Return Investment = \(\frac{Net\ profit\ before\ interest\ and\ tax}{Capital\ employed}\) \(\times\) 100
= \(\frac{25,000}{1,25,000}\) = x 100 = 20%
Capital employed = Share capital + Reserves and surplus + Long term borrowings
= 70,000 + 25,000 + 30,000 = Rs.1,25,000

Fixed assets turnover ratio = \(\frac{Revenue\ from\ operation}{Average\ i\ xed\ assets}\) = \(\frac{60,00,000}{6,00,000}\) = 10 times

Trade receivables turnover ratio = \(\frac{Credit\ revenue\ from\ operations}{Average\ trade\ receivables}\) = \(\frac{9,60,000}{1,60,000}\) = 6 times
Trade receivables = Debtors + Bills receivable = 1,00,000 + 60,000 = Rs.1,60,000

Net profit ratio = \(\cfrac { Net\ profit\ after\ tax }{ Revenue\ from\ operations } \times 100=\cfrac { 1,40,000 }{ 3,50,000 } \times 40\)
Net profit = Revenue from operations – Cost of revenue from operations – Administration
expenses – Selling expenses
= 3,50,000 – 1,50,000 – 50,000 – 10,000 = Rs.1,40,000
Tutorial note
It is assumed that there is no tax payable.

Capital gearing ratio = \(\frac{Funds\ bearing\ fixed\ interest\ and\ fixed\ dividend}{Equity\ shareholders'funds}\)
= \(\frac{3,00,000}{4,00,000}\) = 0.75:1
Funds bearing fixed interest and dividend = 6% Preference share capital + 8% Debentures
= 1,00,000 + 2,00,000 = Rs.3,00,000
Equity shareholder’s funds = Equity share capital + General reserve + Surplus
= 2,00,000 + 1,25,000 + 75,000 = Rs.4,00,000

\(Gross\ profit\ ratio=\cfrac { Gross\ profit }{ Revenue\ from\ operators } \times 100\)
= \(\cfrac { 20,000 }{ 1,00,000 } \times 100=20\)%
Gross profit = Revenue from operations – Cost of revenue from operations
= 1,00,000 – 80,000 = Rs.20,000
(ii) Operating cost ratio
Operating cost ratio is the proportion of operating cost to revenue from operations.
This ratio is a test of the operational efficiency of the business. It is calculated as under.
\(Operating\ cost\ ratio=\cfrac { Operating\ cost }{ Revenue\ from\ operations } \times 100\)
Operating cost is the cost which is associated with the operating activities of the business.
Operating cost = Cost of revenue from operations + Operating expenses
Operating expenses = Employee benefit expenses + Depreciation + Other expenses related to office and administration, selling and distribution
A lower operating ratio indicates better profitability. Lesser the operating cost ratio, higher is
the margin available for payment of non operating expenses such as interest on loans, loss on sale of fixed assets, etc

Quick ratio = \(\frac{Quick\ assets}{Current\ liabilities}\) = \(\frac{1,85,000}{1,00,000}\) = 1.85:1
Quick assets = Current assets – Inventories – Prepaid expenses
= 2,50,000 – 50,000 – 15,000
= Rs.1,85,000

Current ratio = \(\frac{Current\ assets}{Current\ liabilities}\) = \(\frac{8,00,000}{4,00,000}\) = 2:1
Current assets = Current investments + Inventories + Trade receivables + Cash and cash equivalents + Prepaid expenses
= 80,000 + 1,60,000 + 4,00,000 + 1,20,000 + 40,000 = Rs.8,00,000
Current liabilities = Trade creditors + Bills payable + Expenses payable
= 1,60,000 + 1,00,000 + 1,40,000 = Rs.4,00,000
(ii) Quick ratio
Quick ratio gives the proportion of quick assets to current liabilities. It indicates whether the business concern is in a position to pay its current liabilities as and when they become due, out of its quick assets. Quick assets are current assets excluding inventories and prepaid expenses. It is otherwise called liquid ratio or acid test ratio. It is calculated as follows:
Quick ratio = \(\frac{Quick\ assets}{Current\ liabilities}\)
Quick assets = Current assets – Inventories – Prepaid expenses
Higher the quick ratio, better is the short-term financial position of an enterprise.

Gross profit ratio = \(\frac { Gross\ profit }{ Revenue\ from\ operations } \) \(\times\) 100
Gross profit = Revenue from operations - Cost of revenue from operations
= Rs.2,50,000 - Rs.2,10,000
= Rs.40,000
∴ Gross profit ratio = \(\frac { 40,000 }{ 2,50,000 } \) \(\times\) 100 = 16%

Fixed assets turnover ratio = \(\frac { Revenue\ from\ operations }{ Average\ fixed\ assets } \)
= \(\frac { 55,00,000 }{ 5,00,000 } \) = 11 times

Quick ratio = \(\frac { Quick\quad assets }{ Current\quad liabilities } \)
Quick assets = Current assets - Inventories - Prepaid expenses
= Rs.4,50,00 + Rs.70,000 - Rs.20,000
= Rs.3,60,000
Quick ratio = \(\frac { 3,60,000 }{ 2,40,000 } \) = 1:5:1

Current ratio = \(\frac { Current\ assets }{ Current\ liabilities } \)
Current assets = Current investments + Inventories + Bills receivables + Trade debtors + Cash and cash equivalents
= Rs.40,000 + Rs.2,00,000 + Rs.1,20,000 + Rs. 80,000 + Rs.10,000
= Rs.4,50,000
Current liabilities = Trade creditors + Bills payable + Expenses payable
= Rs.80,000 + Rs.50,000 + Rs.20,000 = Rs.1,50,000
Current ratio = \(\frac { 4,50,000 }{ 1,50,000 } \) = 3:1

(i) Ratios are only means: Ratios are not end in themselves but they are only means to achieve a particular purpose.
(ii) Accuracy of financial information : The accuracy of a ratio depends on the accuracy of information taken from financial statements.

(i) Return on investment shows the proportion of net profit. before interest and tax to capital employed (shareholders' funds and long term debts).
(ii) This ratio measures how efficiently the capital employed is used in the business.
(iii) It is an overall measure of profitability of a business concern.
(iv) It is computed as below: Return on Investment (ROI)
= \(\frac { Net\ profit\ before\ interest\ and\ tax }{ Capital\ employed } \) x 100
​​​​​​​Capital employed = Share holder's fund + Non currebt liablities greater the return on investment better is the profitability of a business and vice versa

(i) Debt equity ratio is calculated to assess the long term solvency position of a business concern.
(ii) Debt equity ratio expresses the relationship between long term debt and shareholders' funds.
(iii) It is computed as follows:
Debt enquity ratio = \(\frac { Long\ term\ debt }{ Shareholders\ funds } \)
Long term debt = Debentures, bonds, long term loans, other long term borrowing. Share holder's fund = Equity share capital + Preference share capital + reserves and surplus

(i) Quick ratio gives the proportion of quick assets to current liabilities.
(ii) It indicates whether the business concern is in a position to pay its current liabilities as and when they become due, out of its quick assets.
(iii) It is otherwise called liquid ratio or acid test ratio.
(iv) It is calculated as follows:
Quick ratio = \(\frac { Quick\ assets }{ Current\ liabilities } \).
Quick assets = Current assets - Inventries - prepaid expenses. higher the Quick ratio better is the short - term financial position of an enterprises.  

(i) Ratio is a mathematical expression of relationship between two related or interdependent items.
(ii) It is the numerical or quantitative relationship between two items
(iii) It is calculated by dividing one item by the other related item.
(iv) When ratios are calculated on the basis of accounting information, these are called 'accounting ratios'.