Explain turnover group ratios.

Explain turnover group ratios.

Solvency Group: Under this group following ratios are calculated which indicates the long term financial prospects of the company. The shareholders, debenture holders and other lenders of long term finance may be interested in these ratios.

- Debt Equity Ratio indicates the stake of shareholders and creditors in the organization. It indicates the cushion available to the creditors on the liquidation of the organization. A high debit equity ratio indicates that the financial stake of the creditors is more than that of the owners. On the other hand, a low debt equity ratio means that the borrowing capacity of the organization is being underutilized.

Formula to calculate Debt Equity Ratio = External Liabilities/ Shareholders' fund

- Proprietary Ratio indicates the relationship between the owners’ funds and total assets. It basically indicates the extent to which owners funds are invested in different types of assets. If owners’ funds are more than the fixed assets, it means that a part of owners’ funds is invested in the current assets also. If the owners’ funds are less than fixed assets, then that means a part of fixed assets is financed by the creditors either long term or short term.

Formula to calculate Proprietary Ratio = Total Assets/ Owners' fund

- Fixed Assets/ Capital Employed Ratio indicate the extent to which the long term funds are sunk in fixed assets.

Formula to calculate Capital Employed Ratio = (Fixed Assets/ Capital Employed) X 100

- Interest Coverage Ratio indicate protection available to the lenders of long term capital in the form of funds available to the lenders of long term capital in the form of funds available to pay the interest charges. A high ratio is desirable but too high ratio may indicate under utilization of the borrowing capacity of the organization whereas too low ratio may indicate excessive long term borrowings.

Formula to calculate Interest Coverage Ratio = Profits before Interests and Taxes (PBIT)/ Interest Charges

- Debt Service Coverage Ratio (DSCR) is one of the most important ratios calculated by the financial institutions or Bankers giving long term finance to the organization. This ratio is calculated to ascertain the capability of the organization to repay the dues arising as a result of long term borrowings. Too low DSCR indicates insufficient earning capacity of the organizations to meet the obligations of long term borrowings.

Formula to calculate DSCR = (Net profit after taxes + Depreciation + Interest on Term Loans)/ (Interest on Term Loans + Installment of Term Loans)
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