Important Formulae in Financial Management

Important Formulae in Financial Management

  • Profit After Tax (PAT) = Operating profit + Non-operating incomes – Non Operating expenses – taxation.
  • Current ratio = current assets/current liabilities.
  • Liquid ratio = liquid assets/liquid liabilities.
  • Fixed assets turnover ratio =Net sales/Fixed assets
  • Debtors turnover ratio = Net credit sales/closing sundry debtors.
  • Capital employed = Fixed assets + Investments + Current assets – Current liabilities
  • Capital Employed = Share capital + reserves & surplus + long term liabilities.
  • Debt equity ratio = External liabilities / shareholder funds or Long term liabilities / shareholder funds.
  • Return on assets (ROA) = (Net profit/sales) * 100
  • Return On Capital Employed (ROCE) = (Net profit + Interest on long term sources/Capital employed) * 100.
  • Capital gearing ratio = Fixed income bearing securities/equity capital.
  • Earnings Per Share (EPS) = (Net Profit after tax (PAT) – Preferred dividend) / No. of equity shares outstanding.
  • Marginal contribution = sales – variable cost.
  • Operating leverage = contribution / Earnings before interest and tax (EBIT).
  • Financial Leverage = Earnings before interest and tax (EBIT) / (EBIT- Interest).
  • Combined leverage = Operating leverage * Financial leverage.
  • Sales revenue – Costs = Net revenue
  • Net revenue – Tax liability = Revenue after taxes.
  • Revenue after taxes + depreciation = Net cash inflow.
  • Pay-back period is period within which cash inflows = cash outflows.
  • Pay-back period = Cash outlay / annual cash inflow.
  • Accounting rate of return (ARR) = Total profits / (net investment in project * no. of years of profit) * 100.
  • Certainty – Equivalent coefficient = Certainty cash inflows / risky cash inflows.
  • Ordering cost = (Annual Demand / Volume per order) * Ordering cost.
  • Carrying cost = (Q/2) * c.
  • Reorder level = Max. lead time * max. usage.
  • Maximum level = Reorder level * reorder quantity- (Minimum usage * minimum lead time).
  • Minimum level = Reorder level-(normal usage * normal lead time)
  • Danger level =Normal usage * lead time for emergency purchases.
  • Safety stock = (Maximum usage * maximum lead time) – (Normal usage * normal lead time)
  • Safety stock = Minimum level
  • Maximum level = Safety stock + Economic Order Quantity (EOQ)
  • Reorder level = Safety stock + (Normal usage * normal lead time).
  • Average stock level = Safety stock +(Economic Order Quantity (EOQ)/2).
  • Inventory turnover = Value of material consumed / average inventory held
  • Value of material = Opening stock + purchases – closing stock.
  • Number of orders = Annual consumption / Economic Order Quantity (EOQ).