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Impact of inflation:
As financial statements are based on historical costs, price level changes due to inflation are never considered.
Conceptual Diversity.
Difference of opinion of the various concepts used to compute the ratios.
Liquidity Ratios
Current Ratio:
Current Assets Current Liabilities
Liquidity Ratios
Cash Ratio:
Cash & Bank Balances + Current Investments Current Liabilities
Leverage Ratios
Debt-equity Ratio:
Debt Equity
Leverage Ratios
Debt-asset Ratio:
Debt Assets Debt Total Capital
Leverage Ratios
Interest Coverage Ratio:
Profit before interest & taxes
Debt Interest
Leverage Ratios
Debt Service Coverage Ratio:
Profit after Tax + Depreciation + Interest on term loan Interest on term loan + Repayment of term loan
Turnover Ratios
Inventory Turnover Ratio:
Cost of goods sold
Average Inventory
Turnover Ratios
Debtors Turnover Ratio:
Net Credit Sales
Average Debtors
Turnover Ratios
Creditors Turnover Ratio:
Net Credit Purchases
Average Creditors
Turnover Ratios
Fixed Assets Turnover Ratio:
Net Sales
Average net fixed assets
Profitability Ratios
Gross Profit Margin Ratio:
Gross Profit
Net Sales
Profitability Ratios
Return on Assets:
Profit after tax
Average total assets
Earning Power:
Profit before interest & tax Average total assets
Profitability Ratios
Return on Capital Employed:
Profit before interest & tax (1-tax rate)*
Average total assets *NOPAT (net operating profit after tax)
Return on Equity:
Equity earnings Average equity
Profitability Ratios
Earnings per share :
Equity earnings
No. of equity shares issued
Profitability Ratios
Dividend Pay-out Ratio :
Valuation Ratios
Price-earnings Ratio:
Market Price Per Share
Earnings Per Share
Yield:
Dividend + Price Change Initial Price
Valuation Ratios
Market Value to Book Value: