Industry

To test Name of Ratio Formula Parties interested

norm
Liquidity and i) Current Ratio Current Assets Short-term creditors, 2:1
Solvency Current Liabilities investors, money
lenders & like parties
ii) Liquid/Quick/ Current assets - Stock - Prepaid -do- 1:1
Acid Test Ratio
Expenses
Current Liabilities - Bank
Overdraft - Prereceived Income
iii) Absolute Liquid Cash + Marketable securities -do- 1:1
Ratio
Quick Liabilities
iv) Proprietary Proprietor’s Fund -do- 60% to
Ratio
Total Assets 75%
[Proprietor’s funds = Equity
Capital + Preference Capital +
Reserves and Surplus +
Accumulated funds - Debit
balances of P & L A/c and
Miscellaneous Expenses]
Capitalisation i) Debt Debt -do- 2:1
Equity Ratio
Equity
[Debt = Long/Short-term loans,
debentures, bills, etc, Equity =
Proprietor’s funds]
ii) Capital Gearing Fixed cost funds -do- 2:1
Ratio
Funds not carrying fixed cost
[Fixed cost funds = Preference
share capital, Debentures,
Loans from banks, financial
institutions, other unsecured
loans].
[Funds not carrying fixed cost
= Equity share capital +
undistributed profit - P & L A/c
(Dr. Bal.) - Misc. expenses].
Profitability and i) Gross Profit Gross Profit x 100 Shareholders, Long- 20% to
Ratio
management Net sales term Creditors, 30%
efficiency Government
ii) Net Profit Ratio Net Profit x 100 -do- 5% to
Net sales 10%
 [Net profit may be either
Operating Net profit, Profit
before tax or Profit after tax].
iii) Return on Net profit x 100 -do- —
Capital
Capital employed
Employed
(ROCE) [Capital employed = Fixed
Assets + Current Assets -
Current Liabilities].
iv) Return on Profit after tax -do- —
Proprietors
Proprietor’s funds
fund
v) Return on Profit after tax less pref. -do- —
Capital
Dividend x 100
Equity Share Capital
vi) Earnings per Profit after tax less pref. -do- —
share [EPS]
Dividend
Total No. of Equity Shares
vii) Dividend per Total Dividend paid to ordinary Shareholders, —
share [DPS]
shareholders Investors
Number of ordinary shares
Management i) Stock Turnover Cost of goods sold Management 5 to 6
efficiency Average Stock times
ii) Debtors Debtors + Bills receivable x Management 45 to 60
Turnover Ratio
365 days
Net Credit sales
iii) Debtor’s Credit sales Management 60 to 90
Turnover Rate
Avg. Debtors + Bills receivable days
iv) Creditor’s Creditors + Bills payable x 365 -do-
Turnover Ratio
Credit purchases
v) Creditor’s Credit purchases
Turnover Rate
Average Creditors
vi) Operating Operating Costs x 100
Ratio
Net sales
[Operating Cost = Cost of
goods sold + Operating
expenses (viz. Administrative,
selling & finance expenses)]
Number of times Preference Net profit (after Interest & Tax Preference
preference shareholders’ but before equity dividend) shareholders
dividends covered coverage ratio Preference Dividend
by net profit
Number of times Equity Net profit (after interest, tax & Equity shareholders
equity dividends shareholder’s Pref. Dividend)
covered by net coverage ratio Equity Dividend
profit
Number of times Interest coverage Net profit (before Interest & Debentureholders,
fixed interest ratio Tax) (PBIT) Loan creditors
covered by net Fixed interests & charges
profit
Relationship Total coverage Net profit (before Interest & Shareholders,
between net profit ratio Tax) (PBIT) investors, creditors,
and total fixed Total fixed charges lenders
charges
The idle capacity Fixed expenses to Fixed expenses Management
in the total cost ratio Total cost shareholders
Organisation
Material Material Material consumption Management
consumption to consumption to Sales
sales sales ratio
Wages to sales Wages to sales Wages Management
ratio Sales
The future market Price earning ratio Market price of a share (MPS) Investors, speculators
price of a share Earnings per share (EPS)