Accounting for Managers

Dr M Maschendar Goud
Assistant Professor
Institute of Public Enterprise
Osmania University Campus
Hyderabad
 Ratio Analysis
“Ratio is a simple mathematical expression”
“Ratio Analysis is the technique of interpretation of financial
statements with the help of meaningful ratios”
• Ratios may be used for comparison of a firm with its own
performance in the past
• Comparison of firm with another firm in the same industry
• Comparison of firm with the whole industry
• comparison of a performance with pre-determined
standards
• Comparison of one department with another department
in a firm
 Advantages of Ratio Analysis
• Simplifies the understanding of the financial statements
• Facilitates the interrelationship among various financial items and figures
• Effective planning and forecasting
• Facilitates the inter and intra comparison
• It serves as an effective control tools like standard costing and budgeting control

Classifications of Ratios

1. Traditional classifications classified into balance sheet ratios, profit & Loss a/c ratios and
mixed ratio ex: Current Ratio, Gross Profit Ratio, Return on Net Worth
2. Functional Classifications classified into liquidity, profitability and earnings ratios
Liquidity ratios are tested the liquidity of the business
They measure the ability of the business to repay the short-term liabilities out of short-term
assets
ex: Current Ratio, Quick Ratio, Stock Turn over Ratio, Creditors Turn over Ratio
Profitability ratios indicate the profitability of the business
Ex: Gross Profit Ratio, Return on Capital Employed
Earnings ratios indicate the return to the owners or shareholders
Ex: Earnings per share, Dividend payout ratio
 Classifications of Ratio Analysis
3. On the basis of importance of the ratios like primary ratios, secondary or supporting ratios
ex: Return on Capital Employed is the primary ratio while Operating profit Ratio is secondary
ratio
4. On the basis of point of time ratios classified into structural ratios and trend ratios
Ex: structural ratios are calculated from the data relating to particular year whereas trend ratios
calculated from the data relating to different periods
5. On the basis of usage classified into ratios for management, ratios for creditors and ratios for
shareholders
Ratios for management indicate the efficiency of the management (ex: operating ratio, Stock
Turnover Ratio)
Ratios for creditors help in ascertaining the short term and long-term solvency of the business
(ex: Current Ratio, Creditors Turn over Ratio, debt equity ratio), and
Ratios for shareholders help the shareholders in assessing the fruitfulness of their investments
(ex: earnings per share, Return on Capital Employed)
6. On the basis of nature of ratios are classified into liquidity (short term solvency ratios,
leverage or long-term solvency ratios, turnover or activity or performance ratios, and
profitability ratios
 1. Liquidity or short term solvency ratios
liquidity ratios measure the short-term solvency of the firm. Liquidity ratios
are:
1. Current Ratio or working Capital Ratio: it is the ratio of current assets to
current liabilities
Current Ratio = Current Assets/Current Liabilities
Current assets includes cash in hand, at bank, Bills receivable, Net Sundry
debtors, stock of raw material, work in progress, finished goods, prepaid
expenses, outstanding incomes, accrued incomes, and short term or
temporary investments etc.
Current liabilities includes Bills payable, Sundry creditors, Bank over draft,
outstanding expenses, incomes received in advance, proposed dividend,
provision for taxation, unclaimed dividends and short term loans or
advances repayable within a year
Current ratio is 2:1 is ideal
If it is less than 2 means business does not enjoy liquidity position
If its is more than 3 firm is having idle funds and not invested them properly
2. Quick Ratio: it is the ratio of quick assets to quick liabilities
Quick ratio = Quick assets/quick liabilities
Quick assets = current assets – (stock and prepaid expenses)
Quick liabilities = current liabilities – bank overdraft
Quick ratio is 1 is ideal
if it is less than 1 is indicative of inadequate liquidity of the
business
If it is more than 1 also not advisable

3. Absolute liquid Ratio (Super Quick Ratio): it is the ratio of

absolute liquid assets to Quick liabilities (Current Liabilities)
Absolute liquid ratio = Absolute liquid assets / Current liabilities
Absolute liquid assets include cash in hand, cash at bank and short
term or temporary investment
Current liabilities
4. Basic Defensive Interval Ratio: I t is the ratio examines the
firms liquidity position in terms of its ability to meet
projected daily expenditure from operations

Basic defensive interval ratio = Quick ratio/Projected daily

cash requirements
Projected daily cash requirements = Projected Cash Operating
Expenses/Number of working days in a year

The higher the ratio is better it is

Liquidity Ratios
1. Current Ratio = Current Assets / Current Liabilities
Current Assets = Cash + Bills Receivable + Debtors + Stock + Short Term
Investments + Prepaid Expenses
Rs. 10000 + Rs. 125000 + Rs. 175000 + Rs. 175000 + Rs. 44000 + Rs.
15000 = 544000
Current Liabilities = Sundry Creditors + Bills Payable + Provision for Tax +
Proposed Preference Dividends + Bank Over Draft
= Rs. 75000 + Rs. 3000 + Rs. 70000 + Rs. 24000 + Rs. 20000 = Rs. 2,19000
Current Ratio = 5,44000/ 2,19000 = 2.48

2. Liquid Ratio = Quick Assets / Current Liabilities

Quick Assets = Current Assets – (Stock + Prepaid Expenses)

Rs. 544000 – (Rs. 175000 + Rs. 15000) = Rs. 3,54000
Liquid Ratio = Rs. 354000 / Rs. 219000 = 1.62
3. Absolute Liquid Ratio = Absolute Liquid Assets / Current Liabilities
Absolute Liquid Assets = Cash + Short Term Investments
Rs. 10000 + Rs. 44000 = Rs. 54000
Absolute Liquid Ratio = 54,000/ 2,19000 = 0.25

4. Basic Defensive Interval Ratio =

Quick Ratio / Projected Daily Cash Requirements
Projected Daily Cash Requirements =
Projected Cash Operating Expenses / Number of Working Days in a
year
 2. Leverage or Capital Structure Ratios
The leverage ratios indicate the relative interests of owners and
creditors. The significant ratios are:

1. Debt and Equity Ratio: It reflects the relative claim of creditors

and shareholders against assets of the business

Debt Equity Ratio = Long term liabilities / Shareholders Funds

Long term Liabilities = Long Term Loans / Debentures

Shareholders Funds = Equity Share Capital + Preference Share Capital
+ Reserves & Surplus – Fictitious Assets
Debt Equity Ratio is 2:1 is considered ideal
If it is 2 or less exposes its creditors to relatively lesser risks
High debt equity ratio exposes its creditors to greater risks
2. Proprietary Ratio: It expresses the relationship between Net
worth and Total Assets

Proprietary Ratio = Net Worth / Total Assets

Net worth = Equity share capital + Preference Share capital +

Reserves + Undistributed profits – fictitious assets
Total Assets = Fixed Assets + Current Assets (excluding Fictitious
assets)

A high proprietary ratio is indicative of strong financial position of

business
The higher the ratio better it is
3. Capital Gearing Ratio: Capital gearing is a ‘British term’
that refers to the debt amount of a company has relative
to its equity. It is calculated as:
Funds bearing fixed interest and fixed dividend / Equity
share holders funds
Or
Debentures + Term Loans + Preference Share Capital /
Equity Share Capital + Reserves – Fictitious Assets

A Company is to be highly geared if it has a high capital

gearing ratio
Lowly geared if the capital gearing ratio is low
4. Fixed Assets Ratio: It indicates the mode of financing the
fixed assets
Fixed Assets ratio = Fixed Assets / Capital employed
Capital employed = Equity share capital + Preference share
capital + Reserves & Surplus + Long Term Liabilities –
Fictitious assets
A financially well managed company will have its fixed
assets financed by long term funds

fixed assets ratio should never be more than 1

A ratio of 0.67 is considered ideal
5. Interest Coverage Ratio or Debt Service Ratio: It
indicates whether the company earning sufficient profits
for paying interest against debts
Interest Coverage Ratio = PBIT / Fixed Interest charges

Profit Before Interest and Tax (PBIT) = PAT + Interest + Tax

Debt Service Ratio (DSR) is around 6 is considered Ideal

The higher the ratio is better it is, it indicates that greater

margin of safety to lenders of long-term debts
6. Dividend Coverage Ratio: It indicates the ability of a
business to pay and maintain the fixed preference
dividend

DCR = PAT /Fixed preference dividend

The higher the ratio better it is

7. Debt Service Coverage Ratio: It indicates the ability of
business to pay not only interest, but also the installment
DSCR = PBIT/Interest + Periodic Loan Installment/(1 – rate
of Income Tax)
The greater the ratio is better it is, the service to the
organisation
Leverage & Capita Structure Ratios (Long term solvency ratios)

1. Debt Equity Ratio = Long Term Liabilities / Shareholders Funds

Long Term Liabilities = 12% Debentures Rs. 8,00,000
Shareholders Funds = Equity Share Capital + Preference Share Capital +
Reserves & Surplus – Fictitious Assets
= Rs. 2,00,000 + Rs. 1,00,000 + Rs. 8,00,000 – Rs. 75,000 = Rs. 10,25,000
Debt Equity Ratio = Rs. 8,00,000 / Rs. 10,50,000 =0.78
2. Proprietary Ratio = Net Worth / Total Assets
Net Worth = Share holders Funds = Equity Share Capital + Preference
Share Capital + Reserves – Fictitious Assets
Or Net Worth = Capital Employed – Long Tern Loans
Capital Employed = Equity Share Capital + Preference Share Capital +
Undistributed Profits + Reserves & Surplus + Long Term Loan and
Debentures – Fictitious Assets – Non-Operating Assets
Net Worth = Shareholders Funds = Rs. 10,25,000
Total Assets = Fixed Assets + Current Assets
= Rs. 17,50,000 + Rs. 2,00,000 = Rs. 19,50,000
Proprietary Ratio = Rs. 10,25,000 / Rs. 19,50,000 = 0.56
3. Capital Gearing Ratio= Funds bearing fixed interest and fixed
dividend / Equity Shareholders Funds
Funds bearing fixed interest and fixed dividend = 12% Debentures + 9%
Preference Share Capital
Rs. 8,00,000 + Rs.1,00,000 = Rs. 9,00,000
Equity Shareholders Funds = Equity Share Capital + Reserves & Surplus –
Fictitious Assents
= Rs. 2,00,000 + Rs. 8,00,000 – Rs. 75,000 = Rs. 9, 25,000
Capital Gearing Ratio = Rs. 9,00,000 / Rs. 9,25,000 = 0.97
4. Fixed Assets Ratio = Fixed Assets / Capital Employed
Fixed Assets = Rs. 17,50,000
Capital Employed = Shareholders Funds + Long term liabilities
Rs. 10,25,000 + Rs. 8,00,000 = Rs. 18,25,000
Fixed Assets Ratio = Rs. 17,50,000 / Rs. 18,25,000 = 0.96
5. Interest Coverage Ratio = PBIT / Fixed Interest Charges
PBIT = PBT + Interest = Rs. 2,00,000 + Rs. 96,000 = Rs. 2,96,000
Interest = Rs. 96,000
= Rs. 2,96,000 / Rs. 96,000 = 3.08
6. Dividend Coverage Ratio = PAT / Fixed Preference Dividend
PAT = PBT – Tax = Rs. 2,00,000 – 50% = Rs. 1,00,000
Fixed Preference Dividend = 9% X Rs. 1,00,000 = Rs. 9,000
Dividend Coverage Ratio = Rs. 1,00,000 / Rs. 9,000 = 11.11
7. Debt Service Coverage Ratio =
(PBIT / Interest + Periodic Loan Installment) / (1 – Rate of Income Tax)
 3. Activity Ratios or Turn Over Ratios
“Activity ratios measure the efficiency or effectiveness with which a firm
manages its resources and assets”
1. Inventory Turn Over Ratio or Stock Turn Over Ratio: STR indicates
the number of times the stock has turned over into sales in a year
STR = Cost of Goods Sold / Average Stock
Where CGS = Sales – Gross Profit
Average Stock = Opening Stock + Closing Stock / 2

Stock Conversion Period = No of Effective days in a year / STR

Stock Turn Over Ratio is 8 is considered as ideal
2. Debtors Turn Over Ratio: it expresses the relationship
between Sales and Debtors

DTR = Net Credit Sales /Average Debtors

Net Credit Sales = Gross Sales – Returns or Sales
Average Debtors = Opening Debtors + Closing Debtors / 2
Debtors Collection Period = No of Days in a year / DTR

DTR is 10-12 is considered as ideal

Debtors Collection Period is 30 – 36 days considered as
ideal
3. Creditors Turn Over Ratio: it expresses the relationship
between Creditors and Purchases

CTR = Net Credit Purchases /Average Creditors

Net Credit Purchases = Gross Purchases – Returns or
Purchases
Average Creditors = Opening Creditors + Closing Creditors / 2
Debt Payment Period = No of Days in a year / CTR

CTR is 12 or more is considered as ideal

Deb Payment Period is 30 or less days considered as ideal
4. Working Capital Turn Over Ratio: the ratio defined as
WCTR = CGS / Working Capital
CGS= Sales – Gross Profit

Working Capital = Current Assets – Current Liabilities

High WCTR indicates high efficient utilisation of funds

5. Fixed Assets Turn Over Ration: it is defined as

Net Sales / Fixed Assets
Fixed Assets = Gross Fixed Assets – Depreciation
6. Total Assets Turn Over Ratio = it is defined as
Net Sales / Total Assets
Total Assets = Fixed Assets + Investments + Current Assets bu do
not include fictitios assets
6. Total Assets Turn Over Ratio = it is defined as
Net Sales / Total Assets
Total Assets = Fixed Assets + Investments + Current Assets bu do
not include fictitios assets
Activity Ratios or Turnover Ratios
1. Inventory Turnover Ratio or Stock Turnover Ratio = CGS /Average
Stock
Cost of Good Sold (CGS) = Opening Stock + Purchases + Manufacturing
Expenses – Closing Stock
= Rs. 80,000 + Rs. 7,96,000 – Rs. 1,20,000 = Rs. 7, 56,000
Average Stock = Opening Stock + Closing Stock / 2
Rs. 80,000 + Rs. 1,20,000 / 2 = Rs. 1,00,000
Stock Turnover Ratio = Rs. 7,56,000 / Rs. 1,00,000= 7.56
Inventory Conversion Period = Number of Days in a year / STR
= 365 / 7.56 = 48.28 days = 48 days
2. Debtors Turnover Ratio = Net Credit Sales / Average Debtors
Net Credit Sales= Rs. 10,00,000
Average Debtors = Opening Debtors + Closing Debtors / 2
Debtors include Bills receivable = Debtors + Bills Receivable
= Rs. 50,000 + Rs. 1,75,000 = Rs. 2,25,000
 Debtors Turnover Ratio = Rs. 10,00,000 / Rs. 2,25,000 = 4.44
Debtors Collection Period = Number of Days in a year / Debtors
Turnover Ratio
Debtors Collection Period = Number of Days in a year / DTR
Number of Days in a year
= 365 / 4.44 = 82.125 days = 82 days
3. Creditors Turnover Ratio = Net Credit Purchases / Average Creditors
Net Credit Purchases = Rs. 7,00,000
Average Creditors = Opening Creditors + Closing Creditors / 2
Closing Creditors = Closing Creditors + Bills Payable
Rs. 1,30,000 + Rs. 70,000 = Rs. 2,00,000
Creditors Turnover Ratio = Rs. 7,00,000 / Rs. 2,00,000 = 3.5
Debt Payment Period = Number of Days in a year / Creditors turnover
Ratio
= 365 / 3.5= 104.29 = 104 days
4. Working Capital Turnover Ratio = Cost of Goods Sold / Working
Capital
= Cost of Goods Sold = Rs. 7,56,000
Working Capital = Current Assets – Current Liabilities
Current Assets = Stock + Debtors + Bills Receivable + Cash
Rs. 1,20,000 + Rs. 40,000 + Rs. 1,60,000 + Rs. 50,000 = Rs. 3,70,000
Current Liabilities = Creditors + Bills Payable + Provisions
= Rs. 1,30,000 + Rs. 70,000 + Rs. 60,000 + Rs. 2,60,000
Working Capital = Rs. 3,70,000 – Rs. 2,60,000 = Rs. 1,10,000
Working Capital Turnover Ratio = Rs. 7,56,000 / Rs. 1,10,000 = 6.87
5. Fixed Assets Turnover Ratio = Net Sales / Fixed Assets
Net Sales= Rs. 10,00,000
Fixed Assets = Buildings + Plant + Trade Investments
= Rs. 2,50,000 + Rs. 2,10,000 + Rs. 80,000 = Rs. 5,40,000
Fixed Assets Turnover Ratio = Rs. 10,00,000 / Rs. 5,40,000 = 1.85
 Profitability Ratios
Profitability ratios measure the profitability of a concern and generally
they are calculated either in relation to sales or investments.
The ratios are General Profitability Ratios and Overall Profitability
Ratios
General Profitability Ratios: it reveals the result of trading operations of
business. It can be calculated as
Gross Profit Ratio: It indicates the extent of profitability of core
operations
Gross Profit / Net Sales X 100
Gross Profit = Net Sales – Cost of Goods Sold
Net Sales = Total Sales – Sales Returns
Cost of Goods Sold = Opening Stock + Purchases + Manufacturing
Expenses – Closing Stock
Higher the ratio, the better will be performance of the business
Net Profit Ratio: it indicates the result of overall operations of the
business while gross profit ratio indicates the extent of profitability of
core operations
Net Profit Ratio = Net Profit After Tax / Net Sales X 100
The higher the ratio is more profitable is the business

Operating Ratio: it expresses the relationship between incurred for

running the business and resultant net sales
Operating Ratio = Operating Cost / Net Sales
Operating Cost = CGS + Office and administration expenses + Selling and
Distribution Expenses

Low Operating Ratio is an indication of operating efficiency of the

business
lower the ratio better it is
Operating Ratios: The ratios of all operating expenses (i.e., materials
used, labour, factory overheads, administration and selling expenses)
to sales. The major components of cost are material, labour, and
overheads. The classification of cost ratios are:

Material Cost Ratio = Material Consumed / Sales x 100

Labour Cost Ratio = Labour Cost / Sales x 100

Factory Overhead Ratio = Factory Expenses / Sales x 100

Administrative Expense Ratio = Administrative Expenses / Sales x

100

Selling and Distribution Expenses Ratio = Selling and

Distribution Expenses / Sales x 100
Operating Profit Ratio: it indicates the relationship between Operating
Profit and Net Sales
Operating Profit Ratio = Operating Profit / Net Sales X 100
Or
100 – Operating Ratio
The higher the ratio better it is

Expense Ratio: Expense ratios are the ratios that supplement the
information given by the operating ratio
each of the expense ratios highlights the relationship between the
particular expense and net sales
Ex: Factory expenses to Net Sales
Operating Expenses to Net Sales
 Overall Profitability Ratios
Return on Capital Employed (ROCE) or Return on Investment Ratio (ROI):
It reveals the result of earning capacity of capital employed in the
business. It can be calculated as
PBIT / Capital Employed X 100
Capital Employed = Equity Share Capital + Preference Share Capital +
Undistributed Profits + Reserves + Long Term Loan and Debentures
– Fictitious Assets – Non Operating Assets
It can also be calculated as Net fixed assets + Trade Investments – Net
Working Capital
It also known as Invested Capital or Return on Invested Capital
It should be more than cost of capital employed
Higher the ROCE the better it is
Return on Net Worth: It indicates the return on Investment made by the
Share Holders. It is calculated as
RONW = PAT / Net Worth
Net Worth = Share holders Funds = Equity Share Capital + Preference
Share Capital + Reserves – Fictitious Assets
It can also calculated as Capital Employed – Long Tern Loans
Higher the Ratio better it is for the share holders

Return on Equity Capital (RoEC) / Return on Equity (RoE): It expresses

the return earned by the owners after adjusting for debt and
preference capital. It is calculated as
PAT – Preference dividend / Paid up Equity Share Capital
It can also be calculated as
PAT – Preference dividend / Equity Share Holders Funds
Share Holders Funds = Equity Share Capital + Reserves – P & L A/C (Dr.
Balance)
The higher the ratio better it is
Return on Assets Ratio (ROA): It reflects the return earned by the firm
for the share holders on the investment of all financial resources
committed to the business. It is calculated as
ROA = PAT / Total Assets
Total Assets do not include fictitious
Earning Per Share (EPS): It is the earnings on one unit of equity, which is
one equity share.
EPS = PAT – Preference Dividend / No of Equity Shares
The higher the EPS better it is
Dividend Per Share (DPS): It is the amount of dividend payable to the
one share holders of one equity share. It is calculated as
Dividend on Equity Share Capital / Number of Equity Shares
Higher the DPS, the happier the investor
Dividend Pay Out Ratio: It is the ratio to DPS to EPS
Dividend Per Share / Earning Per Share
Price Earning Ratio (P / E Ratio): It expresses the relationship between
market price of one share and the earning per share of a company. It is
calculated as
P / E Ratio = MPS / EPS
MPS = Market Price of Equity Share; EPS = Earnings Per Share
There is no Ideal
Earnings Yield: It is the inverse of P / E ratio
Earnings Yield = 1 / P / E ratio or EPS / Market Price

Dividend Yield Ratio: It expresses the relationship between dividend

earned per share and the market price per share

Dividend Yield Ratio = DPS / MPS

Book Value: It is fraction of the Net Worth of the business which is
depicted in the Balance Sheet. It is calculated as
Book Value = Equity Share Holders Funds / No of Equity Shares
The higher the book value of a share, the more strong the business is
Cash Earnings Per Share: It expresses the relationship between net
profit before depreciation and with number of equity shares. It is
calculated as
Net Profit + Depreciation / No of Equity Shares
Cash Profit Ratio: It is the relationship between cash profit and sales
Cash Profit Ratio = Cash Profit / Sales
Cash Profit = Net profit + Depreciation
Dividend Yield Ratio: It expresses the relationship between dividend
earned per share and the market price per share
Dividend Yield Ratio = DPS / MPS
Book Value: It is fraction of the Net Worth of the business which is
depicted in the Balance Sheet. It is calculated as
Book Value = Equity Share Holders Funds / No of Equity Shares
The higher the book value of a share, the more strong the business is
assumed to be.
Profitability Ratios
General Profitability Ratios
1. Gross Profit Ratio = Gross Profit / Net Sales X 100
Net Sales = Rs. 9,00,000
Gross Profit = Net Sales – Cost of Goods Sold
Cost of Goods Sold = Opening Stock + Purchases + Manufacturing
Expenses – Closing Stock
Rs. 85,000 + Rs. 2,45,000 + Rs. 1,00,000 – Rs. 1,30,000 = Rs. 3,00,000
Gross Profit = Rs. 6,00,000 / Rs. 9,00,000 = 2/3 = 0.67 = 66.67%
2. Net Profit Ratio = Profit After Tax / Net Sales X 100
Profit After Tax = Gross Profit + Income from Trade Investments –(Office
Expenses + Selling Expenses + Interest + Provision for Tax)
Rs. 6,00,000 – (Rs. 1,65,000 + Rs. 75,000 + Rs. 1,40,000 + Rs. 55,000) +
Rs. 20,000 = Rs. 1,85,000
Net Sales = Rs. 9,00,000
Net profit Ratio = Rs. 1,85,000 / Rs. 9,00,000 = 20.56%
3. Operating Ratio = Operating Cost / Net Sales
Operating Cost = Cost of Goods Sold + Office Expenses + Selling
Expenses
Rs. 3,00,000 + Rs. 1,65,000 + Rs. 75,000 = Rs. 5,40,000
Operating Ratio = Rs. 5,40,000 / Rs. 9,00,000 = 0.60 = 60%
4. Operating Profit Ratio = 100- Operating Ratio
100 – 0.60 = 0.40 or 40%
Overall Profitability Ratios
5. Return on Capital Employed = PBIT / Capital Employed
PBIT = PAT + Tax + Interest
= Rs. 1,65,000 + Rs. 55,000 + Rs. 1,40,000 = Rs. 3,60,000
Capital Employed = Equity Share Capital + Preference Share Capital +
Reserves & Surplus + Long Term Liabilities – Fictitious Assets – Non
Operating Assets
= Rs. 5,00,000 + Rs. 3,50,000 + Rs. 1,50,000 + Rs. 1,00,000 + Rs.
10,00,000 – Rs. 1,50,000 – Rs. 2,00,000 – Rs. 1,00,000 = Rs. 16,50,000
 ROCE = Rs. 3,60,000 / Rs. 16,50,000 = 0.2182 = 21.82%
6. Return on Net Worth (RONW) = Profit After Tax / Net Worth
PAT = Rs. 1,65,000
Net Worth = Capital Employed – Long Term Liabilities
= Rs. 16,50,000 – Rs. 10,00,000 = Rs. 6,50,000
RONW = Rs. 1,65,000 / Rs. 6,50,000 = 0.2538 = 25.38%
7. Return on Equity Capital = PAT – Preference Dividend / Paid Eq.
Capital
= Rs. 1,65,000 – Rs. 35,000 / Rs. 5,00,000 = 0.26 = 26%
8. Return on Assets Ratio = PAT / Total Assets
PAT = Rs. 1,65,000
Total Assets = Total Assets – Fictitious Assets
Rs. 25,00,000 – Rs. 1,50,000 = Rs. 23,50,000
Return on Assets Ratio = Rs. 1,65,000 / Rs. 23,50,000 = 0.0702 = 7.02%
9. Earnings Per Share (EPS) = PAT – Preference Dividend / No of Eq.
Shares
= Rs. 1,65,000 – Rs. 35,000 / 50,000
= Rs. 1,30,000 / Rs. 50,000 = 2.60
10. Dividend Per Share (DPS) = Dividend on Equity Share Capital / No
of Equity Shares
Rs. 50,000 / 50,000 Shares = Rs. 1.00 per Share
11. Dividend Pay out Ratio = DPS / EPS = Rs. 1.00 / Rs. 2.60 = 0.3846 =
38.46%
12. Price Earning Ratio = EPS / Market Price per Share
= Rs. 2.60 / Rs.26 = 10
13. Earning Yield = EPS / Market Price = Rs. 2.60 / Rs. 26 = 0.10 = 10%
14. Dividend Yield Ratio = DPS / Market Price = Rs. 1.00/ Rs. 26.00=
0.0385 or 3.85%
15. Book Value of Share = Net Worth or Shareholders Funds / Number
of Equity Shares = Rs. 6,50,000 / 50,000 = Rs. 13
Thank You