Financial Ratios ::: (Most useful) Very important read everyone
The broad categories in which Financial
Ratios are classified are:
Liquidity Ratios
Gearing Ratios
Profitability Ratios
Turnover Ratios
Coverage Ratios
Liquidity Ratios
Liquidity Ratios are important for the working
capital lenders, who provide loans for shorter
duration. As such Banks, which generally
provide working capital loans, want to know
the liquidity position of the unit over a short
term period say one year. These ratios can
be analysed in under noted two forms:
Current Ratio
Acid Test Ratio or Quick Ratio
Current Ratio
Current Ratio = Current Assets / Current
Liabilities
Acid Test Ratio = (Current Assets - Inventory)
/ Current Liabilities
Gearing Ratios
Gearing Ratios are of two types:
Total Debt/Equity Ratio =
Total Outside Liabilities (TOL)
Tangible Net Worth (TNW)
Total Debt/Equity Ratio =
Long-Term Liabilities
Tangible Net Worth
Total Outside Liabilities (TOL)
The sources of funds of an enterprise can broadly be
classified into following three categories:
Own funds or Tangible Net Worth [Total Networth (ie
Capital plus reserves) less Intangible assets]
Short-term loans and
Long-term loans
Among the above three, the last two are external
sources of funding and therefore are together
classified as Total Outside Liabilities (TOL).
Profitability Ratios
Profitability ratios measure the profit earning capacity of the unit
vis-à-vis many parameters like sales, capital employed etc. The
ratios used for ascertaining the profitability of the main activity
of the unit are :
Operating Profit Ratio
Operating Profit Before Interest = --------------------------------------
(Before Finance Cost) Net Sales
Operating Profit After Interest
Operating Profit Ratio =
-----------------------------------------
(After Finance Cost) Net Sales
Turnover Ratios
Raw Material holding
Stock of raw material X 365/
Annual consumption of raw
material
Stock in process holding
Stock in process level X 365/
Cost of production
Finished goods holding
Finished goods level X 365/
Cost of production
Receivables holding level
Bills receivables level X 365/
Annual gross sales
Trade Creditors holding level
Expression
Trade Creditors level X 365/
Annual purchase
Coverage Ratios
The two types of coverage ratios are:
Interest Coverage Ratio
Debt Service Coverage Ratio
Interest Coverage Ratio
Interest Coverage Ratio are computed as –
Interest Coverage Ratio = (Profit before Tax +
Depreciation + Interest) / Interest
Gross Debt Service Coverage Ratio
The Gross Debt Service Coverage Ratio
(DSCR), is computed as –
Gross Debt Service Coverage Ratio
Profit after tax + Depreciation + Interest on TL
= ----------------------------------------------------
Annual principal instalments + Interest
on TL
The broad categories in which Financial
Ratios are classified are:
Liquidity Ratios
Gearing Ratios
Profitability Ratios
Turnover Ratios
Coverage Ratios
Liquidity Ratios
Liquidity Ratios are important for the working
capital lenders, who provide loans for shorter
duration. As such Banks, which generally
provide working capital loans, want to know
the liquidity position of the unit over a short
term period say one year. These ratios can
be analysed in under noted two forms:
Current Ratio
Acid Test Ratio or Quick Ratio
Current Ratio
Current Ratio = Current Assets / Current
Liabilities
Acid Test Ratio = (Current Assets - Inventory)
/ Current Liabilities
Gearing Ratios
Gearing Ratios are of two types:
Total Debt/Equity Ratio =
Total Outside Liabilities (TOL)
Tangible Net Worth (TNW)
Total Debt/Equity Ratio =
Long-Term Liabilities
Tangible Net Worth
Total Outside Liabilities (TOL)
The sources of funds of an enterprise can broadly be
classified into following three categories:
Own funds or Tangible Net Worth [Total Networth (ie
Capital plus reserves) less Intangible assets]
Short-term loans and
Long-term loans
Among the above three, the last two are external
sources of funding and therefore are together
classified as Total Outside Liabilities (TOL).
Profitability Ratios
Profitability ratios measure the profit earning capacity of the unit
vis-à-vis many parameters like sales, capital employed etc. The
ratios used for ascertaining the profitability of the main activity
of the unit are :
Operating Profit Ratio
Operating Profit Before Interest = --------------------------------------
(Before Finance Cost) Net Sales
Operating Profit After Interest
Operating Profit Ratio =
-----------------------------------------
(After Finance Cost) Net Sales
Turnover Ratios
Raw Material holding
Stock of raw material X 365/
Annual consumption of raw
material
Stock in process holding
Stock in process level X 365/
Cost of production
Finished goods holding
Finished goods level X 365/
Cost of production
Receivables holding level
Bills receivables level X 365/
Annual gross sales
Trade Creditors holding level
Expression
Trade Creditors level X 365/
Annual purchase
Coverage Ratios
The two types of coverage ratios are:
Interest Coverage Ratio
Debt Service Coverage Ratio
Interest Coverage Ratio
Interest Coverage Ratio are computed as –
Interest Coverage Ratio = (Profit before Tax +
Depreciation + Interest) / Interest
Gross Debt Service Coverage Ratio
The Gross Debt Service Coverage Ratio
(DSCR), is computed as –
Gross Debt Service Coverage Ratio
Profit after tax + Depreciation + Interest on TL
= ----------------------------------------------------
Annual principal instalments + Interest
on TL
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