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2 WORKING CA-CL • Absolute measure of firm’s Working Capital = (CA- Gross Working Capital means Total
CAPITAL(WC) liquidity. CL). Current Assets.
/Net Current Asset CA has direct relation
with WC.( Increase in
CA increases WC)
CL has inverse relation
with WC. ( Increase in
CL decreases WC).
3 Net Working Capital to WC/SALES • WC has direct relation to
sales Ratio sales.
• Increase in sales needs
increase in WC.
4 Quick /Liquid Ratio. (CA-stock-Prepaid) • Prepaid=adv. To supplier. Ability to pay current Increase in Liquid Ratio indicates
(Acid Test Ratio) -------------------- • Standard Norm for Liquid Liabilities. Increase in Current Ratio. However,
(CL) Ratio- 1:1. Increase in Current Ratio not necessarily
• CA –( Stock +Prepaid) also indicates Increase in Liquid Ratio.
called Liquid Assets, Quick However,
Assets.
5 Fixed Assets to Current Total FA
Assets Ratio Total CA
B LONG TERM
STABILITY/
LEAVERAGE
RATIOS.
1 Debt/Equity Ratio Long-Term-Debts Long-Term-Debts (LTD)=SL+USL. Standard Norm For
Pure Equity SL= Secured Loans. Debt Equity Ratio- 2:1
USL=Unsecured Loans
Pure Equity=((Capital +Reserve &
Surpluses.)-
Misc.Exp.To The Extent Not Written
Off.)
2 Times Interest Earned EBIT(OP) EBIT=Earnings Before Interest & Tax. Ability to meet fixed
(TIE) / Interest Coverage -------------------- (Operating Profit) interest obligations.
Ratio TOTAL INTREST.
3 DEBT SERVICE COP Cash Operating Profit (COP) Shows ability to Serve Financial institute normally satisfied with
MARGIN(DSM) ----------------------- =Net Profit + Tax +(Non Cash Exps.) Principle portion of its DSCR in the range of 1.6 to 2 times.
Debt Service Coverage CL-PI + Interest on Debt. long term debt & lease
Ratio (DSCR)
CL=current liabilities Principle Debt
+Interest on Debt.
4 Operating Leverage Contribution Contribution means Gross Margin (OL) measures , (OL) can be explained in simple math’s
(OL) ----------------------- (OP)= (Contribution-OP.EXP) a) Effects of changes in as under
Operating Profit Quantity produced /sold Operating Profit (OP)----
(OP) upon EBIT of company, Contribution
b) Business Risk To get Rs 1 (OP) How much
c) Effects of contribution(OL)
Production
Planning
5 Financial Leverage Operating Profit (FL) measures, (FL) can be explained in same as (OL)
(FL) (OP). a) Effects of changes in mathematical formula.
------------------ EBIT
OP after interest upon EPS of
company,
b) Change in Mix of
debt &
equity in capital
structure of
company.
c) Financial Risk of
the
Firm
6 Combined Leverage : Contribution Combined Leverage
----------------------- measures,
Operating Profit Total Risk of Company
(OP)
Alternatively-
((OL)* (FL) )
C PROFITABILITY
RATIOS:
1 Gross Profit Ratio Gross Profit
(G/P Ratio) ----------------* 100
Total Net Sales.
2 Net Profit Ratio Profit After Tax
(N/P ratio) (PAT)
--------------------*
100
Total Net Sales
3 Operating Ratio (OR)/ Total Operating Measure of the operating efficiency of
Expense Ratio Exp. the firm.
-----------------------
Total Net Sales.
4 Return On Investment Profit After Tax CE=FA +INV+ WC Overall all effectiveness Other variants of this ratios are,
(ROI) (PAT) FA=Fixed Assets. of Management, in Return On Assets=(PAT/Total Assets)
------------------ WC=Working Capital. generating
Capital Employed CE is also known as Net Tangible Profits from resources. • Total assets for this purpose FA
(CE) Asset. + WC (but excludes
fictious,intangible assets,
CE is also known as Net Tangible obsolete stocks, doubtful debts).
Worth. Return On Ordinary share holders
----------------------------------------------- Equity=(PAT-Preference Dividend)
CE= CAPITAL + R & S + SL + --------------------------------
USL-(MISC. EXP). Pure Capital Employed
R&S=Reserves & Surpluses.
SL= Secured Loans.
USL=Unsecured Loans.
MISC. EXP= Misc.Exp.To The Extent
Not Written Off.)
4 ACTIVITY RATIOS: COMMON IMPORTANT POINTS
(Efficiency ACTIVITY RATIOS,
Ratios/Asset Utilization
Ratios)
1 Accounts Receivable Total Net Credit Indicates quality of receivables & how 1) Any turnover ratio the sales figure in
Turnover (ART) Sales Successfully the firms collect the same. numerator relevant item (e.g.
----------------------- Bad Debts are not deducted from Debtor, stock, fixed Asset ----- etc)in
Total Av. Debtors debtors as it will result in higher Denominator.
debtors turnover.
Net Credit sales = Credit sales- Sales
Returns
Av. Debtors =( Op Drs + Cl. Drs)/2
2 Inventory Turnover (IT) Cost Of Goods Cost Of Goods Sold (i) How Finished Goods 2) If specific formula is given in the
Sold = (Op.St + purch + Direct.Exp.- Cl. stock moving or problem for turnover ratio then put note to
----------------------- Stk) otherwise. that effect.
Av. Stock Av. Stk = (op.stk + cl.stk)/2 (ii)It indicates 3) High ratio indicates an efficient and
possibility of inventory effective utilization of an asset.
of obsolescence.
3 Fixed Asset Turnover Total Sales. * Total Asset (Excluding fictitious Indication To The
(FAT): ----------------------- asset) Extent Company Is
---- Using Its Plant &
* (Total Fixed Machinery.
Asset.)
E MARKET RATIOS:
1 Earning Per (PAT - Preference Measure the amount earnings available
Share(EPS): Dividend) To Eq. shareholders.
----------------------- Higher EPS Have +Ve impact On
(No. Of Eq. Market Price Of Shares.
Shares.)
2 No. Of Days Credit To Av. Debtor (i) If you divide Credit Sales by 365
Debtors (Customers): ----------------- Days, you will get Age Of Debtor in
(Age Of Debtors) (Credit sales / 365 days.
days ) (ii) If you divide Credit Sales by 12
months, you will get Age Of Debtor in
months.
8 Capital Gearing Ratio ( Eq capital + Highly geared Trading On Equity in simple terms
reserves) company means if returns in business
means it’s are much more than
-------------------- capital
carrying fixed Bank rate of interest , it is better
( Pf Shares + rate of interest to borrow from bank &
Debentur or dividend is financial institutes
es+ more than
debts) equity capital. On the strength of current Equity
rather than to issue more
equity shares thereby