RATIO ANALYSIS

- P S SHARMA, RSC, BELAPUR

Liquidity Ratios
1. Current Ratio(Benchmark 1.33 : 1)
The ratio is worked out by dividing the Current Assets with Current Liabilities.
Current Assets
Current Liabilities

Current Assets = Cash and Bank balances + Government securities (Govt. Bonds which are tradable and
not NSCs, KVPs etc.) + Receivables (Debtors + B/R) + Inventories + Advance payment of taxes/Prepaid
expenses + Advances for purchases (excluding advances for purchase of fixed Assets) + Installments of
deferred receivables due within one year and miscellaneous Current Assets.

Following are not to be included in Current Assets

1. Debtors more than 6 M

2. Dead Inventory or Obsolete Stock

Current Liabilities = Short term Bank Borrowing including Bills Discounted + Other Short term Loans +
Trade Creditors + Other Current Liabilities (Interest Accrued + Advances from Customers + Statutory Liabilities
+ Miscellaneous Current Liabilities + Provisions).

2. Quick Ratio or Acid Test Ratio(Benchmark 1 : 1)

Quick Assets/ Current Liabilities

Quick Assets= Current Assets stock prepaid expenses

Solvency ratios
3. Debt Equity Ratio (Benchmark 2 : 1)
It is a relation between Long term Funds raised and Tangible Net Worth. The ratio is as under:
Long term Liabilities
Tangible Net Worth
Tangible net worth = Capital + Reserves + Surpluses - Intangible Assets (goodwill, patents, preliminary
expenses, discount on issue of shares, Deferred revenue expenditure and Profit & Loss A/C debit balance)

4. Fixed Asset Ratio

Fixed Assets/ Long Term Funds
5. DCSR (Debt Service Coverage Ratio)
The profit before depreciation and interest is divided with installments due during the year plus
interest on term loan.
PBDIA or Cash Profit + Interet On Capital
Interest + TL installments

PBDIA = Profit after Tax + Depreciation + Salary to partners +Interest on capital to Partners + Interest on long
term debts + Amortization + Extra ordinary expenses Extra ordinary income.
Turnover Ratios
1. Stock Turnover ratio

Cost of goods sold or sales

Average inventory
Cost of Goods Sold = Sale GP or Op Stock + Purchases + Direct Expenses Cl Stock

The ratio can be calculated in days or months by dividing 12 / 365 by the ratio

2. Debtor turnover ratio

Credit sales
Average receivables

1. Receivables = Debtors + B/R

2. if credit sales are not given , total sales are presumed as credit sales
3. average collection period in months is arrived at by dividing 12 by the ratio .
4. average collection period= average receivables/ (credit sales X 12)
5. average collection period= account receivables/ Average monthly or daily credit sales

3. Creditor Turnover Ratio

Credit purchases
Account payables

Account Payables= creditors + bills payable

4. Total asset Turnover= Cost of goods sold/ Average total Assets

5. Fixed asset turnover= Cost of goods sold / Average Fixed Assets

11. Capital Turnover ratio= Cost of goods sold/ average capital emplo yed

Profitability Ratios
1. GP Ratio= (GP/ Sales) X 100
2. NP Ratio= (NP/Sales) X100
3. Operating ratio= (Profit before interest and tax/ sales) X100
4. Return On Capital Employed
PBIT
Average capital employed

PBIT = Profit before Tax + Interest on long term debts + Intt. on capital to Partners
+ Salary to partners + Extra ordinary expenses Extra ordinary income.

Capital Employed = Tangible Net Worth + Total Long term Liabilities

Average capital employed = (Capital employed at the beginning of the year + capital
employed at the end of the year ) divided by 2.
5. Return on shareholders equity
NP (Profit After Taxes)
Average shareholders equity

6. Earnings per share

NP (PAT) and Preference Dividend
No. of Equity shares

Notes:
1. Net Working Capital (NWC) = LTS-LTU or Current Assets - Current liabilities
2. Gross Working Capital= Total Current Assets
3. Working Capital Gap (Tondon Committee) =
Total Current Assets - Other Current Liabilities (OCL)
4. OCL= Current Liabilities Excluding Bank Overdraft and CC.
5. Nayak Committee applicable for Working Capital Limits of :
(MSME up to 5 Crore and Trading + Others up to 2 Crore)

Working Capital Requirement = 25% of Projected Turnover

Minimum Margin = 5% of Projected Turnover
Working Capital Limit = 20% of Projected Turnover