Ratio Analysis — Part 2: Activity and Profitability Ratios: visual lesson, ISC Class 12 Accounts

Lesson

Activity and profitability ratios

Part 2 — turnover ratios, profitability ratios including earnings per share and price-earnings, and return on investment.

In this lesson you will

Compute trade receivables, trade payables, inventory and working capital turnover ratios using averages and credit figures
Find the cost of revenue from operations and average inventory from given figures
Compute the gross profit, net profit, operating and operating profit ratios, separating operating from non-operating items
Compute earnings per share, the price-earnings ratio, capital employed and return on investment
Find missing figures from given ratios and read a set of ratios together

Part 2 at a glance

Concept

All in times. Average = (opening + closing) ÷ 2.
Turnover ratio	Flow of the year (numerator)	Resource (denominator)
Trade receivables	Credit revenue from operations	Average trade receivables (debtors + bills receivable)
Trade payables	Net credit purchases	Average trade payables (creditors + bills payable)
Inventory	Cost of revenue from operations	Average inventory
Working capital	Revenue from operations	Working capital (current assets − current liabilities)

Concept

Working of the cost of revenue from operations of Mohiniyattam Coir: opening inventory plus purchases plus direct expenses less closing inventory gives 37,50,000, which is also revenue less gross profit; average inventory 3,75,000
Mohiniyattam Coir, year ended 31 March 2026	₹
Opening inventory	3,50,000
Add: Purchases	36,00,000
Add: Direct expenses (wages, carriage inwards)	2,00,000
Less: Closing inventory	(4,00,000)
Cost of revenue from operations	37,50,000
Check: revenue − gross profit	50,00,000 − 12,50,000 = 37,50,000
Average inventory	(3,50,000 + 4,00,000) ÷ 2 = 3,75,000