# Ratio Analysis Formula

• Last Updated : 15 Mar, 2022

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.

### 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.

### 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.

### 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.

### 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.

### 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:

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.

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

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