ACCOUNTING RATIOS AT A GLANCE

CA CS CIMA Prakash Somani (Landmark Group) (23502 Points)

14 March 2008  
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		 Debentureholders, 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)		 Investors, speculators