# IIBF CCP STUDY FREE MATERIAL RATIOS FORMULAS 2022

## IIBF CCP STUDY FREE MATERIAL RATIOS FORMULAS 2022

CCP STUDY FREE MATERIAL RATIOS FORMULAS:- As the ratio analysis also forms part of the Certified Credit Professional Syllabus, here, down below is some brief on the ratio along with formulas for the calculation of various ratios.

RATIOS:

A single component sometimes might not be able to convey or represent how it is essential but when compared to different other but related components, becomes more effective & ratio analysis is just that.

It is a tool in the hands of one who knows how it can be used to identify strong or weak points in the financials thereby, can understand how the company is being operated & what are its strong and weak areas.

In formal words, a ratio presents the relationship between 2 related components of a financial statement as a single component may not be able to do so.

For what purposes the Ratio Analysis is done or conducted?

As already stated above, ratio analysis is a tool that is done to identify the weak & strong points of the entity & to take decisions whenever something shifts or opportunity presents itself. Below are some of the objectives for why ratio analysis is usually conducted:

1. To identify the business areas which need the management attention the most;
2. To identify the potential areas that have the possibility of improvement by making efforts in the desired direction;
3. To do a deeper analysis of the profitability, liquidity, solvency & efficiency levels in the business to know its status;
4. To do some cross-sectional analysis by comparing the entity’s performance with the best industry standards; and
5. To provide information-driven from financial statements to make useful projections and future estimates.

Read Also:- IIBF CCP MOCK TEST – CERTIFIED CREDIT PROFESSIONAL 2022

### CLASSIFICATION OF RATIOS:

 Accounting: These express in mathematical terms between accounting figures which for meaningful purpose. P & L Ratios Balance Sheet Ratios Composite or Inter-Statement Ratios Functional: They are based on the purpose for they are computed. Profitability Turnover/Activity Ratios Financial Or Solvency Ratios: These ratios examine a firm’s ability to meet its long-term debts & obligations. Liquidity Ratios Leverage Ratios Turnover Ratios Profitability Ratios

 Ratios & Their Formulas No. Ratio Formula Safe a. LIQUIDITY RATIOS:  To understand the entity’s ability to meet its liabilities of short-term nature 1 Current Ratio Current Assets: Current Liabilities 2:1 2 Quick Ratio (Current Assets – Inventory – prepaid expenses): Current Liabilities) 1:1 Gross Working Capital Total Current Assets (TCA) 3 Net Working Capital (NWC) Current Assets – Current Liabilities Working Capital Gap (WCG) Current Assets – Current Liabilities other than Bank borrowings (short-term) b. SOLVENCY (LEVERAGE) RATIOS: They measure the relationship b/w borrower’s owned funds & borrowed funds as well as the size of stake, stability and degree of solvency. 4 Net Worth (NW) Capital + Reserves + Profits or – Loss 5 Tangible Net Worth (TNW) Net worth – Intangible Assets 6 Adjusted Tangible Net Worth (ATNW) Tangible Net Worth – Investments in Subsidiary and affiliates 7 TOL: TNW Total Out Side Liabilities: Tangible Net Worth 8 TOL Total liabilities – Net worth 9 TOL: ATNW Total Out Side Liabilities: Adjusted TNW 10 Debt-Equity Ratio Long Term Loans: Net Worth High = Risky 11 Gross DSCR Net Profit + Depreciation + Interest on T/L * T/L Installment + Int. On T/L 12 Net DSCR Net Profit + Depreciation (Cash accruals) * T/L Installment c. ACTIVITY RATIOS: Measures the Unit’s efficiency in turning its inventory into sales and efficiency with which the debtors are turned over into cash. 13 Inventory Turnover Ratio Cost of Sales/ Average Inventory High= Fav. 14 Inventory Velocity (in Days) Average Inventory/ Cost of Sales (i.e Cost of Goods sold) * 365 High= Risky 15 Debtors Turnover Ratio Net Credit Sales / Average Trade Debtors High= Fav. 16 Debtors Velocity (in Days) Average Trade Debtors/ Net Credit Sales * 365 High= Fav. 17 Creditors Turnover Ratio Net Credit Purchases/ Average Trade Creditors High= Unfav. 18 Creditors Velocity (in days) Average Creditors/ Net Credit Purchases * 365 Lower= Fav. 19 Holding level for Raw Materials Average RM Inventory/ Cost of RM consumed * 365 20 RM Consumed Opening RM + RM Purchases – Closing RM 21 Holding level for Stock in process Average SIP Inventory/ Cost of Production * 365 22 Holding level for F.G. Average F.G. Inventory/ Cost of Sales * 365 23 Operating Cycle Period Inventory days + Debtors’ days – Creditors’ days 24 Interest Coverage Ratio Net Profit before Interest and Tax / Interest High= Safe

#### What is the importance of Ratios Analysis?

Ratio analysis tells us what a single or an individual figure can’t. Ratios find out the relationships between two figures which help us make decisions on a timely basis. They basically indicate the risky, safe, favorable, or unfavorable areas in the organizations.

To be precise, they indicate the following situations or conditions in regard to the company or entity:

• Long-term solvency of the entity (TOR)
• Short-term solvency of the entity (CR & QR).
• The Profitability of the entity (GP & NP Ratios).
• Return on Investment in the entity (ROI).
• The turnover norms of current assets & Current liabilities
• Credit Rating: Ratios play a significant role in the credit rating of the accounts in such a way that they indicate the risk perception of the lending bank Pricing which is also linked to Credit Rating.

Read Also:- IIBF CCP QUESTION PDF 2022 – Certified Credit Professional

#### What are the limitations of ratios?

Though the ratios are important tools in conducting the financial analysis and to take help in various managerial decisions they have their limitations too. Due to these limitations, ratios need to be interpreted with care.

While doing the ratio analysis of the financials (especially when it is done by the external parties), the following limitations come in their way:

• Ratios are a tool of comparison, either within the company or industry. But when its newly incorporated, one doesn’t have any historical data to compare it with the past performance.
• If the calculation of ratios is wrong, it may lead to wrong decisions.
• There is no valid proof whether the books of accounts are in agreement with the (GAAP) generally accepted accounting procedures or not.
• Some details of disputed Statutory liabilities such as IT or GST or Customs Duty etc might not be available when the entity is not under obligation to get its accounts audited. So, nothing can be said whether there will be any defaults in servicing its debt obligations or not.
• Ratios don’t indicate whether the short-term loans that are raised by the entities are being used for long-term investment or not.
• They also don’t tell us whether there are adequate provisions in place for Depreciation, Taxation Dividend, etc.
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