Explanation of Various Ratios
1. Stock turnover Ratio = Cost of Goods sold / Average Stock
or
Sales / Average Stock
The ratio explains the efficiency level of converting inventor into sales.The ultimate objective of any business organization is to achieve higher amount of sales but still mainting lower amount of stock.This ratio is best indicator towards aforesaid objective.
If stock turnover ratio of a company is 35 times,it means that the company is able to achieve sales of Rs35 during the year at average stock level of Rs1.Hence,high ratio certainly indicates efficient perfomance in the context of attaining higher sales at low inventory levels.
2.Working Capital Turnover Atio = Sales / Average Working Capital
This ratio represents the firm's ability to generate sales as compared to the working capital employed in the business.If the ratio is 23 times,it means that the firm is able to maintain sales of Rs23 during the year desipte the fact only Rs.1 is the average investment made in the working capital during the year.
3.Capitial Employed Turnover Ratio = Sales / Average capitial Employed
The objective of this ratio is to determine the efficiency with which the capitial employed is utilized for achieving sales.
It is a well established fact that sales achieved by any business organization is the result of combine effect of investment made in fixed assets and working capitial.Hence,capitial employed turnover ratio plays very important role in deciding the effectiveness of sales being achieved.
If the capitial employed turnover ratio of any business organization is 48 times,it means that the sales of Rs48 has been achieved by employing investment of Rs1 in fixed assets and working capitial.Therefore,higher the ratio, the more effective utilization of capitial employed has been made and vice-versa.
4.Earnings Per Share(EPS) = Earnings available to equality shareholders / No.of equity shares
The objective of this ratio is to measure the profitability of the company on per equity shares basis.Hence,higher the EPS better it is and vice-versa.
Another point to be noted is that EPS helps in determining the market price of the equity shares.It also helps in estimating the company's capacity to pay dividend.
5.Divided Per Shares(DPS) = Dividened to equity sharesholer / No.of equity shares
The obective of this ratio is to measure the dividened distributed per equity share.Hence,higher the DPS,better it is and vice-versa.
It is to be noted that low Dividend per Share may not be considered undesirable if the company utilizes its accumlated profits for the purpose of growth and investment in the new projects.
6.Dividend-Payout(D/P) Ratio = DPS * 100 / EPS
This ratio indicates the proportion of earnings that has been distributed as dividend by the company to the equity sharesholders.If EPS of a company is Rs10 and DPS is Rs4,it means that 40% of earnings is distributed as dividend to equity sharesholders.To judge whether the ratio is satisfactory or not, it should be compared with its own past ratios or with of similiar enterprises in the same industry.
7.Price-Earnings Ratio = Market Price per share / EPS
The objective of this ratio is to find out the expectations of the sharesholders about the earnings of the company as compared to the market price of the share.
This ratio indicates the payback period within which the investment in the shares can be recovered by ways of EPS.High level of P/E ratio is very favourable to the existing shareholders as it indicates the fact that the company is growing and has good earnings prospects.
8.Earnings Yield = EPS * 100 / Market Price per Share
The objective of this ratio is to measure the earnings of the company as compared to the market price of the share.If earnings yield of a company is 20%, it means that the return to the shareholder is 20% of investment.Hence,higher the ratio,better it is.
9.Dividend Yield = DPS * 100 / Market Price per share
The objective of this ratio is to measure the dividend as compared to the market price of the share.If Dividend Yield of a company is 20%, it means that the dividend paid to the shareholder is 20% of the investment.
10.Net Profit Ratio = PAT * 100 / Sales
The objective of this ratio is to compute the overall profitabiity obtained by the business as to the sales.Higher the ratio, greater is the capacity of the company to pay dividend and create reserve.
11.Operating Cost Price = Operating Cost * 100 / Sales
This ratio indicates the average operating cost incurred on sale of goods worth Rs100.This ratio is desired to be maintained as low as possible it will automatically mean higher operating profits to the company.
12.Return on shareholders'Funds = Profit after tax * 100 / Shareholder'Funds
This ratio represent the firm's ability to generate profit which is attributed to shareholder's funds.Hence,higher the ratio, the more efficient will be the management, in utilization of shareholder's funds.
13.Return on total Assets = EBIT * 100 / Total Assets
The objectives of this ratio is to find out how efficiency the total assets have been used by the management in generating the profits.Hence,higher the ratio,the more efficient will be management in utilization of total assets.
This ratio represent the firm's ability to generate profits which is attributable to equity shareholdrs'funds.
Hence,higher the ratio, the more efficient will be the management in utilization of equity shareholders'funds.
15.Quick Ratio(Liquid Ratio) = Quick Assets / Current Liabilities
This ratio indicates the quick assets available for each rupee of current liability.Traditionally,quick ratio 1:1 is considered to be satisfactory as it denotes the facts that the liquid assets of the company are sufficient to meet the current liabilities.High Quick Ratio may represent excess investment in quick assets and low quick ratio may represent inadequate investment in quick assets.Therefore, it is always recommended to maintain quick ratio as near to its idea of 1:1.
16.Gross Profit Ratio = Gross Profit * 100 / Sales
The main objective of this ratio to determine the efficiency with which the production and selling operation are carried on.
1.Gross Margin earned as % of sales; and
2.The portion of sales that is le ft over to cover operating expenses other than cost of goods sold and non-operating expenses like interest on borrowed funds and to pay dividend to shareholders
17.Debt Service Coverage Ratio = EBIT / interest + (Loan Repaid / 1-Tax Rate)
The ratio shows the number of times the amount of interest on long-term debts and principal loan repaid is covered by the profits out of which such amount has to be paid.
18.Current Ratio = Current Assets / Current Liabilities
The ratio indicates the current assets available for each rupee of current liability.If this ratio is 2:1, it means that the firm is having current assets of Rs2 for every Rs1 of current liability.It also means that even if current assets become half, the firm can still meet its short-term obligations.
However, too high current ratio may represent excess investment in current assets which may result in idle funds and which may further result in low profitability since idle funds earn nothing.Similarly, too low current ratio may represent indequate investment in current assets which may result in low liquidity and may threaten the solvency of the enterprise.
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