Statement Analysis Tools and Accounting Ratios Test - 5

Formula of Debt Equity Ratio is:
Formula: Debt/Equity
D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders equity

ROI measures the amount of return on an investment relative to the investment's cost.

Activity ratios measure the relative efficiency of a firm based on its assets, leverage or other such balance sheet items and are important in determining whether a company's management is doing a good enough job of generating revenues and cash from its resources.

Ideal liquid ratio is 1:1 i.e. Liquid assets should be equal to the current liabilities. In other words it represents a more stringent test for the liquidity of a company in comparison to the current ratio

Proposed dividend is an important source of financing temporary working capital, and not the part of shareholders funds.

This financial ratio is most commonly used for industries which require a large percentage of revenues to maintain operations.

Current Ratio shows relationship between current assets and current liabilities.

Low current ratio indicates that business has more liability but less amount to pay off. It means business may face difficulty in meeting its short term liabilities.

Long term funds employed in the business are also known as Capital Employed. i.e. Share capital + Reserves and Surplus + long term borrowings + Long term provisions

Net Profit Ratio is the ratio of after tax profits to net sales. It reveals the remaining profit after all costs of production , administration, and financing have been deducted from sales, and income taxes recognized.

working capital turnover ratio is also referred to as net sales to working capital. It shows the company's effectiveness in using its working capital.

Liquid ratio is a ratio that measures a company's ability to pay short term and long term obligations. This is done by comparing a company's most liquid assets, those that can be easily converted to cash, with short term obligations.

Trade payable turnover ratio is a ratio of credit purchases to average trade creditors. It measures the speed with which a company pays its suppliers. 

Fictitious Assets (unamortized expenses) are subtracted while calculating capital employed:

i.e. Share Capital + Reserves and Surplus + Long term borrowings – Fictitious Assets

Quick Ratio is also known as liquid ratio. Formula: Liquid Assets/ Current Liabilities

Quick assets do not include inventories. Stores and spares is the part of inventories. Only liquid assets are considered in quick assets and stores and spares are considered as illiquid.

Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time.

Inventory turnover ratio is calculated under the Activity Ratio.

i.e. Inventory Turnover Ratio = Cost of Revenue from operations or cost of goods sold/Average Inventory. Average inventory is used instead of ending inventory because many company's merchandise fluctuates greatly throughout the year.

Revenue from operations + Other income = Total Revenue. Revenue means amount collected by the business from its main operations.

Solvency ratios is one of the various ratios used to measure the ability of a company to meet its long term debts. Quick ratio used to measure companies ability to meet its short term debts.

Common size statements is a statement in which each account is expressed as a percentage of the value of sales. This type of financial statement can be used to allow for easy analysis between companies or between time periods of a company

Proprietry ratio is calculated under the solvency ratio. i.e. Proprietary Ratio = Proprietors Funds/Total Assets

Money generated by the company from its main operation can be termed as revenue

Solvency ratio measures a company's ability to meet its long term obligations . in general a solvency ratio measures the size of a company's profitability compared to its obligations

Inventory turnover ratio is also known as stock turnover ratio. Inventory is wider term whereas stock is a narrow term.