Creditors Turnover Ratio and its Formula/Calculation

Creditors Turnover Ratio shows the relationship between the net credit purchases and the average creditors. This ratio is expressed as a rate.

Purpose:

Purpose of this ratio is to

1) Calculate the speed with which creditors are paid off on an average during the year.

2) Calculate the creditors' velocity to indicate the period taken by the average creditors to be paid off.

3) Judge how efficiently the creditors are managed.

Formula:

Components:

1) Credit purchases means gross credit purchases minus purchases returns.

2) Average creditors mean average of opening and closing amount of creditors. If details are not given then only closing creditors may be considered as average creditors.

3) Amount of bills payable.

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Debt service coverage ratio and its Formula/Calculation

Debt service coverage ratio shows the relationship between net profit and interest plus loan instalments payable. This ratio is expressed in pure number.

Purpose:

Purpose of this ratio is to measure the debt servicing capacity of the company.

Formula:

Components:

1) Profit before interest & tax means net profit before payment of interest on loan and tax.

2) Interest means interest on long-term loans.

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Debt service Ratio and its Formula/Calculation

Debt service ratio shows the relationship between net profit and interest payable on loans. This ratio is also called as interest coverage ratio. This ratio is expressed as a pure number.

Purpose:

1) Purpose of this ratio is to measure the interest paying capacity of the company.

2) The purpose of this ratio is to find out the number of times the fixed financial charges are covered by income before interest and tax.

Significance:

1) It is important from the lenders' point of view.

2) It indicated whether the company will earn sufficient profits to pay periodical interest charges.

3) It shows that the company will be able is pay interest regularly.

Formula:

Components:

1) Profit before interest & tax means net profit before payment of interest on loan and tax.

2) Interest means interest on long-term loans.

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Price earnings ratio (P/E Ratio) and its Formula/Calculation

Price earnings ratio (P/E Ratio) measures relationship between market price of equity shares and earnings per share. It is usually expressed as a fraction.

Purpose:

1) Purpose of this ratio is to show the effect of the earning on the market price of the share.

2) It helps the investors while deciding whether to purchase, keep or sell the equity shares.

3) It helps to ascertain the value of equity share.

Formula:

Components:

1) Market price per equity share = quoted price of a listed equity share.

2) Earnings per equity share refer to formula given above.

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Dividend payout ratio and its Formula/Calculation

Dividend payout ratio shows relationship between dividend paid to equity shareholders out of profit available to the equity shareholders.

Purpose:

Purpose of this ratio is to measure the dividend paying capacity of the company.

Significance:

1) Higher ratio signifies that the company has utilized the larger portion of its earning for payment of dividend to equity shareholders.

2) It says lesser amount of earning has been retained.

Formula:

Components:

1) Dividend per equity shares means total dividend paid to equity shareholder dividend by number of equity shares.

2) Earning per shares refer to formula given above

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Earning per share and its Formula/Calculation

Earning per share is calculated to find out overall profitability of the organization. It represents earnings of the company whether or not dividends are declared. Earning per share is determined by dividing net profit by the number of equity shares.

Purpose:

Purpose of this ratio is to calculate the amount of profit available on each equity shares to take care of equity dividend, transfer to reserve, etc.

Significance:

1) This ratio helps the investors or shareholders to take decision while purchasing or selling shares.

2) This ratio shows the possibilities of issue of bonus shares.

3) Higher ratio indicates overall profitability.

Formula:

Components:

1) Net profit after tax & interest - less preference dividend.

2) No. of equity shares.

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Return on equity share capital and its Formula/Calculation

This ratio explains relationship between net profit (after tax and interest and dividend on preference share) and equity share holders' funds. This ratio is expressed in percentage.

Purpose:

Purpose of this ratio is to calculate amount of profit available to take care of equity dividend, transfer to reserves, etc.

Significance:

1) It is useful to the investors while deciding whether to purchase or sale of shares.

2) This ratio helps to make comparative study of equity capital with other company and it will be appreciate if there is high return.

Formula:

Alternatively this ratio may be calculated by using following formula for calculating the return per equity shares.

Components:

1)Net profit after tax & interest and preference dividend.

2)Equity share capital by adding reserves or deducting miscellaneous expenditures.

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