Financial ratios
UNIT – 4: FINANCIAL RATIOS
Statement of P&L
Particulars Amount Amount
Sales *****
Less Cost of Goods Sold (Opening stock + Purchases + Direct *****
expenses – Closing stock)
Gross Margin *****
Less Operating Expenses
Administrative *****
Selling and Distribution ***** *****
Operating Profit (EBIT) *****
Add Non-Operating Income *****
Less Non-Operating Expenses *****
Net profit/ Earnings Before Tax (EBT) *****
Less Tax *****
Net profit/ Earnings after tax (EAT) *****
Ratios
S.N Ratio Formula Ideal Special point
ratio
1. Current ratio Current assets/ 2:1 Debtors less provision for
Current liabilities doubtful debts are considered
2. Liquid (Current assets – 1:1
ratio/Quick stock-prepaid
ratio/ Acid test expenses) /
ratio Current liabilities
3. Absolute liquid (Cash + Bank + 0.5:1
ratio Marketable
securities) /
Current liabilities
4. Debt-equity Long term debt / 2:1 Long term debt refers to the
ratio Shareholders funds invested by outsiders
Fund including debentures, mortgages
and long term loans.
Shareholders Fund or Net worth
means Equity share capital +
Preference share capital +
reserves and surplus
5. Capital gearing Fixed income 1:1 Fixed income bearing funds
ratio bearing funds / include debentures, long term
Equity loans and preference share
shareholders’ capital.
funds
Rashmi Vadavi 1
Financial ratios
Equity Shareholders Fund =
Equity Share capital + Reserves
and surplus
6. Proprietary ratio Shareholder’s 0.5:1 Total assets include all current
fund / Total assets assets and non-current assets.
The realisable value of
intangible assets is also
included.
7. Interest EBIT / Interest
coverage ratio
8. Preference EAT / Preference
Dividend dividend
coverage ratio
9. Total assets Net sales / Total Investments should not be
turnover ratio assets included in total assets.
If Net Sales are not given, Cost
of Goods sold may be used.
10. Fixed assets Net sales / Net
turnover ratio fixed assets
11. Capital turnover Net sales / Capital Net sales = Total Sales – Sales
ratio Employed returns
Capital Employed = Fixed
Assets + Current Assets –
Current
Liabilities
Capital Employed =
Shareholders Fund + Borrowed
Fund
12. Working capital Net sales /
turnover ratio Working capital
13. Stock turnover Cost of goods If COGS not given, take net
ratio (also called sold / Average sales
inventory stock
turnover ratio) Average stock = (Opening stock
+ Closing stock) / 2
If Opening stock not given,
Average stock = Closing stock
14. Stock velocity 365days or
12months or
52weeks / Stock
turnover ratio
15. Debtors Net credit sales / Average receivables = (opening
turnover ratio Average debtors + opening bills
receivables receivables + closing debtors +
closing bills receivables / 2)
Rashmi Vadavi 2
Financial ratios
Provision for bad and doubtful
debts should not be deducted.
16. Debtors velocity 365 or 12 or 52 /
Debtors turnover
ratio
17. Creditors Net credit Average payables =
turnover ratio purchase / (opening creditors + opening
Average payables bills payables + closing
creditors + closing bills
payables / 2)
18. Creditors 365 or 12 or 52 /
velocity Creditors turnover
ratio
19. Gross Profit (Gross profit / Net
Ratio (Gross sales) x 100
Profit Margin)
20. Operating profit (Operating profit / Operating Profit or EBIT =
ratio Net sales) x 100 Gross profit – Operating
expenses
EBIT = Net Sales – Cost of
Goods Sold – Operating
Expenses
EBIT = EBT + Non-operating
expenses – Non-operating
income
21. Net Profit Ratio (Net profit / Net
sales) x 100
22. Operating Ratio (Operating cost / Operating cost = Cost of goods
Net sales) x 100 sold + Operating expenses
Operating expenses include
Office and administrative
expenses, Selling and
distribution expenses, bad debts,
and discount allowed.
Financial expenses like Interest
on long term funds will not be
considered.
23. Earnings Per EAT after
Share preference
dividend /
Number of Equity
Shares
24. Dividend Per Dividend Paid to
Share Equity
Shareholders /
Number of Equity
Shares
Rashmi Vadavi 3
Financial ratios
25. Price Earning Market Price per
Ratio share / Earnings
per share
Questions
Q 1. From the following Balance Sheet of Bhavna Ltd. as on 31st December 2023 and the
Trading, Profit and Loss Account for the year ended 31st December 2023, calculate the
following ratios and comment:
1. Current Ratio
2. Liquid Ratio
3. Inventory Turnover Ratio
4. Debtors Turnover Ratio and Average Collection Period
5. Operating Ratio
6. Capital Gearing Ratio
7. Net Profit Ratio
8. Gross Profit Ratio
9. Debt-Equity Ratio
10. Proprietary Ratio
11. Fixed Assets Turnover Ratio
12. Working Capital Turnover Ratio
13. Interest Coverage Ratio
14. Preference Dividend Coverage Ratio
15. Earnings Per Share
Balance Sheet
Liabilities Amount Assets Amount
8% Preference Capital 2,00,000 Fixed Assets 26,00,000
Equity Capital 10,00,000 Bank Balance 1,00,000
General Reserve 8,00,000 Short Term 3,00,000
Investments
12% Debentures 14,00,000 Debtors ((Last Year 4,00,000
Rs 2,00,000)
4,00,000 Stock 6,00,000
Creditors 1,20,000
Outstanding Expenses 2,20,000
Rashmi Vadavi 4
Financial ratios
Income Tax Liability 2,60,000
40,00,000 40,00,000
Trading, Profit and Loss Account
Particulars Amount Particulars Amount
To Opening Stock 6,00,000 By Sales 60,00,000
To Purchases 51,60,000 By Closing Stock 6,00,000
To Gross Profits 8,40,000
66,00,000 66,00,000
To Administrative Expenses 80,000 By Gross Profits 8,40,000
To Rent 56,000 By Profit on Sale of Fixed Assets 1,10,000
To Interest 90,000
To Selling Expenses 44,000
To Depreciation 2,00,000
To Income Tax Provision 2,40,000
To Net Profit 2,40,000
9,50,000 9,50,000
Q 2.
Following is the Balance Sheet of Genesys Multiprint Ltd. as on 31st March 2023
Liabilities Amount Assets Amount
Equity Share Capital 48,00,000 Fixed Assets 24,20,000
10% Debentures 9,20,000 Cash 8,80,000
Sundry Creditors 6,60,000 Sundry Debtors 11,00,000
Bills Payable 8,80,000 Stock 33,00,000
Other Current Liabilities 4,40,000
Total 77,00,000 Total 77,00,000
Other relevant information related to the company:
1. Sales of the company is Rs 1,10,00,000 (assume all sales are on credit)
2. Net Profit Before Interest and Tax is 23,00,000
3. Net Profit After Tax is 22,00,000
4. The Company has given preference dividend of Rs 1,00,000
5. Each Equity Share is of Face Value Rs 10. Industry Standard for each ratio is as follows:
Ratio Industry
Standard
Current Ratio 2:1
Receivable Turnover Ratio
8 times
Inventory Turnover Ratio 5 times
Rashmi Vadavi 5
Financial ratios
Net Profit Ratio
12% to 15%
Earnings Per Share Rs 9 per
share
Interest Coverage Ratio 30 times
Solve the below mentioned ratios and comment on each ratio:
1. Current Ratio
2. Receivable Turnover Ratio
3. Inventory Turnover Ratio
4. Net Profit Ratio
5. Earnings Per Share
6. Interest Coverage Ratio
Q 3.
Following is the Balance Sheet of Ventura Auto Ltd as on 31st March 2023
Liabilities Amount Assets Amount
Equity Share Capital 40,000 Plant and Machinery 24,000
8% Loan on Mortgage 42,000 Land and Building 40,000
Creditors 30,000 Furniture 16,000
Bank Overdraft 4,000 Stock 12,000
Debtors 12,000
Cash in Hand 12,000
Total 1,16,000 Total 1,16,000
Other relevant information related to the company:
1. Sales of the company is Rs 1,40,00,000
2. Market Price of the Company is Rs 500 per share
3. Gross Profit of the company is Rs 70,00,000
4. Earnings Per Share of the Company is Rs 50 per share
5. Net Profit after tax is Rs 1,64,000 Industry Standard for each ratio is as follows:
Ratio Industry Standard
Price Earning Ratio 7
Quick Ratio 1:1
Debt-Equity Ratio 2:1
Rashmi Vadavi 6
Financial ratios
Gross Profit Ratio 40% to 45%
Fixed Assets Turnover Ratio 2 times
Return on Equity 70%
Solve the below mentioned ratios and comment on each ratio:
1. Price Earning Ratio
2. Quick Ratio
3. Debt-Equity Ratio
4. Gross Profit Ratio
5. Fixed Assets Turnover Ratio
6. Return on Equity
Q 4.
Following is Balance Sheet of GIO Engineering Securities Ltd. as on 31st March 2023
Liabilities Amount Assets Amount
Equity Share Capital 20,00,000 Fixed Assets 25,00,000
10% Preference Share Capital 10,00,000 Bills Receivable 1,00,000
10% Debentures 25,00,000 Cash 5,00,000
Sundry Creditors 4,00,000 Sundry Debtors 17,00,000
Bills Payable 2,00,000 Stock 4,00,000
Other Current Liabilities (does 1,00,000
not include bank overdraft)
Total 52,00,000 Total 52,00,000
Other relevant information related to the company:
1. The company has declared and given preference dividend.
2. Each equity share is of face value Rs 10.
3. Sales of the company is Rs 1,00,00,000
4. Net Profit before tax is Rs 20,00,000
5. Tax rate is 50%.
Industry standard for each ratio is as follows:
Ratio Industry
Standard
Current Ratio 2:1
Earnings per share Rs 5
Rashmi Vadavi 7
Financial ratios
Net profit ratio 35%
Quick Ratio 1:1
Fixed Assets to Debentures 1:1
Solve the below mentioned ratios and comment on each ratio:
1. Current Ratio
2. Earnings Per Share
3. Net Profit Ratio (on net profit after tax)
4. Quick Ratio
5. Fixed Assets to Debentures
Q 5. Current Ratio of a company is 2:5.
Liquid Ratio is 1:5. Working capital is Rs 60000. Calculate:
1. Current Liabilities
2. Current Assets
3. Liquid Assets
4. Stock
Q 6. On the basis of the following information, calculate
1. Debt-Equity Ratio
2. Working Capital Turnover Ratio
3. Current Ratio
4. Liquid Ratio
5. Fixed Assets Turnover Ratio
6. Total Assets Turnover Ratio
Particulars Amount
Revenue from Operations 60,00,000
Cost of Revenue Operations 45,00,000
Other Current Assets 11,00,000
Current Liabilities 4,00,000
Paid up Share Capital 6,00,000
6% debentures 3,00,000
9% loan 1,00,000
Rashmi Vadavi 8
Financial ratios
Reserves and Surplus 2,00,000
Closing Inventory 1,00,000
Fixed Assets 12,00,000
Q 7. From the following, calculate
1. Operating profit ratio
2. Working Capital Turnover Ratio
3. Gross Profit Ratio
4. Net Profit Ratio (if tax rate is 50%)
Particulars Amount
Revenue from Operations 2,00,000
Gross Profit 75,000
Office Expenses 15,000
Selling Expenses 26,000
Interest on Debentures 5,000
Income from rent 2,500
Commission Received 2,000
Current Assets 60,000
Current Liabilities 10,000
Q 8. From the following information, calculate the values of:
a) Sales
b) Debtors
c) Closing stock
d) Creditors
Debtors’ velocity 3 months
Stock velocity 6 months
Creditor’s velocity 2 months
Gross Profit 20%
Gross profit for the year is $500,000.
Stock of the year is $20,000 more than what it was in the beginning.
Bills receivables & bills payable were $60,000 & $336,667, respectively.
Rashmi Vadavi 9
Financial ratios
Q 9.
From the following particulars extracted from the financial statements of Company X,
calculate
a) Current Ratio b) Acid Test Ratio c) Stock Turnover Ratio d) Debtors Turnover Ratio e)
Creditors Turnover Ratio
Calculate the ratios for two years – 2022 and 2023 independently and comment on the
liquidity position of the company
Particulars 2022 2023
Opening Stock 47,000 53,000
Closing Stock 53,000 67,000
Provision for doubtful debts 2,000 3,000
Sales less Returns 252,000 365,000
Sundry Creditors 32,000 35,000
Purchases 180,000 190,000
Sundry Debtors 42,000 63,000
Cash 10,000 15,000
Bank 8,000 10,000
Bills Receivables 15,000 20,000
Bills Payables 29,000 30,000
Marketable securities 8,000 8,000
Q 10.
From the Following information, calculate the liquidity ratios:
Machinery – 250,000; Prepaid expenses – 2000; Sundry debtors – 167,500;Cash balance –
15,500; Short term investments – 20,000; Sundry creditors – 150,000; Stock – 145,000; Bills
payable – 38,000; Expenses outstanding – 12,000; Long term loans – 75,000.
Q 11.
From the Following information, calculate the liquidity ratios:
Debtors – 200,000
Prepaid expenses – 20,000
Bills receivables – 50,000
Cash balance – 10,000
Marketable securities – 100,000
Sundry creditors – 230,000
Stock – 180,000
Rashmi Vadavi 10
Financial ratios
Bills payable – 75,000
Bank overdraft – 175,000
Q 12.
Current Ratio = 1.75:1
Working capital = 150,000.
Calculate current assets?
Q 13.
Current Ratio = 1.6:1
Quick Ratio = 1.1:1
Stock = 50,000.
Calculate current assets, current liabilities, liquid assets and working capital.
Q 14.
Current Ratio = 2.5:1
Quick Ratio = 1.5:1
Working Capital = 60,000.
Calculate current assets, current liabilities, liquid assets and stock.
Q 15.
Total Assets = Rs.11,00,000
Fixed Assets = Rs. 5,00,000
Capital Employed = Rs. 10,00,000
Long Term Investment = Nil
Calculate Current Ratio.
Rashmi Vadavi 11