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1. Current Ratio :Current Ratio = Current Assets

Current Liabilities

Interpretations of the Ratio

A high value of the current ratio gives us an indication that the firm is liquid and has the ability to

pay dues. On the other hand, a low value of Current Ratio gives us an indication that it will be

difficult for the firm to pay its short term obligations. A standard value of current ratio as 2:1 is

considered satisfactory.

2. Quick Ratio or Acid Test RatioQuick ratio = Quick or liquid assets (Current AssetsInventory)

Current LiabilitiesBank Borrowing

Interpretation

A standardised value of 1:1 is considered as a satisfactory value for quick ratio and represents a

satisfactory current financial condition. A higher value shows less dependence on Inventory for

paying short term liabilities and vice versa.

3. Debt Equity RatioDebt equity ratio = Long term debt or Term liabilities

Tangible Net worth Tangible Net worth

Interpretation

The ratio shows the extent to which debt financing has been used in business. A high ratio shows

that the claims of creditors are greater than those of owners. A low debt equity ratio implies a

greater claim of the owners than creditors. A high ratio will indicate high stake of creditors in

relation to total funds. A low ratio will indicate non-utilisation of the borrowed funds for financing

the business activity.

4. Inventory turnover= Cost of goods soldAverse inventory

Interpretation

A high inventory turnover indicates good inventory management while a low turnover suggests

inefficient inventory management. A low turnover may indicate excessive inventory or slow moving

inventory is comparison with sales.

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5. Debtors turnover and collection periodDebtors turnover = Credit sales

Average debtors

Average Collection period = Days in a year

Debtors Turnover

Interpretation

The shorter collection periods shows better quality of debtors and prompt payment by debtors. The

collection period, should however, be compared with the industry average.

6. Creditors Turnover or Payment Period = Average Sundry Creditors x 12 or 52 or 365Annual Purchases of Raw Material

Interpretation

Increasing period may be a concern for the lenders as they may doubt the intention of the party to

pay its creditors or due to a possible liquidity crunch due to non-payment by the debtors. On the

other hand the rising period may be due to the string reputation of the party to enjoy more credit

and also the business trend.

7. Fixed Assets TurnoverFixed Assets Turnover = Sales

Net Fixed Assets

Interpretation of the ratio

Generally, a high fixed assets turnover ratio indicates efficient utilisation of fixed assets in generating

sales, while a lower ratio indicates inefficient management and utilisation of fixed assets.

8. Total Assets TurnoverSales

Total Assets

Interpretation

A higher value of this ratio indicates the firm's ability of generating more sales per rupee invested in

assets.

9. Capital Employed TurnoverCapital Employed Turnover = Sales/Capital employed.

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Interpretation

Higher the ratio more is the efficient utilisation of owners and long term creditors funds. The ratio

should be compared to that of the industry.

10.Gross Profit MarginGross profit margin = Sales - Cost of goods sold x 100

Sales

A higher ratio indicates better management and profitability.

11.Net Profit Margin/ Net Profit RatioNet Profit margin = Net profit x 100

Sales

A high value indicates that a large extent of expenditure related to marketing, administration,

discount, commission etc. is reducing the profitability of the company and vice versa.

12.Return on Investment (ROA)Return on Assets = PBIT

Total Assets

Interpretation

A higher ratio indicates higher profitability of all financial resources invested in the firms assetsand

vice versa.

13.Return on Capital Employed (ROCE)ROCE = Net profit after taxes

Capital employed (CL + TL + TNW)

Higher the ratio, more efficient is the firm in using funds entrusted to it.

14. Return on Share Holder's Equity/ Net Worth

Return on Share holders' equity = Net profit after taxes/ Share Holders Equity (Net Worth).

Interpretation

A higher value indicates a greater extent of earnings generated on the shareholders funds whichis

one of the major objectives of business and vice versa.