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To test
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Name of Ratio
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Formula
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Industry norm
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Liquidity and Solvency
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i) Current Ratio
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Current Assets /Current Liabilities
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2:1
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ii) Liquid/Quick/ Acid Test Ratio
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Current assets - Stock - Prepaid Expenses/Current Liabilities –Bank Overdraft –Prereceived Income
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1:1
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iii) Absolute Liquid Ratio
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Cash + Marketable securities/Current Liabilities
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1:1
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iv) Proprietary Ratio
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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]
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60% to 75%
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Capitalisation
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i) Debt Equity Ratio
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Long term Debt/Equity [Debt = Loans, debentures etc. Equity = Proprietor’s funds]
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2:1
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ii) Capital Gearing Ratio
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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].
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2:1
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Profitability and management efficiency
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i) Gross Profit Ratio
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(Gross Profit/Net Sales) x 100
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20% to 30%
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ii) Net Profit Ratio
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(Net Profit/Net Sales) x 100
[Net profit may be either Operating Net profit, Profit before tax or Profit after tax].
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5% to 20%
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iii) Return on Capital Employed (ROCE) (ROI)
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(Net profit/Capital employed) x 100 [Capital employed = Fixed Assets + Current Assets - Current Liabilities].
|
-
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Return on Capital Employed (ROCE) (ROI) Du Pont Analysis
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Profit Margin x Total Assets Turnover ratio
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|
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iv) Return on Proprietors fund/Net Worth (RONW)
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Profit after tax/Proprietor’s funds
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-
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v) Return on Equity (ROE)
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(Profit after tax less pref. Dividend / Equity Share Capital)x100
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-
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Return on Equity (ROE) Du Pont Analysis
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Profit Margin x Total Asset Turnover x Financial Leverage
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|
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vi) Earnings per share [EPS]
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Profit after tax less pref. Dividend/ Total No. of Equity Shares
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-
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vii) Dividend per share [DPS]
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Total Dividend paid to equity shareholders/
Number of equity shares
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-
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Management efficiency
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i) Stock Turnover
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Cost of goods sold/Average Stock
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|
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ii) Debtor’s Turnover Rate
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Credit sales/ Avg. Debtors + Bills receivable
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60 to 90 days
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iii) Debtors Collection Period
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(Debtors + Bills receivable/Net Credit sales)x 365
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5 to 6 times
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iv) Creditor’s Turnover Rate
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Credit purchases/Average Creditors+ Bills Payable
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-
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iv) Creditor’s Payment Period
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(Creditors + Bills payable / Credit purchases) x 365
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|
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vi) Operating Ratio
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(Operating Costs/Net sales) x 100 [Operating Cost = Cost of goods sold + Operating expenses (viz. Administrative, selling & finance expenses)]
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-
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Number of times preference dividends covered by net profit
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Preference shareholders’ coverage ratio
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Net profit after tax/Preference Dividend
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-
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Number of times equity dividends covered by net profit
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Equity shareholder’s coverage ratio
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Net profit after interest- Pref. Dividend/Equity Dividend
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-
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Number of times fixed interest covered by net profit
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Interest coverage ratio
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Net profit before Interest & Tax (PBIT)/Fixed interest charges
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-
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Relationship between net profit and total fixed charges
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Total coverage ratio
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Net profit before Interest & Tax)(PBIT)/Total fixed charges
|
-
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The idle capacity in the Organisation
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Fixed expenses to total cost ratio
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Fixed expenses/Total cost
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-
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Material consumption to sales
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Material consumption to sales ratio
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Material consumption/Sales
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-
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Wages to sales
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Wages to sales ratio
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Wages/Sales
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-
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The future market price of a share
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Price Earnings ratio
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Market price of a share (MPS)/Earnings per share (EPS)
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