Ratio Analysis / Financial Statement Analysis Profitability Ratios :

(a) Net Profit Ratio = Net profit after tax x 100

Sales
Ratio Analysis is the process of analyzing and interpreting numerical relation
between the items of the financial statement. It helps to measure the financial
(b) Gross Profit Ratio = Gross profit x 100
strength and weakness of an organization.
Sales
Liquidity Ratios : (c) Return on Shareholder’s Equity = Net profit after tax x 100
.(a) Current Ratio = Current Assets
Shareholder’s equity
Current Liabilities
(d) Return on Assets / Investment = Net profit after tax + Interest x 100
(b)Liquid Ratio / Quick Ratio / Liquid Ratio = Liquid Assets
Total Assets
Current Liabilities
(e) Return on Capital Employed = Net profit after tax + Interest x 100
Capital Employed
Turnover Ratios / Activity Ratios :
(a) Inventory Turnover Ratio = Sales Or, Cost of goods sold
Inventory Av. Inventory
Leverage Ratios :
(b) Debtors Turnover Ratio = Sales Or, Credit Sales
(a) Debt to Equity Ratio = Long Term Debt x 100
Debtors Av. Debtors
Shareholder’s equity
(c) Average Collection Period = Days in a year
Or, Total Debt x 100
Debtors Turnover Ratio
Shareholder’s equity
Or, Days in a year x Debtors
(b) Debt to Capital Ratio = Long Term Debt x 100
Sales
Capital employed
(d) Fixed Assets Turnover Ratio = Sales
Or, Total Debt x 100
Fixed Assets
Capital employed
(e) Total Assets Turnover Ratio = Sales
(c) Interest Coverage Ratio = Net profit before interest and tax / EBIT
Total Assets (excluding fictitious assets)
Interest
(f) Capital Employed Turnover Ratio = Sales
Capital Employed
 Notes : Balance Sheet
►Current Assets = Debtors, Bills Receivable , Account Receivable, Capital & Liabilities Amount Assets Amount
Stock / Inventory, Cash , Bank, Prepaid expenses, Accrued Income, Marketable
Securities, Short term investments etc. Shareholder’s Equity Fixed assets

►Current Liabilities = Creditors, Bills Payable, Account Payable, Bank Long term debt Investment
Overdraft, Short term Loan, Outstanding expenses, Provision for tax, Proposed
dividend etc. Current liabilities Current assets

►Quick Assets = Total Current Assets - Stock / Inventory - Prepaid expenses Misc. expenses/ Fictitious
assets
► Working Capital = Current Assets - Current Liabilities

► Gross Profit = Sales - Cost of goods sold

► Cost of goods sold = [ Op. Stock + Purchase + Wages + Carriage +

Customs duty – Cl. Stock]

► Net Profit = Gross Profit - Operating expenses - Interest - Tax

► Long Term Debt = Debenture, Bank loan, Secured loan, Bonds, Mortgage
loan etc.

► Total Debt = Long Term Dent + Current Liabilities

► Shareholder’s Equity = Eq. share capital, Preference share capital, General

reserve, Capital reserve, P/L account or Retained earnings - ( Preliminary
expenses, Discount on issue of share, Underwriting commission, P/L account Dr.
balance)

► Capital Employed = Shareholder’s Equity + Long Term Debt