CLASSIFICATION OF RATIOS

BASIC CLASSIFICATION
SUB CATEGORY SUB ANALYSIS RATIOS FORMULAE IMPACTS / IMPLICATIONS
OBSERVATIONS ANS DERIVED IN
I. EARNINGS RATIO (i) PRINCIPAL RATIOS %
Measures the overall
effectiveness of the
management in
generating
profits with its
available
1. RETURN ON NET ASSETS PAIT/NET ASSETS X 100
resources %
Indication of good
financial
health and the
managements
ability to earn a
satisfactory profit and
return on
2. NET PROFIT MARGIN PAIT/SALES X 100 investments %
Indicates a company
with
which it is able to use
all Higher the Net asset Turnover,
its assets & resources more the assests are
3. NET ASSET TURNOVER SALES / NET ASSETS to generate sales efficiently used NO/. OF TIMES
Measures the returns
earned on owners
(both preference and
equity capitals)
investments using Higher the returns, better the
4. RETURN ON EQUITY PAITPD/(EQ.SH.CAP+RES)
normal values. position of the owners

Measures the returns

of the company to its
(ii) PROFITABILITY sales or assets or
RATIOS equity
 Represents the
percentage of each
rupee sales remaining Higher the Gross profit margin
after the company has the
5. GROSS PROFIT MARGIN GP/SALES X 100 paid for its goods better %
Represents the pure
profit (profit ignoring
govt charges, taxes
etc) earned on each
6. OPERATING PROFIT MARGIN
PBIT/SALES X 100 rupee sales. %
Measures the
efficiency with which
the company has
accquired and used
resources to generate Lower the ratio, the better the
7. COST OF SALES % COST OF SALES /SALES sales.
X 100 cost efficiency is. %
Measures the
efficiency with which
EACH ELEMENT the company has
OF COST/SALES X accquired and used
100 each element of its
Eg: Material, Labour, cost to generate Lower the ratio, the better the
8. COST MEASURES Expenses Etc. sales. cost efficiency is. %
(iii) CAPITAL T.O.R
(or) Measures the
CAPITAL efficiency with
EFFICIENCY which the company
RATIO has been
(or) ASSET using assets to
ACTIVITY RATIO generate sales.
Measures Efficiency of
the
company in using
Fixed assets Generally Higher Fixed assets
9. FIXED ASSETS T.O.R SALES / NET FIXED ASSETS
in generating sales TOR is preferred NO/. OF TIMES
 Measures the
efficiency of the
company in using its
current assets in
generating sales and
measure the
effectiveness of the Generally Higher Current
working capital assets
10. CURRENT ASSETS T.O.RSALES / CURRENT ASSETS
management TOR is preferred NO/. OF TIMES
Measures the
efficiency of the
company in using its
stock to generate Generally higher Stock T.O.R is
11. STOCK T.O.R SALES / AVERAGE STOCK
sales. better NO/. OF TIMES

Liquidity refers to the

state of nearness to
cash i.e, the time and
efforts needed to sell
II. RISK RATIOS (i) LIQUIDITY RATIOS an asset to get cash.
Measure the level of
safety afforded to the
CURRENT ASSETS / company's short term
12. CURRENT RATIO CURRENT LIABILITIES creditors Ideal current ratio is 2: 1
LIQUID ASSETS /
CURRENT
LIABILITIES (or) Measures how quickly
(CURRENT ASSETS - the current
AVERAGE STOCK) / investments can be
13. QUICK RATIO CURRENT LIABILITIES realised into cash.

(ii) GEARING RATIOS
III. WORKING CAPITAL RATIOS
Indicates the positon
of the
debt portion of the
money
(other than share The more debt the company
holders fund) uses, the
like long term debts greater is its financial
used by leverage.
the company to i.e., the company will face
generate profit more risks and returns.
Measures the
relationship between
prior-charged debts
14. GEARING RATIO (or) and the company's net
DEBT TO EQUITY RATIO. DEBT / TOTAL EQUITY assets.
X 100
This shows whether
the company is
earning enough profits
before Interests to pay
off its interest
comfortably or
whether its interest
costs are too high that
it gives a significant
effect on profits An interest cover of 2 times or
available for ordinary less
15. INTEREST COVER RATIOPBIT / INTEREST EXPENSES
share holders. would be low.
This shows the period
for which the funds of
the company are held
as stock. The longer
the company funds are
AVERAGE STOCK invested in stock the
VALUE / smaller its eventual
16. STOCK TURNOVER PERIOD
PURCHASES X 365 returns. NO/. OF DAYS
 17. AVERAGE CREDITORS
PERIOD or
AVERAGE PAYMENT
PERIOD
or This represents the
AVERAGE PAYABLES funds loaned to the
PAYMENT CREDITORS VALUE / company on a short
PERIOD PURCHASES X 365 term basis.
This helps to calculate
whether the
company's invoices
are settled on time
(Average age of
debtors) as this trade
debtors is one of the
most liquid assets and
this potential revenue
18. DEBTOR COLLECTION is transformed into
PERIOD (or) cash receipt only when
AVERAGE DEBTORS DEBTORS VALUE / payments are made by
PERIOD NETSALES X 365 clients promptly. NO/. OF DAYS

This represents the

amount earned on
each outstanding
share on the equity
IV. GROWTH RATIOS 19. EARNINGS PER SHARE GROWTH capital. %
This ratio gives the
information about the
company's share of
the market & to
evaluate the
company's marketing
and advertising
effectiveness during
20. SALES REVENUE GROWTH the year. %
 This indicates the
proportion of
distributable profits for
the year that is being
retained by the
company & the level of
risk that the company
will not be able to
maintain the same A high dividend cover means a
dividend payments in high
future years should proportion of profits are
21. DIVIDEND COVER PAIT / DIVIDEND PAYABLE
the earnings fall. retained NO/. OF TIMES
1 - (DIVIDEND
PAYABLE /
22. EARNINGS RETENTION RATIO
PAIT ) X 100 %

Dividends are
(PAITPD - RETAINED
company's evidence to
EARNINGS) / NO. OF
prove its ability to
SHARES ELIGIBLEprovide return for its
V. INVESTORS RATIO 23. DIVIDEND PER SHARE FOR DIVIDEND share holders
This is a direct
comparision between
the return provided for
the share holders as a
percentage of the
market value of their
share holdings and the
DIVIDEND PER SHARE interest yields from
/ loan stocks and gilts
MARKET PRICE PER and other investment
24. DIVIDEND YIELD SHARE X 100 opportunities. %
It is a measure of a
company's
performance and is
PAITPD / NO. OF particularly useful
SHARES when it is compared
ELIGIBLE FOR with the results of
25. EARNINGS PER SHARE DIVIDEND previous several years. CURRENCY
 It measures the
relationship between
MARKET VALUE PER the market value of
SHARE / the company's shares
EARNINGS PER and the earnings from
26. PRICE EARNING RATIO SHARE those shares. NO/. OF TIMES
This indicates the
proportion of
distributable profits for
the year that is being
retained by the
company & the level of
risk that the company
will not be able to
maintain the same A high dividend cover means a
EARNINGS PRE dividend payments in high
SHARE / future years should proportion of profits are
27. DIVIDEND COVER DIVIDEND PER SHARE the earnings fall. retained NO/. OF TIMES
EARNINGS PER The earnings yield should be
SHARE / Earnings yield can be greater
MARKET VALUE PER matched against the than the share holders
SHARE investors required rate opportunity
28. EARNINGS YIELD X100 of return cost (required rate of return) %
NET PROFIT / SHARE
HOLDERS
29. RETURN ON EQUITY BOOK VALUE X 100 %
VED IN
ITEMS DEFINITIONS / FORMULAE COMMENTS
SPOT RATE Rate available for buying or selling a currency immediately
Profit made on difference between spot buy rate
and
SPREAD spot sell rate
* The home country
exporters will
suffer as their receipts (if
invoiced
raised in foreign currency)
value
will fall down.
* The home country
importers will
enjoy as their payments ( if
invoice
are settled in foreign
currency) value will fall
CURRENCY FLUCTUATIONS
If Home Currency gets stronger down
* The home country
exporters will
enjoy as their receipts (if
invoiced
raised in foreign currency)
value
will increase.
* The home country
importers will
suffer as their payments ( if
invoice are settled in foreign
currency) value will
If Home Currency gets Weaker increase.
 Where,
F0 = Forward rate or
expected
Future Spot rate of
Base
currency
S0 = Spot rate of Base
currency
ic = Interest rate of foreign
currency (to be found)
ib = Interest rate of Base
country
INTEREST RATE PARITY
F0 = S0 X (1+ic)/(1+ib) currency
Where,
F0 = Forward rate or
expected
Future Spot rate of
Base
currency
S0 = Spot rate of Base
currency
hc = Inflation rate of foreign
currency (to be found)
hb = Inflation rate of Base
country
PURCHASING POWER F0
PARITY
= S0 X (1+hc) / (1+hb) currency
THE ECONOMIC ENVIRONMENT FOR BUSINESS
MACRO ECONOMICS
MICRO ECONOMICS
MACRO ECONOMIC POLICY
POLITICAL ECONOMIC AIMS
INFLATION - 5 TYPES
MULTIPLIER EFFECT
Economics that deals with the structure, Performance and behaviour of an economy as a whole.
The trends of the economy are analysed with the focus on
*National income (gross national product)
*Inflation
*unemployment
*Interest rates
*Foreign exchange currency rates
*International Trade
*Investments
Study of workings and behaviour of individual economic units such as markets & firms
Eg: Study of
* perfect competition
* Monopoly
* Oligopoly etc
Policy framed by the Government so as to influence the performance and
behaviour of the
National economy as a whole
are :
* Increase or sustain Economic Growth
* Avoid Extreme Economic Fluctuations
* Maintain Price Stability
* achieve Full employment or eradicate unemployment
* healthy Balance of payments
* eradicate extreme poverty
1. Demand Inflation - occurs when the demand and purchasing power outstrips
(exceeds) the rate of output. Options for Govt. To reduce demand are - increasing
taxation, lowering govt. expenditures & increasing interest rates.
2. Cost Inflation - Increase in cost because of the shortage of factors (money,
material, labour etc) of supply.
3. Imported Inflation
4. Money supply Inflation
5. 'Expectations' effect Inflation
An effect in economy in which an increase in spending produces an increase in
national income and
consumption greater than the initial amount spent.
FORMULAE