Liquidity · Profitability · Solvency · Activity Ratios · Current Year vs Prior Year · Audit Analytical Review · SA 520
The Ratio Analysis tool computes key financial ratios from a company's balance sheet and P&L statement for the purpose of financial analysis, credit appraisal (CMA preparation), or audit procedures. It covers liquidity ratios (Current Ratio, Quick Ratio), profitability ratios (Net Profit %, ROE, ROCE), solvency ratios (Debt-Equity Ratio, Interest Coverage), and efficiency ratios (Inventory Turnover, Debtors Turnover). Useful for CAs, bankers, and financial analysts.
What is a healthy Current Ratio?
A Current Ratio of 2:1 is traditionally considered healthy (current assets twice current liabilities), though acceptable ratios vary by industry. Below 1 indicates potential liquidity stress.
What does a high Debt-Equity ratio indicate?
A high D/E ratio (above 2:1) typically indicates high financial leverage, greater risk for lenders, and potential difficulty in raising fresh debt. Acceptable levels vary by industry.
How is ROCE different from ROE?
ROCE (Return on Capital Employed) measures returns on total capital (debt + equity), while ROE (Return on Equity) measures returns only on shareholders' equity. ROCE is better for comparing companies with different capital structures.
Which ratios do banks use for working capital loans?
Banks primarily look at Current Ratio, Quick Ratio, Debt-Equity Ratio, DSCR (Debt Service Coverage Ratio), and Net Working Capital while evaluating working capital loan proposals under CMA guidelines.