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Comprehensive Guide to Financial Ratios

This document discusses various types of accounting ratios used to analyze financial statements. It defines ratios that measure liquidity, profitability, activity, financial stability, management efficiency, leverage, turnover, and valuation. Specific ratios covered include the current ratio, quick ratio, gross profit ratio, return on equity, debt to equity, inventory turnover, accounts receivable turnover, and price to earnings ratio.

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14 views17 pages

Comprehensive Guide to Financial Ratios

This document discusses various types of accounting ratios used to analyze financial statements. It defines ratios that measure liquidity, profitability, activity, financial stability, management efficiency, leverage, turnover, and valuation. Specific ratios covered include the current ratio, quick ratio, gross profit ratio, return on equity, debt to equity, inventory turnover, accounts receivable turnover, and price to earnings ratio.

Uploaded by

itsatulverma
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Ratio Analysis

 Accounting ratios express the relationships


between 2 or various financial figures in
the form of percentages or fraction.
Types of Ratios
 Liquidity Ratios
 Profitability Ratios
 Activity Ratios
 Financial Stability Ratios/Solvency Ratios
 Management Efficiency Ratios
Liquidity Ratios

 Current Ratio= CA/CL


 2:1
 Quick Ratio/Liquid Ratio/Acid Test Ratio
 = Quick Assets/Current liabilities
 Quick Assets= Current Assets- Inventory-
prepaid expenses

 Absolute Liquidity Ratio =


 (Cash and bank balances + Current
Investments)/Current Liabilities
Profitability Ratios
 Gross Profit Ratio = ( Gross profit/Net sales )
 *100
 G.P = Net sales- Cost of goods sold
 EBITDA margin= Earnings before interest,
tax, depreciation and amortization margin

 =( Earnings before interest, tax, depreciation


and amortization /Net sales)*100

 Net Profit Ratio =(PAT/Net Sales) * 100


 Return on Equity ( ROE ) = (PAT –
preference dividend)/Equity Shareholders
Funds

 Equity Shareholders Funds = Equity share


capital+ reserves and surplus
 Return on Capital Employed (ROCE) =
EBIT/(Average total assets- Preliminary
expenses)
Leverage Ratios
 Debt Equity Ratio =Total Debt (Short term +
long term)/Total Equity shareholders funds

 Interest Coverage Ratio = EBIT/interest


Turnover Ratios
 Inventory Turnover Ratio =
 This measures the speed at which the
inventory is converted into sales
 Cost of goods sold/Average Inventory
 Higher the better
 Debtors Turnover Ratio = Annual Credit
Sales/ Average Debtors

 Higher the better

 Average collection period = 360/Debtors


turnover ratio

 Collection period must be lower than credit


period enjoyed by the firm.
 Creditors Turnover Ratio = Annual Credit
Purchases/Average Creditors

 Average payment Period = 360/Crs Turnover


Ratio

 Lower the better


 Fixed Assets Turnover Ratio = Net
Sales/Average Net Fixed Assets

 Total Fixed assets - depreciation


 Total Asset Turnover Ratio = Net Sales/Total
Assets
Valuation Ratios
 Earnings Per Share = ( PAT-Preference
Dividend)/No of equity shares

 Dividend Per Share = Dividend payable/No of


equity shares

 Price Earnings Ratio = MPS/EPS

 Where MPS= market price per share


 Dividend Yield Ratio = DPS/MPS
 Market value to book value ratio

 This measures the relationship between the


market value per share and book value per
share

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