RATIO COMPUTATION FORMULA RULE OF THUMB

Current Ratio Current Asset 2:1 (ideal; indicates good

Current Liabilities short-term financial strength)
Quick (Acid Test) Quick Assets 1:1 (ideal; indicates good
Ratio Current Liabilities immediate liquidity)
Gross Profit Ratio Gross Profit x100 Varies by industry, but
Net Sales typically 50% or higher is
considered healthy in many
sectors
Net Profit Ratio Net Profit x100 10% or higher is usually
Net Sales considered good, though it
also varies by industry
Operating Operating Cost x100 Lower is better; typically
Expenses Ratio Net Sales under 30% is desired
depending on the industry.
Earning per Profit available for Equity Higher is better; no
Equity Share shareholders x100 specific number, as it
No. Of Equity Share depends on company and
sector
Dividend Yield Dividend per Equity Share x100 2–6% is common; higher
Market Price Share may suggest a mature,
stable company.
Price Earning Market Price of Equity Share x100 15–25 is average; varies
Ratio Earning per Equity Share widely by industry.
Interest EBDIT 2 or above (means the firm
Coverage Interest can easily pay interest)
Debt Equity Ratio Total Debt 1:1(equal balance is healthy,
Net Worth though capital-intensive
firms may have higher)
Total Debt Ratio Total Debt Less than 0.5 is considered
Total Assets good (i.e., not overly reliant
on debt)
Inventory Cost of Good Sold 5 to 10 times annually;
Turnover Ratio Average Inventory at Cost higher means efficient
inventory management.
No. Of days 360 Lower is better; typically
inventory holding Inventory Turnover Ratio 30–90 days is considered
efficient, but depends on the
industry.
Account Credit Sales 7 to 10 times annually is
Receivable Average Debtor good; higher means efficient
(Debtors) credit collection
Turnover
Debtor Collection 360 30–60 days is standard;
Period Debtors Turnover Ratio lower means quicker
collection of receivables
Working Capital Cost of Sales or Sales 2 or higher (but depends on
Ratio Average Working Capital business nature); indicates
efficient use of working
capital
Return on EBIT 15% or higher is
Investment, Capital Employed considered strong
before tax; performance.
(i)ROCE EBIT
(ii)ROTA Total Assets

Return on EBIT(1-T) 10% or higher is generally

Investment, Capital employed or total assets good.
After tax;
ROCE
ROTA
Return on Equity (Net Profit after Tax – Preference 15–20% is ideal; higher
Dividend) Equity Shareholders' Funds means better shareholder
return.
Pay-out Ratio Dividend per Equity Share 30–50% is common; higher
Earnings per Equity Share may suggest stable dividend
policy but less reinvestment
Capital Gearing (Preference Share Capital + Debentures Low gearing (<50%) is
Ratio + Long-Term Loan) safer.
Equity Share Capital High gearing (>50%)
means more reliance on
debt; higher risk, higher
potential return