Return on Proprietors Funds and its Formula/Calculation

This ratio measures the relationship between net profit after tax & interest and proprietors fund. This ratio is alternatively known as "Return on proprietors' equity" or "Return on shareholders' investment" or "Investors' ratio". This ratio is expressed in percentage. Purpose of this ratio is to measure the rate of return on the total fund made available by the owners. This ratio helps to judge how efficient the concern is in managing owners' funds at its disposal. This ratio is very significant to prospective investors and shareholders. With the help of this ratio company can decide to rise finance from external sources even from public deposit it ratio is satisfactory. Shareholders can expect to capitalize its reserves and issue bonus shares when ratio is higher for reasonable period of time.

Formula:

Components:

1) Net profit after tax and interest

2) Proprietors' funds

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Debtors' Turnover Ratio and its Formula/Calculation

Debtors' Turnover Ratio shows the relationship between credit sales and average trade debtors. Alternatively, this ratio is known as "accounts receivable turnover ratio" or "turnover of debtors' ratio". This ratio is expressed as a rate.

Purpose:

Purpose of this ratio is to.

1) Calculate the speed with which debtors get settled on an average during the year.

2) Calculate debtors' velocity to indicate the period of credit allowed to average debtors.

3) Judge how efficiently the debtors are managed.

Formula:

Components:

1) Sundry debtors

2) Accounts receivables I.e. bills receivables.

3) Average daily sales.

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Stock Turnover Ratio and its Formula/Calculation

Stock turnover ratio shows relationship between costs of goods sold and average stock. This ratio is also known as "Inventory Ratio" or "Inventory Turnover Ratio" or "Stock Turn Ratio" or "Stock Velocity Ratio" or "Velocity of Ratio". This ratio measures the number of times of stock turns or flows or rotates in an accounting period compared to the sales affected during that period. This ratio indicated the frequency of inventory replacement. This ratio is expressed as rate. Purpose of stock turnover ratio is to calculate the speed at which the stock is being turned over into sales. Calculate the stock velocity to indicate the period takes by average stock to be sold out. Judge how efficiently the stock are managed and utilized to generate sales.

Formula:

Components:

1)

2)

* If opening stock is not given, the closing stock is treated as average stock.

Alternative method of stock turnover ratio:

This ratio can be calculated by using average stock at selling price at as the denominator. Under this method, average Stock at selling price is related to net sales.

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Net operating profit ratio and its Formula/Calculation

Operating profit ratio indicates the relationship between operating profit and net sales. This ratio is expressed in percentage. It signifies higher operating efficiency of management and control over operating cost. It indicates profitability of various operations of the organization I.e. buy, manufacture, sales, etc. It shows the ability of an organization to generate operating profit out of its daily operations.

Formula:

Components:

1) Net operating profit is equal to gross profit minus all operating expenses or sales minus cost of goods sold and operating expenses.

2) Net sales are equal to sales minus sales returns.

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Net profit Ratio and its Formula/Calculation

Net profit ratio indicates the relationship between net profit and net sales. Net profit can be either operating net profit or net profit after tax or net profit before tax. Alternatively, this ratio is also known as “Margin on sales ratio". Normally this ratio is calculated & expressed in Percentage. It measures overall profitability of the business. It is very useful in judging return on investments. It provides useful inferences as to the efficiency and profitability of the business. It indicates the portion of net sales is available for proprietors. It is a clear index of cost control, managerial efficiency, sales promotion, etc..

Formula:

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Return on capital employed and its Formula/Calculation

This ratio explains the relationship between total profit earned by business and total investment made or total assets employed. It is expressed in percentage. This ratio is also known as "Return on Investment", or "Return on Total Resources". Purpose of this ratio is to measure overall profitability from the total funds made available by owners and leaders. To judge how efficient the business concern is in managing the funds at its disposal. This ratio is effective tools to measure overall managerial efficiency of business. Comparison of this ratio with other company and this information can be obtained for determining future course of action. This ratio indicates the productivity of capital employed and measures the operating efficiency of the business.

Formula:

Components:

1) Net profit before tax, interest & dividends (PBIT)

2) Capital employed calculation:

Capital employed =

I) Equity share capital

ii) Add. Preference share capital reserve & surplus

iii) Add. Long term borrowings (Term loan + Debentures)

iv) Less: Fictitious assets like miscellaneous expenses not written off.

v) Less profit & loss A/c Dr. Balance (loss)

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Expenses Ratio and its Formula/Calculation

Expenses ratio explains relationship of items or group of expense to net sales. Such ratios are collectively known as expanses ratio. This is calculated and expressed in percentage. This Ratio expresses the percentage of items of expenses with net sales. This ratio helps us to know the cause behind overall changes in operating ratio. Purpose of this ratio is to take corrective action. It indicates the efficiency of management in control led expenses and improving profitability. This ratio enables the income tax department to judge the correctness and reliability of income disclosed in income tax returns. Analytical study of this ratio can be judged by trend of expenses. Comparative study of year to year expenses can be possible.

Formula:

1.

2.

3.

4.

5.

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