earnings per share= Earnings available for common stockholders/No. of common shares outstanding
Earnings available for common stockholders= Net Income-Preferred Dividend
5. Return on Asset (ROA) = Earnings available for common stockholders/Total Assets
6. Return on Equity (ROE) = Earnings available for common stockholders/Total Equity
7. Dividend per share (DPS) = Dividend paid or declared to common shareholder/ No. of Common share
8. Dividend payout ratio= DPS/EPS (*100)
9. Retention rate= (EPS-DPS)/EPS (*100)
10. Return on Capital Employed= EBIT “or” EAT/Average total capital employed (*100)
Average total capital employed=Shareholders funds (Common &Preferred), Long term debt
11. DuPont Ratio=ROE =
=
=
= Profit Margin
TAT
Financial Leverage
E. Market Ratios:
1. Price/Earnings (P/E) ratio = Market price per share/EPS
2. Market/Book value (M/B) ratio = Market Price per share/ Book value per share
Book value per share =Shareholders funds (total equity)/No. of shares outstanding
3. Dividend Yield = DPS/Mkt. price per share *100
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