Financial Ratios Analysis | Accounting Ratios Formulas

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




OVER ALL PROFITABILITY RATIOS
1. Return on Shareholders’ Investment/ Net
worth/ Fund
=
  Net Profit after
Interest & Tax      × 100
       Share
holders’ Fund

2.     
Return on
Equity Capital
=
Net Profit after Tax – Preference Dividend × 100
Equity Share Capital
[Equity
Capital/ Shareholders’ Fund= Equity Capital + P.L.S (Cr) + Capital Reserve etc.
– Capital Losses]
3.      Earning Per Share (E.P.S.) =
           Net Profit after Tax & Interest –
Preference Dividend × 100
 Total Number of
Equity Shares
4.     
Return on
Gross Capital Employed
=
                                     Adjusted Net Profit × 100
     Gross Capital Employed
[Gross Capital Employed = Fixed
Assets + Investment + Current Assets]
5.     
 Return
on Capital Employed
=
 Adjusted Net
Profit ×
100
Net
Capital Employed
[Net
Capital Employed = Fixed Assets + Investment + Current Assets – Current
Liabilities]
6.     
Dividend
Yield Ratio
=     
                                                      
Dividend per Share    ×
100 
                                                  Market Value per Share
7.     
Dividend
Pay-out Ratio
=  
Dividend
Per Equity Share ×
100 
                                                 Earning Per Share
8.     
Price
Earning Ratio ( P/E)
=
 Market
Price per Equity Share
×
100 
           Earning Per Share
9.     
Return on
Total Resources
=
                                           Net
Profit after tax and Interest
× 100 
                                                
Total Assets or Total Liabilities
SHORT TERM FINANCIAL POSITION / TEST OF
LIQUIDITY
  1. Current Ratio / Working
    Capital Ratio
    =
                                                      Current Assets ×
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
× 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
× 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
[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
Trade Creditors
[Average Trade Creditors = Opening B/P or Creditors +
Closing B/P, Creditors ] 
                                                                                  
2
  1. Average Payment Period
    =
                                            Trade
Creditors X No. of Working Days (360)
                                                                           Net Purchases       

OR                         No. of Working
Days
Creditors Velocity
  1. Working Capital Ratio
    =
                                                                    Cost of Goods Sold × 100 
                                                                  Net
Working Capital
[Net Working Capital = Current Assets – 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 – Capital Loan]
TEST OF SOLVENCY OR LONG -TERM FINANCIAL
POSITION
  1. RETURN ON TOTAL RESOURCES =
                                                                   Net Profit
                                                                 Total Assets    
  1. DEBT EQUITY RATIO =
                                                   Outsiders’ fund / Equity or Total Liability
                                                     Insiders’/ Shareholders’ Fund /
Equity
[Shareholders’ Fund = Share Capital  + Reserves & Surplus + Share Premium +
Profit & Loss Account Credit Balance – Preliminary Exp. – Profit & Loss
Account Debit Balance – 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 ×
100 
                                       Capital Employed
[Capital Employed = Current Assets – Current Liabilities +
Fixed Assets]
  1. CAPITAL EMPLOYED TURNOVER RATIO
    =
                                                           Sales ×
100 
                                            Net
Capital Employed
[Net Capital Employed = Equity Share Capital + Reserves
& Surplus +Long Term Liabilities – Other Assets like Investment in Govt.
Securities etc.]
[Average Capital Employed = Net Capital Employed – ½ Net
profit after interest & Tax]
  1. CAPITAL EMPLOYED TRUNOVER RATIO =
                       Sales ×
100 
                      Net Capital Employed
  1. RETURN ON SHAREHOLDERS FUNDS =
                                      Net
Profit
                                 Share holders’
Funds
  1. FIXED ASSETS TO NETWORTH / ASSETS TO PROPRIETORSHIP
    RATIO =
Net Fixed Assets
Shareholders’ 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 holders’ Fund
COMPUTATIONS OF ITEMS
1.      SUNDRY DEBTOR =
Sales
× Debtors Velocity (in months)
            12 months
[Debtors =
Sundry Debtors – Bills Receivable]
2.      SUNDRY CREDITORS =
     Purchases ×
Creditors Velocity (in months)
                        12
months
[Creditors = Sundry Creditors – Bills
Payable]
[Purchases = Cost of Goods Sold + Closing Stock – Opening
Stock]
3.     
CLOSING
STOCK =
                     
 Opening Stock + Above
than Opening Stock
Opening Stock=
Average Stock × 2 – Above than Opening
Stock
               2
OR
Average
Stock × 2 – Closing Stock
Average Stock = Cost
of Goods Sold × 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 × Average stock of merchandise
OR    Sales – 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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