Ratio Analysis Definition and Formula

Hello friends today we talk about few important ratio. With the help of ratio analysis you can easily take decision about the performance of any particular company and also compare your performance with other companies also. These ratios are distributed into different categories. There are few important ratios definition with formula is given below. Have a look about the ratio analysis definition and formula in this article.

Ratio analysis Definition and Formula

There are lot of important ratio but before calculating ratio analysis you must aware about ratio analysis definition and formula which is given below:

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Definition of Return on Shareholder’s Fund Ratio:

The Return on Shareholders’ Funds (ROSF) ratio is a measure of the profit for the period which is available to the ordinary shareholders with the ordinary shareholders’ stake in a business.

Formula of Return on Shareholder’s Funds:

Profit after Interest & Tax but before Dividend X 100
Return on Shareholders’ Funds = ((Net profit after taxation & preference dividend) / (Ordinary share capital + Reserves)) * 100%

Definition of Working Capital:

Working Capital is a money available to a company for day-to-day operations. Working capital and the current ratio measure the liquidity of your business – its ability to meet short-term debt with current assets. This ratio indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative working capital in our business. If it shows over 2 means that the company is not investing excess assets. Most of the charted accountants believe that a ratio between 1.2 and 2.0 is quite well in our business. Working Capital is also known as Net Working Capital or Working Capital Ratio.

Formula of Working Capital

Working Capital = Current Assets – Current Liabilities

Definition of Net Fixed Assets Ratio:

Net fixed assets are referring to the total of historical asset costs of a company minus the less accumulated depreciation.
The things included in net fixed assets include the property, equipment, and improvement costs. Fixed assets are normally expected to be used for more than one accounting period which is why they are part of Non-Current Assets of the entity. Economic benefits from fixed assets are therefore derived in the long term.

Formula of Net Fixed Assets

Net Fixed Assets = Total Fixed Assets – Depreciation

Definition of Capital Employed Ratio:

Capital employed formula is used as deducting the current liabilities from the current assets. It can be defined as equity plus loans which are subject to interest.

To define it properly, capital employed can be expressed as the total amount of capital that has been utilized for acquisition of profits. It also refers to the value of all assets (fixed as well as working capital) employed in a business.

Formula of Capital Employed

Capital Employed = Total Assets – Current Liabilities
Capital Employed = Equity + Loans
Capital Employed = Share Capital (Equity + Preference) + Reserves + Surplus/Profit & Loss A/c (Cr.)/Accumulated Profits + Debentures + Long term loans – [Preliminary Expenses – Discount/Commission or Issue of Share / Debenture – Profit & Loss A/c (Dr. Balance)]
Capital Employed = Net Fixed Assets + Long Term Investments + Working Capital

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