Ratio Analysis

Financial Statements Analysis
Tata McGraw-Hill Publishing Company Limited, Management Accounting
6-
FINANCIAL STATEMENTS
ANALYSIS
Ratio Analysis
Common Size Statements

Importance and Limitations of
Ratio Analysis
Tata McGraw-Hill Publishing Company Limited, Management
6-2
Ratio Analysis
Ratio analysis is a widely used tool of financial analysis. It is
defined as the systematic use of ratio to interpret the
financial statements so that the strengths and
weaknesses of a firm as well as its historical
performance and current financial
condition can be determined.
6-3
Basis of Comparison
1) Trend Analysis involves comparison of a firm over a
period of time, that is, present ratios are compared with
past ratios for the same firm. It indicates the direction of
change in the performance improvement, deterioration
or constancy over the years.
2) Interfirm Comparison involves comparing the ratios of a
firm with those of others in the same lines of business or
for the industry as a whole. It reflects the firms
performance in relation to its competitors.
3) Comparison with standards or industry average.
6-4
Types of Ratios
Liquidity
LiquidityRatios
Ratios
Capital
CapitalStructure
StructureRatios
Ratios
Profitability
ProfitabilityRatios
Ratios
Efficiency
Efficiencyratios
ratios
Integrated
Integrated
Analysis
AnalysisRatios
Ratios
Growth
Growth Ratios
Ratios
6-5
Net Working Capital

Net working capital is a measure of liquidity calculated by
subtracting current liabilities from current assets.
Table 1: Net Working Capital
Particulars
Total current assets
Total current liabilities
NWC
Company A
Rs 1,80,000
1,20,000
60,000
Company B
Rs 30,000
10,000
20,000
Table 2: Change in Net Working Capital

Particulars
Current assets
Current liabilities
NWC
Company A
Rs 1,00,000
25,000
75,000
Company B
Rs 2,00,000
1,00,000
1,00,000
6-6
Liquidity Ratios
Liquidity ratios measure the ability

of a firm to meet its short-term
obligations
6-7
Current Ratio
Current Ratio is a measure of liquidity calculated dividing
the current assets by the current liabilities
Current Ratio =
Current Assets
Current Liabilities
Particulars
Firm A
Firm B
Current Assets
Rs 1,80,000
Rs 30,000
Current Liabilities
Rs 1,20,000
Rs 10,000
Current Ratio
= 3:2 (1.5:1)
3:1
6-8
Acid-Test Ratio
The quick or acid test ratio takes into consideration
the differences in the liquidity of the
components of current assets
Acid-test Ratio =
Quick Assets
Current Liabilities
Quick Assets = Current assets Stock

Pre-paid expenses
6-9
Example 1: Acid-Test Ratio

Cash
Debtors
Inventory
Total current assets
Total current liabilities
(1) Current Ratio
(2) Acid-test Ratio
Rs 2,000
2,000
12,000
16,000
8,000
2:1
0.5 : 1
6-
Supplementary Ratios for

Liquidity
Inventory
InventoryTurnover
Turnover
Ratio
Ratio
Debtors
Debtors Turnover
Turnover Ratio
Ratio
Creditors
Creditors Turnover
Turnover Ratio
Ratio
6-
Inventory Turnover Ratio

The ratio indicates how fast inventory is sold. A high ratio is good
from the viewpoint of liquidity and vice versa. A low ratio
would signify that inventory does not sell fast and stays
on the shelf or in the warehouse for a long time.
Inventory turnover ratio =
Cost of goods sold

Average inventory
The cost of goods sold means sales minus gross profit.

The average inventory refers to the simple average of the opening
and closing inventory.
6-
Example 2: Inventory Turnover Ratio

A firm has sold goods worth Rs 3,00,000 with a gross profit margin of
20 per cent. The stock at the beginning and the end of the year
was Rs 35,000 and Rs 45,000 respectively. What is the
inventory turnover ratio?
Inventory
turnover ratio
(Rs 3,00,000 Rs 60,000)

=
(Rs 35,000 + Rs 45,000) 2
6 (times per
year)
12 months
Inventory
=
= 2 months
holding period
Inventory turnover ratio, (6)
6-
Debtors Turnover Ratio

The ratio measures how rapidly receivables are collected. A high
ratio is indicative of shorter time-lag between credit sales and
cash collection. A low ratio shows that debts are not
being collected rapidly.
Debtors turnover ratio
Net credit sales

Average debtors
Net credit sales consist of gross credit sales minus

returns, if any, from customers.
Average debtors is the simple average of debtors (including
bills receivable) at the beginning and at the end of year.
6-
Example 3: Debtors Turnover Ratio

A firm has made credit sales of Rs 2,40,000 during the year. The
outstanding amount of debtors at the beginning and at the end
of the year respectively was Rs 27,500 and Rs 32,500.
Determine the debtors turnover ratio.
Debtors
turnover ratio
Rs 2,40,000
=
Debtors
collection period
(Rs 27,500 + Rs 32,500) 2
8 (times per
year)
12 Months
=
Debtors turnover ratio, (8)
1.5
Months
6-
Creditors Turnover Ratio

A low turnover ratio reflects liberal credit terms granted by
suppliers, while a high ratio shows that accounts are to be settled
rapidly. The creditors turnover ratio is an important tool of
analysis as a firm can reduce its requirement of current assets by
relying on suppliers credit.
Creditors turnover
ratio
Net credit purchases

=
Average creditors
Net credit purchases = Gross credit purchases - Returns to

suppliers.
Average creditors = Average of creditors (including bills payable)
outstanding at the beginning and at the end of the year.
6-
Example 4: Creditors Turnover Ratio

The firm in previous Examples has made credit purchases of Rs
1,80,000. The amount payable to the creditors at the beginning
and at the end of the year is Rs 42,500 and Rs 47,500
respectively. Find out the creditors turnover ratio.
Creditors
turnover ratio
Creditors
payment period
(Rs 1,80,000)
=
(Rs 42,500 Rs 47,500) 2
4 (times
per year)
12 months
=
Creditors turnover ratio, (4)
= 3 months
6-
The summing up of the three turnover ratios (known as a cash

cycle) has a bearing on the liquidity of a firm. The cash cycle
captures
the interrelationship of sales, collections from debtors
and payment to creditors.
The combined effect of the three turnover ratios

is summarised below:
Inventory holding period
Add: Debtors collection period
Less: Creditors payment period
2 months
+ 1.5 months
3 months
0.5 months
As a rule, the shorter is the cash cycle, the better are the liquidity
ratios as measured above and vice versa.
6-
DEFENSIVE INTERVAL RATIO

Defensive interval ratio is the ratio between quick
assets and projected daily cash requirement.
Liquid assets
Defensiveinterval ratio
Projected daily
cash requirement
Projected daily cash requirement
Projected cash operating expenditure

=
Number of days in a year (365)
6-
Example 5: Defensive Interval Ratio

The projected cash operating expenditure of a firm from the
next year is Rs 1,82,500. It has liquid current assets
amounting to Rs 40,000. Determine the
defensive-interval ratio.
Projected daily cash requirement =

Defensive-interval ratio =
Rs 1,82,500
365
Rs 40,000
Rs 500
= Rs 500
= 80 days
6-
Cash-flow From Operations Ratio

Cash-flow from operation ratio measures liquidity of a
firm by comparing actual cash flows from operations
(in lieu of current and potential cash inflows from
current assets such as inventory and debtors)
with current liability.
Cash-flow from
operations ratio
Cash-flow from operations

=
Current liabilities
6-
Leverage Capital Structure Ratio

There are two aspects of the long-term solvency of a firm:
(i) Ability to repay the principal when due, and
(ii) Regular payment of the interest .
Capital structure or leverage ratios throw light on the
long-term solvency of a firm.
Accordingly, there are two different types of leverage ratios.
First type: These ratios are
computed from the balance
sheet
Second type: These ratios are

computed from the Income
Statement
(a)
Debt-equity ratio
(a)
Interest coverage ratio
(b)
Debt-assets ratio
(b)
Dividend coverage ratio
(c)
Equity-assets ratio
6-
I. Debt-equity ratio
Debt-equity ratio measures the ratio of long-term or total
debt to shareholders equity.
Long-term Debt + Short
Debt-equity ratio measures

ratio of long-term debt + Other Current
Totalthe
Debt
Debt-equity
ratiode3bt
= to shareholders equity Liabilities = Total external
term or total
Shareholders equity
Obligations
If the D/E ratio is high, the owners are putting up relatively less
money of their own. It is danger signal for the lenders and
creditors. If the project should fail financially, the
creditors would lose heavily.
A low D/E ratio has just the opposite implications. To the creditors, a
relatively high stake of the owners implies sufficient safety
margin and substantial protection against
shrinkage in assets.
6-
For the company also, the servicing of debt is less

burdensome and consequently its credit standing
is not adversely affected, its operational flexibility
is not jeopardised and it will be able to
raise additional funds.
The disadvantage of low debt-equity ratio is that

the shareholders of the firm are deprived
of the benefits of trading on equity
or leverage.
6-
Trading on Equity
Trading on equity (leverage) is the use of borrowed funds in
expectation of higher return to equity-holders.
Trading on Equity
Particular
(a) Total assets
Financing pattern:
Equity capital
15% Debt
(b)Operating profit (EBIT)
Less: Interest
Earnings before taxes
Less: Taxes (0.35)
Earnings after taxes
Return on equity (per cent)
(Amount in Rs thousand)
A
1,000
1,000
1,000
1,000
1,000
300
300
105
195
19.5
800
200
300
30
270
94.5
175.5
21.9
600
400
300
60
240
84
156
26
200
800
300
120
180
63
117
58.5
6-
II. Debt to Total Capital

The relationship between creditors funds and
owners capital can also be expressed using
Debt to total capital ratio.
Debt to total capital ratio =
Permanent
Capital
Total debt
Permanent capital
Shareholders equity
Long-term debt.
6-
III. Debt to total assets ratio

Debt to total assets ratio =
Total debt
Total assets
Proprietary Ratio
Proprietary ratio indicates the extent to which assets
are financed by owners funds.
Proprietary ratio =
Proprietary funds
X 100
Total assets
Capital Gearing Ratio

Capital gearing ratio is used to know the relationship between equity
funds (net worth) and fixed income bearing funds (Preference
shares, debentures and other borrowed funds.
6-
Coverage Ratio
Interest Coverage Ratio
Interest Coverage Ratio measures the firms ability to make
contractual interest payments.
Interest coverage ratio =
EBIT (Earning before interest and taxes)

Interest
Dividend Coverage Ratio

Dividend Coverage Ratio measures the firms ability to pay dividend
on preference share which carry a stated rate of return.
Dividend coverage ratio =
EAT (Earning after taxes)

Preference dividend
6-
Total fixed charge coverage ratio

Total fixed charge coverage ratio measures the firms ability to meet all fixed
payment obligations.
Total fixed charge
=
coverage ratio
EBIT + Lease Payment

Interest + Lease payments + (Preference dividend
+ Instalment of Principal)/(1-t)
Total Cashflow Coverage Ratio

However, coverage ratios mentioned above, suffer from one major
limitation, that is, they relate the firms ability to meet its various
financial obligations to its earnings. Accordingly, it would be
more appropriate to relate cash resources of a firm to its
various fixed financial obligations.
Total cashflow
=
coverage ratio
EBIT + Lease Payments + Depreciation + Non-cash expenses

Lease payment
+
+ Interest
(Principal repayment)
(1 t)
(Preference dividend)
(1 - t)
6-
Debt Service Coverage Ratio

Debt-service coverage ratio (DSCR) is considered a more
comprehensive and apt measure to compute debt
service capacity of a business firm.
n
DSCR
t=1
EATt
Interestt
n
t=1
Depreciationt
OAt
Instalmentt
DEBT SERVICE CAPACITY

Debt service capacity is the ability of a firm to make the
contractual payments required on a scheduled
basis over the life of the debt.
6-
Example 6: Debt-Service Coverage Ratio

Agro Industries Ltd has submitted the following projections. You are
required to work out yearly debt service coverage ratio (DSCR)
and the average DSCR.
(Figures in Rs lakh)
Year
Net profit for the

year
Interest on term loan

during the year
Repayment of term
loan in the year
1
2
3
4
5
6
7
8
21.67
34.77
36.01
19.20
18.61
18.40
18.33
16.41
19.14
17.64
15.12
12.60
10.08
7.56
5.04
Nil
10.70
18.00
18.00
18.00
18.00
18.00
18.00
18.00
The net profit has been arrived after charging depreciation of Rs 17.68 lakh
every year.
6-
Solution
Table 3: Determination of Debt Service Coverage Ratio
(Amount in lakh of rupees)
Ye
ar
Net
profit
Depreciation
Interest
Cash
available
(col.
2+3+4)
Principal
instalment
Debt
obligation
(col. 4 + col. 6)
DSCR [col. 5
col. 7
(No. of times)]
1
2
3
4
5
6
7
8
21.67
34.77
36.01
19.20
18.61
18.40
18.33
16.41
17.68
17.68
17.68
17.68
17.68
17.68
17.68
17.68
19.14
17.64
15.12
12.60
10.08
7.56
5.04
Nil
58.49
70.09
68.81
49.48
46.37
43.64
41.05
34.09
10.70
18.00
18.00
18.00
18.00
18.00
18.00
18.00
29.84
35.64
33.12
30.60
28.08
25.56
23.04
18.00
1.96
1.97
2.08
1.62
1.65
1.71
1.78
1.89
Average DSCR (DSCR 8)
1.83
6-
Profitability Ratio
Profitability ratios can be computed either from
sales or investment.
Profitability Ratios
Related to Sales
Profitability Ratios
Related to Investments
(i)
Profit Margin
(i)
Return on Investments
(ii)
Expenses Ratio
(ii)
Return on Shareholders
Equity
6-
Profit Margin
Gross Profit Margin
Gross profit margin measures the percentage of each sales
rupee remaining after the firm has paid for its goods.
Gross profit margin =
Gross Profit
X 100
Sales
6-
Net Profit Margin

Net profit margin measures the percentage of each sales rupee
remaining after all costs and expense including interest
and taxes have been deducted.
Net profit margin can be computed in three ways
i. Operating Profit Ratio =
ii. Pre-tax Profit Ratio =
iii. Net Profit Ratio =
Earning before interest and taxes

Net sales
Earnings before taxes
Net sales
Earning after interest and taxes

Net sales
6-
Example 7: From the following information of a firm,

determine (i) Gross profit margin and (ii) Net profit
margin.
1. Sales
2. Cost of goods sold
3. Other operating expenses
(1) Gross profit margin =
(2) Net profit margin =
Rs 1,00,000
Rs 2,00,000
Rs 50,000
Rs 2,00,000
Rs 2,00,000
1,00,000
50,000
= 50 per cent
= 25 per cent
6-
Expenses Ratio
i. Cost of goods sold =
ii. Operating expenses =
Cost of goods sold

X 100
Net sales
Administrative exp. + Selling exp.
Net sales
iii. Administrative expenses =
Administrative expenses
Net sales
iv. Selling expenses ratio =
Selling expenses
Net sales
v. Operating ratio =
X 100
X 100
X 100
Cost of goods sold + Operating expenses

X 100
Net sales
vi. Financial expenses =
Financial expenses
Net sales
X 100
6-
Return on Investment
Return on Investments measures the overall effectiveness
of management in generating profits with
its available assets.
i. Return on Assets (ROA)
ROA =
EAT + (Interest Tax advantage on interest)

Average total assets
ii. Return on Capital Employed (ROCE)

ROCE =
EAT + (Interest Tax advantage on interest)

Average total capital employed
6-
Return on Shareholders Equity

Return on shareholders equity measures the return on the
owners (both preference and equity shareholders )
investment in the firm.
Return on total shareholders equity =
Net profit after taxes
X 100
Average total shareholders equity
Return on ordinary shareholders equity (Net worth) =
Net profit after taxes Preference dividend
X 100
Average ordinary shareholders equity
6-
Efficiency Ratio
Activity ratios measure the speed with which various
accounts/assets are converted into sales or cash.
Inventory turnover measures the efficiency of various types
of inventories.
Cost
goods sold of
i. Inventory
Turnover
measures
the of
activity/liquidity
Inventory
Turnover
Ratio
=
Average
inventory of a firm; the speed with
whichinventory
inventory is sold
Cost
raw materials used
i. Inventory
Turnover
measures
theofactivity/liquidity
of
Raw
materials
turnover
=
inventory of a firm; the speed
with which
inventory
is sold
Average
raw material
inventory
of goods manufactured
i. Inventory Turnover measuresCost
the activity/liquidity
of
Work-in-progress turnover =
Average
work-in-progress
inventory of a firm; the speed
with which
inventory isinventory
sold
6-
Debtors Turnover Ratio

Liquidity of a firms receivables can be examined
in two ways.
Credit sales
i. Debtors
Inventoryturnover
Turnover
i.
= measures the activity/liquidity of inventory of
a firm; the speed with
Average
whichdebtors
inventory
+ Average
is sold bills receivable (B/R)
2. Average collection period =
Months (days) in a year

Debtors turnover
Months (days)
in a year
(x) (Average Debtors
+ Average
(B/R)
i.
Inventory
Turnover
measures
the
activity/liquidity
of
inventory
of
a
Alternatively =
Total
firm; the speed with which inventory
is credit
sold sales
Ageing Schedule enables analysis to identify

slow paying debtors.
6-
Assets Turnover Ratio

Assets turnover indicates the efficiency with which firm
uses all its assets to generate sales.
Cost
of goods sold of inventory of
i.
Inventory
Turnover
measures
the
activity/liquidity
i. Total assets turnover =
a firm; the speed with which inventory
Average total
is sold
assets
ii. Fixed assets turnover =
Cost of goods sold

Average fixed assets
Cost of goods sold

i.
Inventory
Turnover
measures
the activity/liquidity of inventory of
iii. Capital turnover =
Average is
capital
sold employed
Cost of goods sold
iv. Current assets turnover =
Average current assets
Cost
of goods sold of inventory of
i.
Inventory
Turnover
measures
the
activity/liquidity
v. Working capital turnover =
Net working
capital
is sold
6-
1)
Return on shareholders equity = EAT/Average total shareholders equity.
2)
Return on equity funds = (EAT Preference dividend)/Average ordinary

shareholders equity (net worth).
3)
Earnings per share (EPS) = Net profit available to equity shareholders

(EAT Dp)/Number of equity shares outstanding (N).
4)
Dividends
per
share
(DPS)
Dividend
paid
to
ordinary
shareholders/Number of ordinary shares outstanding (N).

5)
Earnings yield = EPS/Market price per share.
6)
Dividend Yield = DPS/Market price per share.
7)
Dividend payment/payout (D/P) ratio = DPS/EPS.
8)
Price-earnings (P/E) ratio = Market price of a share/EPS.
9)
Book value per share = Ordinary shareholders equity/Number of equity

shares outstanding.
6-
Integrated Analysis Ratio

Integrated ratios provide better insight about financial and
economic analysis of a firm.
(1) Rate of return on assets (ROA) can be decomposed in to
(i) Net profit margin (EAT/Sales)
(ii) Assets turnover (Sales/Total assets)
(2) Return on Equity (ROE) can be decomposed in to
(i) (EAT/Sales) x (Sales/Assets) x (Assets/Equity)
(ii) (EAT/EBT) x (EBT/EBIT) x (EBIT/Sales) x (Sales/Assets) x
(Assets/Equity)
6-
Rate of Return on Assets

EAT as percentage of
sales
EAT
Divided by
Gross profit = Sales less

cost of goods sold
Assets
turnover
Sales
Sales
Fixed assets
Divided by
Total Assets
Plus
Current assets
Alternatively
Minus
Shareholder equity
Expenses: Selling
Administrative Interest
Plus
Minus
Long-term borrowed
funds
Income-tax
Plus
Current liabilities
6-
Return on Assets
Earning Power
Earning power is the overall profitability of a firm; is computed
by multiplying net profit margin and
assets turnover.
Earning power
= Net profit margin Assets turnover
Where, Net profit margin = Earning after taxes/Sales
Asset turnover
= Sales/Total assets
Earning
after taxes
Sales of inventory
EAT of
i.
Inventory
Turnover
measures
the
activity/liquidity
x
x
Earning Power =
a firm; the speed with which
Salesinventory isTotal
sold Assets Total assets
6-
EXAMPLE: 8
Assume that there are two firms, A and B, each having total assets
amounting to Rs 4,00,000, and average net profits after
taxes of 10 per cent, that is, Rs 40,000, each.
Firm A has sales of Rs 4,00,000, whereas the sales of firm B aggregate
Rs 40,00,000. Determine the ROA of firms A and B. Table 4 shows
the ROA based on two components.
Table 4: Return on Assets (ROA) of Firms A and B

Particulars
Firm A
1. Net sales
2. Net profit
3. Total assets
4. Profit margin (2 1) (per cent)
5. Assets turnover (1 3) (times)
6. ROA ratio (4 5) (per cent)
Rs 4,00,000
40,000
4,00,000
10
1
10
Firm B
Rs 40,00,000
40,000
4,00,000
1
10
10
6-
Return on Equity (ROE)

ROE is the product of the following three ratios: Net profit ratio (x)
Assets turnover (x) Financial leverage/Equity multiplier
Three-component model of ROE can be broadened further to
consider the effect of interest and tax payments.
Net Profit
EBT the activity/liquidity
EBIT
EAT Turnover measures
i. Inventory
of
x
=
x
SalesinventorySales
Earnings
taxes
EBITwith which
inventory before
of a firm;
the speed
is sold
As a result of three sub-parts of net profit ratio, the ROE
is composed of the following 5 components.
EAT
EBT
EBT
EBIT
EBIT
x
Sales
Sales
Assets
Assets
Equity
6-
A 5-way break-up of ROE enables the management of a firm to analyse the effect of interest
payments and tax payments separately from operating profitability. To illustrate further assume 8
per cent interest rate, 35 per cent tax rate and other operating expense of Rs 3,22,462 (Firm A) and
Rs 39,26,462 (Firm B) for the facts contained in Example 8. Table 5 shows the ROE (based on the
5 components) of Firms A and B.
Table 5: ROE (Five-way Basis) of Firms A and B
Particulars
Firm A
Net sales
Less: Operating expenses
Earnings before interest and taxes (EBIT)
Less: Interest (8%)
Earnings before taxes (EBT)
Less: Taxes (35%)
Earnings after taxes (EAT)
Total assets
Debt
Equity
EAT/EBT (times)
EBT/EBIT (times)
EBIT/Sales (per cent)
Sales/Assets (times)
Assets/Equity (times)
ROE (per cent)
Rs 4,00,000
3,22,462
77,538
16,000
61,538
21,538
40,000
4,00,000
2,00,000
2,00,000
0.65
0.79
19.4
1
2
20
Firm B
Rs 40,00,000
39,26,462
73,538
12,000
61,538
21,538
40,000
4,00,000
2,50,000
1,50,000
0.65
0.84
1.84
10
1.6
16
6-
Common Size Statements

Preparation of common-size financial statements is an extension
of ratio analysis. These statements convert absolute sums into
more easily understood percentages of some base amount. It is
sales in the case of income statement and totals of assets and
liabilities in the case of the balance sheet.
Limitations
Ratio analysis in view of its several limitations should be
considered only as a tool for analysis rather than as an end in
itself. The reliability and significance attached to ratios will largely
hinge upon the quality of data on which they are based. They are
as good or as bad as the data itself. Nevertheless, they are an
important tool of financial analysis.
6-

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Financial Statements Analysis

Tata McGraw-Hill Publishing Company Limited, Management Accounting

Common Size Statements

Tata McGraw-Hill Publishing Company Limited, Management

Tata McGraw-Hill Publishing Company Limited, Management

Net Working Capital

Table 2: Change in Net Working Capital

Tata McGraw-Hill Publishing Company Limited, Management

Liquidity ratios measure the ability

Tata McGraw-Hill Publishing Company Limited, Management

Tata McGraw-Hill Publishing Company Limited, Management

Quick Assets = Current assets Stock

Example 1: Acid-Test Ratio

Tata McGraw-Hill Publishing Company Limited, Management

Supplementary Ratios for

Tata McGraw-Hill Publishing Company Limited, Management

Inventory Turnover Ratio

Inventory turnover ratio =

Cost of goods sold

The cost of goods sold means sales minus gross profit.

Example 2: Inventory Turnover Ratio

(Rs 3,00,000 Rs 60,000)

(Rs 35,000 + Rs 45,000) 2

Debtors Turnover Ratio

Debtors turnover ratio

Net credit sales

Net credit sales consist of gross credit sales minus

Example 3: Debtors Turnover Ratio

(Rs 27,500 + Rs 32,500) 2

Debtors turnover ratio, (8)

Tata McGraw-Hill Publishing Company Limited, Management

Creditors Turnover Ratio

Net credit purchases

Net credit purchases = Gross credit purchases - Returns to

Example 4: Creditors Turnover Ratio

(Rs 42,500 Rs 47,500) 2

Creditors turnover ratio, (4)

Tata McGraw-Hill Publishing Company Limited, Management

The summing up of the three turnover ratios (known as a cash

The combined effect of the three turnover ratios

DEFENSIVE INTERVAL RATIO

Projected daily cash requirement

Projected cash operating expenditure

Number of days in a year (365)

Tata McGraw-Hill Publishing Company Limited, Management Accounting

Example 5: Defensive Interval Ratio

Projected daily cash requirement =

Tata McGraw-Hill Publishing Company Limited, Management

Cash-flow From Operations Ratio

Cash-flow from operations

Tata McGraw-Hill Publishing Company Limited, Management

Leverage Capital Structure Ratio

Second type: These ratios are

Interest coverage ratio

Dividend coverage ratio

Debt-equity ratio measures

For the company also, the servicing of debt is less

The disadvantage of low debt-equity ratio is that

Tata McGraw-Hill Publishing Company Limited, Management

Tata McGraw-Hill Publishing Company Limited, Management

II. Debt to Total Capital

Tata McGraw-Hill Publishing Company Limited, Management

III. Debt to total assets ratio

Capital Gearing Ratio