7) Fixed Asset Ratio or Fixed Asset to Long term funds
Fixed Assets ratio is a type of solvency ratio (long-term solvency) which is found
by dividing total fixed assets (net) of a company with its long-term funds. It shows
the amount of fixed assets being financed by each unit of long-term funds.
It helps to determine the capacity of a company to discharge its obligations towards
long-term lenders indicating its financial strength and ensuring its long-term
survival.
Fixed Asset Ratio = Fixed Assets (after depreciation)
Total Long term funds
8)Ratio of Current Asset to Proprietor’s Fund
Current Assets to Proprietors’ Fund Ratio establishes the relationship between
current assets and shareholder’s funds.
The purpose of this ratio is to calculate the percentage of shareholders funds
invested in current assets.
Ratio of Current Asset to Proprietor’sFund = Current Asset
Proprietor’s Fund
9) Debt Service or Interest Coverage
The interest coverage ratio serves to measure the amount of a company's equity
compared to the amount of interest it must pay on all debts for a given period. This
is expressed as a ratio and is most often computed on an annual basis. To calculate
the interest coverage ratio, simply divide the earnings before interest and taxes, or
EBIT, for the established period by the total interest payments due for that same
period.
Debt Service or Interest Coverage = Net Profit (Before Interest and Tax)
Fixed Interest Charges
10)Total Coverage or Fixed charge coverage
The Fixed Charge Coverage ratio is a financial ratio that measures a firm's ability
to pay all of its fixed charges or expenses with its income before interest and
income taxes. The fixed charge coverage ratio is basically an expanded version of
the times interest earned ratio or the times interest coverage ratio.
Total Coverage or Fixed charge coverage = _____EBIT_________
Total Fixed Charges
11)Preference Dividend Coverage Ratio
This coverage ratio, also called times preferred dividend earned ratio, looks at the
company’s net income to see if it is sufficient to meet the fixed dividend amount
payable on its outstanding preferred shares. Thus, it is useful to all current and
potential shareholders, as well as debt holders, as an important component in
evaluating a company’s financial health.
Banks and other creditors will use this ratio to evaluate how much additional debt
the company can handle.
Pref. Dividend Coverage Ratio = Net Profit (Before Interest and Tax)
Preference Dividend
12) Cash to Debt Service Ratio
The cash flow-to-debt ratio is the ratio of a company’s cash flow from operations
to its total debt. This ratio is a type of coverage ratio and can be used to determine
how long it would take a company to repay its debt if it devoted all of its cash flow
to debt repayment. Cash flow is used rather than earnings because cash flow
provides a better estimate of a company’s ability to pay its obligations.
Cash to Debt Service Ratio = Cash Flow from Operations
Total Debt
D) Analysis Of Profitability
1) General Profitability Ratios
Profitability ratios are financial metrics used by analysts and investors to measure
and evaluate the ability of a company to generate income (profit) relative to
revenue, balance sheet assets, operating costs, and shareholders’ equity during a
specific period of time. They show how well a company utilizes its assets to
produce profit and value to shareholders.
A higher ratio or value is commonly sought-after by most companies, as this
usually means the business is performing well by generating revenues, profits, and
cash flow. The ratios are most useful when they are analyzed in comparison to
similar companies or compared to previous periods. The most commonly used
profitability ratios are examined below.
Types
1) Gross Profit Ratio
This shows how much a business is earning, taking into account the needed
costs to produce its goods and services. A high gross profit margin ratio reflects
a higher efficiency of core operations, meaning it can still cover operating
expenses, fixed costs, dividends, and depreciation, while also providing net
earnings to the business. On the other hand, a low profit margin indicates a high
cost of goods sold, which can be attributed to adverse purchasing policies, low
selling prices, low sales, stiff market competition, or wrong sales promotion
policies.
Gross Profit Ratio = Gross Profit × 100
Net sales
2) Operating Ratio
Operating profit margin – looks at earnings as a percentage of sales before interest
expense and income taxes are deduced. Companies with high operating profit
margins are generally more well-equipped to pay for fixed costs and interest on
obligations, have better chances to survive an economic slowdown, and are more
capable of offering lower prices than their competitors that have a lower profit
margin. Operating profit margin is frequently used to assess the strength of a
company’s management since good management can substantially improve the
profitability of a company by managing its operating costs
Operating Ratio = Operating Cost × 100
Net sales
3) Expense Ratio
The expense ratio (ER), also sometimes known as the management expense ratio
(MER), measures how much of a fund's assets are used for administrative and
other operating expenses. An expense ratio is determined by dividing a fund's
operating expenses by the average dollar value of its assets under management
(AUM). Operating expenses reduce the fund's assets, thereby reducing the return to
investors.
Expense Ratio = Particular Expense × 100
Net sales
4) Net Profit Ratio
It looks at a company’s net income and divides it into total revenue. It provides the
final picture of how profitable a company is after all expenses, including interest
and taxes, have been taken into account. A reason to use the net profit margin as a
measure of profitability is that it takes everything into account. A drawback of this
metric is that it includes a lot of “noise” such as one-time expenses and gains,
which makes it harder to compare a company’s performance with its competitors.
Net Profit Ratio = Net Profit After Tax × 100
Net sales
5) Operating Profit Ratio
Operating profit margin – looks at earnings as a percentage of sales before interest
expense and income taxes are deduced. Companies with high operating profit
margins are generally more well-equipped to pay for fixed costs and interest on
obligations, have better chances to survive an economic slowdown, and are more
capable of offering lower prices than their competitors that have a lower profit
margin. Operating profit margin is frequently used to assess the strength of a
company’s management since good management can substantially improve the
profitability of a company by managing its operating costs
Operating Profit Ratio = Operating Profit ×100
Net sales
