FORMULAS
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IMPACT IF
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IMPACT IF
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HIGH
|
LOW
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I. LIQUIDITY RATIOS
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To know the Unit's ability to meet the short term liabilities
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1. CURRENT RATIO
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Current Assets
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High level of Inventory/ book
|
Unable to pay
| |
/Current Liabilities
|
debts
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Creditors
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2. QUICK RATIO
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(Current Assets –
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Idle Funds
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Strain on Liquidity
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Inventory- prepaid
| ||||
expenses) /
| ||||
Current Liabilities )
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GROSS WORKING
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Total Current Assets (TCA)
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CAPITAL (NWC)
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NET WORKING CAPITAL
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Current Assets – Current Liabilities
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(NWC)
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WORKING CAPITAL GAP
|
Current Assets – Current Liabilities other than Bank borrowings (short)
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(WCG)
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II. SOLVENCY
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To measure the relationship between borrower's owned funds and
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(LEVERAGE) RATIOS
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borrowed funds.
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Indicates size of stake, stability and degree of solvency.
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NET WORTH (NW)
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Capital + Reserves + Profits or - Loss
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TANGIBLE NET
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Net worth –
| |||
WORTH(TNW)
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Intangible Assets
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ADJUSSTED TANGIBLE
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Tangible Net Worth –
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IMPACT IF
|
IMPACT IF
| |
NET WORTH (ATNW)
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Investments in
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HIGH
|
LOW
| |
Subsidiary and
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affiliates
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1. TOL/TNW
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Total Out Side
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Higher ratio indicates increased
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Low is good and
| |
Liabilities
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dependence on borrowings and
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too much low is
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(Total liabilities – Net
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other liabilities.
|
alos not good. It
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worth) /
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indicates
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Tangible Net Worth
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Low Stake
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Unable to get
| ||
Credit
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2. TOL/ATNW
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Total Out Side
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Over Trading
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High Capital
| |||
Liabilities
| ||||
gearing
| ||||
(Total liabilities – Net
| ||||
Conservating
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worth) /
| ||||
Management
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Adjusted TNW
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3. DEBT-EQUITY RATIO
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Long Term
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Indicates the proportion of
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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.
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4. GROSS DSCR
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Net Profit +
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Debt can be serviced faster
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Repayment
| |
Depreciation + Int.
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( Repayment capacity of loan is
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obligations strains
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On T/L /
|
good)
|
resources
| ||
T/L Installment + Int.
| ||||
On T/L
| ||||
5. NET DSCR
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Net Profit + Depreciation (Cash accruals) /
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T/L Installment
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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.
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1. Inventory Turnover Ratio
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Cost of Sales/
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Brisk Sales
|
Obsolete Stock
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(times)
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Average Inventory
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Market Problem
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(Opening Stock +
|
Poor Demand
| |||
Closing Stock/2 =
| ||||
Avg. Inventory)
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2. Inventory Velocity
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Average Inventory/
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Higher the figure, the slower is the turnaround of
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(Holding level) in Days
|
Cost of Sales(Cost of
|
current asset and in general higher the risk
| ||
good sold) x 365
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3. Debtors Turnover Ratio
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Net Credit Sales /
|
Cautious trading
|
Unable to collect
| |
(times)
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Avg. Trade Debtors
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debt
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4. Debtors Velocity
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Avg. Trade
|
indicates the number of days
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The company has
| |
(Holding level) (Debt
|
Debtors/Net Credit
|
credit given by the company as
|
an efficient
| |
Collection period) in Days
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Salesx365
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on the date of the balance sheet.
|
collection
| |
A high figure indicates sales on
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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
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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
| ||||
