Table8owing Summary of Accouoting Rartios

How Expressed Hemark

Signlfhcance

1. LIQUIDITYRATIOS Inventories (Excluding Store

. Current Ratio This ratio shows short-term financial soundness of the Pure Ratio Current Assets = Current Investments+
and Spares and Loose Tools) Trade Recervable
business. Higher ratio means better capacity to meet its
Current Assets (Net of Provision for Doubtful Debts) Cash anc
current obligation. The ideal Current Ratio is 2:1
Current Liabilities + Shot-term Loans and Advance
Cash Equivalents
+Other Current Assets
Short-term Borrowings Trade Payables + Othem
Current Liabilities +

Current Liabilities + Short-term Provisions.

Quick Assets = Current Assets - Inventories - Prepaid Expenses

Pure Ratio
2. Liquid Ratio/Acid Test Liquid Ratio is a fairly stringent measure of liquidity. It is
based on those current assets which are highly liquid, ie, Current Liabilities have same meaning as in Current Ratio.
Ratio/Quick Ratio
can be converted into Cash and Cash Equivalents quickly. Note: Inventories and prepaid expenses are not considered as
Liquid Assets or Quick Assets Quick Ratio of 1:1 is considered as ideal. Higher the Quick
Quick Asset.
Current Liabilities Ratio better the short-term financial position.

I1. SOLVENCY RATIOS

This ratio long-term financial position and
the Pure Ratio Debt Long-term Borrowings, (i.e., debentures, mortgage,
1. Debtto Equity Ratio assesses

soundness of enterprises. In general, lower the Debt to public deposits) + Long-term Provisions
Debt
Shareholders' Funds = Share Capital +Reserves and Surplus
Equity (Shareholders' Funds) Equity Ratio higher the degree of protection enjoyed by
the lenders. Or

Non-current Assets (Tangible Assets + Intangible Assets +Non-current

Investments+ Long-term Loans and Advances) +Working Capital Non
current Liabilities (Long-term Borrowings + Long-term Provisions).
Current Assets Current Liabilities
Working Capital =

2. Total Asset to Debt Ratio This ratio measures the safety margin available to lenders Pure Ratio, Total Assets =Non-current Assets (Tangible Assets + Intangible Assets+
of long-term debts. It measures the extent to which debt e.g,2:1 Non-current Investments+ Long-term Loans and Advances)+Current Assets
Total Assets is being covered by assets. ICurrent Investments+ Inventories (including Stores and Spares and Loose
Debt
Tools)+Trade Receivables+Cash and Cash Equivalents+Short-term Loans
and Advances+Other Current Assets)

Debt Long-term Borrowings + Long-term Provisions

etary Ratio This ratio shows the extent to which total assets have been Pure Ratio or % Shareholders' Funds = Share Capital + Reserves and Surplus

hareholders' Funds or financed by the proprietor. Higher the ratio,

higher the Assets to Debt Ratio.
Total Assets has the same meaning as in Total
prietors' Funds or Equity safety margin unsecured lenders and creditors.
for
Total Assets

est Coverage Ratio + Tax +Interest

This ratio shows how many times the interest
charges are Times Proft before Interest and Tax Proft after Tax
rofit before Interest and Tax covered by the profts available to pay interest.Higher the
nterest on Long-term Debt ratio,more security for the lender is in respect of payment
of interest regularly.

II. ACTIVITY RATIOS/TURNOVER RATIOS

ventory Turnover Ratio This ratio measures how fast Inventory is moving and Times Average Inventory
Cost of Revenue from generating sales. Higher the ratio, more efficient
Opening Inventory +ClosingInventory
Operations management of inventories and vice versa. 2
Average Inventory
Trade Receivables Turnover Ratio This ratio shows efficlency in the collection of amount due Times Trade Receivables means debtors plus bills receivable.
Credit Revenue from from trade receivables. Higher the ratio, better it is since Provision for Doubtful Debts is not deducted.
Average Trade Receivables
Operations it indicates that debts are being collected more quickly.
Average Trade Receivables (Opening Debtors+Opening Bills Receivable) +
(Closing Debtors + Closing Bills Receivable)
2

Trade Payables Turnover Ratio It shows the number of times the creditors are turned over
Times Trade Payables means creditors plus bills payable.
Net Credit Purchases in relation to purchases. A high turnover ratio or shorter
Average Trade Payables payment period shows the availability of less credit or Average Trade Payables
early paymernts. (Opening Creditors+Opening Bills Payable) +
(Closing Creditors +Closing Bills Payable)
2
4. Working Capital Turnover Ratio This ratio shows the number of times working capital has
Times Working Capital = Current Assets - Current Liabilities
Revenue from Operations been employed in the process of carrying on business.
Working Capital Higher the ratio, better the efficiency in the utilisation of
working capital.
 1. Gross Profit Ratio
This ratio indicates the
relationship between gross Gross Profit Revenue from Operations
-
Cost of Revenue
proht and net sales. Higher the Ratio, lower the cost from Operation
Gross Profit 100 of goods sold.
Cost of Revenue frorm Operations
Revenue from Operations
Opening inventory (excluding Stores and Spares andStores
+Direct Expenses Closing
Loose Toots) + Net Purchases
-

Inventory (excludingand Spares and Loose

Tools) Or
Cost of Materials Consumed + Purchases of Stock-in-Trade + Changes in
Inventories of Finished Goods, WIP andStock in-Trade +Direct Expenses.
If direct expenses are not given, assume them to be nil.

2. Operating Ratio This ratio is calculated the

to assess
operational Cost of Revenue from Operations
Cost of Revenue from Operations effhciency of the business. A decline in the operating = Opening inventory (excluding Stores and Spares and Loose Tools)+ Net Purchases
ratio, is better because it means higher margin, and
+Operating Expenses x 100
+Direct Expenses Closing Inventory (excluding Stores and Spares and Loose
Revenue from Operations thus, more proDt. Tools)
Or
Cost of Materials Consumed Purchases of Stock-in-Trade +Changes in
Inventories of Finished Goods, WIP and Stock-in-Trade + Direct Expenses.
Or
Revenue from Operations Gross Proft
ifDirect Expenses are not given, assume them to be nil
Operating Expenses EmployeesBenefitExpenses+Depreciation and Amortisation
+Other Expenses (Other than Non-operating Expenses)
Revenuefrom Operations = Sales-Sales Return

3. Operating Proft Ratio The objective of computing this ratio is to deterrnine Operating Profit
the operational efficiency of management. = Net Proft (Before Tax) +Non-operating Expenses Non-operating Income
Operating Profit or
- x100
Revenue from Operations = Gross Profit +Operating Income -

Operating Expenses
Non-operating Expenses Interest =
Long-term Borrowings+ Loss on Sale of
on
Fixed Assets or Non-current Assets

Non-operating Income = Interest received on investments +Proft on Sale of

Fixed Assets or Non-current Assets
Net Profit after Tax = Gross Profit +Other Income - indirect Expenses - Tax
It indicates overall efficiency of the business. Higher %
4. Net Profit Ratio
the net profit ratio, better the business.
Net Profit after Tax x100
Revenue from Operations
It assesses the overall performance of the enterprise. Capital Employed: Capital + Reserves and
Liabilities Side Approach: Share Surplu=
5. Return on Investment or Return on + Long-term Borrowings + Long-term Provisions
Capital Employed It measures, how the resources entrusted to
efficiently Assets Side Approach: Non-Current Assets+Working Capital.
the business are used. Current Assets Current Liabilities
Working Capital
-
=

Profit before Interest,

Tax and Dividend (Assume that all Non-current Investments are Trade Investments)
x100 (Interest on Non-trade Investments should be deducted from Profit before Interes=
Capital Employed Tax and Dividend)