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Accounting Ratios

To test

Name of Ratio

Formula

Parties interested

Industry norm

Liquidity and Solvency

i)

Current Ratio

Current Assets 
Current Liabilities

Short-term creditors, investors, money lenders & like parties

2:1

ii) 

Liquid/Quick/
Acid Test Ratio

Current assets - Stock - Prepaid Expenses
Current Liabilities - Bank Overdraft - Prereceived Income

-do-

1:1

iii) 

Absolute Liquid Ratio

Cash + Marketable securities
Quick Liabilities

-do-

1:1

iv) 

Proprietary Ratio

 

Proprietor’s Fund
Total Assets [Proprietor’s funds = Equity Capital + Preference Capital + Reserves and Surplus + Accumulated funds - Debit balances of P & L A/c and Miscellaneous Expenses]

-do-

60% to 75%

Capitalisation

i) 

Debt Equity Ratio

Debt
Equity [Debt = Long/Short-term loans, debentures, bills, etc, Equity = Proprietor’s funds]

-do-

2:1

ii) 

Capital Gearing Ratio

Fixed cost funds
Funds not carrying fixed cost [Fixed cost funds = Preference share capital, Debentures, Loans from  banks, financial institutions, other unsecured loans]. [Funds not carrying fixed cost = Equity share capital + undistributed profit - P & L A/c (Dr. Bal.) - Misc. expenses].

-do-

2:1

Profitability and management efficiency

i) 

Gross Profit Ratio

 

Gross Profit x 100
Net sales

Shareholders, Long-term Creditors, Government

20% to 30%

ii)

Net Profit Ratio

Net Profit x 100
Net sales [Net profit may be either Operating Net profit, Profit before tax or Profit after tax].

-do-

5% to 10%

iii) 

Return on Capital Employed (ROCE)

Net profit x 100
Capital employed [Capital employed = Fixed Assets + Current Assets - Current Liabilities].

-do-

-

iv) 

Return on Proprietors fund

Profit after tax
Proprietor’s funds

-do-

-

v) 

Return on Capital

Profit after tax less pref. Dividend  x 100
Equity Share Capital

-do-

-

vi) 

Earnings per share [EPS]

Profit after tax less pref. Dividend
Total  No. of Equity Shares

-do-

-

vii) 

Dividend per share [DPS]

Total Dividend paid to ordinary shareholders
Number of ordinary shares

Shareholders, Investors

-

Management efficiency

i) 

Stock Turnover

Cost of goods sold
Average Stock

Management

5 to 6 times

ii) 

Debtors Turnover Ratio

Debtors + Bills receivable  x 365
Net Credit sales

Management

45 to 60 days

iii) 

Debtor’s Turnover Rate

Credit sales
Avg. Debtors + Bills receivable

Management

60 to 90 days

iv) 

Creditor’s Turnover Ratio

Creditors + Bills payable x 365
Credit purchases

-do-

-

v) 

Creditor’s Turnover Rate

Credit purchases
Average Creditors

-

vi) 

Operating Ratio

Operating Costs x 100
Net sales [Operating Cost = Cost of goods sold + Operating expenses (viz. Administrative, selling & finance expenses)]

-

-

Number of times preference dividends covered by net profit

Preference shareholders’ coverage ratio

Net profit (after Interest & Tax but before equity dividend)
Preference Dividend

Preference shareholders

 -

Number of times equity dividends covered by net profit

Equity shareholder’s coverage ratio

Net profit (after interest, tax & Pref. Dividend)
Equity Dividend

Equity shareholders

 -

Number of times fixed interest covered by net profit

Interest coverage  ratio

Net profit (before Interest & Tax) (PBIT)
Fixed interests & charges

Debenture holders, Loan creditors

 -

Relationship between net profit and total fixed charges

Total coverage ratio

Net profit (before Interest & Tax) (PBIT)
Total fixed charges

Shareholders, investors, creditors, lenders

 -

The idle capacity in the Organisation

Fixed expenses to total cost ratio

Fixed expenses
Total cost

Management shareholders 

 -

Material consumption to sales

Material consumption to sales ratio

Material consumption
Sales

Management

 -

Wages to sales

Wages to sales ratio

Wages
Sales

Management

 -

The future market price of a share

Price earning ratio

Market price of a share (MPS)
Earnings per share (EPS)

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