savio13
Savio Cabral
I. Solvency Ratios: These ratios analyze short term and immediate financial position of a business organization and indicate the ability of the firm to meet its short term commitments (Current Liabilities) out of its short term resources (Current Assets) also known as Liquidity or Credit Ratios.
Solvency Ratios includes:
1) Long Term Solvency ratios:-
a) Proprietary Ratios - Proprietary Ratio is a test of financial and credit strength of the business. It relates shareholders funds to total assets i.e. Total funds. This ratio determines the long term or ultimate solvency of the company.
Proprietary Ratio =
b) Debt Equity - it expresses the relation between the external equities and internal equities or the relationship between borrowed capital and owners capital.
Debt Equity Ratio =
c) Capital Gearing Ratio - Capital Gearing Ratio brings out the relationship between two types of capital i.e. capital carrying fixed ratio of interest or fixed dividend and capital that does not carry fixed rate of interest or fixed dividend.
Capital Gearing Ratio =
a) Current Ratio - Current Ratio is also known as the ‘Working Capital Ratio’, ‘Solvency Ratio’ or ‘2 in 1 Ratio’. This ratio expresses the relationship between current assets and current liabilities.
Current Ratio =
b) Quick Ratio - Quick ratio is also known as ‘Liquid Ratio’ or ‘Quick Assets Ratio’ or ‘Acid Test Ratio’ or ‘Near Money Ratio’ or ‘1 to 1 Ratio’. This ratio is designed to indicate the liquid financial position of an enterprise. Thus, the ratio shows the firms ability to meet its immediate obligations promptly. It measures the relationship between quick assets and quick liabilities.
Quick Ratio =
II. Profitability Ratios: These ratios are intended to reflect the overall efficiency of the organization, its ability to earn a reasonable return on capital employed or on shares issued and the effectiveness of its investment policies.
Profitability Ratios includes:
1) Product
a) Gross Profit Ratio - Gross profit brings out the relationship between gross profit and net sales. It is also known as ‘Turnover Ratio’ or ‘Margin’ or ‘Gross Margin Ratio’ or ‘Rate of Gross Profit’. It is expressed as % of net sales.
Gross profit =
Net Profit can be calculates as:-
c) Operating Ratio - Operating Ratio is the relationship between cost of activities and net sales. This ratio brings out the relationship between total costs of goods sold to net sales.
Operating Ratio =
a) Return on Capital Employed - This ratio explains the relationship between total profits earned by the business and total investments made or total assets employed. This ratio thus measures the overall efficiency of business operations. This ratio is alternatively known as ‘Return on Total Sources’.
Return on capital employed =
b) Return on Proprietors Fund - This ratio is alternatively known as ‘Return on Proprietors Equity’ or ‘Return on shareholders investment’ or ‘Investors Ratio’. The ratio indicates the relationship between net profit earned and total proprietors funds.
Return on Proprietors Fund =
c) Return on Equity Share Capital - This ratio indicates the rate of earning on the equity or ordinary share capital. This is expressed as a % or in absolute monetary terms. Alternatively, this may be expressed as an amount of return per equity share but as a % of the equity capital, it is easily understood. This ratio is also known as ‘The Rate of Return on Equity Capital’.
Return on Equity Share Capital =
d) Earning per share - Earning peer share is calculated to find out overall profitability of the organization. Earnings per share represent earnings of the company whether or not dividends are declared. If there is only one class of shares, then EPS are determined by dividing net profit by the no. of equity shares. If there are both equity and preference shares the net profit should be reduced by the amount necessary to pay preference dividend.
Earnings per share =
e) Dividend Payout Ratio - The purpose of this ratio is to find out the proportion of earning used for payment of dividend and the proportion of earning retained. The ratio is the relationship between earning per equity share and dividend per equity share.
Dividend Payout Ratio =
Solvency Ratios includes:
1) Long Term Solvency ratios:-
a) Proprietary Ratios - Proprietary Ratio is a test of financial and credit strength of the business. It relates shareholders funds to total assets i.e. Total funds. This ratio determines the long term or ultimate solvency of the company.
Proprietary Ratio =
Proprietors Funds
Total Funds
Total Funds
b) Debt Equity - it expresses the relation between the external equities and internal equities or the relationship between borrowed capital and owners capital.
Debt Equity Ratio =
Debt
Debt + Equity
Debt + Equity
c) Capital Gearing Ratio - Capital Gearing Ratio brings out the relationship between two types of capital i.e. capital carrying fixed ratio of interest or fixed dividend and capital that does not carry fixed rate of interest or fixed dividend.
Capital Gearing Ratio =
Securities bearing fixed rate of interest
Shareholders fund
2) Short Term Solvency ratios: -Shareholders fund
a) Current Ratio - Current Ratio is also known as the ‘Working Capital Ratio’, ‘Solvency Ratio’ or ‘2 in 1 Ratio’. This ratio expresses the relationship between current assets and current liabilities.
Current Ratio =
Current Assets
Current Liabilities
Current Liabilities
b) Quick Ratio - Quick ratio is also known as ‘Liquid Ratio’ or ‘Quick Assets Ratio’ or ‘Acid Test Ratio’ or ‘Near Money Ratio’ or ‘1 to 1 Ratio’. This ratio is designed to indicate the liquid financial position of an enterprise. Thus, the ratio shows the firms ability to meet its immediate obligations promptly. It measures the relationship between quick assets and quick liabilities.
Quick Ratio =
Quick Assets
Quick Liabilities
Quick Liabilities
II. Profitability Ratios: These ratios are intended to reflect the overall efficiency of the organization, its ability to earn a reasonable return on capital employed or on shares issued and the effectiveness of its investment policies.
Profitability Ratios includes:
1) Product
a) Gross Profit Ratio - Gross profit brings out the relationship between gross profit and net sales. It is also known as ‘Turnover Ratio’ or ‘Margin’ or ‘Gross Margin Ratio’ or ‘Rate of Gross Profit’. It is expressed as % of net sales.
Gross profit =
Gross Profit * 100
Sales
b) Net Profit Ratio - Net Profit Ratio indicates the relationship between net profit and net sales. Net profit can be either operating net profit or net profit after tax or net profit before tax. This ratio is known as ‘Margin or Sales Ratio’.Sales
Net Profit can be calculates as:-
Net Profit After Tax * 100
Net Sales
Net Profit Before Tax * 100
Net Sales
Net Sales
Net Profit Before Tax * 100
Net Sales
c) Operating Ratio - Operating Ratio is the relationship between cost of activities and net sales. This ratio brings out the relationship between total costs of goods sold to net sales.
Operating Ratio =
Operating Cost *100
Net Sales
2) InvestmentNet Sales
a) Return on Capital Employed - This ratio explains the relationship between total profits earned by the business and total investments made or total assets employed. This ratio thus measures the overall efficiency of business operations. This ratio is alternatively known as ‘Return on Total Sources’.
Return on capital employed =
Net profit before interest and tax *100
Capital employed
Capital employed
b) Return on Proprietors Fund - This ratio is alternatively known as ‘Return on Proprietors Equity’ or ‘Return on shareholders investment’ or ‘Investors Ratio’. The ratio indicates the relationship between net profit earned and total proprietors funds.
Return on Proprietors Fund =
Net Profit After Tax * 100
Proprietors Funds
Proprietors Funds
c) Return on Equity Share Capital - This ratio indicates the rate of earning on the equity or ordinary share capital. This is expressed as a % or in absolute monetary terms. Alternatively, this may be expressed as an amount of return per equity share but as a % of the equity capital, it is easily understood. This ratio is also known as ‘The Rate of Return on Equity Capital’.
Return on Equity Share Capital =
NPAT – Preference Dividend
Equity Shares Capital
Equity Shares Capital
d) Earning per share - Earning peer share is calculated to find out overall profitability of the organization. Earnings per share represent earnings of the company whether or not dividends are declared. If there is only one class of shares, then EPS are determined by dividing net profit by the no. of equity shares. If there are both equity and preference shares the net profit should be reduced by the amount necessary to pay preference dividend.
Earnings per share =
NPAT – Preference Dividend
No. of Equity shares
No. of Equity shares
e) Dividend Payout Ratio - The purpose of this ratio is to find out the proportion of earning used for payment of dividend and the proportion of earning retained. The ratio is the relationship between earning per equity share and dividend per equity share.
Dividend Payout Ratio =
Dividend per equity share
Earning per equity share
Earning per equity share