Ratio Analysis
Gross Profit Ratio: It indicates the efficiency of the production/trading operations.
Formula: Gross Profit X 100
Net sales
Net Profit Ratio: It indicates net margin on sales
Formula: Net Profit X 100
Net Sales
Return on Share Holders Funds: It indicates measures earning power of equity capital.
Formula: Profits Available for Equity Shareholders X 100
Average Equity Shareholders Funds
Earning per Equity Share (EPS): It shows the amount of earnings attributable to each equity share.
Formula: Profits Available for Equity Shareholders
Number of Equity Shares
Dividend Yield Ratio: It shows the rate of return to shareholders in the form of dividends based on the market price of the share.
Formula: Dividend per Share X 100
Market Price per Share
Price Earning (PE) Ratio: It a measure for determining the value of a share. May also be used to measure the rate of return expected by investors.
Formula: Market Price of Share (MPS) X 100
Earning per Share (EPS)
Current Ratio: It measures short-term debt paying ability
Formula: Current Assets
Current Liabilities
Debt-Equity Ratio: It indicates the percentage of funds being financed through borrowing; a measure of the extent of trading on equity.
Formula: Total Long-Term Debt
Shareholders Funds
Fixed Assets Ratio: This ratio explains whether the firm has raised adequate long-term funds to meet its fixed assets requirements.
Formula: Fixed Assets
Long-Term Funds
- Formula: Liquid Assets
Quick Ratio: The ratio termed as “Liquidity Ratio “. The ratio is ascertained by comparing the liquid assets to current liabilities.
Current Liabilities
Stock Turnover Ratio: The ratio indicates whether investment in inventory in efficiently used or not. It, therefore explains whether investment in inventory within proper limits or not.
Formula: Cost of Goods Sold
Average Stock
Debtor’s Turnover Ratio: It indicates the speed with which the payments for credit purchases are made to the creditors.
Formula: Credit Purchases
Average accounts payable
Working Capital Turnover Ratio: It is also known as working capital leverage ratio. This ratio indicates whether or not working capital has been effectively utilized in making sales.
Formula: Net Sales
Working Capital
Fixed Assets Turnover Ratio: This ratio indicates the extent to which the investments in fixed assets contribute towards sales.
Formula: Net Sales
Fixed Assets
Pay-Out Ratio: This ratio what proportion of earning per share has been used for paying dividend.
Formula: Dividend Per Equity Share X 100
Earning Per Equity Share
Overall Profitability Ratio: It is also called as “return on investment” (ROI) or return on capital employed (ROCE). It indicates the % of return on the total capital employed in the business.
Formula: Operating Profit X 100
Capital Employed
The term capital employed has been given different meanings
- Sum total of all assets whether fixed or current
- Sum total of fixed assets,
- Sum total of long-term funds employed in the business, i.e.
- {Share Capital + Reserves & Surplus + Long term Loans - (Non business Assets + Fictitious Assets)}.
- Operating Profit means “Profit Before Interest and Tax”.
Fixed Interest Coverage Ratio: The ratio is very important form the lenders point of view. It indicates whether the business would earn sufficient profits to pay periodically the interest charges.
Formula: Income Before Interest and Tax
Interest Charges
- Formula: Net Profit After Interest and Tax
Fixed Dividend Cover Ratio: This ratio is important for preference shareholders entitled to get dividend at a fixed rate in priority to other shareholders.
Preference Dividend
Debt Service Coverage Ratio: This ratio is explained ability of a company to make payment of principal amounts also in time.
Formula: Net Profit Before Interest and Tax
Interest + Principal Payment Installment
Tax Rate
Proprietary Ratio: It is a variant of debt-equity ratio. It establishes relationship between the proprietor’s funds and the total tangible assets.
Formula: Shareholders Funds Total Tangible assets
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