RATIOS LISTS

Notes:
1.
2.
3.
4.
5.
6.

Definition of Current Assets = All current assets are included

Definition of Current Assets = All current liabilities included
Definition of Quick Assets = All current assets Less Inventories
Average is computed as = (Opening value + Closing value) / 2
Definition of Net Sales = Sales Less sales returns + discount on sales
Definition of Net Worth = Equity Capital + Preference Capital + Reserves & Surplus

Name of the Ratio

Liquidity Ratios

Formula

Remarks
Liquidity Ratios indicate a firms ability to meet
current liabilities out of current assets

Current Ratio

Current Assets/Current
Liabilities

1. If the ratio is 2 or above, firm will be able

acceptable for lenders to lend further.
2. Interpretation of this ratio should consider
composition of current assets; higher the

Acid test ratio

Quick assets /Current Liabilities

cash the better.

1. Quick Assets definition given above.
2. If it is 1, firm will be able to meet its
current liabilities out of current assets which
are very liquid.

Activity Ratios

Activity ratios examine efficiency of activities.

Generally used by managers and analysts.

Inventory Turnover

Net Sales/Average Inventory

Ratio
Average Receivable
turnover
Average Collection
period

Higher the better. Historical Comparison and

comparison with peer firms will be useful.

Net Credit Sales / Average

Accounts receivable

Higher the better. If Net credit sales figure is not

available, we may use Net Sales figure to compute.

Net Credit Sales / Average daily

credit sales.
Average daily credit sales =
Average Credit sales/365

The result should be compared with credit policy. If

credit policy is 30 days and the computed number is
greater than this, credit collection is not effective.
Page 1 of 3

Fixed Assets

Net Sales/Average net fixed

Turnover
assets
Total Assets Turnover Net Sales/Average total assets

Higher the better.

Total Assets means total of fixed assets and current
assets.
Higher the better.
These ratios reflect the final results of business

Profitability Ratios

operations. There are two types within this: Profit

Margin Ratios and the other rate of return ratios.
Profit Margin ratios base the returns on sales; rate of
returns base the returns on investments/assets.
Gross Profit Margin
Ratio

Gross Profit/Net Sales

Historical trends and Peer comparison give a lot of

information.

Gross Profit = Sales less Cost of

Goods sold.
Cost of Goods sold = cost of
inventories used + wages +

Higher the better. It will always be less than 1.

Historical trend and Peer comparison will be useful.
As margins increase, competition may enter.

Electricity, Fuel and other direct

manufacturing/operational
Net Profit Margin
Ratio

expenses.
Net Profit/Net Sales
Net Profit after interest and taxes
but including depreciation.

Return on Total
Assets

Net Income ie., Net Profit/

Return on Equity

Ratio (PE Ratio)

firm like production, administration, selling,

financing and tax management.
Higher the better; historical trend and peer

Average Total Assets

Price Earnings

It signifies the efficiencies all departments of the

comparison will be helpful. it should tend towards

1.
This tests efficiency of capital employed. If the

Profit After Taxes/ Average Net

assets are properly employed, this ratio will be

worth

smaller. Higher the better.

If net worth (denominator) includes Preference
shares, ratio may be calculated with PAT as
Page 2 of 3

Market Value to
Book Value per share

Market Price per share/Earnings

numerator. Or deduct preference from net worth and

per share

compute Return on Equity after deducting

Earnings per share = PAT/

Number of equity shares.
Market Price per share/Book
value per share
Book value = Equity + Reserves

preference dividends.
This is a valuation ratio. Usually a 16 multiple was
considered investible level. Peer comparison is
desirable.

and Surplus ie., Net worth /

number of shares.
Leverage Ratios or

These ratios check whether the firm is in a position

Solvency Ratios

to service/repay its liabilities out of its assets.

Debt Equity Ratio

Debt/Equity.
Debt = Long term debts
Equity = Net worth including
preference capital

Interest Coverage
Ratio

Lending Institutions consider 2:1 as an ideal ratio.

However, this ratio may be larger for infrastructure
type of companies. Industry wise there could be
variations.

EBIT / Interest
An improvement over this is

Higher the better.

called Debt Service Coverage

Ratio:
EBIT + Depreciation/ Debt
interest + loan installment

This ratio examines firms ability to repay interest

and loan installments
Explain Capital Gearing or Trading on Equity with
impact of Taxes.

Page 3 of 3