Liquidity Ratios
Liquidity ratios calculate a firm capability to spend off its shortterm 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 
3  Absolute Liquid Ratio  Cash + Marketable Securities/Current Liabilities 
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 shortterm processes. It is this emphasis on the short term that indicates working capital from longerterm 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 longterm debt, shortterm debt, jointstock, and select stock. A firm balance of shortterm debt versus longterm 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.S.No.  Ratios  Formulas 
1  Overall Profit Ability Ratio  Net Profit / Total Assets 
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 = 0.45Problem 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. 1,80,000Problem 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 
 Current Ratio
 Quick Ratio
 Inventory to working capital
 Debt to Equity Ratio
 Proprietary Ratio
 Capital Gearing Ratio
 Current Assets to Fixed Assets
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
Expenses  Rs.  Income  Rs. 
To Opening Stock  1,400  By Net Sales  10,000 
To Purchases  6,400  By Closing Stock  600 
To Direct Expenses  300  
To Gross Profit  2,500  
10,600  10,600 
Expenses  Rs.  Income  Rs 
To Operating Expenses a)Administrative Expenses b)Selling and Distribution Expenses  1,600 300  By Gross Profit  2,500 
To Financial Expenses  100  
To Net Profit  500  
2,500 
Operating Ratio = (Cost of goods sold and other operating expenses / Net Sales) × 100 Cost of Goods Sold: Rs, Opening Stock 1,400Purchases 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.
Rs.  Rs.  
Share Capital (Rs. 10)  8,00,000  Fixed Assets  10,00,000 
Reserves  2,00,000  Current Assets  3,60,000 
8% Debentures  2,00,000  
Creditors  1,60,000  
13,60,000  13,60,000 
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:
Particular  Rs.  Particular  Rs. 
To Opening Stock  76,250  By Sales  5,00,000 
Purchases  3,15,250  Closing Stock  98,500 
Carriages and Freight  2,000  
Wages  5,000  
Gross Profit b/d  2,00,000  
5,98,500  5,98,500  
To Administration Expenses  By Gross Profit b/d  2,00,000  
Selling and Dist. expenses  1,01,000  Nonoperating incomes  
Non operating expenses  12,000  Interest on securities  1,500 
Financial Expenses  7,000  Dividend on Shares  3,750 
Net Profit c/d  84,000  Profit on sale of shares  750 
2,06,000  2,06,000 
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 = ($48,844 million + $22,926 million) / $105,718 million
 Quick Ratio = 0.68x
 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 = $108,047 million / $338,516 million
 Debt Ratio = 0.32x
 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 = $161,782 million / $4,106 million
 Inventory Turnover Ratio = 39.40x
 Payable Turnover Ratio = $161,782 million / $46,236 million
 Payable Turnover Ratio = 3.50x
 Asset Turnover Ratio = $260,174 million / $338,516 million
 Asset Turnover Ratio = 0.77x
 Net Fixed Asset Turnover Ratio = $260,174 million / $37,378 million
 Net Fixed Asset Turnover Ratio = 6.96x
 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 = $63,930 million / $260,174 million
 Operating Profit Margin = 24.6%
 Net Margin = $55,256 million / $260,174 million
 Net Margin = 21.2%
 Return on Total Asset (ROA) = $63,930 million / $338,516 million
 Return on Total Asset (ROA) = 18.9%
 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 : bRatio analysis formula = a/b OR Ratio Analysis Formula = a/b × 100%
Current Ratio = Curent Assets / Curent Liabilities Quick Ratio = Liquid Assets / Current Liabilities Gross Profit Ratio = Gross Profit / Net Sales × 100 Net Profit Ratio = Net Profit / Net Sales × 100 Inventory Ratio = Net Sales / Inventory Working Capital Turnover Ratio = Net Sales / Working Capital Overall Profitability Ratio = Net Profit / Total Assets
Solved Examples on Ratio Analysis Formula
Example 1: The gross profit of a company is $ 8 million and it has made net sales of $32 million. Find the gross profit ratio of the company
Solution: The given values of profit and sales are as follows: Gross Profit = $8 million Net Sales = $32 million Ratio of gross profit and net sales = & Gross Profit Ratio = Gross Profit/Net Sales × 100 = $8 million/$32million × 100 = 25% Answer: Gross Profit Ratio of the Company = 25%
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:

Evaluates the strength and weakness of the business

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

Maintains transparency

Good at budget preparations

Utilization of assets are properly done

Clear comparison between inter and intra company.

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

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.
 What is Ratio Analysis Limitation?
 Misinterpretation is one of the major limitations in ratio analysis because of inadequate or historical data.
 Reviewing past trends management is not always suitable for future prediction; they may also not be correct.
 Only the person who is highly skilled and has enormous knowledge can use ration analysis correctly.
 Ratio analysis may not offer a realistic picture of the business as the data is dependent on historical data.
 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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