Ratio Analysis
Ratio Analysis
Formulas
1) Financial ratios S.no | Ratio | Formula | Ideal ratio | comments | 1 | Current ratio | Current assetsCurrent liabilities | 2:1/1.33:1 | Indicates firm’s commitment to meet financial obligations.Avery heavy ratio is not desirable as it indicates less efficient use of funds | 2 | Quick ratio | Quick assetsCurrent liabilities | 1:1 | This ratio also indicates short term solvency of a firm | 3 | Debt –Equity ratios | long term debtequity | 1:2 | Indicates long term solvencyHigher ratio is riskier for the creditors | 4 | Proprietary ratio | Shareholders’ fundsTotal tangible assets | | Variant of debt-equity ratioShows the extent of shareholders funds in the total assets employed in the businessHigher ratio indicates relatively little danger to creditors and vice versa |
Notes 1) Current assets are those assets which can be converted into cash within a period of one year or normal operating cycle of the business whichever is longer
Examples : Cash in hand, cash at bank ,stock, debtors, bills receivable, prepaid expenses 2) Current liabilities are those liabilities payable within an year or operating cycle 3) Quick assets = current assets – (stock+prepaid expenses) 4) Quick ratio is also known as the acid test ratio or liquidity ratio 5) Tangible assets are those assets which have physical existence 6) Long term debt /external funds/external equities =debentures+termloans 7) Share holders’ funds/internal funds/proprietary funds/owners funds=equity share capital+preference share capital+reserves+profit and loss account-fictitious assets
2) Profitability ratios
S.no | Ratio | Formula | Ideal ratio | comments | 1 | Gross Profit Ratio | Gross profit X 100Net sales | Higher the ratio better it is | This ratio expresses the relationship between gross profit and net salesGross profit should be adequate to cover operating expenses | 2 | Net Profit ratio | Net profit X100Net sales | Higher
Formulas
1) Financial ratios S.no | Ratio | Formula | Ideal ratio | comments | 1 | Current ratio | Current assetsCurrent liabilities | 2:1/1.33:1 | Indicates firm’s commitment to meet financial obligations.Avery heavy ratio is not desirable as it indicates less efficient use of funds | 2 | Quick ratio | Quick assetsCurrent liabilities | 1:1 | This ratio also indicates short term solvency of a firm | 3 | Debt –Equity ratios | long term debtequity | 1:2 | Indicates long term solvencyHigher ratio is riskier for the creditors | 4 | Proprietary ratio | Shareholders’ fundsTotal tangible assets | | Variant of debt-equity ratioShows the extent of shareholders funds in the total assets employed in the businessHigher ratio indicates relatively little danger to creditors and vice versa |
Notes 1) Current assets are those assets which can be converted into cash within a period of one year or normal operating cycle of the business whichever is longer
Examples : Cash in hand, cash at bank ,stock, debtors, bills receivable, prepaid expenses 2) Current liabilities are those liabilities payable within an year or operating cycle 3) Quick assets = current assets – (stock+prepaid expenses) 4) Quick ratio is also known as the acid test ratio or liquidity ratio 5) Tangible assets are those assets which have physical existence 6) Long term debt /external funds/external equities =debentures+termloans 7) Share holders’ funds/internal funds/proprietary funds/owners funds=equity share capital+preference share capital+reserves+profit and loss account-fictitious assets
2) Profitability ratios
S.no | Ratio | Formula | Ideal ratio | comments | 1 | Gross Profit Ratio | Gross profit X 100Net sales | Higher the ratio better it is | This ratio expresses the relationship between gross profit and net salesGross profit should be adequate to cover operating expenses | 2 | Net Profit ratio | Net profit X100Net sales | Higher