# RATIO ANALYSIS FORMULA

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Ratio analysis is a quantitative way of achieving wisdom into a company’s liquidity, working efficiency, and profitability by examining its monetary reports such as the balance sheet and income report. Ratio analysis is a cornerstone of fundamental equity research. This type of research is especially helpful to critics beyond an enterprise since their immediate reference of knowledge about an institution is its financial reports. Ratio analysis is slightly beneficial to corporate insiders, who have more suitable credentials to more elaborate on working knowledge about the association.

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### Liquidity Ratios

Liquidity ratios calculate a firm capability to spend off its short-term debts as they evolve owed, using the firm current or quick investments. Liquidity ratios retain the current ratio, quick ratio, and working capital ratio.
 S.No. Ratios Formulas 1 Current Ratio Current Assets/Current Liabilities 2 Quick Ratio Quick Assets/Current Liabilities Quick Assets = Current Assets – Inventory – Prepaid Expenses

### Profitability Ratios

These ratios tell how nicely a firm can develop earnings from its processes. Earnings margin, the yield on investments, the yield on equity, the yield on capital employed, and gross margin ratios are all instances of profitability ratios.
 S.No. Ratios Formulas 1 Gross Profit Ratio Gross Profit/Net Revenue of Operations × 100 2 Operating Cost Ratio Operating Ratio = (Cost of Revenue from Operations + Operating Expenses)/Net Revenue from Operations ×100 3 Operating Profit Ratio Operating Profit/ Revenue from Operations × 100 4 Net Profit Ratio Net profit/Revenue from Operations × 100 5 Return on Investment Ratio Net Profit After Interest  And Taxes/ Shareholders Funds or Investments  X 100 6 Return on Capital Employed Ratio Net Gain After Surcharges/ Gross Capital Employed X 100 7 Earnings Per Equity Share Net Gain After Surcharges & Preference Premium /No of Equity Shares 8 Dividend Yield Ratio Premium Per Equity Claim/Earning Per Equity Claim X 100 9 Price Earnings Ratio Net Gain after Taxation& Preference Premium / No. of Equity Share 10 Dividend Yield Ratio Dividend Per Share/ Market Value Per Share X 100 11 Price Earnings Ratio Demand Expense Per Share Equity Claim/ Gaining Per Share X 100 12 Net Profit to Net Worth Ratio Net Profit after Surcharges/ Shareholders Net Worth X 100

### Working Capital Ratios

“Working capital” is the capital you require to sustain short-term processes. It is this emphasis on the short term that indicates working capital from longer-term assets in fixed assets or R&D.
 S.No. Ratios Formulas 1 Inventory Ratio Net Sales / Inventory 2 Debtors Turnover Ratio Total Sales /  Account Receivables 3 Debt Collection Ratio Receivables  x Months or days in a year / Net Credit Sales for the year 4 Creditors Turnover Ratio Net Credit Purchases / Average Accounts Payable 5 Average Payment Period Moderate Trade Creditors / Net Credit Purchases X 100 6 Working Capital Turnover Ratio Net Sales / Working Capital 7 Fixed Assets Turnover Ratio Price of goods Traded / Whole Designated Assets 8 Capital Turnover Ratio Cost of Sales / Capital Employed

### Capital Structure Ratios

Both debt and equity can be located on the balance sheet. Corporation assets, also documented on the balance sheet, are bought with debt or equity. Capital structure can be a combination of a business’s long-term debt, short-term debt, joint-stock, and select stock. A firm balance of short-term debt versus long-term debt is believed when examining its capital structure.
 S.No. Ratios Formulas 1 Debt Equity Ratio Total Long Term Debts / Shareholders Fund 2 Proprietary Ratio Shareholders Fund/ Total Assets 3 Capital Gearing ratio Equity Allocation Funds / Specified Interest Bearing Funds 4 Debt Service Ratio Net  Earnings Before Welfare & Taxations / Fixed Welfare Payments

### Overall Profitability Ratio

The overall profitability ratio is also called return on investment. It shows the ratio of return on the whole capital employed in the enterprise. It is also named as retrieval on assets, return on capital employed.

### Sample Problems

Problem 1: For a firm, some measurable terms are as follows: Current Assets = Rs. 11971 Inventory = Rs. 8338 Current Liability = Rs. 8035 Find the value of the Quick ratio. Solution:
As given, Current Assets = Rs. 11971 Inventory = Rs. 8338 Current Liability = Rs. 8035 And formula for quick ratio is: QuickRatio = Totalcurrentratio−InventoryTotalCurrentLiabilities QuickRatio = 11971−83388035 Quick ratio = 0.45
Problem 2: A company has a capital of Rs. 10, 00,000; its turnover is 3 times the capital and the margin on sales is 6%. What is the return on investment? Solution:
Capital Turnover Ratio = Sales / Capital 3  = Sales / Rs. 10,00,000 Sales = Rs. 30,00,000 Rate of Return on Investment = (Gross Profit / Investment) × 100 = (Rs.1,80,000 / Rs.10,00,000) × 100 = 18% Gross Profit = 6% of Rs.30,00,000 = Rs. 1,80,000
Problem 3: The following is the Balance Sheet of a company as of 31st March:
 Liabilities Rs. Assets Rs. Share Capital 2,00,000 Land and Buildings 1,40,000 Profit & Loss Account 30,000 Plant and Machinery 3,50,000 General Reserve 40,000 Stock 2,00,000 12% Debentures 4,20,000 Sundry Debtors 1,00,000 Sundry Creditors 1,00,000 Bills Receivables 10,000 Bills Payables 50,000 Cash at Bank 40,000 8,40,000 8,40,000
Calculate
1. Current Ratio
2. Quick Ratio
3. Inventory to working capital
4. Debt to Equity Ratio
5. Proprietary Ratio
6. Capital Gearing Ratio
7. Current Assets to Fixed Assets
Solution:
1) Current Ratio = Current Assets / Current Liabilities = Rs. 3,5,000 / Rs. 1,50,000 = 2.33 : 1 2) Quick Ratio = Liquid Assets / Liquid Liabilities = Rs. 1,50,000 / 1,50,000 = 1 : 1 3) Inventory to Working Capital = Inventory / Working Capital = Rs. 2,00,000 / Rs. 2,00,000
= 1 : 1
(Working Capital = Current Assets – Current Liabilities = Rs. 3,50,000 – Rs. 1,50,000 = Rs. 2,00,000) 4) Debt to Equity Ratio = Long Term Debts / Shareholder’s Fund = Rs. 4,20,000 / Rs. 2,70,000 = 1.56 : 1 5) Proprietary Ratio = Shareholder’s Fund / Total Assets = Rs. 2,70,000 / Rs. 8,40,000 = 0.32 : 1 6) Capital Gearing Ratio = Fixed InterestBearing Securities / Equity Share Capital = Rs. 4,20,000 / Rs. 2,00,000 = 2.1 : 1 7) Current Assets to Fixed Assets Ratio = Current Assets / Fixed Assets = Rs. 3,50,000 / Rs. 4,90,000 = 0.71 : 1 Problem 4: From the following particulars found in the Trading, Profit and Loss Account of A Company Ltd., work out the operation ratio of the business concern: TRADING ACCOUNT OF A COMPANY LTD.                                        for the period ending December 31   PROFIT AND LOSS ACCOUNT OF A COMPANY LTD. for the period ending December 31 Solution:
Operating Ratio = (Cost of goods sold and other operating expenses / Net Sales) × 100 Cost of Goods Sold:                                                                                                   Rs, Opening Stock                                                                                                        1,400
Purchases 6,400 Direct Expenses 300 8,100 Less Closing Stock 600 Cost of Goods Sold 7,500 Operating Expenses: Rs. a) Administrative Expenses 1,600 b) Selling and Distribution Expenses 300 c) Financial Expenses 100 Operating Expenses 2,000
Operating Ratio = (7,500 + 2.000 / 10,000) × 100 = 95%
Problem 5: From the following Balance Sheet and additional information, you are required to calculate: (i) Return on Total Resources (ii) Return on Capital Employed (iii) Return on Shareholders’ Fund                                                                                                       Balance Sheet as of 31st Dec. The net operating profit before tax is Rs. 2,80,000. Assume tax rate at 50% Dividend declared amounts to Rs.1,20,000 Solution:
I) Return on Total Resources = (Profit after Tax / Total Assets) × 100 = (Rs. 1,40,000 / Rs. 13.60.000) × 100 = 10.29%
ii) Return on Capital Employed = (Profit before Tax & Interest / Capital Employed) × 100 = (Rs. 2,96,000 / Rs.12,00,000) × 100 = 24.7% iii) Return on Shareholder’s Fund = Profit after Tax / Shareholders Fund = (Rs.1,40,000 / Rs.10,00,000) × 100 = 14%
Problem 6: The following Trading and Profit and Loss Account of Fantasy Ltd. for the year 31‐3‐2000 is given below: Calculate: 1. Gross Profit Ratio        2. Expenses Ratio     3. Operating Ratio 4. Net Profit Ratio           5. Operating (Net) Profit Ratio   6. Stock Turnover Ratio.  Solution:
1) Gross Profit Margin = (Gross profit / Sales) × 100
= (2,00,000 / 5,00,000) × 100 = 40% 2) Expenses Ratio = (Op.Expenses / Net Sales) × 100 = (1,13,000 / 5,00,000) × 100 = 22.60% 3) Operating Ratio = (Cost of goods sold + Op. Expenses / Net Sales) × 100 = (3,00,000 + 1,13,000 / 5,00,000) × 100 = 82.60% Cost of Goods sold = Op. stock + purchases + carriage and Freight + wages – Closing Stock = 76250 + 315250 + 2000 + 5000 ‐ 98500 = Rs.3,00,000 4) Net Profit Ratio = (Net Profit / Net Sales) × 100 = (84,000 / 5,00,000) × 100 = 16.8% 5) Operating Profit Ratio = (Op. Profit / Net Sales) × 100 Operating Profit = Sales – (Op. Exp. + Admin Exp.) = (87,000 / 5,00,000) × 100 = 17.40% 6) Stock Turnover Ratio = Cost of goods sold / Avg. Stock = 3,00,000 / 87,375 = 3.43 times

## What is the Ratio Analysis Formula?

The term “Ratio Analysis” refers to the analytical technique wherein a plethora of financial ratios is computed based on the financial information either available in the annual reports or public domain. The ratio analysis helps in assessing the subject company’s financial and operational position.
The financial ratios used in ratio analysis technique are broadly categorized into the following four major categories:
• Liquidity Ratios
• Solvency Ratios
• Efficiency Ratios
• Profitability Ratios

#### Efficiency Ratios

These ratios indicate how efficiently a company is able to utilize its available assets or convert its inventories to cash. The formula of some of the major efficiency ratios are:
• Receivables Turnover Ratio = Sales / Accounts Receivable
• Inventory Turnover Ratio = COGS / Inventories
• Payable Turnover Ratio = COGS / Accounts Payable
• Asset Turnover Ratio = Sales / Total Assets
• Net Fixed Asset Turnover Ratio = Sales / Net Fixed Assets
• Equity Turnover Ratio = Sales / Total Equity

### Example of Ratio Analysis Formula (With Excel Template)

Let’s take an example to understand the calculation of Ratio Analysis in a better manner.

#### Ratio Analysis Formula – Example #1

Let us take the example of Apple Inc.’s annual report for 2019 to illustrate the calculation of different ratios used in ratio analysis. As per the latest annual report, the following information is available. Based on the given information, calculate the liquidity, solvency, efficiency and profitability ratios of Apple Inc. for the year 2019. Solution:

#### Liquidity Ratios

Current Ratio is calculated using the formula given below Current Ratio = Current Assets / Current Liabilities
• Current Ratio = \$162,819 million / \$105,718 million
• Current Ratio = 1.54x
Quick Ratio is calculated using the formula given below Quick Ratio = (Cash & Cash Equivalents + Accounts Receivables) / Current Liabilities
• Quick Ratio = (\$48,844 million + \$22,926 million) / \$105,718 million
• Quick Ratio = 0.68x
Cash Ratio is calculated using the formula given below Cash Ratio = Cash & Cash Equivalents / Current Liabilities
• Cash Ratio=  \$48,844 million / \$105,718 million
• Cash Ratio = 0.46x

#### Solvency Ratios

Debt to Equity Ratio is calculated using the formula given below Debt to Equity Ratio = Total Debt / Total Equity
• Debt to Equity Ratio = \$108,047 million / \$90,488 million
• Debt to Equity Ratio = 1.19x
Debt Ratio is calculated using the formula given below Debt Ratio = Total Debt / Total Assets
• Debt Ratio = \$108,047 million / \$338,516 million
• Debt Ratio = 0.32x
Interest Coverage Ratio is calculated using the formula given below Interest Coverage Ratio = EBITDA / Interest Expense
• Interest Coverage Ratio = \$76,477 million / \$3,576 million
• Interest Coverage Ratio = 21.39x

#### Efficiency Ratios

Receivables Turnover Ratio is calculated using the formula given below Receivables Turnover Ratio = Sales / Accounts Receivable
• Receivables Turnover Ratio = \$260,174 million / \$22,926 million
• Receivables Turnover Ratio = 11.35x
Inventory Turnover Ratio is calculated using the formula given below Inventory Turnover Ratio = COGS / Inventories
• Inventory Turnover Ratio = \$161,782 million / \$4,106 million
• Inventory Turnover Ratio = 39.40x
Payable Turnover Ratio is calculated using the formula given below Payable Turnover Ratio = COGS / Accounts Payable
• Payable Turnover Ratio = \$161,782 million / \$46,236 million
• Payable Turnover Ratio = 3.50x
Asset Turnover Ratio is calculated using the formula given below Asset Turnover Ratio = Sales / Total Assets
• Asset Turnover Ratio = \$260,174 million / \$338,516 million
• Asset Turnover Ratio = 0.77x
Net Fixed Asset Turnover Ratio is calculated using the formula given below Net Fixed Asset Turnover Ratio = Sales / Net Fixed Assets
• Net Fixed Asset Turnover Ratio = \$260,174 million / \$37,378 million
• Net Fixed Asset Turnover Ratio = 6.96x
Equity Turnover Ratio is calculated using the formula given below Equity Turnover Ratio = Sales / Total Equity
• Equity Turnover Ratio = \$260,174 million / \$90,488 million
• Equity Turnover Ratio = 2.88x

#### Profitability Ratios

Gross Margin is calculated using the formula given below Gross Margin = (Sales – COGS) / Sales
• Gross Margin = (\$260,174 million – \$161,782 million) / \$260,174 million
• Gross Margin = 37.8%
Operating Profit Margin is calculated using the formula given below Operating Profit Margin = EBIT / Sales
• Operating Profit Margin = \$63,930 million / \$260,174 million
• Operating Profit Margin = 24.6%
Net Margin is calculated using the formula given below Net Margin = Net income / Sales
• Net Margin = \$55,256 million / \$260,174 million
• Net Margin = 21.2%
Return on Total Asset (ROA) is calculated using the formula given below Return on Total Asset (ROA) = EBIT / Total Assets
• Return on Total Asset (ROA) = \$63,930 million / \$338,516 million
• Return on Total Asset (ROA) = 18.9%
Return on Total Equity (ROE) is calculated using the formula given below Return on Total Equity (ROE) = Net Income / Total Equity
• Return on Total Equity (ROE) = \$55,256 million / \$90,488 million
• Return on Total Equity (ROE) = 61.1%

## What is Ratio Analysis Formula?

Ratio Analysis Formula is obtained by dividing the first number of the ratio with the second number of the ratio. It is expressed as a single decimal number or sometimes multiplied by 100 and expressed as a percentage. Ratio = a : b

### Ratio analysis formula = a/b OR Ratio Analysis Formula = a/b × 100%

Some of the frequently used ratios in accountancy and business are as follows. These ratios are helpful to quickly analyze and make the needed conclusion.

## Solved Examples on Ratio Analysis Formula

• ### Example 1: A plastic material is used to manufacture tables and its transversal strain is 0.8 and its axial strain is 0.6. Find the Poisson ratio of the plastic material.

Solution: The given values of strain are as follows. Transversial strain = 0.8 Axial Strain = 0.6 Poisson Ratio = Transversial Strain/Axial Strain = 0.8/0.6 = 1.33 Answer: Hence the Poisson’s ratio is 1.33

## FAQs on Ratio Analysis Formulas

1. What is the Ratio Analysis Objective?

Some of the essential objectives of ratio analysis are:

1. Evaluates the strength and weakness of the business

2. Assess the liquidity, the solvency, the profitability, and the level of efficiency of the business.

3. Maintains transparency

4. Good at budget preparations

5. Utilization of assets are properly done

6. Clear comparison between inter and intra company.

7. An excellent method to predict the future course of actions of the business.

8.  It helps to review the past trends of the management.

Intelligence, skill, and proper data are the key points in the analysis, interpretation, and calculation of the ratios.

1. What is Ratio Analysis Limitation?
Everything has its advantages and limitations. Just as the ratio analysis has advantages, it has a few limitations parallelly. Some of the limitations are:
1. Misinterpretation is one of the major limitations in ratio analysis because of inadequate or historical data.
2. Reviewing past trends management is not always suitable for future prediction; they may also not be correct.
3. Only the person who is highly skilled and has enormous knowledge can use ration analysis correctly.
4. Ratio analysis may not offer a realistic picture of the business as the data is dependent on historical data.
5. A comparison between the company’s performance of different sectors cannot be done using ration analysis as different companies work in a different environment and have different accounting practices.

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