Very Useful Ratio analysis

		FORMULAS	IMPACT IF	IMPACT IF
			HIGH	LOW
	I. LIQUIDITY RATIOS	To know the Unit's ability to meet the short term liabilities
	1. CURRENT RATIO	Current Assets	High level of Inventory/ book	Unable to pay
		/Current Liabilities	debts	Creditors
	2. QUICK RATIO	(Current Assets –	Idle Funds	Strain on Liquidity
		Inventory- prepaid
		expenses) /
		Current Liabilities )
	GROSS WORKING	Total Current Assets (TCA)
	CAPITAL (NWC)
	NET WORKING CAPITAL	Current Assets – Current Liabilities
	(NWC)
	WORKING CAPITAL GAP	Current Assets – Current Liabilities other than Bank borrowings (short)
	(WCG)
	II. SOLVENCY	To measure the relationship between borrower's owned funds and
	(LEVERAGE) RATIOS	borrowed funds.
		Indicates size of stake, stability and degree of solvency.
	NET WORTH (NW)	Capital + Reserves + Profits or - Loss
	TANGIBLE NET	Net worth –
	WORTH(TNW)	Intangible Assets
	ADJUSSTED TANGIBLE	Tangible Net Worth –	IMPACT IF	IMPACT IF
	NET WORTH (ATNW)	Investments in	HIGH	LOW
		Subsidiary and
		affiliates
	1. TOL/TNW	Total Out Side	Higher ratio indicates increased	Low is good and
		Liabilities	dependence on borrowings and	too much low is
		(Total liabilities – Net	other liabilities.	alos not good. It
		worth) /		indicates
		Tangible Net Worth	Low Stake	Unable to get
				Credit
	2. TOL/ATNW	Total Out Side
			Over Trading	High Capital
		Liabilities
				gearing
		(Total liabilities – Net
				Conservating
		worth) /
				Management
		Adjusted TNW
	3. DEBT-EQUITY RATIO	Long Term	Indicates the proportion of	Anything below 2
		Loans/Net Worth	owners’ stake to that of the	is normally
			outsiders, in the long term	considered good.
			sources of the company.
			Anything over 2 is not normally
			considered good.
	4. GROSS DSCR	Net Profit +	Debt can be serviced faster	Repayment
		Depreciation + Int.	( Repayment capacity of loan is	obligations strains
		On T/L /	good)	resources
		T/L Installment + Int.
		On T/L
	5. NET DSCR	Net Profit + Depreciation (Cash accruals) /
		T/L Installment

		FORMULAS	IMPACT IF	IMPACT IF
			HIGH	LOW
	III. ACTIVITY RATIOS	Measures the Unit's efficiency in turning its inventory into sales and
		efficiency with which the debtors are turned over into cash.
	1. Inventory Turnover Ratio	Cost of Sales/	Brisk Sales	Obsolete Stock
	(times)	Average Inventory		Market Problem
		(Opening Stock +		Poor Demand
		Closing Stock/2 =
		Avg. Inventory)
	2. Inventory Velocity	Average Inventory/	Higher the figure, the slower is the turnaround of
	(Holding level) in Days	Cost of Sales(Cost of	current asset and in general higher the risk
		good sold) x 365
	3. Debtors Turnover Ratio	Net Credit Sales /	Cautious trading	Unable to collect
	(times)	Avg. Trade Debtors		debt
	4. Debtors Velocity	Avg. Trade	indicates the number of days	The company has
	(Holding level) (Debt	Debtors/Net Credit	credit given by the company as	an efficient
	Collection period) in Days	Salesx365	on the date of the balance sheet.	collection
			A high figure indicates sales on	mechanism
			easy terms.	Prompt payment
			Unable to collect debt	by customers
				The company is
				able to dictate
				terms due to good
				quality of its
				product.
	5. Creditors Turnover Ratio	Net Credit Purchases/	Poor Management	Unable to pay the
	(times)	Avg. Trade Creditors	Demand Product	creditors
	6. Creditors Velocity	Average Creditors/	Indicates number of days credit	the company is
	(Holding level) in days	Net Credit Purchases	received by the company, as on	adequate funds to
		X 365	the date of the balance sheet.	meet the Creditors
				Creditors are not
			Unable to pay the creditors or	allowing more time
				it is also called poor
			creditors are allowing more time
				management.
			due to its good financial	Demand Product
			reputation
	7.Holding level for Raw	Avg.RM Inventory/	To know the holding period (no. Of days of Raw
	Materials	Cost of RM	Materials, SIP and FG in an Operating Cycle. ( Efficiency in
		consumed x 365	maintenance of Inventory)
		RM Consumed =	The nature and availability of raw materials should be
			examined to correctly interpret the ratio.
		(Op.RM + RM
			High days indicates
		Purchases – Clg. RM)
			a) indiscreet buying b) presence of unsaleable stocks
			seasonal stocking
	8.Holding level for Stock in	Avg.SIP Inventory/ Cost of Production x 365
	process
	9.Holding level for  F.G.	Avg.F.G. Inventory/ Cost of Sales x 365

		FORMULAS	IMPACT IF	IMPACT IF
			HIGH	LOW
	IV.PROFITABILITY	To assess a Unit's ability to generate earnings
	RATIOS
	1. PBDIT	Profit before
		Depreciation, Interest
		and Tax
	2.PBDIT/INT (Interest	PBDIT/Interest	Int. Servicing capacity is good	Int. Servicing
	Coverage Ratio - ICR)			capacity is low.
	3.PAT/NET SALES %	Profit after tax/ Net	Profit % is good. Indicates	Indicates operating
		Sales x 100	operating efficiency	inefficiency

 

	PROFITABILITY RATIOS	FORMULAS	IMPACT IF	IMPACT IF
			HIGH	LOW
	4.PAT/Net Worth	Profit after tax/ Net	the owner’s funds have invested	the owner’s funds
		worth	profitably.	have
			To be compared with the ratio in	been not invested
				profitably.
			similar units.
	5. Expenses/Sales %	Operating	Trend for the company over a	Indicates efficiency
		Expenses/Sales x 100	period is to be examined.	As years go by
			If high it indicates Operating	sales should
			inefficiency.	increase without a
				corresponding
				increase in
				expenses
	6. Retained Profit/PAT %	Retained Profit/	Indicates prudence of the managers in conserving
		Profit after Tax x 100	financial resources and long term strategies of the
			unit.
	7. PBDIT/Total Assets	Profit before	This ratio is a measure of gross profitability or gross
		Dep+Int+Tax/ Total	return from the activity of the company. A
		Assets	percentage of more than 10 is considered healthy
			whereas below 2 is considered risky.
	8.OPM %( OP/NS %)	Operating Profit/ Net Efficiency in operating the unit		Low performance
		sales x 100	Should be comparable with	in operating
			similar industries
	9.PBT/Net Sales%	Profit before Tax/	Indicates operating efficiency	indicates operating
		Net Sales x 100		inefficiency
	10.Cash Accruals	PAT ( Net Profit) +
		Depreciation
	11.Net sales to Total	Net Sales /	Efficient utilization of assets	Idle/underutilized
	Tangible Assets (times)	(Total Assets –		assets
		Intangible Assets)
	12.PBT to Total Tangible	Profit before Tax/
	Assets (%)	(Total Assets –
		Intangible Assets)
	13.Interest/Cost of sales	Interest/ Cost of	Interest burden is more	Interest burden is
		Sales		less

	PROFITABILITY RATIOS	FORMULAS	IMPACT IF	IMPACT IF
			HIGH	LOW
	14.ROE% ( Return on	PAT*100 / Net worth
	Equity)	(Owners' funds)	Efficient utilization of assets	Idle/underutilized
				assets or Heavy
				Capital investment
	14.ROI% ( Return on	PBIT *100 / Debt +
	Investment)	Equity
	15.ROCE or ROA (Return	PBDIT *100/ (Total
	on capital employed or	Assets - Intangible
	Return on Assets)	Assets)
	V. STOCK EXCHANGE RATIOS (EFFICIENCY RATIOS)
	Ratio	Formula	Impact
	1. EPS (Earning per Share)	PAT/No. Of Shares	Indicates to what extent income is available per
			share, to pay dividend.
	2. Price Earning Ratio (P/E	Market Price per
	Ratio)	Share /
		Earning Per
		Share(EPS)
	3. Earning- Yield Rate	Earning Per Share	Assesses annual income accruing from the share
		(EPS)/	investment
		Market Price per
		Share
	4. Payout Ratio (Earnings -	PAT/ Total Dividend	Indicates the dividend paid to the net income.
	cover Ratio)	Paid
	5. Dividend-yield Rate	Dividend per	Enables comparison of Dividend policy and yield
		Share/Market price
		of Shares x 100