Prepared by

Syed Basit HussainRATIO ANAYLSIS B.com II

(a) Profitability Analysis (b) Financial Position Analysis

(c) Performance Analysis
Profitability Ration Financial Position Management Ratio

Short Term
General Profitability
1) G.P Ratio
2) N.P Ratio
3) Operating Profit Ratio
4) Operating /Cost Ratio
5) Particular Expense Ratio
Long Term
Long Term Short Term 1) Debt-Equity Ratio
Overall Profitability 2) Proprietary Ratio
Ration 3) Fixed assets Ratio
4) Long-term debt to
1) Return on Share 1) Current Ratio shareholder Fund
holder investment 2) Quick/Liquid/Acid 5) Fixed asset network ratio
2) Return on Share Test Ratio 6) Debt service Ratio
holder Equity 3) Absolute liquid ratio 7) Capital gearing Ratio
3) E.P.S
(Earning per share)
4) Return on Gross 1) Stock turnover Ratio
Capital employed 2) Debtors turnover Ratio
5) Return on Net 3) Creditors turnover
Capital employed 4) Average age of Inventory
6) Dividend yield Ratio 5) Average age of Debtors
7) Dividend payout Ratio 6) Average age of Creditors
8) Price earning ratio 7) Working Capital turnover
Ratio

Formulas:
Profitability Ratio
Short Term
1) Gross Profit Ratio = G.P/Sales x100=% → % of G.P to Sales ↑ is better
2) Net Profit Ratio = N.P/Sales x100=% → % of N.P to Sales ↑ is better
3) Operating Profit Ratio = Operating Profit/Sales x100=% ratio of operating profit to sales ↑ is better
Operating profit= Sales -C.G.S –operating Exp
Operating profit= Sales –Operating Cost
Operating Cost= C.G.S +operating Exp.
Operating profit= G.P –Operating Exp.
Operating profit= N.P +Other income –other expenses
4) Operating Ratio = Operating Cost/Sales x100= % → % of operating cost to sales ↓ is better
5) Particular Expense ratio =Particular Exp/Sales x100 =% ratio of any expense to sales ↓ is better

Long-Term (overall profitability ratios)

1) Return on Shareholder’s Investment= N.P after I & Tax/shareholders Fund x100=%
Return on Shareholder’s Fund (share cap +all reserves & surplus –any losses)
Net Worth
2) Return on Shareholder’s Equity =N.P after I & Tax –preference dividend/ordinary Equity sh.cap x100
3) Earning per share(E.P.S) = N.P after I & Tax –preference dividend./no. of ordinary shares=Rs/shar
4) Dividend yield Ratio = Dividend per share/M.V per share
5) Dividend payout Ratio = Dividend per share/E.P.S
6) Price Earning Ratio = M.V per share/E.P.S
7) Return on Total sources Ratio = N.P after I & Tax/Total assets
8) Return on Capital Employed =N.P before I & Tax/total capital employed x100
Capital employed= fixed assets+ current assets –current liabilities OR
capital employed =Share capital +reserves +Debentures –preliminary Expenses
Financial Position Ratios
Short term
1) Current Ratio/working capital ratio = Current Assets/current Liabilities Standard 2:1
What is the amount to current asset to payoff current liabilities
2) Liquid/Quick/acid test Ratio = Liquid/Quick assets/Current liabilities Standard 1.5:1
Liquid Assets= current Assets –Stocks –Prepaid Expenses.
3) Absolute Liquid Ratio = Absolute liquid assets/Current liabilities Standard 1:1
Absolute liquid assets= Cash +Bank, investment
 Long-Term
1) Debt-Equity Ratio = long term debt/Equity (S.H funds)
2) Total Debt Equity Ratio = Total Debt/Equity (S.H funds)
3) Proprietary/Equity Ratio = Shareholder’s fund/total assets
4) Fixed assets to net worth ratio= Fixed assets (after depreciation)/Net worth (S.H funds)
5) Fixed Assets Ratio = Fixed assets (after Depreciation)/ total long term fund
Total long term fund= (share holder fund+ long term debts)
6) Current Assets to Proprietary = Current assets/ share holders fund
Ratio
7) Debt Service Ratio or = N.P before I & Tax/Fixed Interest Charges (times)
Interest coverage Ratio or
Banker Ratio
8) Capital Gearing Ratio = Equity /Fixed interest bearing securities (times)
9) Fixed Assets Turnover ratio = C.G.S/ave.fixed assets

Management Ratios/Efficiency Ratios/Solvency Ratios

1) Stock Turnover Ratio
2) Average Turnover Ratio
3) Debtors turnover Ratio
4) Debtors collection period
Ave. age of debtors
5) Creditors turnover Ratio
6) Creditors payment Period
Ave. age of Creditors
7) Working Capital turnover
ratio
Answer in
= C.G.S/Average Stock Times
= No. of days in an year/Stock Turnover Days
= Net Credit Sales/Ave. Debtors Times
Average debtors= Op.debtors+Clo.debtors/2
= No. of days in an year/ Debtors turnover ratio Days
= Net. Cr. Purchases/Ave.Creditors Times
= No. of days in an year/Creditors turnover Days
= C.G.S/Net working Capital
Net working capital =Current assets –current liabilities

Extras: C.G.S = Sales –G.P

Sales = C.G.S + G.P
G.P = Sales –C.G.S
C.G.S = Opening Stock +Purchases +Direct Expenses –Closing Stock
Operating expenses = selling, distribution, administrative and general charges, provision for
doubtful debts, depreciation
Net Profit= Operating profit +other income –other expenses

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