Ratio Analysis
It’s a tool which enables the banker or lender to arrive at the
following factors :
Liquidity position
Profitability
Solvency
Financial
Stability
Quality of the Management
Safety & Security of the loans & advances to be or already
been provided.
How a Ratio is expressed?

As Percentage

As Proportion

As Pure Number /Times
Classification of items for Ratio Analysis

Shareholders Fund/ Net worth:
◦ Share Capital
◦ Reserves (General, Capital, Revaluation ,Other Reserves, Credit
Balance in P&L A/c)
◦ Fictitious assets (Debit balance in P&L A/c, Preliminary or
Preoperative expenses)

Long term liabilities:
◦ Term Loans (Banks & Institutions)
◦ Debentures/Bonds,
◦ Unsecured Loans, Fixed Deposits, Other Long Term Liabilities

Capital Employed: Shareholders Fund/ Net worth + Long
term liabilities:
Classification of items for Ratio Analysis

Current assets :
◦
◦
◦
◦
◦
◦

Current liabilities:
◦
◦
◦
◦
◦

Cash & Bank Balance,
Marketable securities,
Book Debts/Sundry Debtors, Bills Receivables,
Stocks (RM,WIP,FG) Stores & Spares,
Prepaid expenses,
Loans and Advances recoverable within 12 months
Cash Credit/OD/Export Credit
Sundry Creditors/Bills Payable
Short duration loans or deposits
Expenses payable &
Provisions against various items
Working Capital: Current assets - Current liabilities

Fixed assets:
◦
◦
◦
◦

Land & Building, Plant & Machineries etc.
Patent, Goodwill
Original Value Less Depreciation
Net Value or Book Value or Written down value
Investments or non current assets :
◦ Investments in shares & securities
◦ Long Term Security Deposits
1.
Liquidity ratios
2.
Leverage/ Capital Structure ratios
a. Asset Based
b. Income Based
3.
Profitability ratios
a. Related to sales
b. Related to total Investments
c. Related to equity funds
d. Overall profitability/ Earning power
4.
Turnover ratios
Liquidity ratios

Current ratio = current assets/ current liabilities

Acid Test ratio/ Quick Ratio = (Current Assets – Stock
– Prepaid Expenses)/ Current Liabilities or
(cash + marketable securities + Debtors)/ Current
Liabilities
Leverage/ Capital Structure ratios Asset Based/ Income Based
1. Debt equity ratio: Long term Debt/ shareholders’ funds
(equity share capital + preference share capital+ reserves
and surplus)
2. Debt to total capital ratio = Long Term debt/ total capital
employed (shareholders’ fund + long term debt)
3. Debt to total asset ratio = total debt/ total asset
4. Proprietary ratio = owners’ fund/ total assets
5. Interest Coverage ratio = earnings before interest and
taxes(EBIT)/ Interest
Leverage/ Capital Structure ratios Income Based
5. Capital gearing ratio = (Preference share capital +
Debentures + other Borrowed funds)/ Equity Funds
6. Debt service coverage ratio = (earnings after tax +
depreciation + other non cash exp. + interest)/ repayment
installment amount + interest
Profitability ratios - Related to sales
1. Gross Profit Ratio = Gross Profit/ Net Sales
2. Operating Profit Ratio = Earnings Before Interest Tax/
Net Sales
3. Net Profit Ratio = Earning after taxes/ Net Sales
4. Cost of Goods sold ratio = Cost of Goods sold/ Net sales
5. Operating Expenses Ratio = (Administrative Exp +
Selling Exp.)/ Net sales
6. Operating ratio = (Cost of Goods sold + Operating
Expenses ) / Net sales
Profitability ratios - Related to total
Investments
1. Return on total assets = (earnings after tax + interest)/
Total assets
2. Return on Capital employed = EBIT/ total capital
employed
3. Return on Shareholders’ Equity = EAT/ shareholders’
equity
Profitability ratios –
Related to equity funds
1. Return on Equity Fund = (EAT – Pref. Dividend)/ net
worth
2. Earnings Per Share (EPS) = net profit available to
equity shareholders (EAT – preference dividend)/ no. of
equity shares
3. Dividend per share (DPS) = dividend paid to equity
shareholders / number of equity shares.
4. Earnings Yield = EPS/ Market Price per share
5. Dividend yield = DPS/ Market Price per share
6. Dividend payout Ratio = EPS/ DPS
7. Price earning ratio = Market price of a share/ EPS
Profitability ratios - Overall profitability or
Earning power
 Return on investment = EAT / Total assets
Turnover ratios
1.
Inventory turnover ratio = cost of goods sold / average
inventory
2.
Inventory holding period = 12 or 52 or 365/ Inventory
turnover ratio
3.
Debtors turnover ratio = credit sales/ Avg. Drs + Avg.
B.R
4.
Average Collection period = 12 or 52 or 365/ Debtors
turnover ratio
Turnover ratios
5.
Creditors turnover ratio = credit purchases/ Avg. Crs +
Avg. B.P
6.
Average Payment period = 12 or 52 or 365/ Creditors
turnover ratio
7.
Total assets turnover = cost of goods sold / avg. total
assets
8.
Fixed Assets turnover = cost of goods sold / avg. fixed
assets
Particulars
Sales
Amt (in Crores.)
1000
Less: Cost of Goods Sold (Op stock - 50)
700
Gross Profit
300
Add: Operating Income
10
Less: Operating Expenses
(Depreciation – 20, Interest – 10, Other Op exp 110 )
140
Operating Profit
170
Add: Non Operating Income
Less: Non Operating Expenses
Net Profit Before Tax
Less: Tax
Net Profit After Tax
5
25
150
30
120
Particulars
Amt (in Crores.)
SOURCES OF FUNDS:
A. Shareholders Funds:
1.Share Capital
Equity Capital
300
Preference Capital
100
Add: 2. Reserves and Surplus
Reserves
P/L a/c
90
120
Less: 3. Misc. Expenditure
Share Issue exp.
Total Net Worth / Shareholders fund
(10)
600
B. Borrowed Fund
Secured Loan
Unsecured Loan
Total Capital Employed (A+B)
100
50
750
Particulars
Amt (in Crores.)
APPLICATIONS OF FUNDS:
A. Fixed Assets:
Gross Block
500
Less: Prov. For Depreciation
50
Net Block
450
B. Long Term Investment
100
C. Working Capital
Current assets
400
(Stock -100, Prepaid Exp – 20, Debtors – 120,
B.R. - 60, other C.A – 180)
Less: Current Liabilities
(200)
200
(Creditors – 100, B.P – 40, other C.L. – 60)
Total Capital Applied
750