Ratio Analysis - Balance Sheet/ Loan purpose

	Ratio	Formula	Numerator	Denominator	Significance/Indicator
1	Current Ratio	Current Assets Current Liabilities	Inventories/Stocks (+)Debtors/B/R (+)Cash& Bank (+)Receivables/ Accruals (+)Short Term loans (+)MktableInvestment/ Short Term Securities	Sundry Creditors (+)O/S Exp (+)hort term loans &advances (+)BankOD/ CashCredit (+)Provi.for Tax (+)Proposed Dividend (+)Unclaimed Dividend	Ability to repay short term commitments promptly.(ie, short term solvency).ideal ratio is 2:1 High Ratio indicates existence of idle Current assets
2	Quick Ratio/Liquid Ratio/Acid Test Ratio	Quick Assets Quick Liabilities	Current Assets (-)Inventories (-)Prepaid Expenses	Current Liabilities (-)Bank OD (-)Cash Credit	Ability to meet immediate liabilities. Ideal ratio is 1.33:1
3	Absolute Cash Ratio	(Cash Marketable Securities) Current Liabilities	Cash in Hand (+)Balance at Bank(Dr) (+)MktableInvestment/ Short Term Securities	Sundry Creditors (+)O/S Exp (+)short term loans &advances (+)Bank OD/Cas Credit (+)Provi.for Tax (+)Proposed Dividend (+)Unclaimed Dividend	Availability of cash to meet short term commitments .There is no Ideal Ratio as such.However,a ratio>1 may indicate that the firm has liquid resources, which are low in profitability.
4	Basic Defence Interval Measure(in days)	Quick Assets Cash Expense Per Day	Current Assets (-)Inventories (-)Prepaid Expenses	(Annual Cash Expenses/365) Cash Expenses=Total Exp-Depre&write -offs	Ability to meet regular Cash expenses.

Notes:The first  3 ratios are expressed in times eg.1.33 times,2.85 times…or as ratio ie 1.33:1…The last ratio is expressed in Days

NOTE:For the capital structureratios,the following terms are used with respective meanings assigned-

(a)    Debt=Long Term Borrowed Funds=Debenture+LongTrem Loans from Financial institutions

(b)    Equity =Owner’s Funds=Equity Capital+Preferencecapital+Reserves& surplus Less:Accumulated Losses.

(c)    Equity shareholder’s Funds=Equity Less  Preference  Share capital

                                                 = Equity share  Capital +Reserves & surplus Less:Accumulated Losses

(d)    Total Debt=Debt+Equity=(a)+(b) above…………………………………………….This is called Liability Route Computation

                                              = Fixed Assets +Net WC………………………………….This is called  AssetRoute Computation

	Ratio	Formula	Numerator	Denominator	Significance/Indicator
1	Debt to Total Funds Ratio	Debt Total Funds	See (a) above	See (d) above	Indicator of use of external funds,Ideal Ratio is 67%
2	Equity to Total Funds Ratio	Equity Total Funds	See (b) above	See (d) above	Indicates Long Term Solvency;mode of Financing,extent of own funds used in operations; Ideal Ratio is 33%
3	Debt-Equity Ratio	Debt Equity	See (a) above	See (b) above	Indicates the relationship between Debt&Equity. Ideal Ratio is 2:1
4	Capital Gearing ratio	Fixed Charge Bearing Capital Equity Shareholder’s Fund	Preference  Share capital + Debt as per (a) above	See (c) above	Shows proportion of fixed charge(Dividend or interest)bearing capital to Equity Funds;the extent of advantage or leverage enjoyd by equity shareholders.
5	Proprietary ratio	Proprietary Funds Total Asset	See (b) above	Net Fixed Assets+TotalCurrent Assets(only Tangible assets will be included)	Shows extent of Owners’Funds,ie,Shareholders funds utilized in financing the assets of the business.
6	Fixed Asset to Long Term fund ratio	Fixed Asset Long term Funds	Net Fixed Assets,ie,Gross Block (-)Depreciation	See (d) above	Shows proportion of fixed Assets(Long Term Assets)financed by long-term funds.indicating the financing approach followed by the firm.ie.Conservative,Matching or aggressive; Ideal Ratio is less than one.

	Ratio	Formula	Numerator	Denominator	Significance/Indicator
1	Debt service Coverage Ratio	Earnings for Debt Services (interest+instalment)	N/P after Taxation (+)Interest on Debt Funds (+)Non-Cash Operating Expenses (eg:Depreciation& amortizations) (+)Non-Cash Operating Adjustments (eg: Loss on sale of Fixed Assets)	Interest on Debt (+)Instalment of Debt?Loan(ie,Principal amount repaid)	Indicates extent of current earnings available for meeting commitments of interest and insatlment;Ideal ratio must between 2 to 3 times
2	Interest Coverage Ratio	EBIT Interest	EBIT	Interest on Debt	Indicates ability to meet interest obligations of the current year.Should generally be greater than 1.
3	Preference Dividend Coverage Ratio	EAT Preference Dividend	EAT	Dividend on Preference Capital	Indicates ability to pay Dividend on Preference Capital

	Ratio	Formula	Numerator	Denominator	Significance/Indicator
1	Raw Material Turnover Ratio	Cost of Material consumed Average stock of RM	Opening stock of RM (+)Purchase (-)Closing stock of RM	(opening stock+closing stock)                           2	Indicates how fast /regularly RM are used in Production
2	WIP Turnover Ratio	Factory Cost Average stock of WIP	Material consumed (+)Wages (+)Production OH	(Opening WIP+closingWIP)                           2	Indicates the WIP Movement /production cycle
3	Finished Goods /Stock Turnover Ratio	Cost of goods sold Average stock	For Manufactures Opening stock of FG (+)(+)Purchase (-)Closing stock of FG For Traders (+)Purchase (-)Closing stock of FG	(opening stock+closing stock)                           2                           Or (Max stock+Min.Stock)                        2	Indicates how fast inventory is used /sold.High T/O ratio indicates fast moving material while low ratio may mean dead or excessive stock
4	Debtors Turnover Ratio	Credit Sales Average Accounts Receivable	Credit Sales net of returns	AccountsReceivable=Debtors+B/R Average Accounts Receivable=(opg.bal+Clg.Bal)/2	Indicates the speed of collection of Credit sales/debtors
5	Creditors Turnover Ratio	Credit Purchases Average Accounts Payable	Credit Purchases net of returns ,if any	Account Payable=Creditors+B/P Average Accounts Payable=(opg.bal+Clg.Bal)/2	Indicates speed/velocity of payment to creditors
6	Working Capital Turnover Ratio	Turnover Net Working Capital	Sales net of returns	Current assets Less:Current Liabilities	Ability to generate sales per rupee of Working Capital
7	Fixed Assets Turnover Ratio	Turnover Net Fixed assets	Sales net of returns	Net Fixed assets	Ability to generate sales per rupee of Fixed assets
8	Capital Turnover Ratio	Turnover Capital Employed	Sales net of returns	Capital Employed can be computed using (a)Assets Route or(b)Liability Route(note 1)	Ability to generate sales per rupee of Long Term Investment

Note:1 Assets Route:Fixed assets+Net Working Capital

             Liability Route: Equity share capital+Pref.share capital+Reserves&surplus+Long term Debt Less:Accumulated losses LessNon Trade investment

Note:2.T/O ratios can also be expressed in terms of days as 365 / T/O ratio.

Eg:No.of days Average stock is held =365/stock turnover ratio

	Ratio	Formula	Numerator	Denominator	Significance/Indicator
1	Return on Investment(ROI)   Or Return On Capital Employed(ROCE)	Total Earnings Capital Employed	Earnings After Tax (+)Int.on Debt Funds (+)Non-operating adjts(eg:other income/Loss on sale of Fixed assets etc)	Capital Employed  can be computed by using –(a) Assets Route or(b)Liability Route(note 1 under Turnover Ratio)	Overall profitability of the business on the total funds employed. If ROCE>Interest Rate ,use of debt funds is justified
2	Return On Equity(ROE) Or Return on Net Worth(RONW)	Equity Earnings Shareholder’s Funds	Earnings After Taxation	Net Fixed Assets (+)Net WC (-)External Liabilities(Long Term)	Indicates profitability of Equity Funds/Owners Funds invested in the business
3	Return On Assets(ROA)	N/P after Taxes Average Total Assets	Earnings After Taxation	Average Total Assets or Tangible Assets or FA , ie,1/2 of Openg&ClgBal	Indicates Net Income per rupee of  average Fixed Assets.
4	Earnings Per Share(EPS)	(EAT-Pref.Dividend) Number of Equity Shares	Residual earnings ie, EAT (-)Preference Dividend	No.of Equity Shares outstanding=Equity Capital               Face value per share	Return or Income per Share,whether or not distributed as dividends.
5	Dividend Per Share(DPS)	Total Equity Dividend Number of Equity Shares	Profits Distributed to Equity Shareholders.	As per (4)above	Amount of Profits distributed per share.
6	Price Earnings Ratio(PE ratio)	Market Price per share Earnings Per Share	Average Mkt Price (closing Mkt price) as per Stock Exchange quotations.	EPS as calculated in (4)above	Indicates the relationship between Market Price and EPS, and the shareholders perception of the company.
7	Dividend  yield(%)	Dividend Avg or Clg Market Price	Dividend	Average or closingMkt price as per Stock Exchange quotations.	True return on invest.based on Mkt Value of Shares
8	Book Value per Share	Net Worth Number of Equity Shares	As calculated in (2)above	As per (4)above	Basis of Valuation of Shares based on book values.
9	Market Value to book Value	Market Price per share Book value per Share	Average or  closingMkt price as per Stock Exchange quotations.	Ratio as calculated in (8)above	Higher ratio indicates better position for Shareholders in terms of Return &capital gains.