Accounting Ratios

Accounting ratios are mathematical tools used to evaluate the financial

performance and position of a company. They are derived from the information
available in the financial statements (like the balance sheet and profit and loss
account). Accounting ratios are used to analyze relationships between different
items in the financial statements, helping stakeholders (like management,
investors, and creditors) make informed decisions.

Liquidity Ratios
The liquidity ratio is a financial metric used to assess a company's ability to meet
its short-term obligations (liabilities) using its most liquid assets (such as cash or
assets that can be quickly converted into cash). These ratios help determine
whether a company has enough short-term assets to cover its short-term debts
and ensure smooth operations without facing financial difficulties.

1) Current Ratio: This ratio measures whether a company has enough assets
(such as cash, receivables, and inventory) to cover its short-term liabilities.
A ratio higher than 1 generally indicates that the company can meet its
short-term obligations.
Formula: Current Ratio=Current Liabilities/Current Assets

 FOR FY 2023: CURRENT RATIO = 303457/269387 = 1.13

 FOR FY 2024: CURRENT RATIO = 262625/240014 = 1.09
Interpretation: The current ratio has decreased slightly, indicating a
marginal decline in the company’s ability to cover its short-term
liabilities with its short-term assets. While the ratio is still above 1, the
decline might signal a need to closely monitor liquidity.

2) Quick Ratio: The quick ratio is a more stringent measure of liquidity as it

excludes inventory (which might be less liquid) from current assets. It
focuses on assets that can be quickly converted to cash, such as cash,
receivables, and marketable securities.
Formula: Quick Assets (Current Assets-Inventories)/Total current liabilities

 FOR FY 2023: QUICK RATIO = 303457-84756/269387 = 0.81

 FOR FY 2024: QUICK RATIO = 262625-85100/240014 = 0.74
 Interpretation: The quick ratio also shows a slight decline, which
suggests a slightly reduced capacity to meet short-term liabilities
using the most liquid assets. This decline might be due to lower
cash or an increase in short-term liabilities.

Solvency Ratios
Solvency ratios are financial metrics used to assess a company's ability to meet its
long-term debt obligations and remain financially stable in the long term. These
ratios help to determine whether a company can sustain its operations without
relying too much on borrowed funds.

1) Debt Equity Ratio: This ratio compares a company’s total debt to its equity,
indicating how much debt the company has for every dollar of equity. A
higher ratio suggests higher leverage and financial risk, as the company is
more reliant on debt to finance its operations. while a lower ratio shows
that the company relies more on equity financing than debt.
Formula: Total Liabilities/Equity

 FOR FY 2023: DEBT EQUITY RATIO = 443582/479078 = 0.93

 FOR FY 2024: DEBT EQUITY RATIO = 444547/515096 = 0.86
Interpretation: The debt equity ratio has improved, indicating the
company has reduced its reliance on debt compared to equity. This
makes the company financially more stable and less risky for investors.

2) Total Assets to Debt Ratio: This ratio measures the proportion of a

company’s assets that are financed through debt. It gives an idea of how
much of the company's total assets are funded by creditors. A higher ratio
indicates a higher degree of financial leverage and more risk, while a lower
ratio suggests that the company is less dependent on debt to finance its
assets. Formula: Total Liabilities/Total Assets

 FOR FY 2023: TOTAL ASSETS-DEBT RATIO = 443582/922660 = 0.48

 FOR FY 2024: TOTAL ASSETS-DEBT RATIO = 444547/959643 = 0.46
Interpretation: The debt ratio had decreased, suggesting the company
has reduced its overall liabilities relative to total assets, which
strengthens its solvency and reduces risk exposure.
3) Proprietary Ratio: The Proprietary Ratio is a financial ratio that measures
the proportion of a company's total assets that are financed by its owners'
equity (i.e., shareholders' equity or net worth). It shows how much of the
company's assets are owned by the shareholders, as opposed to being
financed through borrowed funds (debt).
Formula: Shareholders’ Fund/Total Assets
 FOR FY 2023: PROPRIETARY RATIO = 479078/922660 = 0.5194
 FOR FY 2024: PROPRIETARY RATIO = 515096/959643 = 0.5369
Interpretation: The company’s reliance on equity financing increases,
which suggests improved financial stability and reduced dependence
on external liabilities.

4) Interest Coverage Ratio: The Interest Coverage Ratio is a financial ratio

that measures a company’s ability to pay interest on its outstanding debt
using its earnings before interest and taxes (EBIT). It helps assess whether a
company can comfortably meet its interest obligations from its operating
income. A higher interest coverage ratio indicates that the company is
more capable of covering its interest expenses, while a lower ratio may
suggest financial stress and difficulty in meeting interest payments.
Formula: Profit Before Tax + Finance Costs/Finance Costs
 FOR FY 2023: INTEREST COVERAGE = 54118+12633/12633 = 4.3633
 FOR FY 2024: INTEREST COVERAGE = 55273+13430/13430 = 4.1151
Interpretation: A lower ratio indicates a slight reduction in the
company’s ability to meet interest obligations using operating profits,
likely due to higher finance costs in FY 2024.

5) Debt to Capital Employed Ratio: The Debt to Capital Employed Ratio is a

financial metric that measures the proportion of a company's capital that is
financed through debt. It is calculated by dividing the total debt by the total
capital employed. The ratio indicates the financial leverage of a company,
helping to assess the risk associated with its capital structure.
Formula: Total Debt/Total Capital Employed.
  FOR FY 2023: DEBT-CAPITAL EMPLOYED = 443582/922660 = 0.4806
 FOR FY 2024: DEBT- CAPITAL EMPLOYED = 444547/959643 = 0.4631
Interpretation: A smaller proportion of total capital is financed through
liabilities, reflecting reduced financial risk.
Activity/Turnover Ratios
These are calculated on the basis of ‘cost of revenue from operations.’ Therefore,
these ratios are also called as ‘Turnover Ratios’. Turnover indicates the speed or
the number of times the capital employed has been rotated in the process of
doing business. These ratios Indicates how efficiently the working capital and
inventory is being used to obtain revenue from operations. Higher turnover ratios
Indicates better use of capital and in turn lead to higher profitability.

1) Inventory Turnover Ratio: The Inventory Turnover Ratio is a financial

metric that measures how efficiently a company manages its inventory. It
indicates the number of times inventory is sold and replaced over a specific
period, usually a year. A higher ratio suggests that the company is
efficiently turning its inventory into sales, while a lower ratio may indicate
overstocking or slow-moving inventory.
Formula: Cost of Goods Sold (COGS)/ Average Inventory
 FOR FY 2023: INVENTORY TURNOVER = 399644/84756 = 6.0134
 FOR FY 2024: INVENTORY TURNOVER = 376418/85100 = 5.9320
Interpretation: Inventory management slightly worsened, indicating
that the company took longer to sell inventory in FY 2024.

2) Debtors Turnover Ratio: The Debtors Turnover Ratio (also known as the
Receivables Turnover Ratio) measures how efficiently a company collects
its receivables or accounts receivable. It indicates how many times a
company is able to collect its average accounts receivable balance during a
specific period, usually a year. A higher ratio suggests that the company is
effectively collecting its debts, while a lower ratio may signal potential
issues with credit policies or collection efficiency.
Formula: Revenue from Operations/Average Trade Receivables
 FOR FY 2023: DEBTORS TURNOVER = 552823/24143 = 23.7949
 FOR FY 2024: DEBTORS TURNOVER = 547942/14740 = 38.9925
Interpretation: The company collected receivables faster in FY 2024,
enhancing cash flow and liquidity.
3) Creditors Turnover Ratio: The Creditors Turnover Ratio (also known as the
Payables Turnover Ratio) measures how efficiently a company pays off its
creditors. It indicates how many times a company settles its average
accounts payable during a specific period, usually a year. A higher ratio
suggests that the company is paying its suppliers quickly, while a lower
ratio might indicate delayed payments or possible cash flow issues.
Formula: Cost of Goods Sold (COGS)/ Average Trade Payables
 FOR FY 2023: CREDITORS TURNOVER = 399644/119278 = 4.8134
 FOR FY 2024: CREDITORS TURNOVER = 376418/129367 = 4.4436
Interpretation: The company took more time to pay its suppliers in FY
2024, which could be a sign of improved credit terms or tighter cash
flow management.

4) Fixed Assets Turnover Ratio: The Fixed Assets Turnover Ratio is a financial
metric that measures how effectively a company uses its fixed assets (such
as property, plant, and equipment) to generate sales. It shows how
efficiently the company is utilizing its investment in fixed assets to produce
revenue. A higher ratio indicates better utilization of fixed assets.
Formula: Revenue from Operations/Net Fixed Assets
 FOR FY 2023: FIXED ASSETS TURNOVER = 552823/596654 = 0.9272
 FOR FY 2024: FIXED ASSETS TURNOVER = 547942/664862 = 0.8248
Interpretation: The efficiency of utilizing fixed assets to generate sales
decreased, potentially due to investments in underutilized assets.

5) Net Assets Turnover Ratio: The Net Assets Turnover Ratio is a financial
metric that measures how effectively a company uses its net assets (total
assets minus liabilities) to generate sales. It indicates the efficiency of the
company's use of its equity capital to produce revenue. A higher ratio
suggests better utilization of the company's net assets to generate income.
Formula: Revenue from Operations/Total Assets
 FOR FY 2023: NET ASSETS TURNOVER = 552823/922660 = 0.7864
 FOR FY 2024: NET ASSETS TURNOVER = 547942/949643 = 0.7617
Interpretation: The overall efficiency in utilizing net assets to generate
sales slightly declined.

6) Working Capital Turnover Ratio: The Working Capital Turnover Ratio is a

financial metric that measures how efficiently a company utilizes its
 working capital (current assets minus current liabilities) to generate sales.
It indicates how well the company is using its short-term assets and
liabilities to support its operations and sales growth. A higher ratio
suggests more efficient use of working capital, while a lower ratio may
indicate inefficiencies in managing short-term assets.
Formula: Revenue from Operations/Working Capital
 FOR FY 2023: WORKING CAPITAL TURNOVER = 552823/34070 =
7.1667
 FOR FY 2024: WORKING CAPITAL TURNOVER = 547942/22611 =
9.6047
Interpretation: The company effectively utilized working capital to
generate more sales in FY 2024, a positive indicator of operational
efficiency.

Profitability Ratios
Profitability ratios are a group of financial metrics used to assess a company's
ability to generate profit relative to its revenue, assets, equity, or other financial
metrics. These ratios help investors and analysts evaluate how efficiently a
company is generating profit from its resources.

1) Gross Profit Ratio: A profitability ratio that measures the percentage of

revenue remaining after subtracting the cost of goods sold (COGS),
indicating how efficiently a company produces its goods.
Formula: Gross Profit/Revenue from Operation x 100
Gross Profit = Revenue of Operations - COGS
 FOR FY 2023: GROSS PROFIT RATIO =
GP = 552823-399644 = 153179
= 153179/552823*100 = 27.72%
 FOR FY 2024: GROSS PROFIT RATIO =
GP = 547942-376418 = 171524
= 171524/547942*100 = 31.30%
Interpretation: The company experienced a slight reduction in gross
profit margin, potentially due to higher costs of goods sold relative to
sales.

2) Operating Ratio: A financial metric that measures the percentage of

revenue spent on operating expenses, excluding non-operating costs like
 interest and taxes, reflecting the efficiency of a company in managing its
operational costs.

Formula: Operating Expenses/Revenue from Operations x 100

 FOR FY 2023: OPERATING RATIO =
OE= 399644+6265+62557=468466
= 468466/552823*100 = 84.74%
 FOR FY 2024: OPERATING RATIO =
OE= 376418+7807+59891= 444116
= 444116/545942*100 = 81.05%
Interpretation: The proportion of total expenses to sales remained
stable, indicating consistent cost management.

3) Operating Profit Ratio: A profitability ratio that shows the percentage of

revenue remaining after covering operating expenses, excluding interest
and taxes, indicating how efficiently a company operates.
Formula: Operating Profit/Revenue from Operations x 100
Operating Profit: Revenue from Operations-(-Operating Expenses)
Operating expenses: COGS + Employee Benefits + Other Expenses
 FOR FY 2023: OPERATING PROFIT=
OP= 552823-(399644+6265+62557) = 84357
OPR = 84357/552823*100= 15.26%
 FOR FY 2024: OPERATING PROFIT=
OP= 547942-(376418+7807+59891) = 103826
OPR= 103826/547942*100 = 18.95%
Interpretation: Operating efficiency slightly improved, maintaining
profitability at the operational level.

4) Net Profit Ratio: A financial ratio that shows the percentage of revenue
that remains as profit after all expenses, including taxes and interest, are
deducted.
Formula: Net Profit after Tax/Revenue from Operations x 100
 FOR FY 2023: NET PROFIT RATIO = 44190/552823*100 = 7.99%
 FOR FY 2024: NET PROFIT RATIO = 42042/547942*100 = 7.67%
Interpretation: Despite stable operating profits, net profit declined
slightly due to higher finance costs or other non-operational expenses.
5) Return on Investment: A measure of profitability that assesses the gain or
loss generated relative to the cost of an investment, indicating the
efficiency of an investment in generating profits.
Formula: Net Profit after Tax/Capital Employed x 100
Capital Employed = Equity + Non-current Liabilities
 FOR FY 2023: RETURN ON INVESTMENT:
CAPITAL EMPLOYED = 479078+174195 = 653273
ROI = 44190/653273*100 = 6.77%
 FOR FY 2024: RETURN ON INVESTMENT:
CAPITAL EMPLOYED = 515096+204533 = 719629
ROI = 42042/719629*100 = 5.84%
Interpretation: The decline in ROI indicates reduced profitability on
shareholders’ equity, likely influenced by lower net profit growth
relative to equity increases.