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Ratio AnalysisIt is a important technique of financial analysis

Benefits of accounting ratios:• Useful in financial position analysis• Useful in simplifying accounting figures• Useful in assessing the operational efficiency• Useful in forecasting purposes• Useful in locating the weak spots of the business• Useful in comparison of performance

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Balance sheet Ratios

• Current ratio/working capital ratio• Liquidity ratio• Absolute liquid ratio• Debt equity ratio• Equity or proprietary or net worth ratio• Fixed assets to net worth ratio• Current assets to net worth ratio

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Profit and Loss account ratios

• Gross profit ratio• Net profit ratio• Operating ratio• Operating profit

ratio• Stock turnover

ratio

Combined/inter statement ratios

• Debtors turnover ratio• Total assets turnover

ratio• Return on capital

employed ratio• Fixed assets turn over

ratio• Current assets turn over

ratio• Working capital turn

over

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Classification of Ratios

• Profitability ratios• Turnover ratios• Financial ratios• Leverage ratios

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Profitability ratios• Gross profit ratio • Operating ratio• Operating profit ratio• Net profit ratio• ROCE• Return on shareholders’ investment• Return on Total assets• Debt service ratio / fixed charges cover• EPS• Price Earning ratio• Payout ratio• Dividend yield ratio

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Turnover/ Activity/Performance ratios

• Sales to capital employed• Fixed assets turnover• Working capital turnover• Total assets turnover• Stock turnover• Receivables turnover• Creditors turnover

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Financial ratios

• Current ratio• Liquid ratio• Absolute liquidity ratio• Working capital ratio• Fixed assets ratio• Current assets to total assets ratio• Debt equity ratio• Proprietory ratio• Capital gearing ratio

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Leverage ratios

• Operating leverage• Financial leverage

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Profitability ratios• Gross Profit Ratio = Gross profit/ Net sales *100 • Operating Ratio = cost of goods sold + operating expenses

*100 Net sales• Operating Profit ratio = Operating Profit/ Net sales * 100• Net Profit Ratio = Net Profit after interest and Tax/ Net

Sales• Return on Capital Employed = Operating Profit/ Capital

Employment*100• Return on Shareholders’ Investment= Net Profit after tax,

interest and preference dividend/ Equity shareholders’ funds *100

• Return on Total Assets = Net Profit after interest and Tax/ Total Assets * 100

• Debt Service Ratio = Net Profit before interest and Tax/ Interest on long term liabilities

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• Earning per Share = Net Profit - Preference DividendNumber of Equity Shares

• Price Earning Ratio = Market price per equity share Earning per share

• Pay out Ratio = Dividend per equity share Earning per share

• Dividend Yield Ratio = Dividend per share * 100 Market price per share

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Turn over ratios

• Sales to capital employed = Sales/ Capital Employed• Fixed assets turnover = Sales/ Net Fixed Assets• Working capital turnover = Sales /Net Working Capital• Total assets turnover = Net Sales/ Total Assets• Stock turnover = Cost of Goods Sold/ Average Stock • Receivables(Debtors) turnover = Net Credit Sales/ Average Debtors• Collection period = 365/ Debtors turnover ratio• Creditors turnover = Credit Sales/ Average Debtors• Collection period = Days in a year/ Creditors turn over ratio

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Financial ratios

• Current ratio = Current Assets / Current Liabilities 2:1• Liquid or quick ratio = Quick assets/ current Liabilities 1:1• Absolute liquidity ratio = Cash in hand and at bank + S.T marketable securities

Current Liabilities• Working capital ratio = Inventory / Working Capital• Fixed assets to net worth ratio = Fixed Assets/ Net worth• Current assets to total assets ratio = Current Assets/ Fixed Assets• Debt equity ratio = L.T Debt/ Shareholders’ Funds• Proprietary ratio = Share holders fund/ Total Assets• Capital gearing ratio = Fixed Interest-bearing securities/ Equity shareholders’

fund

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Leverage ratios

• Operating leverage = Marginal contribution/EBIT

• Financial leverage = EBIT/EBT