Current Ratio is calculated as on a particular date, generally as on the date of Balance sheet. Naturally, the Current Assets must be more than the Current Liabilities More the value of Current Assets, better is the liquidity of the firm to meet its current liabilities. It is expressed as follows

Current Ratio

Current Assets

__________________

Current Liability

Although idle ratio 2:1, it is not seen in the actual practice. Banks are more interested in observing the Current Ration of the borrowers, especially for lending for working capital. Banks accept the ration of 1.3:1.

Banks are more vigilant on this ratio because major financial help extended by them is for working capital needs of the clients and Current Ratio is the best indicator of working capital position of any company.

It is pertinent to know what constitutes the Current Assets and Current Liabilities. Following is the illustrative list of Current Assets and Current Liabilities

Current assets includes following:-

- 1. Cash and Cash equivalents
- 2. Sundry Debtors, mainly receivable in 90 days
- 3. Short term Investments, easily convertible in cash and made in the regular course of business
- 4. Stock in trade. Lenders also analyse if the inventory is slow moving or dead investments.
- 5. Tender Deposits, Retention Money etc, if no claims are raised against them
- 6. Tax refunds, if properly approved by the Government authorities

Current liabilities include

- 1. Sundry Creditors
- 2. Bills Payable &
- 3. Short Term Borrowings, falling due within one year
- 4. Installments of Long term Loans falling due within one year
- 5. Dividends Payable
- 6. Outstanding Liabilities
- 7. Taxes collected but not deposited with the government authorities
- 8. Deposits collected from dealers or other business associates

CALCULATE RATIO

It is also known as acid test or liquid ratio. It is slight variation of Current Ratio. For calculating this ratio, only those assets are considered which are quickly convertible in cash. Thus Past due debtors, slow moving items of inventory etc are excluded from the total of Current Assets.

It indicates company’s ability to use. its quick assets to repay it’s current liability’s. It is expressed as follows

Quick Ratio

Current Assets – Inventory

______________________________

Current Liability

Idle ratio = 1:1

Ratio 1:1 indicates that all the current liabilities are well covered by quickly convertible current assets.

Calculate Quick Ratio

It signifies credit period enjoyed by the firm while paying the creditors, or in other words it indicates average credit period of the Creditors for Goods.

It is calculated as follows:

X 365

Creditors for Purchases

______________________________

Gross Purchases

The formula gives “Number of days” for which the Creditors remain unpaid.

This ratio is reliable only if the purchases are spread uniformly through out the year. Therefore this ratio is not reliable if the Purchases are seasonal or if the Minimum order quantity is very high. In the organizations who procure bulk purchases or import bulk in bulk quantity, this ratio gives unrealistic results.

Calculate Creditor’s Turnover Ratio

It signifies credit period extended by the firm to its Customers

It is calculated as follows:

X 365

Sundry Debtors

______________________________

Gross Turnover of Sales

The formula gives “Number of days” for which the Debtors are not recovered.

This ratio is reliable only if the Sales are spread uniformly through out the year. Therefore this ratio is not reliable if the sales are seasonal or if the Sales order quantity is very high. In the organizations who are into manufacturing of Plant and Machineryor Capital goods this ratio gives unrealistic results.

Calculate Debtors Ageing

It measures the Number of times inventory of the company rotates during the year. This ratio is expressed in “ Pure Number form”. For trading concern the best achieved ratio is between 4 and 5. It is an “Efficiency measuring” ratio. More number of times the Inventory moves during the year greater is the efficiency. It also indicates that cost of working capital finance is reduced if the ratio is high.

It is calculated as follows

Stock of Finished Goods

______________________________

Net Sales

Many organizations calculate this ratio by considering Average Inventory, that is to say

Average of Closing and Opening stock of FG

______________________________

Net Sales

Calculate Stock Turnover Ratio

This ratio is also classified under Efficiency Ratio. This ratio indicates how many times the Debtors of the company revolve in the financial year. This ratio is calculated by as follows

Sundry Debtors

______________________________

Gross Sales

It returns a numeric results indicating efficiency of recovery from the Receivables. Higher ratio points out that the Sales are realized faster. This ratio is higher if the debtors outstanding as on the Balance Sheet date are lower as compared to the average outstanding during the year. Thus it can be a deceptive in some cases.

Calculate Debtors T/O Ratio

This ratio indicates how fast the creditors are paid by the company. This ratio is calculated by following formula

Gross Purchases

______________________________

Sundry Creditors

Care should be taken to see that creditors related to only Raw Material Purchases are considered and creditors for capital expenditure or exceptional transactions are excluded.

This ratio can be deceptive if the creditors as on the date of Balance Sheet are significantly lower or higher than the average outstanding during the year

Calculate Creditor’s Turnover Ratio

This ratio gives us the results as to how efficiently the fixed assets, especially Plant and Machinery are used. This ratio is important when the capital expenditure is incurred in the accounting year under consideration.

The ratio is calculated with the following formula

Gross Turnover of Sales

______________________________

Gross Fixed Assets

Calculate Fixed Assets Turnover Ratio

It measures how Efficiently a company is utilizing its working capital during the financial year. For a trading firm ratio between 5 and 6 is considered as good, whereas for manufacturing the judgment depends on the production cycle of the unit.

It is expressed as follows :

Net sales

______________________________

(Beginning W.C. + Earning W. C. )/ 2

For more accurate results, average working capital utilized during the year can also be considered on Monthly average basis.

CALCULATE RATIO

This ratio returns Percentage of Gross Profit to Net sales. This is the most popular ratio. Owners and Investors of the business are very keen to know what is the Profit of their business as compared to its annual Net sales.

This is an indicator of the Gross profitability of the organisation therefore is compared with the similar units in the market,( Inter Company Comparision) as well as it is compared with the ratio of previous years, ( Intra Company Comparision). Improved ratio over previous year is a good achievement whereas if the GP Ratio is reduced it indicates poor performance. This is a very popular and powerful tool for comparing Performance of the management over a period of time.It is expressed as follows :

X 100

Gross Profit

______________________________

Sales (Gross Sales)

Gross Profit ratio compared with earlier year G.P. Ratio.

CALCULATE GP RATIO

This ratio returns Percentage of Profit after tax to Net sales. This is the most popular ratio. Owners and Investors of the business are very keen to know what is the Net Profit of their business as compared to its annual net sales.

This is an indicator of the profitability of the organisation therefore is compared with the similar units in the market,( Inter Company Comparision) as well as it is compared with the ratio of previous years, ( Intra Company Comparision). Improved ratio over previous year is a good achievement whereas if the NP Ratio is reduced it indicates poor performance. This is a very popular and powerful tool for comparing Performance of the management over a period of time.

It is expressed are as follows :

X 100

Net Profit after tax

______________________________

Net Sales for the year

CALCULATE NP RATIO

This ratio gives the Percentage of Earnings to the total Capital Employed. As the term Capital Employed ( Denominator )is wider than Funds Invested, Numerator is also adjusted to include Tax and Interest paid on the borrowed funds to calculate this ratio.

It is calculated as follows :

X 100

Profit before Interest and Tax

______________________________

Capital Employed

Capital employed is calculated as

Total of Balance sheet ( Liability Side) less Provisions,

Thus only the Provisions for expenses are deducted from the Total Liabilities to arrive at the figure “ Capital Employed”

This being the profitability ratio, this ratio should be compared with the ratio of previous years.

CALCULATE ROCE

It is expressed as follows:

X 100

Net Profit after tax

__________________________________

Own funds at the beginning of the year

This ratio is a good indicator of profitability or earning capability of the company.

Therefore it is compared with the earlier years’ results.

It is also used as indicator to compare different project investments with in a project profit ratio. Higher ROI should be selected.

CALCULATE ROI

Cost of Raw Material is always a crucial constituent of the total cost of Production. Therefore Material consumption ratio is a very important ratio to the management. This Ratio gives the percentage of material consumed during the course of manufacturing process. In respect of Trading concern this ration indicates the gross profit earned on purchases. Material costs should ideally include landed cost. This ratio is always to be compared with the ratio of previous year. The trend indicated by this ratio is a vital guideline to the management.

The ratio is simple to calculate

X 100

(Opening Stock of RM+ WIP+ Purchases )-(Closing Stock of RM and WIP)

____________________________________________________________________

GROSS SALES

Calculate Material consumption ratio

This ratio tells us the percentage of Operating cost or Manufacturing costs to Total sales. In simple form, it is 1- GP Ratio. However it is calculated as

X 100

Raw Material + Operating Costs

______________________________

Gross Sales

CALCULATE RATIO of operating cost

Every investor is interested in knowing how much profit is attributable to his share of Investment in the business. EPS ratio gives answer to this question. As the name suggests the ratio returns the share of profit earned per share issued and subscribed by the company. In this ratio, on the numerator side, Profit is considered after taxation. Definition of the NPAT is very clear in various documents. The important factor is denominator. It is because it is possible that the number of shares issued and subscribed vary tremendously during the financial year, and such change of number of shares may not result in corresponding amount of Capital. Therefore for calculating Number of shares, one has to refer to the relevant accounting standards issued by the accounting bodies, in India it is ICAI. The ratio gives amount of profit attributable per issued and subscribed Equity Share.

The ratio is calculated as follows :

EPS =

NPAT- Preference dividend

______________________________

No of Equity Shares

This ratio is of very important to the investors. Little variation in this ratio is earning per share is also considered along with the Market value as well as with the dividends received on the equity share

CALCULATE EPS

It is indicates the part of earning not paid to investors is left for investment to provide for future earning growth,

It is expressed as follows :

Dividend Payout Ratio =

DPS

_____________

EPS

Investors seeking high current income prefer high dividend payout ratio. Those investors seeking capital growth prefer low dividend payout ratio.

Higher ratio indicates higher withdrawal of Profits, conversely lower ratio indicates policcy to “Plough back” the profit for future growth.

CALCULATE Dividend Payout Ratio

There has to be balance between Own Capital and Borrowed capital. The composition of Long term funds of the company with regard to Own funds and borrowed funds is indicated by D E Ratio. For general SME sector or non capital intensive industries banks and funding institutions prefer 3:1 ratio, however depending upon the need of long term funds, this ratio can be higher. Higher D E Ratio gives good Financial leverage to the organisation.

All the bankers and financial institutions give tremendous importance to this ratio.

The ratio is calculated as follows

Long term Borrowed funds

_______________________________

Owned Funds

This ratio gives clear indication of burden of outside debts on the company and also burden of interest cost to the organisation.

CALCULATE DEBT EQUITY RATIO

This is also a very popular ratio for assessing the borrowing capacity of the company. The ratio is known as Total Outside Liability to Tangible Net worth. The New Worth represents the shareholders’ funds. Therefore the Ratio gives us the relationship between aggregate of borrowings to the Shareholders’ funds. This is represented in comparative figure formats like 1:2 etc. By comparing the ratio of two consecutive years lenders can get the idea of the financial position of the borrowers. The ratio is calculated with the following formula

Long term borrowings

_______________________________

Net worth of the company

Calculate ratio TOL/TNW

It is a measure of a company ability to serve the loan funds.

Financial costs are generally clubbed for calculating this ratio. Interest on working capital as well as on term loan is considered in this ratio.

It is expressed as follows:

EBIT

__________________________________

All financial Charges

As a variation, EBIDTA is also considered as a Numerator.

Calculate FOIR

Debt Service Coverage Ratio

This is a very crucial ratio for funding institute. The DSCR tells us the surplus of cash generated over and above its fixed obligations. This is a very important ratio for appraising the long term loan requirements. The ratio is calculated as follows

Earnings before Interest but after Tax with Interest added back

_________________________________________________________

Interest and Repayment Obligations for the year

This ratio is expressed in the form of Pure Number, the ratio 1.75 is considered safe for the lender to finance.

Calculate D S C R

This is very popular ratio to arrive at the minimum level of Operations which covers all the costs and from this point the organization starts earning profits. This is based on the assumption of Fixed and Variable cost system.

To calculate BEP, organisation must identify its Fixed costs and Variable costs. Some costs have a fixed element, it means a portion of these costs are fixed irrespective of the level of operations. The fixed element of variable costs are also identified to arrive at correct BEP.

Fixed and Variable Cost system assumes that every unit produced and sold contributes to the fixed costs of the organisation, this recovery of fixed costs is known as CONTRIBUTION, BEP is a point where accumulated “Contribution” equals the fixed costs of the company for the given period. Thus every additional unit sold generates profit after the level of BEP.

The ratio is calculated in two phases

Firstly the PV RATIO is calculated with the following formula

X 100

Contribution

__________________________________

SALES

Where Contribution is

Sales – Variable Costs

Second Phase

BEP is calculated with the following formula

SALES

__________________________________

PV Ratio

Calculate BEP

One of the variations in BEP is “Cash BEP” where Depreciation is not considered as expenses because it is a Non Cash Expenses

Labour cost to Sales

Power Consumption to Sales

These ratios are calculated in Percentage format. These can be compared with the ratios of previous periods to examine the variations in the current period.

It means Profit Before Interest and Tax. This figure is important for the top management as well as financial institutions. This figure shows the gross earnings of the company before Interest and Tax. In other words had the company been “Zero Debt” company, it would have earned Pre tax profit upto PBIT

Many times some amounts are “Charged” to Profit and loss account of the company to recover the original heavy expenditure. It is called Amortization. The items like brand building, expenses incurred prior to commencement of the project or during construction period etc are charged to the Revenue after the company starts its commercial activities. This Charging is known as Amortization. These are non cash expenses. Earnings before such charges are debited are significant to the management and lenders. As the name indicates, this is a figure of profit/earnings before Interest, Depreciation, taxes and other Amortizations.

The term Capital employed includes all the funds applied in the company whether from shareholders, banks, creditors etc. except the provisions which are to be met instantly.

New worth indicates the funds owned by the shareholders/owners of the organisation. It is a sum of Capital raised and free reserves less any intangible asset or unabsorbed debit balance of Profit and Loss Account.

Difference between Current Assets and Current liabilities of a company is called as Working Capital Gap. This gap indicates excess of funds blocked in Current Assets of the company over its current liabilities.

Banks finance for the working capital needs of their customers. The permissible limit of such finance is calculated by various methods. Generally banks insists for a margin of 25 % new Current Asset as the margin. However a healthy company can raise upto 25 % of gross current assets. Working Capital gap, as reduced by the requisite margin is known as MPBF

Working capital gap minus the funds raised for working capital by way of Working capital limits is known as Net working capital.

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