Absolute Liquid Ratio:

Definition and Explanation:

Absolute liquid ratio extends the logic further and eliminates accounts receivable (sundry debtors and bills receivables) also. Though receivables are more liquid as comparable to inventory but still there may be doubts considering their time and amount of realization. Therefore, absolute liquidity ratio relates cash, bank and marketable securities to the current liabilities. Since absolute liquidity ratio lays down very strict and exacting standard of liquidity, therefore, acceptable norm of this ratio is 50 percent. It means absolute liquid assets worth one half of the value of current liabilities are sufficient for satisfactory liquid position of a business. However, this ratio is not as popular as the previous two ratios discussed.

Formula:
Absolute liquid ratio is calculated by using the following formula: Absolute liquid ratio = Absolute liquid assets / Current liabilities Where absolute liquid assets = Cash + Bank + marketable securities.

Example:
From the following balance sheet calculate absolute liquid ratio: Liabilities Share capital Reserves Bank overdraft Sundry creditors Bills payable Outstanding expenses $ 5,00,000 1,90,000 1,00,000 1,40,000 50,000 10,000 Assets Goodwill Plant & machinery Trade investments Marketable securities Bills receivable Cash Bank Inventories $ 50,000 4,00,000 2,00,000 1,50,000 40,000 45,000 30,000 75,000 9,90,000

9,90,000

Solution: Absolute liquid assets Absolute liquid ratio = Absolute liquid assets/Current liabilities Absolute liquid assets are marketable securities, cash and bank. Thus $1,50,000 + $45,000 + $30,000 = $2,25,000 Current liabilities are bank overdraft, sundry creditors, bills payable and creditors for outstanding expenses. = 1,00,000 + 1,40,000 + 50,000 + 10,000 = $3,00,000. Absolute liquid ratio = 2,25,000 / 3,00,000 = 0.75 The absolute liquid ratio in this case is 0.75 which is better as compared to rule of thumb standard which is 0.50.

Solvency Ratio = ( Shareholders fund * 100 ) / Total Assets

Note: A high value indicates a healthy company, while a low value indicates the opposite.

Solvency ratio is one of the various ratios used to measure the ability of a company to meet its long term debts. Moreover, the solvency ratio quantifies the size of a companys after tax income, not counting non-cash depreciation expenses, as contrasted to the total debt obligations of the firm. Also, it provides an assessment of the likelihood of a company to continue congregating its debt obligations. Formula The formula used for computing the solvency ratio is: Solvency ratio = (After Tax Net Profit + Depreciation) / Total liabilities As stated by Investopedia, acceptable solvency ratios vary from industry to industry. However, as a general rule of thumb, a solvency ratio higher than 20% is considered to be financially sound. Generally, a lower solvency ratio of a company reflects a higher probability of the company being on default with its debt obligations.

Earning Per Share Ratio (EPS Ratio):

In order to avoid confusion on account of the variant meanings of the tern capital employed, the overall profitability can also be judged by calculating 'earning per share'.

Formula:
The following formula is used to calculate EPS ratio. Earnings Per Share Ratio = Net profit available for equity shareholder / Number of equity shares

Definition
The price to earnings ratio (P/E ratio) is the ratio of market price per share to earning per share. The P/E ratio is a valuation ratio of a company's current price per share compared to its earnings per share. It is also sometimes known as earnings multiple or price multiple. Though Price-earning ratio has several imperfections but it is still the most acceptable method to evaluate prospective investments. It is calculated by dividing Market Value per Share (P) to Earnings per Share (EPS). Market value of share can be taken from stock market or online and earning per share figure can be calculated by dividing net annual earnings to total number of shares (Net Annual Earnings/Total number of shares). P/E ratio is a widely used ratio which helps the investors to decide whether to buy shares of a particular company. It is calculated to estimate the appreciation in the market value of equity shares.

Calculation (formula)
The formula used to calculate the price to earnings ratio is:

Price to Earnings Ratio = Market Price per Share / Earnings per Share

The price to earnings ratio can also be calculated with the help of following formula: Price to Earnings Ratio = Market Capitalization / Earnings after Taxes and Preference Dividends The P/E ratio tells how much the market is willing to pay for a companys earnings. A higher P/E ratio means that the market is more willing to pay for the earnings of the company. Higher price to earnings ratio indicates that the market has high hopes for the future of the share and therefore it has bid up the price. On the other hand, a lower price to earnings ratio indicates the market does not have much confidence in the future of the share. The average P/E ratio is normally from 12 to 15 however it depends on market and economic conditions. P/E ratio may also vary among different industries and companies. P/E ratio indicates what amount an investor is paying against every dollar of earnings. A higher P/E ratio indicates that an investor is paying more for each unit of net income. So P/E ratio between 12 to 15 is acceptable. For example, if company A shares are trading at $50/share and most recent EPS is $2/share. The P/E ratio will be $50/2$ = $25. This indicates that the investors are paying $25 for every $1 of companys earnings. Companies with no profit or negative earnings have no P/E ratio and usually written as N/A

Dividend Yield
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Definition Dividend yield is the amount that a company pays to its share holders annually for their investments. It is expressed as a percentage and indicates attractiveness of investing in a companys stocks. Dividend yield is considered as ROI for income investors who are not interested in capital gains or long-term earnings. It is calculated as Annual Dividend Per Share divided by Current Market Value Per Share. Calculation (formula)

Dividend Yield Ratio = Dividend per Share / Market Value per Share
An example will help understanding Dividend Yield. If a company pays $2 as annual dividend and its shares are currently trading at $70/share. The dividend yield would be 2.9% ($2/$70 * 100). Dividend yield indicates how much you are earning for each dollar invested in a company. Investors widely use this ratio in trend analysis and consider their past dividend yield ratios to decide whether

to invest in the company or not. Dividend yield is most important for the investors who are seeking long term investments and a consistent return every year. Old companies have been observed consistent in paying dividends with a very small or no variation. Investment in such companies shares is relatively secure and less risky and their pay out ratio is also high as compare to new companies. It also helps in making a comparison of other investments, such as, deposits, debentures, certificates, Govt. securities etc.