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Ratios
1. Ratio Analysis
It is a important technique of financial analysis
Benefits of accounting ratios:
• Useful in financial position analysis
• Useful in simplifying accounting figures
• Useful in assessing the operational efficiency
• Useful in forecasting purposes
• Useful in locating the weak spots of the business
• Useful in comparison of performance
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2. Balance sheet Ratios
• Current ratio/working capital ratio
• Liquidity ratio
• Absolute liquid ratio
• Debt equity ratio
• Equity or proprietary or net worth ratio
• Fixed assets to net worth ratio
• Current assets to net worth ratio
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3. Profit and Loss Combined/inter statement
account ratios ratios
• Gross profit ratio • Debtors turnover ratio
• Net profit ratio • Total assets turnover ratio
• Operating ratio • Return on capital employed
• Operating profit ratio ratio
• Stock turnover ratio • Fixed assets turn over ratio
• Current assets turn over
ratio
• Working capital turn over
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5. Profitability ratios
• Gross profit ratio
• Operating ratio
• Operating profit ratio
• Net profit ratio
• ROCE
• Return on shareholders’ investment
• Return on Total assets
• Debt service ratio / fixed charges cover
• EPS
• Price Earning ratio
• Payout ratio
• Dividend yield ratio
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6. Turnover/ Activity/Performance ratios
• Sales to capital employed
• Fixed assets turnover
• Working capital turnover
• Total assets turnover
• Stock turnover
• Receivables turnover
• Creditors turnover
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7. Financial ratios
• Current ratio
• Liquid ratio
• Absolute liquidity ratio
• Working capital ratio
• Fixed assets ratio
• Current assets to total assets ratio
• Debt equity ratio
• Proprietory ratio
• Capital gearing ratio
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9. Profitability ratios
• Gross Profit Ratio = Gross profit/ Net sales *100
• Operating Ratio = cost of goods sold + operating expenses
*100 Net sales
• Operating Profit ratio = Operating Profit/ Net sales * 100
• Net Profit Ratio = Net Profit after interest and Tax/ Net Sales
• Return on Capital Employed = Operating Profit/ Capital
Employment*100
• Return on Shareholders’ Investment= Net Profit after tax,
interest and preference dividend/ Equity shareholders’ funds
*100
• Return on Total Assets = Net Profit after interest and Tax/
Total Assets * 100
• Debt Service Ratio = Net Profit before interest and Tax/
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Interest on long term liabilities
10. • Earning per Share = Net Profit - Preference Dividend
Number of Equity Shares
• Price Earning Ratio = Market price per equity share
Earning per share
• Pay out Ratio = Dividend per equity share
Earning per share
• Dividend Yield Ratio = Dividend per share * 100
Market price per share
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11. Turn over ratios
• Sales to capital employed = Sales/ Capital Employed
• Fixed assets turnover = Sales/ Net Fixed Assets
• Working capital turnover = Sales /Net Working Capital
• Total assets turnover = Net Sales/ Total Assets
• Stock turnover = Cost of Goods Sold/ Average Stock
• Receivables(Debtors) turnover = Net Credit Sales/ Average Debtors
• Collection period = 365/ Debtors turnover ratio
• Creditors turnover = Credit Sales/ Average Debtors
• Collection period = Days in a year/ Creditors turn over ratio
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12. Financial ratios
• Current ratio = Current Assets / Current Liabilities 2:1
• Liquid or quick ratio = Quick assets/ current Liabilities 1:1
• Absolute liquidity ratio = Cash in hand and at bank + S.T marketable securities
Current Liabilities
• Working capital ratio = Inventory / Working Capital
• Fixed assets to net worth ratio = Fixed Assets/ Net worth
• Current assets to total assets ratio = Current Assets/ Fixed Assets
• Debt equity ratio = L.T Debt/ Shareholders’ Funds
• Proprietary ratio = Share holders fund/ Total Assets
• Capital gearing ratio = Fixed Interest-bearing securities/ Equity shareholders’
fund
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