Ratio Analysis – Ratios Formulae

Ratio analysis’”the foundation of fundamental analysis’”helps to gain a deeper insight into the financial health and the current and probable performance of the company being studied. For this insight, the analysts use the quantitative method where the information recorded in the company’™s financial statements are compared and analyzed. And there are certain formulae that are used for the same.

In this blog, we shall discuss various Ratio Analysis, the various Ratios Formulae, and their importance. We would look into the classification of ratios, where we have explained the importance of using various ratios and the formulae to know how they are calculated. To help you learn better and for the easy revisions later, you are provided here with the formulae for the ratios that we have discussed in this series. Let’™s move on and look into Ratio Analysis ‘“ Ratios Formulae.

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Liquidity Ratios

Also known as Solvency Ratios, and as the name indicates, it focuses on a company’™s current assets and liabilities to assess if it can pay the short-term debts. The three common liquidity ratios used are current ratio, quick ratio, and burn rate. Among the three, current ratio comes in handy to analyze the liquidity and solvency of the start-ups.

S. No.	RATIOS	FORMULAS
1	Current Ratio	Current Assets/Current Liabilities
2	Quick Ratio	Liquid Assets/Current Liabilities
3	Absolute Liquid Ratio	Absolute Liquid Assets/Current Liabilities

Profitability Ratios

These ratios analyze another key aspect of a company and that is how it uses its assets and how effectively it generates the profit from the assets and equities. This also then gives the analyst information on the effectiveness of the use of the company’™s operations.

S. No.	RATIOS	FORMULAS
1	Gross Profit Ratio	Gross Profit/Net Sales X 100
2	Operating Cost Ratio	Operating Cost/Net Sales X 100
3	Operating Profit Ratio	Operating Profit/Net Sales X 100
4	Net Profit Ratio	Net Profit/Net Sales X 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 Profit after Taxes/ Gross Capital Employed X 100
7	Earnings Per Share Ratio	Net Profit After Tax & Preference Dividend /No of Equity Shares
8	Dividend Pay Out Ratio	Dividend Per Equity Share/Earning Per Equity Share X 100
9	Earning Per Equity Share	Net Profit after Tax & Preference Dividend / No. of Equity Share
10	Dividend Yield Ratio	Dividend Per Share/ Market Value Per Share X 100
11	Price Earnings Ratio	Market Price Per Share Equity Share/ Earning Per Share X 100
12	Net Profit to Net Worth Ratio	Net Profit after Taxes / Shareholders Net Worth X 100

Working Capital Ratios

Like the Liquidity ratios, it also analyses if the company can pay off the current debts or liabilities using the current assets. This ratio is crucial for the creditors to establish the liquidity of a company, and how quickly a company converts its assets to bring in cash for resolving the debts.

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	Average Trade Creditors / Net Credit Purchases X 100
6	Working Capital Turnover Ratio	Net Sales / Working Capital
7	Fixed Assets Turnover Ratio	Cost of goods Sold / Total Fixed Assets
8	Capital Turnover Ratio	Cost of Sales / Capital Employed

Capital Structure Ratios

Each firm or company has capital or funds to finance its operations. These ratios, i.e., the Capital Structure Ratios, analyze how structurally a firm uses the capital or funds.

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 Share Capital / Fixed Interest Bearing Funds
4	Debt Service Ratio	Net profit Before Interest & Taxes / Fixed Interest Charges

Overall Profitability Ratio

True to its name, these ratios measure how profitable a particular firm or company is, or how it can turn its assets and capital into profits for future use.

S. No.	RATIOS	FORMULAS
1	Overall Profit Ability Ratio	Net Profit / Total Assets

Hope the knowledge that we shared on the Ratio Analysis ‘“ Ratios Formulae topic helped you understand these!