| To Test |
Name of Ratio |
Formula |
Parties Interested |
Industry Norm |
| Liquidity and Solvency |
i) Current Ratio |
Current Assets
Current Liabilities
|
Short-term Creditors, Investors,
Money lenders & like parties
|
2:1 |
| ii) Liquid / Quick / Acid Test Ratio |
Current assets - Stock - Prepaid Expenses
Current Liabilities - Bank Overdraft -
Prereceived Income |
-do-
|
1:1 |
| iii) Absolute Liquid Ratio |
Cash + Marketable securities
Quick Liabilities |
-do- |
1:1 |
| iv) Proprietary Ratio |
Proprietor's Fund
Total Assets
[Proprietor's funds = Equity Capital + Preference Capital
+ Reserves and Surplus + Accumulated funds - Debit
balances of P & L A/c and Miscellaneous Expenses] |
-do- |
60% to 75% |
| Capitalisation |
i) Debt Equity Ratio |
Debt
Equity
[Debt = Long / Short -term loans, debentures, bills, etc, Equity
= Proprietor's funds] |
-do-
|
2:1 |
| ii) Capital Gearing
Ratio |
Fixed cost funds
Funds not carrying fixed cost
[Fixed cost funds = pref. share capital, Debentures,
Loans from banks, Financial institutions, other unsecured loans].
[Funds not carrying fixed cost = Equity share capital + undistributed
profit - P&L A/c (Dr. Bal.) - Misc. expenses]. |
-do- |
2:1 |
Profitability and Management
efficiency
|
i) Gross Profit Ratio |
Gross Profit x 100
Net sales |
Shareholders, Long-term Creditors, Government.
|
20% to 30%
|
| ii) Net Profit Ratio |
Net Profit x 100
Net sales
[Net profit may be either Operating Net profit, Profit before
tax or Profit after tax]. |
-do- |
5% to 10% |
| iii) Return on Capital employed
(ROCE) |
Net profit x 100
Capital employed
[Capital employed = Fixed Assets + Current Assets - Current
Liabilities]. |
-do- |
— |
| iv) Return on Proprietors fund |
Profit after tax
Proprietor's funds |
-do- |
— |
| v) Return on Capital |
Profit after tax less pref. Dividend x
100
Equity Share Capital |
-do- |
— |
| vi) Earnings per share [EPS] |
Profit after tax less pref. Dividend
Total No. of Equity Shares |
-do- |
— |
| vii) Dividend per share [DPS] |
Total Dividend paid to ordinary shareholders
Number of ordinary shares |
Shareholders, Investors |
— |
Management
efficiency |
i) Stock Turnover |
Cost of goods sold
Average Stock |
Management
|
5 to 6 times
|
| ii) Debtors Turnover Ratio |
Debtors + Bills receivable x 365
Net Credit sales |
Management |
45 to 60 days |
| iii) Debtor's Turnover Rate |
Credit sales
Avg. Debtors + Bills receivable |
Management |
60 to 90 days |
| iv) Creditor's Turnover Ratio |
Creditors + Bills payable x 365
Credit purchases |
-do- |
|
| v) Creditor's Turnover Rate |
Credit purchases
Average Creditors |
|
|
| vi) Operating Ratio |
Operating Costs x 100
Net sales
[Operating Cost = Cost of goods sold + Operating expenses (viz.
Administrative, selling & finance expenses)] |
|
|
| Number of times pref. dividends covered by Net
profit |
Preference share-holder's coverage Ratio |
Net profit (after Interest & Tax but before
equity dividend)
Preference Dividend |
Preference Shareholders |
|
| Number of times equity dividends covered by Net
profit |
Equity shareholder's coverage Ratio |
Net profit (after interest, tax & Pref.
Dividend)
Equity Dividend |
Equity Shareholders |
|
| Number of times fixed interest covered by Net
profit |
Interest coverage Ratio |
Net profit (before Tax & Interest) (PBIT)
Fixed Interests & charges |
Debenture holders, Loan Creditors |
|
| Relationship between Net profit and total fixed
charges |
Total coverage Ratio |
Net profit (before Interest & Tax) (PBIT)
Total fixed charges |
Shareholders, Investors, Creditors,
Lenders |
|
| The idle capacity in the Organisation |
Fixed expenses to Total Cost Ratio |
Fixed Expenses
Total cost |
Management Shareholders |
|
| Material consumption to sales |
Material Consumption to sales Ratio |
Material Consumption
Sales
|
Management |
|
| Wages to sales |
Wages to sales Ratio |
Wages
Sales |
Management |
|
| The future market price of a share |
Price Earning Ratio |
Market price of a share (MPS)
Earning per share (EPS) |
Investors, Speculators |
|
| Dividend per share |
Dividend per share |
Dividend paid to ordinary shareholders
Number of ordinary shares |
Shareholders, Investors |
|
