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Analysis of Profitability:: Short Term Financial Position or Test of Solvency

This document outlines various ratios used to analyze profitability and financial position. It discusses ratios for general profitability like gross profit ratio and operating profit ratio. It also covers overall profitability ratios such as return on shareholders' investment, earnings per share, and dividend yield ratio. The document also lists ratios that evaluate short term financial position like current ratio and quick ratio. Additionally, it outlines ratios for analyzing current assets movement, long term solvency, and debt levels.

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53 views2 pages

Analysis of Profitability:: Short Term Financial Position or Test of Solvency

This document outlines various ratios used to analyze profitability and financial position. It discusses ratios for general profitability like gross profit ratio and operating profit ratio. It also covers overall profitability ratios such as return on shareholders' investment, earnings per share, and dividend yield ratio. The document also lists ratios that evaluate short term financial position like current ratio and quick ratio. Additionally, it outlines ratios for analyzing current assets movement, long term solvency, and debt levels.

Uploaded by

gauravbhardwaj900
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
Download as docx, pdf, or txt
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Analysis of Profitability:

General profitability:
Gross profit ratio = (Gross profit / Net sales) 100
Operating ratio = (Operating cost / Net sales) 100
Expense ratio = (Particular expense / Net sales) 100
Operating profit ratio = (Operating profit / Net sales) 100
Overall profitability:
Return on shareholders' investment or net worth = Net profit after interest and tax /
Shareholders' funds

Return on equity capital = (Net profit after tax Preference dividend) / Paid up
equity capital

Earnings per share (EPS) ratio = (Net profit after tax Preference dividend) /
Number of equity shares

Return on gross capital employed = (Adjusted net profit / Gross capital employed)
100

Return on net capital employed = (Adjusted net profit / Net capital employed) 100

Dividend yield ratio = Dividend per share / Market value per share

Dividend payout ratio or pay-out ratio = Dividend per equity share / Earnings per
share
Short Term Financial Position or Test of Solvency:
Current ratio = Current assets / Current liabilities
Quick or acid test of liquid ratio (for immediate solvency) = Liquid assets / Current
liabilities
Absolute liquid ratio = Absolute liquid assets / Current liabilities
Current Assets Movement, Efficiency or Activity Ratios:
Inventory / Stock turnover ratio = Cost of goods sold / Average inventory at cost

Debtors of receivables turnover ratios = Net credit sales / Average trade debtors

Average collection period = (Trade debtors No. of working days) / Net credit sales

Creditors or payables turnover ratio = Net credit purchase / Average trade creditors

Average payment period = (Trade creditors No. of working days) / Net credit
purchase

Working capital turnover ratio = Cost of sales / Net working capital
Analysis of Long Term Solvency:
Debt to equity ratio = Outsiders funds / Shareholders funds or External funds
/ Internalfunds

Ratio of long term debt to shareholders funds (Debt equity) = Long term debt /
Shareholders funds

Proprietary of equity ratio = Shareholders funds / Total assets

Fixed assets to net worth = Fixed assets after depreciation / Shareholders' funds

Fixed assets ratio or fixed assets to long term funds = Fixed assets after depreciation
/ Total long term funds

Ratio of current assets proprietors' funds = Current assets / Shareholders' funds

Debt service or interest coverage ratio = Net profit before interest and tax / Fixed
interest charges

Capital gearing ratio = Equity share capital / Fixed interest bearing funds

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