Analytical Ratios

Current Ratio In current assets, companies have to block funds. A part of this investment is recovered by blocking the payment of your supplier which becomes current liability. Higher the ratio, higher funds are blocked in current assets and therefore higher ratio shows company's ineffciency Quick Ratio Quick ratio is like current ratio. The only difference is that the current assets, which are not readily convertible to cash, are not considered. Debt Equity Ratio It shows how leveraged the business is. A company with higher debt equity ratio has to pay higher interest costs. Therefore, the fixed obligation is higher. In days of boom, when profit growth is higher and interest cost remains fixed, it can work wonders for the company. However, in bad days when profit does not grow, or worse it falls, the company still has to pay interest and therefore it can affect it negatively Interest Cover Ratio It shows to what extent operating profit from business can cover interest payments. The higher the ratio, the better. Inventory Turnover Days It shows for how many days of production, the company has inventory. Lower the better. Debtors Velocity Days It shows debtors amount to how many days of credit sales. Lower the better. Creditors Velocity Days It shows creditors amount to how many days of purchase. Higher the better Fixed Asset Turnover Days It shows fixed assets amount to how many days of sales Operating Margin It shows, in percentage terms, the residual after meeting the expenses indispensable for production and day to day operation of business. The higher, the better. Gross Profit Margin It shows, in percentage terms, the residual after meeting the expenses indispensable for production of goods. The higher, the better. Net Profit Margin It shows, in percentage terms, the residual after meeting the all kind of expenses. The higher, the better Return on Equity It shows the accounting return equity investors of business are earning. The higher the better Return on Capital Employed It shows the accounting return all investors (including equity, preference and debt holders) are earning. The higher the better Payout Ratio It shows how much of the net profit of a year is paid out as dividend to shareholders. Higher the better