Accounting Ratios

Accounting Ratios

1. Profitability/Perfromance Ratios

   • Relation b/w Ratios : net profit margin X asset turnover = ROCE 
   • Gross Profit Margin: Gross Profit / Sales revenue %
     • Gross Profit = sales - COS ~ margin Co. achieves on Sales
   • Operating Profit Margin: profit from Operations / sales revenue %
     • Net Profit Margin : Profit from op. / Sales revenue %
   • Return on Cap Emp : % Profit / Capital Employed
     • Return On equity : PAT / Equity %
   • Net Asset Turnover: (times) Sales revenue / Cap Emp

2. Position/Liquidity Ratios

   • Working Capital Ratios
     • Current Ratio : Current assets / Current Liabilities
       • ~Measures Ability to pay Short term Financial Obligations. ~ 1.5:1 ideal 
     • Quick Ratio: CA - Inventory / CL
       • ~ also known as liquid or acid test ratio. ~ checks if Co. has enough liquid resources to settle its Liabilities.
   • Inventory Turnover Period : Inventory / COS X 365 days
     • ~alternative - COS / Inventory =    ____ times. ~ checks if required amt. is invested in Stock or not.
   • Receivables Collection Period: Trade receivables / Credit sales X 365days
     • ~ If sales not given use revenue. ~credit period given by Co. to its customers.
   • Payables Payment period: Trade payables / Credit purchase X 365 days
     • ~ if purchases not given COS. ~ Credit period taken by Co. from suppliers.

3. Long Term Financial Position

   • Gearing
     • ~Indicates high degree of risk  ~ Indicates sensitivity of Earnings and dividends to changes in profitability and activity levels. ~ High and low Gearing. ~use gearing successfully -    (a)Stable Profits   (b) suitable assets for security.
     • Debt / Equity : Loans+Pref.Sh.capital / ordinary Sh.cap+reserves+NCI
   • Overtrading
     • ~Arises when Co. expands without expanding capital base, hence they rely on overdraft and payables.
   • Interest Cover : PBIT / Interest Payable
     • ~Ability to pay Interest out of the profits generated.

4. Investor Ratios

   • EPS : earning / share
   • Price/Earning Ratio : current sh.price / latest EPS
     • ~ aka Stock market ratio/ earnings multiple. ~Represents market view of future prospects of share.
   • Dividend Yield : Dividend per share / current sh.price
   • Dividend Cover : PAT / Dividends