Liquidity, solvency, activity and profitability ratios: current, quick, debt-equity, proprietary, interest coverage, turnover, gross and net profit, operating ratio and ROI.
| Current ratio | current assets ÷ current liabilities |
| Quick ratio | (current assets − inventories − prepaid expenses) ÷ current liabilities |
| From the current ratio and working capital | current liabilities = working capital ÷ (current ratio − 1) |
| Debt-equity ratio | long-term debts ÷ shareholders’ funds |
| Proprietary ratio | shareholders’ funds ÷ total assets |
| Interest coverage ratio | profit before interest and tax ÷ interest on long-term debt |
| Inventory turnover | cost of revenue from operations ÷ average inventory |
| Trade receivables turnover | credit revenue from operations ÷ average trade receivables; collection period = 365 ÷ turnover days |
| Gross and net profit ratios | gross profit (or profit after tax) ÷ revenue from operations × 100 |
| Operating ratio | (cost of revenue from operations + operating expenses) ÷ revenue from operations × 100 |
| Return on investment | profit before interest and tax ÷ capital employed × 100 |
Maple Ltd has revenue from operations of ₹48,00,000, profit after tax of ₹5,76,000 (tax 25%), interest on long-term debt of ₹28,000 and capital employed of ₹63,68,000. Find (a) the net profit ratio (b) the profit before interest and tax (c) the return on investment.
Working: (a) ₹5,76,000 ÷ ₹48,00,000 × 100 (b) ₹5,76,000 × 100/75 = ₹7,68,000; + ₹28,000 (c) ₹7,96,000 ÷ ₹63,68,000 × 100
Answer: (a) 12%; (b) ₹7,96,000; (c) 12.5%