Accounting Ratios
To test
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Name of Ratio
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Formula
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Parties interested
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Industry norm
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Liquidity and Solvency
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Current Assets
Current Liabilities |
Short-term creditors, investors, money lenders & like parties
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2:1
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Current assets – Stock – Prepaid Expenses
Current Liabilities – Bank Overdraft – Prereceived Income |
-do-
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1:1
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Cash + Marketable securities
Quick Liabilities |
-do-
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1:1
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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] |
-do-
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60% to 75%
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Capitalisation
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Debt
Equity [Debt = Long/Short-term loans, debentures, bills, etc, Equity = Proprietor’s funds] |
-do-
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2:1
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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]. |
-do-
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2:1
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Profitability and management efficiency
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Gross Profit x 100
Net sales |
Shareholders, Long-term Creditors, Government
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20% to 30%
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Net Profit x 100
Net sales [Net profit may be either Operating Net profit, Profit before tax or Profit after tax]. |
-do-
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5% to 10%
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Net profit x 100
Capital employed [Capital employed = Fixed Assets + Current Assets – Current Liabilities]. |
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—
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Profit after tax
Proprietor’s funds |
-do-
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—
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Profit after tax less pref. Dividend x 100
Equity Share Capital |
-do-
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—
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Profit after tax less pref. Dividend
Total No. of Equity Shares |
-do-
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—
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Total Dividend paid to ordinary shareholders
Number of ordinary shares |
Shareholders, Investors
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—
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Management efficiency
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Cost of goods sold
Average Stock |
Management
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5 to 6 times
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Debtors + Bills receivable x 365
Net Credit sales |
Management
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45 to 60 days
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Credit sales
Avg. Debtors + Bills receivable |
Management
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60 to 90 days
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Creditors + Bills payable x 365
Credit purchases |
-do-
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Credit purchases
Average Creditors |
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Operating Costs x 100
Net sales [Operating Cost = Cost of goods sold + Operating expenses (viz. Administrative, selling & finance expenses)] |
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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 Interest & Tax but before equity dividend)
Preference Dividend |
Preference shareholders
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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, tax & Pref. Dividend)
Equity Dividend |
Equity shareholders
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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 interests & charges |
Debentureholders, Loan creditors
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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 |
Shareholders, investors, creditors, lenders
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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 |
Management shareholders
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Material consumption to sales
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Material consumption to sales ratio
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Material consumption
Sales |
Management
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Wages to sales
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Wages to sales ratio
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Wages
Sales |
Management
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The future market price of a share
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Price earning ratio
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Market price of a share (MPS)
Earnings per share (EPS) |
Investors, speculators
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