Matching Financial Ratios: Column I and II

This section details the correct pairings between financial ratios in Column I and their definitions from Column II, crucial for financial analysis and understanding.

Debt-Equity Ratio Explanation

a. Debt-Equity Ratio correctly matches with iii. Long term debts $\div$ Shareholder's Funds.

• Reasoning: This ratio assesses financial leverage by comparing long-term debt obligations against shareholder equity.
  $ \text{Debt-Equity Ratio} = \frac{\text{Long term debts}}{\text{Shareholder's Funds}} $

Proprietary Ratio Explanation

b. Proprietary Ratio correctly matches with iv. Shareholder's Funds $\div$ Total Assets.

• Reasoning: This ratio indicates the proportion of a company's assets financed by owners' equity, reflecting solvency.
  $ \text{Proprietary Ratio} = \frac{\text{Shareholder's Funds}}{\text{Total Assets}} $

Interest Coverage Ratio Explanation

c. Interest coverage ratio correctly matches with i. Net Profit before interest and tax $\div$ Interest on long term loans.

• Reasoning: This ratio assesses the company's ability to cover its interest expenses using operating earnings (EBIT).
  $ \text{Interest Coverage Ratio} = \frac{\text{Net Profit before interest and tax}}{\text{Interest on long term loans}} $

Capital Gearing Ratio Explanation

d. Capital gearing ratio correctly matches with ii. Equity share capital + Reserves $\div$ Preference share capital + Interest bearing finance.

• Reasoning: This ratio measures the proportion of fixed-interest bearing capital (like preference shares and debt) relative to equity.
  $ \text{Capital Gearing Ratio} = \frac{\text{Equity share capital + Reserves}}{\text{Preference share capital + Interest bearing finance}} $