Ratio Formulas — Family by Family
All 31 ratios in your deck and your notes, grouped into the five families your deck teaches. Each one comes with its formula, how it is expressed, its standard if there is one, what a high or low value means, what the question must give you, and the trap that costs marks on it. The cheat-sheet at the bottom puts all of them in one table.
0. What Ratio Analysis Is, and Why It Exists Theory · 5-mark questions
1Absolute numbers don't make sense on their own
Your deck opens with two examples slides 2–3. First, a company's sales and net earnings over five years, where the raw figures alone tell you very little. Second, three interview candidates: A scored 600, B got an "A grade", C is at the 80th percentile. Who did best? You cannot tell, because "data expressed in different forms are not comparable." Ratios fix both problems. They turn raw figures into relationships, and relationships can be compared across years and across firms of different sizes.
Financial analysis is "assessing a company's performance using data published in financial statements and making recommendations" slide 6.
A ratio is "the numerical or quantitative relationship between two variables." Ratio analysis is "a systematic use of ratios to interpret or assess the performance and status of the firm." It "makes related information comparable" slide 8.
A ratio is "the numerical or quantitative relationship between two variables." Ratio analysis is "a systematic use of ratios to interpret or assess the performance and status of the firm." It "makes related information comparable" slide 8.
What the analysis is for slide 7: deciding (1) whether to invest in a business; (2) whether to invest internally in an asset or working capital, and how to finance it; (3) whether to lend to a business, and on what terms. Prerequisites slide 4: the data must be easy to understand (use vertical statements) and comparable.
2The three ways a ratio is expressed
| Form | Looks like | Used for |
|---|---|---|
| Pure ratio | 2 : 1, 4.2 : 1 | Liquidity (current, quick) and Debt-Equity: one balance-sheet item against another |
| Rate / times | 3 times, 5 times | Turnover ratios, Interest Coverage, DSCR, P/E |
| Percentage | 20%, 50% | Every margin, expense ratio and return (ROA, ROCE, ROE), plus Proprietary, Payout, Yield |
Deck slide 10; your notes list the same three on p. 25. Writing a ratio in the wrong form loses marks, for example "D/E = 1.25%" or "P/E = ₹70". Two more units exist: ₹ per share (EPS, DPS) and days (collection, payment and holding periods).
3The five families, and who cares about each
| Family | The question it answers | Who asks it | Ratios |
|---|---|---|---|
| I. Liquidity | Can it pay its bills this year? | Suppliers, bankers, short-term creditors | Current, Quick |
| II. Leverage / Capital structure | Is it financed safely? Can it service its long-term debt? | Debenture holders, term lenders | D/E, Proprietary, ICR, DSCR |
| III. Profitability | Does it earn enough on its sales and on its investment? | Owners, management | GP, OP, NP margins · expense ratios · ROA, ROCE, ROE |
| IV. Valuation | Is the share fairly priced? What does an investor get? | Shareholders, prospective investors | EPS, P/E, DPS, Payout, Yield |
| V. Activity / Efficiency | How fast do assets turn into sales and cash? | Management | Inventory, Debtors, Creditors, FA, TA turnover |
Families from deck slide 11. The syllabus names four (liquidity, leverage, profitability, activity) Syllabus p. 1. Valuation is taught in your deck and notes, and exam papers ask EPS and P/E, so learn it too.
I. Liquidity Ratios Short-term solvency
Your deck defines liquidity as "the ability of a firm to satisfy its short-term obligations as they become due" slide 12. Your notes put it more simply: "Liquidity ratios → means short term solvency of company" notes p. 25. The people who care most are short-term creditors: suppliers, bankers and anyone owed money within the year.
1Current Ratio · Working capital ratio
Current Ratio
\[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = x:1 \]
Expressed as
x : 1
Standard
2 : 1 slide 13
It tells you
"The rupees of current assets available for each rupee of current liability" slide 13.
Higher means
More safety for short-term creditors. But too high is also a warning: idle cash, piled-up stock or slow debtors, i.e. funds that are not earning anything. Zen Ltd year 2 is 5.5 : 1.
Lower means
Below 1 : 1 the firm cannot cover its bills from current assets and must borrow or sell long-term assets to pay them.
Question must give
Every current asset and every current liability. What goes into CA and CL →
Source
Watch out: A healthy current ratio can hide a stock pile-up. Always read it together with the quick ratio. Jiny Ltd's CR of 2.67 falls to a QR of exactly 1.00, because 62.5% of its current assets are stock.
2Acid-Test / Quick / Liquid Ratio · Three names, one ratio
Acid-Test / Quick / Liquid Ratio
\[ \text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Quick Liabilities}} = \frac{\text{CA} - (\text{Inventory} + \text{Prepaid})}{\text{CL} - \text{Bank Overdraft}} \]
Expressed as
x : 1
Standard
1 : 1 slide 14
It tells you
"A more rigorous and penetrating test of liquidity" slide 14: can the firm pay its urgent debts without selling any stock?
Higher means
Can meet immediate obligations from cash, near-cash and debtors alone.
Lower means
Below 1 : 1 means the firm depends on selling stock to pay its bills. Zen Ltd year 1 (0.98) is a clothing retailer whose inventory is 69% of its current assets.
Question must give
CA split so you can see stock and prepaid; CL split so you can see any bank overdraft. The full Quick Liabilities explanation →
Source
Watch out: Only the bank overdraft / cash credit comes out of CL. Short-term bank loans stay in. If there is no overdraft, QL = CL, so say so and move on.
II. Capital Structure / Leverage Ratios Long-term solvency
Long-term creditors judge a firm on its ability "to pay the interest regularly as well as repay the instalment of the principal on due dates" slide 17. Your notes: "Measure ability of firm to pay long term liability" notes p. 26. The first two ratios read the balance sheet (how the firm is financed). The last two read the P&L (whether profits can service the debt).
3Debt-Equity Ratio · Borrowed funds ÷ Owned funds
Debt-Equity Ratio
\[ \text{D/E} = \frac{\text{Long-Term Debt}}{\text{Shareholders' Equity}} = \frac{\text{Borrowed Funds}}{\text{Owned Funds}} = x:1 \]
Expressed as
x : 1
Standard
The deck gives no single standard. It shows a firm going 1:1 → 2:1 → 3:1 over 2019–21 as a sign of rising risk slide 18. ≤ 2 : 1 is the figure usually quoted in Indian lending practice.
It tells you
"The relative proportion of debt and equity in financing the assets of the firm." It "measures the long-term financial solvency" slide 18.
Higher means
Heavier fixed interest burden and more risk for lenders. It also means more trading on equity: if the firm earns more than the interest rate, owners gain.
Lower means
Conservatively financed and safe for lenders, but the firm may be leaving cheap debt unused.
Question must give
Long-term debt (debentures, term loans) and Shareholders' Funds. SH Funds → · Debt →
Source
Watch out: Deduct fictitious assets from equity. Do not count trade payables as debt. If the question says "Total Debt-Equity", include all current liabilities too (2025-26 Re-Exam). Express it as x : 1, not %. Your notes wrote "1.25%" for PVC, but it is 1.25 : 1.
4Proprietary Ratio · Equity ratio
Proprietary Ratio
\[ \text{Proprietary Ratio} = \frac{\text{Shareholders' Funds}}{\text{Total Assets}} \times 100 \]
Expressed as
%
Standard
None given. Higher is more conservative.
It tells you
"The extent to which assets are financed by owners' funds" slide 19. The remainder is financed by outsiders.
Higher means
Owners fund most of the assets, which gives creditors a wide safety margin.
Lower means
The business runs mainly on outsiders' money.
Question must give
SH Funds and Total Assets (FA + Investments + CA). Total Assets →
Source
Watch out: Total Assets excludes fictitious assets. ABC Company: ₹16,00,000, not the balance-sheet total of ₹16,40,000.
5Interest Coverage Ratio · Times interest earned
Interest Coverage Ratio
\[ \text{ICR} = \frac{\text{EBIT}}{\text{Interest}} = x \text{ times} \]
Expressed as
times
Standard
None in the deck. Higher is safer. At 1 time, the whole operating profit goes in interest.
It tells you
"The firm's ability to pay certain fixed interest payments" slide 20.
Higher means
Profits cover interest many times over. Siddharth Ltd: 15 times.
Lower means
A small fall in profit could make interest unpayable. ABC Co (deck Q4): 2.86 times.
Question must give
EBIT (build it: EBIT = NPAT + Tax + Interest) and the interest charge (possibly Rate × Loan).
Source
Watch out: Use EBIT, never NPAT. Interest is paid before tax, so the cover must be measured before tax as well. The deck gives two routes: EBIT = NPAT + Tax + Interest, or EBIT = Sales − COGS − Admin & Selling exp. (− depreciation).
6Debt Service Coverage Ratio (DSCR)
Debt Service Coverage Ratio (DSCR)
\[ \text{DSCR} = \frac{\text{EBITDA} + \text{Lease Rentals}}{\text{Interest} + \text{Lease Rentals} + \text{Repayment of Term Loan}} \]
Expressed as
times
Standard
1.5 to 2.0 "regarded as satisfactory" by financial institutions slide 21.
It tells you
Whether the cash-like operating profit can pay the whole annual debt bill: interest and the principal instalment.
Higher means
Comfortable repayment capacity.
Lower means
Below 1 means the firm cannot meet its instalments from operations.
Question must give
EBITDA, interest, the annual principal instalment, and lease rentals if any (take 0 if none are given).
Source
Watch out: Use one year's instalment, not the whole loan ("10 yearly instalments of ₹25,00,000" gives ₹25,00,000). The tax rate in deck Q4 is a distractor: DSCR is pre-tax. Your notes get 1.57. The exact figure is 1.578, which rounds to 1.58 times.
III-A. Profitability Ratios Related to Sales Margins & expense ratios
These rest on the premise that "a firm should earn sufficient profit on each rupee of sales" slide 25. Every one has Net Sales as its denominator and is expressed as a percentage. The only difference between them is which rung of the profit ladder sits on top.
7Gross Profit Margin · GP ratio
Gross Profit Margin
\[ \text{GP Margin} = \frac{\text{Gross Profit}}{\text{Net Sales}} \times 100 \]
Expressed as
%
Standard
Compare with past years and with the industry.
It tells you
"The percentage of each sales rupee remaining after the firm has paid for its goods" slide 26.
Higher means
Good pricing power, or cheap purchasing and production.
Lower means
Input costs are rising, or prices were cut to push sales.
Question must give
Net sales (after returns) and GP, or COGS so that GP = Sales − COGS.
Source
Watch out: Sales must be net of returns. Deck illustration: Net Sales 100 − COGS 60 = GP 40, so GP margin = 40%.
8Operating Profit Margin · Operating profit ratio
Operating Profit Margin
\[ \text{Operating Profit Ratio} = \frac{\text{Operating Profit}}{\text{Net Sales}} \times 100, \quad \text{OP} = \text{Net Sales} - \text{COGS} - \text{Op. exps} + \text{Op. income} \]
Expressed as
%
It tells you
Profit from the core business, before financing costs (interest) and before non-operating gains or losses.
Higher means
The core business itself is profitable.
Lower means
Operating costs are eating the gross margin.
Question must give
Sales, COGS and the operating expenses. What counts as operating →
Source
Watch out: Operating ratio + Operating profit ratio = 100%. Use this to check your answer: Siddharth 92.22% + 7.78% = 100%.
9Net Profit (Before Tax) Ratio · Pre-tax margin · NPBT / EBT margin
Net Profit (Before Tax) Ratio
\[ \text{NPBT Ratio} = \frac{\text{EBT / NPBT}}{\text{Net Sales}} \times 100 \]
Expressed as
%
It tells you
Margin after all costs including interest, but before tax. It lets you compare firms that pay different tax rates.
Question must give
EBT, or NPAT + tax.
Source
10Net Profit (After Tax) Ratio · NP ratio · NPAT / EAT margin
Net Profit (After Tax) Ratio
\[ \text{NP Ratio} = \frac{\text{EAT / NPAT}}{\text{Net Sales}} \times 100 \]
Expressed as
%
Standard
Compare over time and with the industry.
It tells you
What the owners finally keep from each ₹100 of sales. AZEE Ltd: 4.9%.
Higher means
Efficient overall, from buying and producing through to financing and tax.
Lower means
Something between GP and NP is too heavy. Use the expense ratios below to find what.
Question must give
NPAT and Net Sales.
Source
Watch out: Your notes list an "Impact margin = Impact ÷ Net sales" notes p. 29. That is this ratio: "EAT" was misheard as "impact". It is the EAT (NPAT) margin.
11Operating Ratio · Expense ratio family, 1
Operating Ratio
\[ \text{Operating Ratio} = \frac{\text{COGS} + \text{Operating Expenses}}{\text{Net Sales}} \times 100 \]
Expressed as
%
Standard
Lower is better. 75–85% is often quoted as healthy for manufacturers.
It tells you
How many paise of every rupee of sales are used up by running the business.
Higher means
Operations are expensive, leaving little operating profit.
Lower means
Operations are efficient.
Question must give
COGS (Opening stock + Purchases + Direct exps − Closing stock) and operating expenses.
Source
Watch out: Leave out interest (a financing cost), tax, and non-operating losses. Your Siddharth answer (92.78%) included ₹5,000 interest. Without it the answer is 92.22%.
12COGS Ratio
COGS Ratio
\[ \text{COGS Ratio} = \frac{\text{COGS}}{\text{Net Sales}} \times 100 = 100 - \text{GP Margin} \]
Expressed as
%
It tells you
The cost of the goods themselves per ₹100 of sales.
Question must give
COGS and Net Sales.
Source
13Administrative Expenses Ratio
Administrative Expenses Ratio
\[ \text{Admin Ratio} = \frac{\text{Administrative Expenses}}{\text{Net Sales}} \times 100 \]
Expressed as
%
It tells you
Office overhead per ₹100 of sales.
Question must give
Admin expenses (salaries, rent, office, general).
Source
Watch out: Your notes left this blank on p. 29. The formula is above.
14Selling & Distribution Ratio
Selling & Distribution Ratio
\[ \text{S\&D Ratio} = \frac{\text{Selling \& Distribution Expenses}}{\text{Net Sales}} \times 100 \]
Expressed as
%
It tells you
The cost of getting sales (advertising, commission, carriage outwards, warehousing, transport) per ₹100 of sales.
Question must give
S&D expenses.
Source
Watch out: Your notes left this blank on p. 29. The formula is above.
15Operating Expense Ratio
Operating Expense Ratio
\[ \text{Operating Expense Ratio} = \frac{\text{Operating Expenses}}{\text{Net Sales}} \times 100 \]
Expressed as
%
Standard
Read the trend.
It tells you
Deck example: 2018 20% → 2019 25% → 2020 30% → 2021 32% slide 28. Overheads are growing faster than sales, which is cost creep.
Question must give
Admin + S&D expenses.
Source
III-B. Profitability Ratios Related to Investment Returns
Return-on-investment ratios measure "the overall effectiveness of management in generating profits with its available assets" slide 29. Match the profit to the fund. Each ratio divides a profit by a pool of funds, and the profit must be the one that belongs to the providers of that pool.
16Return on Assets (ROA)
Return on Assets (ROA)
\[ \text{ROA} = \frac{\text{Net Profit After Tax}}{\text{Average Total Assets}} \times 100 \]
Expressed as
%
It tells you
Profit earned on everything the firm uses. Your notes' comment on AZEE: "On the total assets employed by the company, the company earned 3.5%" notes p. 31.
Higher means
Assets are used productively.
Lower means
Too many assets for the profit they produce.
Question must give
NPAT, and Total Assets (FA + Investments + CA). Average them if you have opening and closing figures.
Source
Watch out: Your notes write "Net Profit Tax" notes p. 30. It means Net Profit After Tax. Average total assets \(= \tfrac{\text{Opening} + \text{Closing}}{2}\), e.g. 1/4/18 and 31/3/19 slide 30.
17Return on Capital Employed (ROCE) · Return on investment (ROI)
Return on Capital Employed (ROCE)
\[ \text{ROCE} = \frac{\text{EBIT}}{\text{Avg Capital Employed}} \times 100 \qquad\text{or}\qquad \frac{\text{EBIT}(1 - t)}{\text{Avg Capital Employed}} \times 100 \]
Expressed as
%
Standard
Must exceed the interest rate on borrowings. If it does not, borrowing is destroying value.
It tells you
Return on all long-term funds (owners' and lenders'), regardless of where they came from.
Higher means
Management earns well on the total long-term investment.
Lower means
Returns are below the cost of funds.
Question must give
EBIT (or tax rate to make EBIT(1−t)) and Capital Employed = SH Funds + Long-term loans. Capital Employed →
Source
Watch out: Why EBIT and not NPAT? Capital employed includes lenders' money, and lenders are paid out of EBIT (as interest). So the profit must be taken before interest. t = tax rate. EBIT(1−t) is "earning before paying interest but after tax" notes p. 30. Always say which version you used. Sheet Q4 gives 24.80% (pre-tax) or 9.92% (post-tax).
18Return on Equity (ROE) · Return on shareholders' / proprietors' funds (ROPF)
Return on Equity (ROE)
\[ \text{ROE} = \frac{\text{NPAT}}{\text{Equity / Shareholders' Funds}} \times 100 \]
Expressed as
%
Standard
Compare with what shareholders could earn elsewhere.
It tells you
"The return on shareholders' funds" slide 31. Your notes' comment on AZEE: "On total shareholder fund, the company has earned around 4%."
Higher means
Owners are well rewarded.
Lower means
Owners would do better elsewhere.
Question must give
NPAT and Shareholders' Funds. SH Funds →
Source
Watch out: The numerator is NPAT, because owners are paid only after interest and tax. The same ratio appears under three names: ROE = Return on Proprietors' Funds = Return on Shareholders' Funds.
IV. Valuation (Market Value) Ratios Investor's view
These measure "how appropriately shares in a company are valued and what type of return an investor may get … whether the shares are overvalued, undervalued, or at a fair price" slide 34. They are per-share figures, so you will first need the number of shares, the preference dividend and DPS.
19Earnings Per Share (EPS)
Earnings Per Share (EPS)
\[ \text{EPS} = \frac{\text{NPAT} - \text{Preference Dividend}}{\text{No. of Equity Shares}} = ₹\_\_ \]
Expressed as
₹ / $ per share
It tells you
"The profit available to the equity shareholders on a per-share basis" slide 35. The numerator (NPAT − Pref. Div.) is called Total Earnings to Equity Shareholders.
Question must give
NPAT, preference dividend (Rate × Pref. capital), and the number of equity shares (Capital ÷ Face value).
Source
Watch out: Deduct the preference dividend even when it is shown as "proposed". Divide by the number of shares, not by the capital amount.
20Price / Earnings (P/E) Ratio
Price / Earnings (P/E) Ratio
\[ \text{P/E} = \frac{\text{MPS}}{\text{EPS}} = x \text{ times} \]
Expressed as
times
It tells you
"The amount investors are willing to pay for each rupee of earnings; the higher the ratio the larger the investors' confidence in the firm's future" slide 36.
Higher means
The market expects growth (or the share is expensive).
Lower means
Low expectations, or the share is undervalued.
Question must give
Market price per share (given) and EPS (computed).
Source
Watch out: It is times, not rupees. Your notes wrote "₹70" for PVC, but it is 70 times. To forecast a price, rearrange: MPS = P/E × EPS (deck Q8).
21Dividend Per Share (DPS)
Dividend Per Share (DPS)
\[ \text{DPS} = \frac{\text{Dividend paid to Equity Shareholders}}{\text{No. of Equity Shares}} = ₹\_\_ \]
Expressed as
₹ / $ per share
It tells you
"The dividends paid to equity shareholders on a per-share basis" slide 36.
Question must give
Total equity dividend and number of shares, or a dividend % × face value.
Source
Watch out: "25% dividend" means 25% of face value. On a ₹10 share, DPS is ₹2.50, not 25% of the ₹560 market price.
22Dividend Payout Ratio · D/P ratio
Dividend Payout Ratio
\[ \text{Payout} = \frac{\text{Dividend to Equity Shareholders}}{\text{Earnings to Equity (NPAT} - \text{Pref Div)}} \times 100 = \frac{\text{DPS}}{\text{EPS}} \times 100 \]
Expressed as
%
It tells you
"The proportion of dividends paid to earnings available to shareholders" slide 37. Retention ratio = 100% − Payout.
Higher means
The firm rewards shareholders generously from its income (deck Q6: Company A, 35%).
Lower means
Most profit is retained for growth.
Question must give
DPS and EPS, or total dividend and total equity earnings.
Source
Watch out: Your PVC answer labels this "Surplus ÷ RE". The formula is DPS ÷ EPS = 2.5 ÷ 8 = 31.25%. Your working was right. Only the label and the "%" were missing.
23Dividend Yield
Dividend Yield
\[ \text{Dividend Yield} = \frac{\text{DPS}}{\text{MPS}} \times 100 \]
Expressed as
%
It tells you
"How much a company pays out in dividends each year relative to its share price" slide 37. This is the cash return to an investor who buys today.
Higher means
A better income stock.
Lower means
The investor is buying for growth, not income.
Question must give
DPS and the market price.
Source
Watch out: Payout is dividend ÷ earnings. Yield is dividend ÷ price. Keep the two apart.
V. Activity / Turnover / Efficiency Ratios Asset utilisation
These measure "the speed with which various accounts / assets are converted into sales or cash". They are also called efficiency or asset-utilisation ratios. "The greater is the rate of turnover … the more efficient is the utilisation of assets" slide 42. They come in pairs: a turnover in times, and a period in days = 365 ÷ turnover.
24Inventory / Stock Turnover Ratio · STO ratio
Inventory / Stock Turnover Ratio
\[ \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} = x \text{ times} \]
Expressed as
times
Standard
Compare with industry.
It tells you
"The speed with which inventory is sold"; "a test of efficient inventory management" slide 43.
Higher means
Stock moves fast. If very high, watch for stock-outs.
Lower means
Overstocking, slow-moving or obsolete goods.
Question must give
COGS (not sales) and opening + closing stock.
Source
Watch out: The numerator is COGS, because stock is carried at cost, so cost must be compared with cost. If only Sales and GP are given, COGS = Sales − GP.
25Stock Velocity / Average Holding Period · Inventory days
Stock Velocity / Average Holding Period
\[ \text{Stock Velocity} = \frac{365 \text{ (or 12 / 52)}}{\text{Stock Turnover Ratio}} = x \text{ days (months / weeks)} \]
Expressed as
days
It tells you
How long stock sits before it is sold. Deck Q9: 73 days.
Question must give
The stock turnover ratio.
Source
26Debtors (Receivables) Turnover Ratio
Debtors (Receivables) Turnover Ratio
\[ \text{Debtors Turnover} = \frac{\text{Net Credit Sales}}{\text{Average (Debtors + Bills Receivable)}} = x \text{ times} \]
Expressed as
times
It tells you
How many times a year the firm collects its average receivables slide 44.
Higher means
Quick collection.
Lower means
Slow collection, loose credit policy, possible bad debts.
Question must give
Credit sales (net of returns) and debtors + B/R.
Source
Watch out: If credit sales are not stated, assume all sales are on credit and write that assumption down.
27Average Collection Period · Debtor days · Receivables days
Average Collection Period
\[ \text{ACP} = \frac{365}{\text{Debtors Turnover}} \;=\; \frac{\text{Average Debtors} \times 365}{\text{Credit Sales}} \]
Expressed as
days
Standard
Compare with the credit period the firm allows.
It tells you
"The speed with which debtors are being collected" slide 44.
Higher means
Customers take too long to pay.
Lower means
Tight collection.
Question must give
Debtors turnover, or debtors and credit sales directly.
Source
Watch out: Your notes use the second form ("365 ÷ Credit sales × Avg Dr") notes p. 36. Both forms are the same ratio.
28Creditors (Payables) Turnover Ratio
Creditors (Payables) Turnover Ratio
\[ \text{Creditors Turnover} = \frac{\text{Net Credit Purchases}}{\text{Average (Creditors + Bills Payable)}} = x \text{ times} \]
Expressed as
times
It tells you
How many times a year the firm pays off its suppliers slide 45.
Higher means
Pays suppliers fast, so it gets little credit from them.
Lower means
Takes long credit from suppliers.
Question must give
Credit purchases (net of returns) and creditors + B/P.
Source
Watch out: Use purchases, not sales or COGS. The creditors arose from buying, so compare with buying.
29Average Payment Period · Creditor days
Average Payment Period
\[ \text{APP} = \frac{365}{\text{Creditors Turnover}} \]
Expressed as
days
Standard
Compare with the credit period suppliers allow.
It tells you
"The speed with which creditors are being paid" slide 45.
Higher means
Suppliers are financing the business. If too long, the firm's credit standing suffers.
Lower means
Pays promptly.
Question must give
Creditors turnover.
Source
Watch out: A healthy firm usually has APP ≥ ACP: it collects from customers before it pays suppliers.
30Fixed Assets Turnover Ratio · FAT
Fixed Assets Turnover Ratio
\[ \text{FA Turnover} = \frac{\text{Net Sales}}{\text{Average Net Fixed Assets}} = x \text{ times} \]
Expressed as
times
It tells you
"How well or efficiently a business uses fixed assets to generate sales" slide 46.
Higher means
"The more efficient is the management and utilisation of the assets" slide 46.
Lower means
Idle capacity, or recent heavy capital spending.
Question must give
Net sales and fixed assets net of depreciation.
Source
Watch out: Deduct accumulated depreciation first. Deck Q12: 90 ÷ (50 − 20) = 3 times.
31Total Assets Turnover Ratio · Asset turnover
Total Assets Turnover Ratio
\[ \text{Total Assets Turnover} = \frac{\text{Net Sales}}{\text{Average Total Assets}} = x \text{ times} \]
Expressed as
times
It tells you
Sales generated per rupee of all assets.
Question must give
Net sales and total assets.
Source
Watch out: Your notes start this line and leave it blank notes p. 34. It is not in the deck, so it has been filled in here. It leads into Unit 8: ROA = NP margin × Total asset turnover, which is the basis of the DuPont analysis.
VI. Advantages and Limitations of Ratio Analysis Theory
| Advantages slide 51 | Limitations slide 52 |
|---|---|
|
|
VII. The One-Page Cheat-Sheet Revise from this
Every ratio on this page, in one table. Click a name to jump to its full card.
| Ratio | Formula | Unit | Standard |
|---|---|---|---|
| I. Liquidity Ratios | |||
| Current Ratio | \(\frac{\text{Current Assets}}{\text{Current Liabilities}} = x:1\) | x : 1 | 2 : 1 |
| Acid-Test / Quick / Liquid Ratio | \(\frac{\text{Quick Assets}}{\text{Quick Liabilities}} = \frac{\text{CA} - (\text{Inventory} + \text{Prepaid})}{\text{CL} - \text{Bank Overdraft}}\) | x : 1 | 1 : 1 |
| II. Capital Structure / Leverage Ratios | |||
| Debt-Equity Ratio | \(\frac{\text{Long-Term Debt}}{\text{Shareholders' Equity}} = \frac{\text{Borrowed Funds}}{\text{Owned Funds}} = x:1\) | x : 1 | see card |
| Proprietary Ratio | \(\frac{\text{Shareholders' Funds}}{\text{Total Assets}} \times 100\) | % | None given. Higher is more conservative. |
| Interest Coverage Ratio | \(\frac{\text{EBIT}}{\text{Interest}} = x \text{ times}\) | times | see card |
| Debt Service Coverage Ratio (DSCR) | \(\frac{\text{EBITDA} + \text{Lease Rentals}}{\text{Interest} + \text{Lease Rentals} + \text{Repayment of Term Loan}}\) | times | see card |
| III-A. Profitability Ratios Related to Sales | |||
| Gross Profit Margin | \(\frac{\text{Gross Profit}}{\text{Net Sales}} \times 100\) | % | see card |
| Operating Profit Margin | \(\frac{\text{Operating Profit}}{\text{Net Sales}} \times 100, \quad \text{OP} = \text{Net Sales} - \text{COGS} - \text{Op. exps} + \text{Op. income}\) | % | |
| Net Profit (Before Tax) Ratio | \(\frac{\text{EBT / NPBT}}{\text{Net Sales}} \times 100\) | % | |
| Net Profit (After Tax) Ratio | \(\frac{\text{EAT / NPAT}}{\text{Net Sales}} \times 100\) | % | Compare over time and with the industry. |
| Operating Ratio | \(\frac{\text{COGS} + \text{Operating Expenses}}{\text{Net Sales}} \times 100\) | % | see card |
| COGS Ratio | \(\frac{\text{COGS}}{\text{Net Sales}} \times 100 = 100 - \text{GP Margin}\) | % | |
| Administrative Expenses Ratio | \(\frac{\text{Administrative Expenses}}{\text{Net Sales}} \times 100\) | % | |
| Selling & Distribution Ratio | \(\frac{\text{Selling \& Distribution Expenses}}{\text{Net Sales}} \times 100\) | % | |
| Operating Expense Ratio | \(\frac{\text{Operating Expenses}}{\text{Net Sales}} \times 100\) | % | Read the trend. |
| III-B. Profitability Ratios Related to Investment | |||
| Return on Assets (ROA) | \(\frac{\text{Net Profit After Tax}}{\text{Average Total Assets}} \times 100\) | % | |
| Return on Capital Employed (ROCE) | \(\frac{\text{EBIT}}{\text{Avg Capital Employed}} \times 100 \qquad\text{or}\qquad \frac{\text{EBIT}(1 - t)}{\text{Avg Capital Employed}} \times 100\) | % | see card |
| Return on Equity (ROE) | \(\frac{\text{NPAT}}{\text{Equity / Shareholders' Funds}} \times 100\) | % | see card |
| IV. Valuation (Market Value) Ratios | |||
| Earnings Per Share (EPS) | \(\frac{\text{NPAT} - \text{Preference Dividend}}{\text{No. of Equity Shares}} = ₹\_\_\) | ₹ / $ per share | |
| Price / Earnings (P/E) Ratio | \(\frac{\text{MPS}}{\text{EPS}} = x \text{ times}\) | times | |
| Dividend Per Share (DPS) | \(\frac{\text{Dividend paid to Equity Shareholders}}{\text{No. of Equity Shares}} = ₹\_\_\) | ₹ / $ per share | |
| Dividend Payout Ratio | \(\frac{\text{Dividend to Equity Shareholders}}{\text{Earnings to Equity (NPAT} - \text{Pref Div)}} \times 100 = \frac{\text{DPS}}{\text{EPS}} \times 100\) | % | |
| Dividend Yield | \(\frac{\text{DPS}}{\text{MPS}} \times 100\) | % | |
| V. Activity / Turnover / Efficiency Ratios | |||
| Inventory / Stock Turnover Ratio | \(\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} = x \text{ times}\) | times | Compare with industry. |
| Stock Velocity / Average Holding Period | \(\frac{365 \text{ (or 12 / 52)}}{\text{Stock Turnover Ratio}} = x \text{ days (months / weeks)}\) | days | |
| Debtors (Receivables) Turnover Ratio | \(\frac{\text{Net Credit Sales}}{\text{Average (Debtors + Bills Receivable)}} = x \text{ times}\) | times | |
| Average Collection Period | \(\frac{365}{\text{Debtors Turnover}} \;=\; \frac{\text{Average Debtors} \times 365}{\text{Credit Sales}}\) | days | see card |
| Creditors (Payables) Turnover Ratio | \(\frac{\text{Net Credit Purchases}}{\text{Average (Creditors + Bills Payable)}} = x \text{ times}\) | times | |
| Average Payment Period | \(\frac{365}{\text{Creditors Turnover}}\) | days | see card |
| Fixed Assets Turnover Ratio | \(\frac{\text{Net Sales}}{\text{Average Net Fixed Assets}} = x \text{ times}\) | times | |
| Total Assets Turnover Ratio | \(\frac{\text{Net Sales}}{\text{Average Total Assets}} = x \text{ times}\) | times | |
◆ Now drill them
Ratios — Solve Anything → works all 12 deck problems, all 5 practice-sheet problems, both 2025-26 exam questions and their theory parts, and checks every answer in your handwritten notes.