Ratio Formula Contents Standard Importance
I. Liquidity Ratios
1. Current Current Assets Current Assets =Current Investments + Inventories 2:1 High current ratio
Ratio (Excluding Spare Parts and Loose Tools) +Trade
Current Liabilities shows the ability of
Receivables + Cash and Cash Equivalents + the fim to pay
Short-term Loans and Advances + Other Current
Assets. short-tem liabilities.
Curent Liabilities =Short-term Borrowings +Trade Low ratio shows poor
Payables+ Other Current Liabilities +Short-term liquid condition of
Provisions. firm.
2. Quick Ratio Liquid Assets Liquid Assets =Current Assets - (Inventories + 1:1 High Quick Ratio
or Liquid Ratio Current Liabilities Prepaid Expenses.) shows that firm has
or Acid-test
Ratio ability to meet liquid
obligations in time.
Il. Solvency Ratios
1. Debt to Debt Debt = Long-term Borrowings +Long-term Ratio of 2:1 is This ratio indicates
Equity Ratio Equity/ Shareholders' Funds Provisions. considered
the proportionate
Equity/Shareholders' Funds satisfactory. claims of owners and
-Share Capital +Reserves and Surplus Generally a outsiders on firm's
Or low ratio is
considered assets. High ratio
Non-current Assets (Tangibie Assets +Intangible favourable. shows claims of
Assets +Non-current Trade Investments +Long-term outsiders are greater
Loans and Advances) +Working Capital - but low ratio shows
Non-Current Liabilities (Long-term Borrowings + outsiders' claims are
Long-tem Provisions). less.
Where, Working Capital =Current Assets - Current
Liabilities
2. Total Assets Total Assets Total Assets Lower the ratio This ratio attempts to
to Debt Ratio Debts = Non-current Assets + Current Assets lower is the measure the
role of
Debts = Long-term Borowings +Long-term proportion of total
Provisions borrowed
funds assets funded by
long-term debts.
3. Proprietary Proprietors' Funds Proprietors'Funds Higher the This ratio indicates
Ratio Total Assets =Share Capital +Reserves and Surplus ratio, better the the extent to which
Or solvency, the assets of
lower the ratio Company can be lost
Non-current Assets (Tangible Assets + Intangible lesser
Assets +Non-curent Trade Investmenis + Long-term without affecting
solvency of the interest of creditors.
Loans and Advances) +Working Capital - firm.
Non-current Liabilities (Long-tern Borrowings +
Long-term Provisions).
4, Interest
Net Profit before Net Profit before interest on long-term debts.
Interest and Tax Higher the It indicates the
Coverage ratio more
Ratio or Debt number of times
Interest on Long-term Debts safer the interest is covered by
Service Ratio
long-term the available profit.
lenders, lower
the ratio more
risk for
long-term
lenders.
5. Debt to Long-term Debt Capital Employed =Long-term Debts + Ahigh ratio It indicates the
Capital Capital Employed Shareholders' Funds helps the proportion of
Employed (or Net Assets) management long-term debts in
Ratio
in Trading on capital employed.
equity. Low
ratio provides
security to
traders.
lIL. Activity Ratios
1. Inventory Cost of Revenue from Cost of Revenue from operations = There is no It measures the
Turnover
Ratio
Operations Cost of Material consumed + Purchase of stock in rule of thumb velocity of
Average Inventory trade + change in inventories of finished goods, WIP for interpreting Conversion of stock
and Stock-in-trade + Direct Expenses this ratio. But into sales. High ratio
higher the indicates efficient
Or ratio, better it management and
=Opening Inventory + Net Purchases + Direct is low ratio shows
Expenses - Closing inventory inefficient
Or management.
Revenue from operations -Gross Profit
Average Inventory
Opening Inventory + Closing Inventory
2
Note: In the absence of opening inventory, closing inventoryis average.
2. Trade Net Credit Revenue from Net Credit Revenue from operations No rule of It indicates the
Receivables Total Revenue from operations, i.e., thumb but number of times the
Turnover
operations
Sales -Cash Revenue from operations i.e., higher ratio debtors are turned
Ratio Average Trade Receivable Cash Sales. shows efficient over during a year.
Average Trade Receivable management.
Opening Receivables + Closing Receivable
2
Trade Receivables = Debtors +Bills Receivable
Note: In case opening Trade receivables not given in the question then closing will be taken as average.
3. Average 365/ 52 I 12 Debtors' or Trade Receivables Turnover Ratio No rule of This shows the
Collection Trade Receivables thumb or set average number of
Period Turnover Ratio standard but days for converting
shorter debtors into cash.
average Low average
collection collection period is
period is better favourable.
for firm.
4. Trade Net Credit Purchases Net Credit Purchases =Total Purchases Higher ratio is This ratio indicates
Payables Average Trade Payable Cash Purchases better for firm. the velocity with
Turnover Average Trade Payables = which the creditors
Ratio are turned over in
Opening Payables + Closing Payables relation to purchase.
2
Trade Payables =Creditors +Bills payable
as averane
Note: In case of opening Trade payables not given in the question then closing Trade Payable will be taken
5. Average 365/ 52/ 12 Trade Payables or Creditors Turnover Ratio Lower the ratio This ratio shows the
better the average no. of days
Payment Trade Payables or
efficiency and taken by a firm to
Period Creditors Turnover Ratio higher ratio pay the creditors.
shows p00r Lower the ratio better
efficiency. the liquidity of the
firm.
6. Fixed Net Revenue from Net Revenue from Operations, Net Fixed Assets Higher the It indicates the
Assets Operations ratio, more relationshipbetween
Turnover Net Fixed Assets efficient net revenue from
Ratio utilisation of operations and net
fixed assets. fixed assets.
7. Net Assets Revenue from Revenue from Operations, Capital Ermployed (or net Higher the It indicates the
Turnover Ratio Operations assets) ratio, more relationship between
(Capital efficient revenue from
Capital Employed utlisation of operations and
Employed (or net assets)
Turnover Ratio) resources, capital employed (or
beter activity net assets) in the
and business.
profitability.
8. Working Net Revenue from Operations Working capital Higher ratio This ratio indicates
Capital Working Capital indicates the velocity of the
Turnover = Current Assets -Current Liabilities. efficient utilisation of net
Ratio Current Assets utlisation of working capital. It
working indicates the no. of
= Current Investments + Inventories (Excluding times working capital
Spare parts and loose tools) capital, low
ratio shows is tumed over in the
+ Trade Receivables + Cash and Cash inefficient COurse of business in
equivalents +Short-term Loans and Advances management. one year.
+ Other Current Assets.
Current Liabilties
= Short-term Borrowings +Trade Payables +
Other Current Liabilities + Short-term
Provisions.
IV. Profitability Ratios
1. Gross Gross Profit Gross Profit =Revenue from Operations -Cost of Higher the It reflects the eficiency
x 100 with whichafim
Profit Net Revenue from Revenue from operations ratio, good for
Ratio Operations (Net Sales) Cost of Revenue from operations = the business, produces its products.
Material Consumed + Purchase of Stock in trade + lower ratio not It should be higher to
change in inventories of Finished goods, WIP,SIT + good for the COVer all expenses and
Direct Expenses business. to pay dividends and
Or interest.
Opening Inventory + Net Purchases + Direct
Expenses - Closing inventory
Or
Revenue from operations - Gross profit
Higher the This ratio indicates
2. Net Profit Net Profit before/after Net Profit (Before Tax)
Ratio
Tax
x 100
= Gross Profit + Other Incomes - Indirect ratio, better the the efficiency of
Net Revenue from Expenses. profitability of management in
Operations (Net Sales) the firm. manufacturing,
Net Profit (Afer Tax) administration,
= Revenue from operations - Cost of Revenue from seling and other
operations -Operating Expenses-Non-operating activities of the firm.
Expenses +Non-operating Income- Tax It is the overal
measurement of
firm's profitability.
Cost of Revenue Operating expenses Lower the ratio It is yardstick for
3. Operating better it is. operating eficiency.
from Operations + =Office, Administration, selling and Distribution
Ratio
Operating Expenses x 100 expenses, Employees Benefit Expenses, Higher ratio is less
Net Revenue from Depreciation and Amortisation favourable.
Operation (Net Sales)
Operating Profit Operating Profit Higher the Thís ratio measures
4.0perating x 100
Profit Ratio Net Revenue =Net Proft (before Tax) +Non-operating Expenses/ ratio, betterthe the overall efficiency
from Operations Losses- Non-operating Incomes results. of the business.
Or
Gross Profit +Operating Income-Operating
Expenses.
Non-operating Expenses
=Interest on Long-term Borrowing + Loss on sale of
Fixed or Non-current Assets.
Non-operating Income
=Interest eceived on investments +Profit on sale of
Fixed Assets or Non-Current Assets + Rent received
5. Return on Net Profit before Capital Employed: Higher the This ratio is the most
Investment Interest, Tax and 1. Liabilities Side Approach:Shareholders' Fund ratio better the important ratio to
(ROI) results. measure the overall
Dividend (Share Capital + Reserves and Surpluses) +
x 100
Non-current Liabilities (Long-term borrowing + profitability of firm. It
Capital Employed indicates the extent
Long-term Provisions).
Or to which the main
Debt +Equity object of business is
achieved.
2. Assets Side Approach: Non-current Assets
(Tangible Assets + Intangible Assets + Non-current
Investment + Long-term Loans and Advances) +
Working Capital.
Or
Total Assets -Current Liabilities