Balance sheet ratios

1. Current Ratio = Current Assets/ Current Liabilities

Where,
Current assets (CA) = Stock+ Drs.+ B.R.+ Prepaid expenses+ O/s Income+ Cash
etc.
Current liabilities (CL)= Crs.+ B.P.+ O/s Exp.+ Bank O/D+ Cash Credit (CC)+ Pre
received income, etc.
Its a liquidity/solvency ratio which indicates the ability of the concern to meet its
short term liabilities. It measures the short term solvency of the concern. It ignores
composition of working capital (If A has more stocks and B has more cash, then B
has better liquidity)

2. Liquid / Acid test/ Quick Ratio = Liquid assets/ Liquid liabilities

Where,
Liquid assets= CA- Stock- Prepaid expenses - Advance tax
Liquid liabilities= CL- Bank o/d- Cash Credit - Pre received income
Its a solvency ratio which indicates the ability of the concern to meet short term
liabilities without selling stocks. It overcomes limitation of composition and quality
of working capital.

3. Stock to Working Capital Ratio

= Stock/ Working Capital x 100
Where,
Stock= Closing stock
Working Capital= CA- CL
Its a solvency ratio. Its shows the extent of funds blocked in stocks. If investment in
stocks is higher it means that the amount of liquid assets is lower.

4. Proprietory ratio

= Proprietors fund or Net worth or Shareholders equity or equity

100
Total Assets or Total Liabilities
Where,
Equity= Equity share capital+ Preference share capital+
Exp.

Reserves & Surplus- Misc.

Total Assets= Fixed Assets+ Investments+ CA (Not Misc.

Exp.)

It indicates long term solvency.

5. Debt- Equity Ratio

= Debt/ Equity
Where,
Debt= Long term borrowings+ Debentures
Equity= Equity share capital+ Preference share capital+
Exp.

Reserves & Surplus- Misc.

Its a solvency ratio which indicates the proportion of debt and equity in financing of
the assets of the concern.

6. Capital Gearing Ratio

= Capital Entitled to Fixed Rate of Interest or Dividend
Capital not so entitled to fixed rate of interest or dividend
Where,
Fixed income securities= Long term borrowings+ Debentures+ Preference share
capital
Not entitled = Equity capital + Reserves and Surplus P&L Dr. Balance Fictitious
assets

It shows the balance between debt and equity. Its a leverage ratio. Leverage means
the process of increasing equity shareholders returns through the use of debt also
known as gearing or trading on equity.

Question 1.
Particulars
Cash at bank
Expenses paid in
advance
Creditors
Bills receivables
12% debentures

Amount
12,500
15,500

Particulars
Land & Building
Stock

Amount
2,00,000
68,250

1,01,500
5,250
62,500

1,30,750
1,36,000
1,00,000

Equity share
capital

2,50,000

Debtors
P&M
Loan from Director
(repayable after
three years)
P&L A/c (Cr.)

54, 250

Calculate:
Capital gearing ratio
Proprietory ratio

Current ratio

liquid ratio

stock to WC ratio

Question 2.
Balance Sheet as on 31s March, 2014
Liabilities
Amount
Equity Share Capital
1L
6% Preference Share
1L
Capital
7% Debentures
40K
8% Public Deposit
20K
Bank Overdraft
40K
Creditors
60K
Unpaid Dividend
10K
Outstanding expenses
7K
Reserves
1.5L
Provision for tax
20K

Assets
Cash in hand
Cash at bank
Bills Receivable
Debtors
Stock
Advances
Furniture
Machinery
L&B
Goodwill

Amount
2K
10K
30K
70K
40K
20K
30K
1L
2,20,000
30K

P/L A/c

20K

Total

5,67,000

Preliminary expenses
Calls in arrears of equity
shares
Total

10K
5K
5,67,000

Calculate:
Current Ratio

Quick Ratio

Capital Gearing ratio

Stock to WC ratio

Proprietory Ratio

Revenue Statement Ratios

1. Gross Profit Ratio
= Gross Profit/ Net Sales * 100
Where,
Gross Profit= Sales COGS
Net Sales= Gross Sales- Returns
It is a profitability ratio which indicates the relationship between profits and sales.

2. Operating Ratio
= (COGS + Operating expenses)/ Net Sales * 100
Where,
COGS= Opening Stock+ Purchase- Closing Stock
Operating expenses= Administration + S & D+ Finance Exp.
This ratio indicates cost of operations. It helps in ascertaining how much amount out
of sales revenue is used in carrying out the operations of the concern.

3. Expense Ratio
= Expense/ Net Sales * 100
Where,
Expense= as given in question.

For eg. Administrative expense ratio = administrative expenses/Net sales*100

Expense ratios are supplementary to operating ratio. It helps in knowing the
efficiency of management in controlling the expenses and thereby improving
profitability.

4. Operating Profit Ratio

= Operating profit/ Net Sales * 100
Where,
Operating profit= Gross Profit- Operating expenses
Its a profitability ratio which indicates profits from operations.

5. Net Profit Ratio

= Net Profit before tax/ Net Sales * 100
Net profit before tax = operating net profit + non-operating income non-operating
expenses
Its a profitability ratio which indicates how efficient is the concern in managing its
all types of activities operating, financing and investing.

6. Stock turnover Ratio

= COGS/ Avg. Stock
Where,
Avg. Stock= (Opening stock+ Closing stock)/2
7. Stock velocity(or Stock holding period)
= 12 or 365 or 52
Stock turnover ratio

This is an activity ratio. Shows relationship between sales and stock. Its purpose is
to calculate the speed at which stock is being turned over into sales.

Question 3.
Trading, Profit & Loss Account for the year ended 31st March 2015
Particulars
To opening stock
To purchases
To Carriage Inward

Amount
27,150
1,63,575
4,275

To office expenses
To sales expenses
To loss on sale of
fixed assets
To net profit

45,000
13,500
1,200

Particulars
By sales
By closing stock
By interest
received on
investment

45,000
2,99,700

Amount
2,55,000
42,000
2,700

2,99,700

Calculate:
Gross Profit
Office expense ratio

Operating ratio
net profit before tax ratio

Stock turnover ratio

Composite Ratio
1. Return on Capital Employed
= EBIT/ Capital Employed * 100
Where,
EBIT= Profit before interest on long term borrowing, tax & dividends abnormal,
non recurring items
Capital Employed = Equity Capital + Preference Capital + Reserves & Surplus +
Long term borrowings (term loans + debentures) P/L (Dr. balance) Fictitious
assets
OR
Capital Employed = Fixed assets + Investments + Working capital

Its a profitability ratio which indicates the relationship between profits and
investments. It helps to judge how efficient the concern is in managing the funds at
its disposal.

2. Return on Proprietors Fund

= Profit after tax (PAT)/ Proprietors Funds * 100

Its a profitability ratio which shows the relationship between profits and
investments by the proprietors in the concern.

3. Return on Equity capital

= Profit available for Equity shareholders/ Equity shareholders funds

*100
Where,
Profit available for Equity shareholders= PAT- Preference dividend
Equity shareholders funds = Equity share capital + Reserves & Surplus Fictitious
assets

Its a profitability ratio which shows the relationship between profits and
investments by the equity shareholders in the concern. It helps the investors in
deciding whether to purchase/sell the shares.
4. Dividend Payout Ratio
= DPS/ EPS* 100
Or
= Dividend to Equity shareholders / Profit available for equity
shareholders * 100
Where,
DPS= Dividend per share
EPS= Earning per share

Its a type of coverage ratio. It helps in judging the dividend paying capacity of the
company.

5. Debt Service Ratio

= EBIT/ Interest
Its a type of a coverage ratio. Its purpose is to measure the interest paying capacity
of the company.

6. Debt service coverage ratio

= Profit available for debt servicing/ (Interest + Installment)
Where,

Profit available for debt service= Profit after tax+ Interest+ Non-cash items

Its a type of a coverage ratio. It shows the relationship between the profits and the
claims of outsiders to be paid out of such profits. The purpose is to measure the
debt-servicing capacity of the company.
7. Debtors turnover Ratio
= Credit sales/ (Avg. Drs. + Bills Receivables)
8. Debtors velocity/ collection period
= (12 or 365 or 52)/ Debtors turnover ratio
Its a turnover ratio. Helps in judging how efficiently the debtors are managed. Also
indicates the period of credit allowed to an average debtor.
9. Creditors turnover Ratio
= Credit Purchase/(Avg. Crs. + Bills Payables)
10.

Creditors velocity/ debt payment period

= (12 or 365 or 52)/ Creditors turnover ratio

Its a turnover ratio. Helps in judging how efficiently the creditors are managed. Also
indicates the period taken by the average creditor to be paid off.

Question 4.
Trading & P/L A/c for the year ended 31-3-2015
Particulars
To opening stock
To purchases
To wages

Amount
45,000
2,20,000
1,00,000

To salaries
To office rent
To interest
To non operating
expenses
To advertisement
To transport on
sales
To income tax
To net profit
Total

40,000
17,000
3,000
2,000

Particulars
Sales
Closing stock
To non operating
income

Amount
4,00,000
95,000
12,000

Total

5,07,000

6,000
4,000
20,000
50,000
5,07,000

Balance Sheet as on 31st March, 2015

Liabilities
12% Preference
share capital (Rs
10)

Equity share

Amount
40,000

1,90,000

Assets
Fixed assets:
Original cost
2,30,000
Less: Depreciation
40,000
Investments (short

Amount

1,90,000
50,000

capital (Rs 10)

term)
Capital Reserve
15,000
Stock
95,000
General Reserve
45,000
Debtors
85,000
P/L Account
10,000
Pre-paid expenses
20,000
10% Debentures
30,000
Bank loan
15,000
Creditors
70,000
Bills payable
5,000
Bank overdraft
20,000
Total
4,40,000
Total
4,40,000
Preference dividend was Rs 4,800 and equity dividend was Rs 19,000.
Calculate:
1. Current ratio
ratio

2. Liquid ratio

4. Debt equity ratio

working capital ratio

5. Capital gearing ratio

7. Gross profit ratio

profit ratio

8. Operating ratio

10. Net profit ratio

expenses ratio

3. Proprietory
6. Stock
9. Operating

11. Administrative expenses ratio 12. Selling

13. Stock turnover ratio

proprietors funds

14. Return on capital employed15. Return on

16. Return on equity capital 17. Dividend payout ratio

ratio
19. Debtors turnover ratio

20. Creditors turnover ratio

18. Debt service