Ratios:

1. Liquidity Ratio: Will you be able to pay short term liabilities

Current ratio: Current asset/current liability
Ideal ratio: 2:1
Low ratio indicates not able to meet short term liability
High ration indicates overinvestment in current asset that are
non-productive asset
Quick ratio (liquid ratio): Liquid asset/current liability Ideal
ratio: 1:1
Liquid assets = current assets- inventory- prepaid expenses
Ability to repay short term liability in 2-3 months
Extremely high ratio implies overinvestment in liquid assets

2. Solvency ratio: Will you be able to pay long term liabilities

Debt Equity Ratio: Non-current liabilities/ shareholders fund
High ratio means Higher debt: increases burden,
decreases profitability, increases risk for the lenders
Interest coverage ratio: Profits before interests and tax/finance
cost
PBIT= PB exceptional tax + Finance cost

Higher ration means firm is safe for the lenders and the firm
can pay its interests out of their earnings
Proprietary ratio/Finance leverage ratio: Shareholders fund *
100/Total Assets
Similar to debt equity ratio

3. Operating efficiency ratio: How well you are using your resource to
generate sales
Inventory turnover ratio: Sales/inventory
Higher ratio indicates lower inventory used to get higher
sales signal of efficient utilization of inventory
Inventory holding ratio: 365/Inventory turnover ratio
Low ration indicates low holding period lesser investment in
inventory- efficient utilization of inventory
Average collection period: Trade receivables * 365/ Sales
Lesser period- quick and efficient collection lesser
investment in W.C- better fund management
Extremely less period compared to competitors can drive
away customers- decline of sales
Asset turnover Ratio: Net revenue from Operations/ Total Assets
o High ratio- better utilization of assets- less asset and high
sales
Capital Turnover Ratio:
o Net revenue from Operations/(Shareholders fund + Long term
liability)
o High ratio- better utilization of funds

Working capital turnover ratio: Net revenue from

Operations/Working capital
o Working capital= Current Assets Current liabilities
o Higher ratio Better revenue with lesser W.C

4. Profitability ratios: How well your sales is converting into bottom line
Net Profitability Margin: Profit after tax *100/ Revenue from
operations
o Overall profit criteria- higher ratio better it is
Operating profit margin: Operating profit *100/ Revenue from
operations
o

O perating Profit=Revenue OperationsTotal Expenditure+ Finance Costs

o higher ratio better it is
Cash profit margin: Cash from Operations *100/ Revenue from
operations
o higher ratio better it is
o Indicator of efficiency in day to day and core operations of an
entity
Return on Capital Employed: PBIT *100/Capital Employed
o Capital Employed = Shareholders fund + Long Term Liability
o Indicator of level of profits earned vis--vis the long term
funds employed in the business
o Higher ratio better utilization of funds.
Return on Assets: Profit After tax * 100/ Total Assets
o Higher ratio- good utilization of assets to generate profit
Return on Equity: Profit After tax * 100/ Shareholders fund
o This is a major variable which is considered by an investor to
find out what his investment will earn or likely to earn in a
business
o Higher ratio is better
Earnings per Share: Profit after tax/No. of Equity Shares
o Out of its EPS, company may declare some dividend to the
shareholders, which is known as Dividend per Share.
o Higher is better. Indicator of what the company has earned on
each of its share.
5. Investment analysis ratios: Is your business worth to invest in
Price Earnings ratio: Market price per share/earnings per share
o Higher ratio positive as well as negative
Book value per share: Shareholders fund/no. o shares
o A high book value indicates intrinsic strength of the share
Price to Book value per share: Market price per share/ Book
value per share
o High- shares are more risky
Dividend Yield Ratio: Dividend per share *100 / Market price per
share
o A higher dividend yield is generally viewed favorably by
investors