Ratio Analysis Formula – GeeksforGeeks

Ratio analysis is a quantitative way of achieving wisdom into a company’s liquidity, working efficiency, and profitability by examining its monetary reports such as the balance sheet and income report. Ratio analysis is a cornerstone of fundamental equity research. This type of research is especially helpful to critics beyond an enterprise since their immediate reference of knowledge about an institution is its financial reports. Ratio analysis is slightly beneficial to corporate insiders, who have more suitable credentials to more elaborate on working knowledge about the association.

Liquidity Ratios

Liquidity ratios calculate a firm capability to spend off its short-term debts as they evolve owed, using the firm current or quick investments. Liquidity ratios retain the current ratio, quick ratio, and working capital ratio.

S.No. Ratios Formulas
1 Current Ratio Current Assets/Current Liabilities
2 Quick Ratio

Quick Assets/Current Liabilities

Quick Assets = Current Assets – Inventory – Prepaid Expenses

3 Absolute Liquid Ratio  Cash + Marketable Securities/Current Liabilities

Profitability Ratios

These ratios tell how nicely a firm can develop earnings from its processes. Earnings margin, the yield on investments, the yield on equity, the yield on capital employed, and gross margin ratios are all instances of profitability ratios.

S.No. Ratios Formulas
1 Gross Profit Ratio Gross Profit/Net Revenue of Operations × 100 
2 Operating Cost Ratio Operating Ratio = (Cost of Revenue from Operations + Operating Expenses)/Net Revenue from Operations ×100
3 Operating Profit Ratio Operating Profit/ Revenue from Operations × 100 
4 Net Profit Ratio Net profit/Revenue from Operations × 100
5 Return on Investment Ratio Net Profit After Interest  And Taxes/ Shareholders Funds or Investments  X 100
6 Return on Capital Employed Ratio Net Gain After Surcharges/ Gross Capital Employed X 100
7 Earnings Per Equity Share Net Gain After Surcharges & Preference Premium /No of Equity Shares
8 Dividend Yield Ratio Premium Per Equity Claim/Earning Per Equity Claim X 100
9 Price Earnings Ratio Net Gain after Taxation& Preference Premium / No. of Equity Share
10 Dividend Yield Ratio Dividend Per Share/ Market Value Per Share X 100
11 Price Earnings Ratio Demand Expense Per Share Equity Claim/ Gaining Per Share X 100
12 Net Profit to Net Worth Ratio Net Profit after Surcharges/ Shareholders Net Worth X 100

Working Capital Ratios

“Working capital” is the capital you require to sustain short-term processes. It is this emphasis on the short term that indicates working capital from longer-term assets in fixed assets or R&D.

S.No. Ratios Formulas
1 Inventory Ratio Net Sales / Inventory
2 Debtors Turnover Ratio  Total Sales /  Account Receivables
3 Debt Collection Ratio  Receivables  x Months or days in a year / Net Credit Sales for the year
4 Creditors Turnover Ratio Net Credit Purchases / Average Accounts Payable
5 Average Payment Period Moderate Trade Creditors / Net Credit Purchases X 100
6 Working Capital Turnover Ratio Net Sales / Working Capital
7 Fixed Assets Turnover Ratio Price of goods Traded / Whole Designated Assets
8 Capital Turnover Ratio  Cost of Sales / Capital Employed

Capital Structure Ratios

Both debt and equity can be located on the balance sheet. Corporation assets, also documented on the balance sheet, are bought with debt or equity. Capital structure can be a combination of a business’s long-term debt, short-term debt, joint-stock, and select stock. A firm balance of short-term debt versus long-term debt is believed when examining its capital structure.

S.No. Ratios Formulas
1 Debt Equity Ratio Total Long Term Debts / Shareholders Fund
2 Proprietary Ratio Shareholders Fund/ Total Assets
3 Capital Gearing ratio Equity Allocation Funds / Specified Interest Bearing Funds
4 Debt Service Ratio  Net  Earnings Before Welfare & Taxations / Fixed Welfare Payments

Overall Profitability Ratio

The overall profitability ratio is also called return on investment. It shows the ratio of return on the whole capital employed in the enterprise. It is also named as retrieval on assets, return on capital employed.

S.No. Ratios Formulas
1 Overall Profit Ability Ratio Net Profit / Total Assets

Sample Problems

Problem 1: For a firm, some measurable terms are as follows:

Current Assets = Rs. 11971

Inventory = Rs. 8338

Current Liability = Rs. 8035

Find the value of the Quick ratio.

Solution: 

As given,

Current Assets = Rs. 11971

Inventory = Rs. 8338

Current Liability = Rs. 8035

And formula for quick ratio is:

QuickRatio = Totalcurrentratio−InventoryTotalCurrentLiabilities

QuickRatio = 11971−83388035

Quick ratio = 0.45

Problem 2: A company has a capital of Rs. 10, 00,000; its turnover is 3 times the capital and the margin on sales is 6%. What is the return on investment?

Solution:

Capital Turnover Ratio = Sales / Capital

                                3  = Sales / Rs. 10,00,000

                              Sales = Rs. 30,00,000

Rate of Return on Investment = (Gross Profit / Investment) × 100

                                               = (Rs.1,80,000 / Rs.10,00,000) × 100

                                               = 18%

                           Gross Profit = 6% of Rs.30,00,000

                                              = Rs. 1,80,000

Problem 3: The following is the Balance Sheet of a company as of 31st March:

Liabilities Rs. Assets Rs.
Share Capital 2,00,000 Land and Buildings 1,40,000
Profit & Loss Account 30,000 Plant and Machinery 3,50,000
General Reserve 40,000 Stock  2,00,000
12% Debentures 4,20,000 Sundry Debtors 1,00,000
Sundry Creditors 1,00,000 Bills Receivables 10,000
Bills Payables 50,000 Cash at Bank 40,000
  8,40,000   8,40,000

Calculate

  1. Current Ratio
  2. Quick Ratio
  3. Inventory to working capital
  4. Debt to Equity Ratio
  5. Proprietary Ratio
  6. Capital Gearing Ratio
  7. Current Assets to Fixed Assets

Solution:

1) Current Ratio = Current Assets / Current Liabilities

                           = Rs. 3,5,000 / Rs. 1,50,000

                           = 2.33 : 1

2) Quick Ratio = Liquid Assests / Liquid Liabilities 

                        = Rs. 1,50,000 / 1,50,000

                        = 1 : 1

3) Inventory to Working Capital = Inventory / Working Capital

                                                   = Rs. 2,00,000 / Rs. 2,00,000

                                                   = 1 : 1

     (Working Capital = Current Assets – Current Liabilities

                                 = Rs. 3,50,000 – Rs. 1,50,000

                                  = Rs. 2,00,000)

4) Debt to Equity Ratio = Long Term Debts / Shareholder’s Fund

                                      = Rs. 4,20,000 / Rs. 2,70,000

                                      = 1.56 : 1

5) Proprietary Ratio = Shareholder’s Fund / Total Assets

                                = Rs. 2,70,000 / Rs. 8,40,000

                                = 0.32 : 1

6) Capital Gearing Ratio = Fixed InterestBearing Securities / Equity Share Capital

                                       = Rs. 4,20,000 / Rs. 2,00,000

                                       = 2.1 : 1

7) Current Assets to Fixed Assets Ratio = Current Assets / Fixed Assets

                                                               = Rs. 3,50,000 / Rs. 4,90,000

                                                               = 0.71 : 1

Problem 4: From the following particulars found in the Trading, Profit and Loss Account of A Company Ltd., work out the operation ratio of the business concern:

TRADING ACCOUNT OF A COMPANY LTD.

                                       for the period ending December 31  

Expenses Rs. Income Rs.
To Opening Stock 1,400 By Net Sales 10,000
To Purchases 6,400 By Closing Stock 600
To Direct Expenses 300    
To Gross Profit 2,500    
  10,600   10,600

PROFIT AND LOSS ACCOUNT OF A COMPANY LTD.

                                                          for the period ending December 31

Expenses Rs. Income Rs

To Operating Expenses 

a)Administrative Expenses

b)Selling and Distribution Expenses 

1,600

300

By Gross Profit 2,500
To Financial Expenses 100    
To Net Profit 500    
  2,500    

Solution:

Operating Ratio = (Cost of goods sold and other operating expenses / Net Sales) × 100

Cost of Goods Sold:                                                                                                   Rs,

Opening Stock                                                                                                        1,400                    

Purchases                                                                                                                6,400

Direct Expenses                                                                                                        300

                                                                                                                                 8,100 

Less Closing Stock                                                                                                      600

Cost of Goods Sold                                                                                                  7,500

Operating Expenses:                                                                                                   Rs.

    a) Administrative Expenses                                                                                    1,600

    b) Selling and Distribution Expenses                                                                       300

    c) Financial Expenses                                                                                                100

Operating Expenses                                                                                                      2,000

Operating Ratio = (7,500 + 2.000 / 10,000) × 100 = 95%

Problem 5: From the following Balance Sheet and additional information, you are required to calculate:

(i) Return on Total Resources

(ii) Return on Capital Employed

(iii) Return on Shareholders’ Fund

                                                                                                      Balance Sheet as of 31st Dec.

  Rs.   Rs.
Share Capital (Rs. 10) 8,00,000 Fixed Assets 10,00,000
Reserves 2,00,000 Current Assets 3,60,000
8% Debentures 2,00,000    
Creditors 1,60,000    
  13,60,000   13,60,000

The net operating profit before tax is Rs. 2,80,000. Assume tax rate at 50% Dividend declared amounts to Rs.1,20,000

Solution:

I) Return on Total Resources = (Profit after Tax / Total Assets) × 100

                                              = (Rs. 1,40,000 / Rs. 13.60.000) × 100 = 10.29%

ii) Return on Capital Employed = (Profit before Tax & Interest / Capital Employed) × 100

                                                  = (Rs. 2,96,000 / Rs.12,00,000) × 100 = 24.7%

iii) Return on Shareholder’s Fund = Profit after Tax / Shareholders Fund 

                                                     = (Rs.1,40,000 / Rs.10,00,000) × 100 = 14%

Problem 6: The following Trading and Profit and Loss Account of Fantasy Ltd. for the year 31‐3‐2000 is given below:

Particular Rs. Particular Rs.
To Opening Stock 76,250 By Sales 5,00,000
Purchases 3,15,250 Closing Stock 98,500
Carriages and Freight 2,000    
Wages 5,000    
Gross Profit b/d 2,00,000    
  5,98,500   5,98,500
To Administration Expenses   By Gross Profit b/d 2,00,000
Selling and Dist. expenses 1,01,000 Non-operating incomes  
Non operating expenses 12,000 Interest on securities 1,500
Financial Expenses 7,000 Dividend on Shares 3,750
Net Profit c/d 84,000 Profit on sale of shares 750
  2,06,000   2,06,000

Calculate:

1. Gross Profit Ratio        2. Expenses Ratio     3. Operating Ratio

4. Net Profit Ratio           5. Operating (Net) Profit Ratio   6. Stock Turnover Ratio. 

Solution:

1) Gross Profit Margin = (Gross profit / Sales) × 100

                                    = (2,00,000 / 5,00,000) × 100

                                    = 40%

2) Expenses Ratio = (Op.Expenses / Net Sales) × 100

                             = (1,13,000 / 5,00,000) × 100

                             = 22.60%

3) Operating Ratio = (Cost of goods sold + Op. Expenses / Net Sales) × 100

                               = (3,00,000 + 1,13,000 / 5,00,000) × 100

                                = 82.60%

Cost of Goods sold = Op. stock + purchases + carriage and Freight + wages – Closing Stock

                               = 76250 + 315250 + 2000 + 5000 ‐ 98500

                               =  Rs.3,00,000  

4) Net Profit Ratio = (Net Profit / Net Sales) × 100

                              = (84,000 / 5,00,000) × 100

                              = 16.8%

5) Operating Profit Ratio = (Op. Profit / Net Sales) × 100

Operating Profit = Sales – (Op. Exp. + Admin Exp.)

                                         = (87,000 / 5,00,000) × 100

                                          = 17.40%

6) Stock Turnover Ratio = Cost of goods sold  / Avg. Stock

                                      = 3,00,000 / 87,375

                                       = 3.43 times

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