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

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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]

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60% to 75%

Capitalisation

i)	Debt Equity Ratio

Debt
Equity

[Debt = Long/Short-term loans, debentures, bills, etc, Equity = Proprietor’s funds]

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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].

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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].

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5% to 10%

iii)	Return on Capital Employed (ROCE)

Net profit x 100
Capital employed

[Capital employed = Fixed Assets + Current Assets – Current Liabilities].

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—

iv)	Return on Proprietors fund

Profit after tax
Proprietor’s funds

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—

v)	Return on Capital

Profit after tax less pref. Dividend x 100
Equity Share Capital

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—

vi)	Earnings per share [EPS]

Profit after tax less pref. Dividend
Total No. of Equity Shares

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—

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