Ratio Analysis and its Formula

A ratio analysis is a mathematical analysis  of financial statement of the company. Ratio analysis is based on balance sheet  and profit and loss account statement.  Ratio analysis is used to evaluate various aspects of a company’s operating and  financial performance such as its efficiency,  profitability ,liquidity etc. These relationships between the financial statement accounts help investors, creditors, and internal company management understand how well a business is performing and areas of needing improvement.

Ratios are also compared  for different year of the same company or  different companies in the same sector to see how they perform during the period up, and to get an idea of comparative analysis.

Ratio analysis can broadly divided between

1. Profitability ratio
2. Liquidity ratio
3. Balance sheet ratio

Following are the main Ratio , their formula and what the ratio Indicate

Sr No	Type of ratio	Formula	What Indicate
Profitability Ratios( Income statement Ratio)
1	Gross Profit Ratio	Gross Profit/Net Sales	Gross Profit Generated By each dollar of Sales
2	Operating Profit ratio	Operating Profit/Net Sales	Operating  Profit Generated By each dollar of Sales
3	Net Profit Margin (Return on Sales)	Net Income/ Net Sales	Net Profit Generated By each dollar of Sales
4	Return on Investment Ratio	Net Profit After Interest  And Taxes/ Shareholders Funds or Investments	Income earned on Investment
5	Return on Capital Employed Ratio	Net Profit after Taxes/ Gross Capital Employed	Return On Capital Invested
6	Dividend Pay Out Ratio	Dividend Per Equity Share/Earning Per Equity Share	Dividend Received
7	Earning Per Equity Share	Net Profit after Tax & Preference Dividend / No. of Equity Share	Earning Per Share
8	Dividend Yield Ratio	Dividend Per Share/ Market Value Per Share	Yield of Dividend Comparative to Market Price
9	Price Earnings Ratio	Market Price Per Share Equity Share/ Earning Per Share	company’s share price to its per-share earnings
10	Du Pont Return on Assets	(Net Income /Sales)   x (Sales/Assets)   x (Assets/Equity)	Indicate how the company generates its return
Liquidity Ratios
11	Working Capital	Current Assets- Current Liabilities	Indicate Working Capital of the company
12	Current Ratio	Current Assets/Current Liabilities	Indicate firm’s ability to pay off its liabilities with its Current Assets
13	Quick Ratio	Liquid Assets/Current Liabilities	Indicate firm’s ability to pay off its liabilities with its with quick Cash Assets
14	Acid Test or Quick Ratio	Cash + Marketable Securities + Accounts Receivable/ Current Liabilities	Indicate firm’s ability to pay off its liabilities with its with quick Cash Assets
15	Cash Ratio	Cash Equivalents + Marketable Securities/Current Liabilities	Cash balance of the company comparative to its current Liability
Balance sheet ratio
16	Inventory Ratio	Net Sales / Inventory	How many time Company’s inventory is sold
17	Total Debts to Assets	Total Liabilities / Total Assets	Proportion of there company’s Assets finance by the debt
18	Debtors Turnover Ratio	Total Sales /  Account Receivables	Indicate the number of times average debtors are turned over during a year
19	Debt Collection Ratio	Receivables  x Months or days in a year / Net Credit Sales for the year	Indicate approximate amount of time that it takes for company to receive its receivable
20	Creditors Turnover Ratio	Net Credit Purchases / Average Accounts Payable	How Effectively Company pay its supplier
21	Average Payment Period	Average Trade Creditors / Net Credit Purchases X 100	Indicate approximate amount of time that it taken by company to pay its Supplier
22	Working Capital Turnover Ratio	Net Sales / Working Capital	Indicate Company’s effectiveness in Using its Working Capital
23	Fixed Assets Turnover Ratio	Cost of goods Sold / Total Fixed Assets	Indicate Company’s effectiveness in using its Fixed assets to generate revenue
24	Capitalization Ratio	Long-Term Debt  /  Long-Term Debt + Owners’ Equity	Indicate debt component of a company’s capital structure
25	Capital Turnover Ratio	Cost of Sales / Capital Employed	Indicate Company’s effectiveness in using its Capital to generate revenue
26	Debt Equity Ratio	Total Long Term Debts / Shareholders Fund	Indicate relationship between the capital contributed by creditors and the capital contributed by shareholders
27	Proprietary Ratio	Shareholders Fund/ Total Assets	Indicate proportion of shareholders’ equity to total assets
28	Capital Gearing ratio	Equity Share Capital / Fixed Interest Bearing Funds	Indicate the Financial Leverage
29	Debt Service Ratio	Net profit Before Interest & Taxes / Fixed Interest Charges	availability of Cash to serving its Debt Charges

 

 

 

 

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