TYPES OF RATIO AND THEIR FORMULAS.

PROFITABILITY RATIOS:-

1. Return on capital employed (ROCE) / ROCE on Total assets / Rate of return on total
assets

Operating Profit or PBIT x 100%
Capital employed

Capital employed = TOTAL ASSETS - CURRENT LIABILITIES

2. Operating Profit margin

Operating profit x 100%
Revenue

3. Gross Profit Margin

Gross Profit x 100%
Sales revenue

4. Net Profit Margin / Return on sales

Net profit or PBIT x 100%
Sales revenue


LIQUIDITY RATIOS:-

1. Current ratio

Current Assets
Current Liabilities

A ratio of 2:1 is considered to be acceptable, anything less is seen as a danger sign as it
indicates that the company has insufficient funds to cover its short term debts, but this
depends on the nature of the business.

2. Acid or Quick-test ratio

Current Assets Inventory (Stock)
Current Liabilities

Generally a ratio of 1:1 is considered to be acceptable, but this depends on the nature of the
business



EFFICIENCY RATIOS:-

1. Equity turnover / Total Asset revenue

Sales or Revenue
Capital employed

Capital employed = TOTAL ASSETS - CURRENT LIABILITIES



2. Stock holding period / Stock Turnover / Inventory turnover

Inventory x 365 days
Cost of Sales

3. Trade debtor collection period / Debtors turnover / Average collection period

Trade Debtors x 365 Days
Credit Sales

If not given credit sales, just use the Sales/Revenue figure

4. Trade payable payment period / Creditors turnover

Creditors x 365 days
Credit Purchases

If no credit purchases, use cost of sales


GEARING RATIOS:-

1. Gearing Ratio / Debt-Equity ratio

Long-term loans x 100%
Equity + Long-term loans

Once gearing creeps above 50%, Profit may not completely cover interest & the business is
seen as a riskier investment

2. Interest cover / Times interest earned / Interest times

Profit before Interest and tax (Operating profit)
Interest Payable

This is in number of times

Cause for concern if interest cover is <1 (i.e.: interest payable exceeds profit from operations)


INVESTMENT RATIOS:-

1. Dividend Cover

Profit Available to Pay Dividend
Dividends Paid and Proposed


2. Earnings per share

Profit before interest and tax
Number of Equity shares


3. Price-Earning Ratio

Market price per share
Earnings per share (EPS)


4. Dividend yield

Dividend per share x 100%
Current market share price