# Financial Ratios Analysis | Accounting Ratios Formulas

ACCOUNTING RATIOS

GENERAL PROFITABILITY
1.      Gross Profit Ratio =
Gross Profit
Ã— 100
Net Sales
2. Net Profit Ratio
Net Profit    Ã— 100
Net
Sales
3. Expenses Ratio =
Particular Expense    Ã— 100
Net Sales
4. Operating profit Ratio =
Net Operating
profit
Ã— 100
Net
Sales
[Operating Profit = Net Profit + Income tax + other exp. â€“
other income]
5. Operating Ratios =
Operating Cost    Ã— 100
Net Sales
[Operating
Cost = Cost of Goods Sold + Operating Exp.]

OVER ALL PROFITABILITY RATIOS
1. Return on Shareholdersâ€™ Investment/ Net
worth/ Fund
=
Net Profit after
Interest & Tax      Ã— 100
Share
holdersâ€™ Fund

2.
Return on
Equity Capital
=
Net Profit after Tax â€“ Preference Dividend Ã— 100
Equity Share Capital
[Equity
Capital/ Shareholdersâ€™ Fund= Equity Capital + P.L.S (Cr) + Capital Reserve etc.
â€“ Capital Losses]
3.      Earning Per Share (E.P.S.) =
Net Profit after Tax & Interest â€“
Preference Dividend Ã— 100
Total Number of
Equity Shares
4.
Return on
Gross Capital Employed
=
Gross Capital Employed
[Gross Capital Employed = Fixed
Assets + Investment + Current Assets]
5.
Return
on Capital Employed
=
Profit Ã—
100
Net
Capital Employed
[Net
Capital Employed = Fixed Assets + Investment + Current Assets â€“ Current
Liabilities]
6.
Dividend
Yield Ratio
=

Dividend per Share    Ã—
100
Market Value per Share
7.
Dividend
Pay-out Ratio
=
Dividend
Per Equity Share Ã—
100
Earning Per Share
8.
Price
Earning Ratio ( P/E)
=
Market
Price per Equity Share
Ã—
100
Earning Per Share
9.
Return on
Total Resources
=
Net
Profit after tax and Interest
Ã— 100

Total Assets or Total Liabilities
SHORT TERM FINANCIAL POSITION / TEST OF
LIQUIDITY
1. Current Ratio / Working
Capital Ratio
=
Current Assets Ã—
100
Current Liabilities
[Current Assets = Cash in Hand +Cash at Bank + B/R +A/R +
Sundry Debtors(net) + Closing Inventory +Prepaid Expenses + Releasable
Investment + Investment in Govt. Securities + Stock in Trade + Other assets
like Accrued Income etc. ]
[Current Liabilities = B/P + A/P + Notes Payable + bank
overdraft+ sundry Creditors + tax payable + accrued expenses + short term bank
loan + other current liabilities]
Standard or Best Ratio: 2:1
1. Liquid Ratio/ Acid Test Ratio/
Quick Ratio/ BANKER RATIO
:
Quick Assets
Ã— 100
Current
Liabilities
[Quick Assets = All current Assets minus Closing Stock,
prepaid Expenses]
OR
[Cash, Bank, Sundry Debtors, Bills Receivable, Marketable
Securities, Temporary Investments]
Standard or Best Ratio: 1:1
3. Absolute Liquidity
Ratio
=
Absolute Liquid Assets
Ã— 100
Current
Liabilities
[Absolute Liquid Assets = Cash + Bank + Marketable
Securities]
Standard or Best Ratio: 0.5:1
MOVEMENT/ EFFICIENCY/ ACTIVITY RATIOS
1. INVENTORY/ STOCK TURNOVER RATIO =
Cost
of Goods Sold
(Time)
Average Inventory
OR              NET SALES
Average Inventory/ INVENTORY
[Average
Inventory = Opening Stock + Closing Stock ]

2
1. Debtor Velocity or Turnover
Ratio
=
Net Credit Sale
[Average Trade Debtors = Opening B/R or Debtor + Closing
B/R, Debtor ]

2
1. Average Collection Period
=
Trade Debtors X No. of Working Days (360)
Net Credit Sales
OR                         No. of Working
Days
Debtors Turnover
1. Creditors Velocity or Turnover
Ratio
=
Net
Credit Purchase

Average
[Average Trade Creditors = Opening B/P or Creditors +
Closing B/P, Creditors ]

2
1. Average Payment Period
=
Creditors X No. of Working Days (360)
Net Purchases

OR                         No. of Working
Days
Creditors Velocity
1. Working Capital Ratio
=
Cost of Goods Sold Ã— 100
Net
Working Capital
[Net Working Capital = Current Assets â€“ current Liabilities
& Provisions]
1. Inventory to Working Capital
Ratio
=
Average Inventory
Working Capital
1. Total Assets Turnover Ratio =
Cost of Goods Sold
Total Assets
9. Capital Turnover Ratio =
Cost of Goods Sold
Total Liabilities
1. Net Capital Turnover Ratio =
Cost of Goods Sold /
Sales
Net Capital Employed
[Net Capital Employed = Shareholders Fund + Reserves & Surplus
+ Long Term Debt â€“ Capital Loan]
TEST OF SOLVENCY OR LONG -TERM FINANCIAL
POSITION
1. RETURN ON TOTAL RESOURCES =
Net Profit
Total Assets
1. DEBT EQUITY RATIO =
Outsidersâ€™ fund / Equity or Total Liability
Insidersâ€™/ Shareholdersâ€™ Fund /
Equity
[Shareholdersâ€™ Fund = Share Capital  + Reserves & Surplus + Share Premium +
Profit & Loss Account Credit Balance â€“ Preliminary Exp. â€“ Profit & Loss
Account Debit Balance â€“ Discount on
issue of Shares and Debentures]
[Total Liability = All Current Liabilities like B/P,
A/P,  Sundry Creditors, Outstanding
Expenses, Bank Overdraft + All long Term liabilities like Debentures, Bonds
Payable, PTC + Other Long Term Liabilities]
1. PROPRIETRY RATIO / EQUITY RATIO =
Shareholders Fund
Total Assets
1. CAPITAL GEARING RATIO / CAPITAL STRUCTURE =
Equity Share Capital
Fixed Interest Bearing Funds
[Equity Share Capital = Equity Share Capital + Reserves +
Surplus + All funds and surplus items belong to Shareholders]
[Fixed Interest Bearing Funds = Preferred Capital +
Debentures + PTC + Bonds Payable +Other long term Loans]
1. RETURN ON CAPITAL EMPLOYED
=
Adjusted Net Profit /Operating Profit Ã—
100
Capital Employed
[Capital Employed = Current Assets â€“ Current Liabilities +
Fixed Assets]
1. CAPITAL EMPLOYED TURNOVER RATIO
=
Sales Ã—
100
Net
Capital Employed
[Net Capital Employed = Equity Share Capital + Reserves
& Surplus +Long Term Liabilities â€“ Other Assets like Investment in Govt.
Securities etc.]
[Average Capital Employed = Net Capital Employed â€“ Â½ Net
profit after interest & Tax]
1. CAPITAL EMPLOYED TRUNOVER RATIO =
Sales Ã—
100
Net Capital Employed
1. RETURN ON SHAREHOLDERS FUNDS =
Net
Profit
Share holdersâ€™
Funds
1. FIXED ASSETS TO NETWORTH / ASSETS TO PROPRIETORSHIP
RATIO =
Net Fixed Assets
Shareholdersâ€™ Funds
1. FIXED ASSETS RATIO / FIXED ASSETS TO LONG-TERM FUND
RATIO =
Net Fixed Assets
Total Long Term Funds
1. RATIO OF CURRENT ASSETS TO PROPRIETOR FUND
=
Current Assets
Share holdersâ€™ Fund
COMPUTATIONS OF ITEMS
1.      SUNDRY DEBTOR =
Sales
Ã— Debtors Velocity (in months)
12 months
[Debtors =
Sundry Debtors â€“ Bills Receivable]
2.      SUNDRY CREDITORS =
Purchases Ã—
Creditors Velocity (in months)
12
months
[Creditors = Sundry Creditors â€“ Bills
Payable]
[Purchases = Cost of Goods Sold + Closing Stock â€“ Opening
Stock]
3.
CLOSING
STOCK =

Opening Stock + Above
than Opening Stock
Opening Stock=
Average Stock Ã— 2 – Above than Opening
Stock
2
OR
Average
Stock Ã— 2 â€“ Closing Stock
Average Stock = Cost
of Goods Sold Ã— Stock velocity (months)

12 months
OR                  Opening Stock + Closing Stock

2
OR                   Cost of Goods Sold
Stock Velocity (Time)
4.
FIXED
ASSETS =
Cost
of goods Sold
Fixed
Assets Turnover Ratio
5.
Capital =
Cost of Goods
Sold
Capital
Turnover Ratio
6.
COST OF
GOODS SOLD =
Merchandise Turnover Ã— Average stock of merchandise
OR    Sales â€“ Gross Profit

7.
NET INCOME
BEFORE TAX =
Net Income After Tax

Percentage of Net Income after Tax*
[* If   Income = 100 %
Tax       = 25 %
Then after Tax = 75 %]

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