Accounting Ratios


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


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