Operating Profit OR Operating Profit Operating Income
=
Gross Profit – Operating Expenses
(4) Operating Ratio
=
Operating Cost
(5)
=
=
Net Profit + Non Operating Expenses – Non
Operating Cost X 100 Net Sales
Cost of Goods Sold + Operating Expenses
Operating Ratio + Operating Profit Ratio = 1
(6) Return on Investment (ROI) 100
=
Profit before Interest, Tax & Dividend X
Capital Employed
Where, Profit before interest, Tax & Dividend = Profit After Tax + Interest + Tax = Profit after Interest + Interest Capital Employed
=
Share Capital (Equity + Preference)
+
Reserves
+
Surplus/Profit
&
Loss
A/c
(Cr.)/Accumulated Profits + Debentures + Long term loans – [Preliminary Expenses – Discount/Commission or Issue of Share / Debenture – Loss A/c (Dr. Balance)]
Profit &
ALTERNATIVELY Capital Employed Working Net Fixed Assets Working Capital
= = =
(7) (a) Return on Shareholder's Funds Dividend X 100
Net Fixed Assets + Long Term Investments + Capital Total Fixed Assets – Depreciation Current Assets – Current Liabilities
=
Profit after Interest & Tax but before
Equity or Shareholder's Funds Equity or Shareholders' Fund
= Share Capital (Equity + Preference) + Reserve + Surplus / Profit & Loss A/c (Cr. Balance) or
accumulated profits Issue of Share Balance) or Accumulated
– Preliminary Expenses – Discount/Commission on Debentures – Profit & Loss A/c (Dr. Losses
Profit after Interest, Tax but before Preference Dividend = Profit after Tax – Preference Dividend = Profit after Interest – Tax – Preference Dividend = Profit before Interest – Interest – Tax – Preference Dividend
(7) (b) Return on Equity (ROE) = Profit after interest, Tax & Pref. Dividend X 100 Equity Shareholder's Funds Equity shareholder's Fund = Equity Share Capital + Reserve + Surplus / Profit & Loss A/c (Cr. Balance) or accumulated profits – Preliminary Expenses – Discount / commission on issue of Share Debentures – Profit & Loss A/c (Dr. Balance) or Accumulated Losses
(8) Interest coverage (Debt Service) Ratio = Profit before Interest, Tax & Dividend Interest on Debentures & Loans
(9) Current Ratio
Current Assets
= Current Assets Current Liabilities =
Short term Stock / Inventories + Incomes
Current Liabilities Provision for Bad Bank Overdraft + received in Advance +
Cash in Hand + Cash at Bank + Bills Receivable + Sundry Debtors + Marketable Securities or investments + Loans & Advances + Prepaid Expenses + Accrued
=
Sundry Creditors + Bills Payable + Debts + Provision for Taxation + Outstanding Expenses + Income Short term Loans
(10) Liquid Ratio / Quick Ratio / Acid Test Ratio = Liquid Assets or Quick Assets Current Liabilities Liquid Assets = Current Assets – Closing Stock – Prepaid Expenses (11) Stock Turnover Ratio (STR)
= Cost of Goods Sold Average Stock
Average Stock = ½ (Opening Stock + Closing Stock) (12) Debtors Turnover Ratio (DTR)
= Net Credit Sales in a year Average Accounts Receivable
Average A/c Receivable = ½ (Opening A/c Receivable + Closing A/c Receivable) Accounts Receivable = Debtors + B/R OR Account Receivable = Opening Debtor + Opening B/R + Closing Debtors + Closing B/R 2 (13) Average Debt Collection Period
= Days or Months in a year Debtors Turnover Ratio
Alternatively, Average Debt Collection Period = Days or Months in a year X Accounts Receivable in a year Net Credit Sales in a year (14) Creditors Turnover Ratio (CTR)
=
Net Credit Purchases
Average Accounts Payable Average A/c Payable = ½ (Opening A/c Payable + closing A/c Payable) Accounts Payable = Creditors + B/P (15) Average Payment Period
= Days or Months in a year Creditors Turnover Ratio
Alternatively, Average Payment Period = Days or Months in a year X Accounts Payable in a year Net Credit Purchases in a year (16) Capital Turnover Ratio
= Net Sales Capital Employed
(17) Fixed Assets Turnover Ratio
= Net Fixed Assets
Net Sales
Net Fixed Assets = Gross Fixed Assets - Depreciation (18) Working Capital Turnover Ratio
= Working Capital
Net Sales
Working Capital = current Assets – Current Liabilities (19) Assets Turnover Ratio = Net Sales Total Assets Total Assets = Fixed Assets + Long Term Investment Current Assets (20) Debt-Equity Ratio
Long term Debts OR Long Term Debts (21) Debt Total Fund Ratio
= Long term Debt or Loans Equity or Shareholders' Funds = =
Debentures + Loans or Mortgage Total Debts – Current Liabilities
= Long Term Debts Total Long Term Funds
Total Funds Term Fund = shareholder's Funds + Long Term Debts (22) Proprietary Ratio Fund
=
Shareholder's Funds or Proprietor's Total Assets
Shareholder's Funds
=
Share Capital (Equity + Preference)
+ Reserves + Surplus/Accumulated Profit or - Preliminary Expenses – Discount on issue of Shares/Debentures – P/L A/c (Dr.)
P/L A/c(Cr)
Ratio Analysis Formula These Financial Ratios should be calculated using the data from the most recent balance sheet available. (In general, you would not use averages.) Desired Value
Formula
Current Ratio
>2
Current Assets -----------------------Current Liabilities
For these Turnover Ratios, use the most recent income statment data, and the average balance sheet item over the time period represented by that income statement. For example, use the average of two balance sheets, one year apart, and the income statement that corresponds to that year of operations. Alternatively, you could use two balance sheets, one quarter apart, and a quarterly income statement. Ratio Inventory Turnover
Sales or Revenues -----------------------Avg. Total Assets
Plant Turnover
Sales or Revenues -----------------------Avg. Plant, Prop. & Equip.
Collection Period
Avg. Accts. Receivable X 365 -----------------------Sales or Revenues
The key to interpreting these ratios is to watch the trend over time for the same company, as well as to compare them to the most succesful competitors in the
