Ratios convert raw financial numbers into comparable, actionable intelligence. This session covers all four families: Liquidity, Solvency, Profitability, and Efficiency.
Raw numbers are useless for comparison when companies are vastly different in size. D-Mart's revenue is ₹50,000 crore; Reliance Retail's is ₹3,00,000 crore. But which is more efficient? Which is more profitable? Which manages cash better? The answer lies in ratios — standardised measures that make any two companies comparable.
| Ratio | Formula | What It Tells You | Benchmark |
|---|---|---|---|
| Current Ratio | Current Assets / Current Liabilities | Can the company meet short-term obligations? | 1.5 - 2.0 (ideal) |
| Quick Ratio | (CA - Inventory - Prepaid) / CL | Same but excludes slow-to-convert assets | ≥ 1.0 |
| Cash Ratio | (Cash + Marketable Securities) / CL | Most conservative liquidity measure | 0.2 - 0.5 |
Your EMI is ₹25,000 (current liability). You have ₹50,000 in your savings account (current asset). Your "Current Ratio" = 50,000/25,000 = 2.0 — comfortable. But if you also owe ₹40,000 on a credit card, your ratio drops to 50,000/65,000 = 0.77 — trouble!
| Ratio | Formula | What It Tells You |
|---|---|---|
| Debt-Equity Ratio | Total Debt / Equity | How much debt for every rupee of equity? Lower is safer. |
| Debt Ratio | Total Debt / Total Assets | What percentage of assets are funded by debt? |
| Interest Coverage (TIE) | EBIT / Interest Expense | Can the company pay its interest comfortably? Higher is better. |
| Equity Multiplier | Total Assets / Equity | Leverage measure used in DuPont analysis. |
Adani Group companies had Debt-Equity ratios of 2x-4x before the Hindenburg crisis, significantly higher than peers. When the stock crashed, the collateral value of pledged shares dropped, threatening debt covenants. Interest coverage ratios of some entities dropped below 2x, raising alarm. This is exactly why solvency ratios matter — they signal risk before a crisis hits.
| Ratio | Formula | What It Tells You |
|---|---|---|
| Gross Margin | Gross Profit / Sales × 100 | How much do we keep after direct costs? |
| Operating Margin | EBIT / Sales × 100 | How much do we keep after all operating costs? |
| Net Margin | PAT / Sales × 100 | How much of every rupee of revenue becomes profit? |
| ROA | PAT / Total Assets | How well do we use all our assets to generate profit? |
| ROE | PAT / Equity | What return do shareholders earn on their investment? |
| ROCE | EBIT / Capital Employed | Return on all long-term capital (equity + debt) |
| Ratio | Formula | Interpretation |
|---|---|---|
| Inventory Turnover | COGS / Avg Inventory | How many times inventory sold & replaced per year |
| Days Inventory (DSI) | 365 / Inventory Turnover | Average days to sell inventory |
| Receivable Turnover | Credit Sales / Avg Receivables | How fast we collect from customers |
| Days Sales Outstanding (DSO) | 365 / Receivable Turnover | Average days to collect payment |
| Payable Turnover | Credit Purchases / Avg Payables | How fast we pay suppliers |
| DPO | 365 / Payable Turnover | Average days to pay suppliers |
| Asset Turnover | Sales / Total Assets | Revenue generated per rupee of assets |
A lower CCC means the company converts inventory to cash faster. Negative CCC (like Amazon) means the company collects from customers before paying suppliers — essentially using supplier money to fund operations.
Your neighbourhood kirana store:
DSI = 15 days (stock rotates every 2 weeks — fast for perishables)
DSO = 5 days (most customers pay cash; some have monthly credit)
DPO = 30 days (pays wholesaler monthly)
CCC = 15 + 5 - 30 = -10 days (negative! The store uses supplier credit to fund operations — very efficient)
DuPont analysis breaks ROE into its component drivers to understand WHERE the return is coming from: