This document provides an introduction to ratio analysis and outlines various types of ratios used to evaluate business performance and financial health. It discusses current, liquid, debt-to-equity, and other ratios that measure liquidity, solvency, turnover, and profitability. Specific ratios are defined, such as current ratio, liquid ratio, debt-to-equity ratio, and gross profit ratio. Examples of ratios for years 2007-08 through 2009-10 are given for an example company. The document emphasizes that ratios should be compared over time and to industry benchmarks to truly understand a company's financial position.

1. RATIO ANALYSIS
INTRODUCTION
The Financial Analyst needs certain yardstick to evaluate the efficiency and performance of
business units. The most frequently used yardstick is Ratio Analysis. It is a tool, which studies
the numerical or quantitative relationship between two variables or items, which are related. This
is because no useful purposes will be served if ratios are calculated between two figures, which
are not at all related to each other. It is difficult to compare any data unless simplified. The ratios
are simplification of huge mass of data and are easy to compare.
Ratios Analysis may be expressed in any of the three ways:
 Rate.
 Proportion and
 Percentage.
The different types of ratios are as follows:
Solvency or Financial Ratios :
It is used to find out the short term and long term financial position of the concern. The
norm varies as per the ratio.

Turnover Ratios :
It measures the effectiveness of the business. Higher is the better.

Profitability Ratios :
Profitability ratios are prepared to find out the overall efficiency of the business. The
higher the ratio better is the company’s position.

SOLVENCY OR FINANCIAL RATIOS
Solvency or financial ratios include all ratios which express financial position of the
concern.

2. SHORT TERM SOLVENCY RATIOS OR LIQUIDITY RATIOS

Current Ratio :The ratio of current assets to current liabilities is called Current Ratio. It indicates the
ability of a concern to meet its current obligations as and when they are due for payment.
It may be expressed as:
Current Ratio: Current Assets
Current Liabilities
Years
Current Assets (Rs.)
2007-08
4487710
2008-09
4900817
2009-10
4426769
Current Liabilities
(Rs.)
1441833
3416993
2747739
2.97:1
1.43:1
1.61:1
Significance:
The ideal ratio is 2:1. High current ratio indicates dependence on long term sources of
raising fund. Lesser ratio indicates inadequate current assets to meet current liabilities.

3. 3.5
3.11
3
2.5
2
1.61
1.43
1.5
1
0.5
0
2007-08
2008-09
2009-2010
Current Ratio

Liquid Ratio:This ratio is also called ‘Quick’ or ‘Acid test ratio’. It is calculated by comparing the
quick assets with current liabilities. It may be expressed as:
Liquid Ratio =
Liquid Assets
Current Liabilities
Year
2007-08
2008-09
2009-10
Liquid Assets (Rs.)
4402845
4814166
4338756
Current Liabilities (Rs.)
1481833
3416993
2747739
1.41
1.58
2.97

4. Significance:
The ideal ratio is 1:1. Comparison of quick ratio with current ratio indicates the inventory
hold ups.
3.50
3.00
2.50
2.00
1.50
2.97
1.00
1.41
1.58
0.50
0.00
2007-08
2008-09
Liquid Ratio
2009-10

5.  Absolute Ratio :
It is modified form of Liquid Ratio. The relationship of absolute liquid assets to
liquid liabilities is known as Absolute liquid ratio. This ratio is also called as
Super Quick ratio. This is calculated as :
Liquid ratio =
Absolute Liquid assets
Liquid liabilities
Years
Absolute liquid
2007-08
4487710
2008-09
4900817
2009-10
4426769
3005877
3416993
2747739
Assets (Rs.)
Liquid liabilities (Rs.)
1.49
1.43
1.61
Significance :
The quick ratio/acid test ratio is very useful in measuring the liquidity position
of a firm. It
measures the firm's capacity to pay off current obligations immediately and is more rigorous
test of liquidity than the current ratio. A standard of 0.5:1 absolute liquidity ratio is
considered an acceptable norm. As a convention, generally, a quick ratio of "one to one"
(1:1) is considered to be satisfactory.

6. R
U
P
E
E
S
I
N
C
R
O
R
ES
1.65
Asolute Liquid Ratio
1.61
1.60
1.55
1.50
1.49
1.43
1.45
1.40
1.35
1.30
2007-08
2008-09
2009-2010
YEARS
Asolute Liquid Ratio
SOLVENCY RATIOS

Debt Equity Ratio:A measure of a company's financial leverage. Debt/equity ratio is equal to
long- term debt divided by common shareholders' equity. The data from the
prior fiscal year is used in the calculation.
It is the relationship between borrower’s fund (Debt) and Owner’s Capital
(equity).

7. Debt Equity Ratio :
Long term debts
Shareholders Fund
Year
2007-08
2008-09
Long term debts (Rs.)
103835
38255
38255
Shareholders Funds (Rs.)
818412
1038071
1696183
0.13
0.04
2009-10
0.02
Significance:
It is important to realize that if the ratio is greater than 1, the majority of assets are financed
through debt. If it is smaller than 1, assets are primarily financed through equity.
0.14
R
U
P
E
E
0.13
0.12
0.1
S
0.08
I
N
0.06
C
R
O
R
E
S
0.04
0.04
0.02
0.02
0
2007-08
2008-09
2009-2010
YEARS
Fixed Assets Ratio

8. 
Proprietary Ratio:This ratio expresses the relationship between the proprietor’s funds and the total tangible
assets. It may be expressed as:
Proprietary ratio:
Shareholder’s funds
Total tangible asset
Years
Shareholder’s funds
(Rs.)
i
2008-09
1038071
2009-10
1696183
1925865
1854487
1854487
0.42
Total tangible assets
(Rs.)
S
2007-08
818412
0.56
0.86
significance:
This ratio shows the general soundness of the company. A high ratio
indicates safety to the creditors and a low ratio shows greater risk to the creditors.

9. Proprietary ratio
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2006-07
2007-08
2008-09
TURNOVER RATIOS(Activity Ratios)
These ratios are also called ‘performance ratios’ or ‘activity ratios’. These ratios highlight
the operational efficiency of the business concern.

Operating Profit Ratio:Operating net profit ratio is calculated by dividing the operating net
profit by sales. This ratio helps in determining the ability of the
management in running the business.
Operating Profit Ratio =
Operating Profit x 100
Sales

10. Years
Operating Profit (Rs.)
2008-09
490192
2009-10
1032741
13185718
8746585
13506451
3.98
Sales (Rs.)
2007-08
525331
5.60
7.65
Significance:
This ratio indicates whether Investment in Inventories is efficiently used or not. Higher
ratio indicates brisk sales. Lower ratio indicates blocking of funds in Inventory.
9
8
7
6
5
4
3
2
1
0
2007-08
2008-09
2009-10
Operating Profit Ratio
 Fixed assets turnover ratio:This ratio determines efficiency of utilization of fixed assets and profitability of a
business concern.
Fixed Assets Turnover Ratio:
Sales/Cost of Sales

11. Net fixed assets
Years
Sales (Rs.)
Net fixed assets
(Rs.)
2007-08
13815718
444032
2008-09
8746585
370663
2009-10
13506451
299346
31.11
23.60
45.12
Significance:
Higher the ratio more is the efficiency in utilization of fixed assets. A lower ratio is the
indication of under utilization of fixed assets.
Fixed assets turnover ratio
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
2006-07
2007-08
Fixed assets turnover
ratio
 Capital turnover ratio:-
2008-09

12. Managerial efficiency is also calculated by establishing the relationship between Cost of
Sales/Sales with the amount of Capital invested in the business. It may be expressed as
follows:
Capital Turnover Ratio:
Sales
Capital employed
Years
Sales (Rs.)
2007-08
2008-09
2009-10
8746585
13506451
818412
1038071
1696183
16.88
Capital employed
13815718
8.43
7.96
(Rs.)
Significance:
Higher ratio indicates higher efficiency and lower ratio indicates ineffective usage of
Capital.

13. 0.3
0.25
0.2
0.15
0.1
0.05
0
2006-07
2007-08
2008-09
Capital turnover ratio
PROFITABILITY RATIOS
Ability to make maximum profit from optimum utilization of resources by a business
concern is termed as ‘profitability’. Profitability depends on sales, costs and utilization of
resources. The following are the various ratios used to analyze profitability.
 Gross profit ratio:This ratio is also known as Gross margin/Trading Margin ratio. Gross profit ratio
indicates the difference between sales and direct costs. Gross profit ratio explains the
relationship between gross profit and net sales.
Gross Profit Ratio:
Gross Profit
x 100
Net Sales
Years
2007-08
2008-09
2009-10

14. Gross profit (Rs.)
3026701
1502741
6265422
Net sales (Rs.)
13818218
8476585
13506451
21.90
17.18
46.39
Significance:
Higher ratio indicates higher profitability. Lower ratio indicates lesser profitability.
90
80
70
60
50
40
30
20
10
0
2006-07
2007-08
Gross profit ratio
2008-09

15.  Net profit ratio:This ratio is also called net profit to sales ratio. It is a measure of management’s
efficiency in operating the business successfully from the owner’s point of view. It
indicates the return on shareholder’s investments.
Net Profit Ratio:
Net Profit after tax
x 100
Net sales
Years
2008-09
2009-10
413157
384373
950450
13815718
8746585
13506451
2.99
Net profit after tax
(Rs.)
Net sales (Rs.)
2007-08
4.39
7.04
Significance:
Higher the ratio better is the operational efficiency of the business concern.

16. 8
7
6
5
4
3
2
1
0
2007-08
7.04
4.39
2.99
2008-09
2009-10