Ratio Analysis (Eng. Medium)

Ratio Analysis is a financial tool used to evaluate and interpret the financial performance using data from its various financial statements.

Types of Ratios:

 

Type	Examples	Purpose
1. Liquidity Ratios	Current Ratio, Quick Ratio	Measures ability to pay short-term debts
2. Profitability Ratios	Net Profit Margin, Return on Equity	Shows how much profit is earned
3. Solvency Ratios	Debt to Equity Ratio, Interest Coverage Ratio	Assesses long-term financial stability
4. Efficiency Ratios	Inventory Turnover, Asset Turnover	Checks how well assets are used
5. Market Ratios	Earnings Per Share (EPS), Price/Earnings (P/E) Ratio	Useful for investors

 

📙 1. Liquidity Ratios

These ratios measure a company’s ability to meet its short-term obligations.

Ratio	Formula	Benchmark (Satisfactory Ratio)
Current Ratio	Current Assets / Current Liabilities	2:1
Liquid Ratio	Liquid Assets / Liquid Liabilities          or   Current Assets – Clos. Stock / Current Liabilities - Bank O.D.          (As per the Old Chapterization)   Current Assets – Clos. Stock / Current Liabilities (As per the New Chapterization)	1:1
Quick Ratio (Acid-Test Ratio)	Quick Assets / Quick Liabilities Where Quick Assets = Current Assets – Clo.Stock - Debt. Quick Liabilities = Current Liabilities - Bank O.D – Creditors   (As per the Old Chapterization) Quick Liabilities = Current Liabilities (As per the New Chapterization)	1:1

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📙 2. Profitability Ratios

These indicate how efficiently a company generates profit.

Ratio	Formula	Indicates
Gross Profit Ratio	(Gross Profit / Net Sales) × 100	Profit after cost of goods
Net Profit Ratio	(Net Profit - B / Net Sales) × 100 Here Net Profit Excluded exceptional and extra ordinary income (i.e., Profit on Sale of Investment, or fixed assets) and Exp. (i.e., Loss by fire, Loss on Sale of any fixed assets or Investment, any amt. transferred to any reserve	Overall profitability
Operating Profit Ratio	(Operating Exp. + C.O.S.  / Net Sales) × 100 Where Operating Exp. does not include any financial exp. (i.e., Interest on Deb., Dividend on Pref. Share dividend)	Efficiency of operations
Rate of Return on Capital Employed	Net Profit – A{PBIT} / Capital Employed) × 100	Return on total investment
Rate of Return on Shareholders Fund	Net Profit – B{PAT} / Shareholders Fund × 100	Return to shareholders
Rate of Return on Eq. Shareholders Fund	Net Profit – C {Profit available to Eq. Shareholders} / Eq. Shareholders Fund × 100	Return to Eq. shareholders
Return on Equity shares	Net Profit – C / Eq. Share Capital × 100	Return to shareholders
Earnings Per Share (EPS)	Net Profit – C / Number of Equity Shares	Earnings per share

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📗 3. Leverage Ratios

These assess long-term financial health and ability to repay debts.

Ratio	Formula	Usage
Proprietary Ratio	Proprietor’s Fund / Total Factual Assets   Where Proprietor’s Fund = Eq. Sh. Cap., Prof. Share Cap., Reserve & Surplus – Fictitious Assets	Proportion owned by shareholders
Debt-Equity Ratio	Long Term Liabilities / Proprietor’s Fund   Where Long Term Liabilities = Debenture, Bank loan	Financial leverage
Interest Coverage Ratio	EBIT / Interest on Deb.	Ability to pay interest

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📒 4. Efficiency or Activity Ratios

These show how well a company utilizes its assets.

Ratio	Formula	What it Measures
Inventory / Stock Turnover Ratio	Cost of Goods Sold / Average Stock	Inventory movement
Debtors Turnover Ratio	Debtors+ B.R. / Credit Sales × No. of days in a year	Speed of collecting receivables
Creditors Turnover Ratio	Creditors+ B.P. / Credit Purchase × No. of days in a year	Speed of paying suppliers
Asset Turnover Ratio	Net Sales / Total Assets	Revenue from total assets
Working Capital Turnover	Net Sales / Working Capital	Sales per unit of working capital

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