Pg-1 Supplementary Sheets on Ratio Analysis-1

EASTERN FASHIONS LTD.

BALANCE SHEET
31.12.2011
Assets Liabilities & Equities
$ $
Current Asset: Current Liabilities:
Cash 2000 Accounts Payable/Trade Creditor 600
Cash On Hand 500 Notes Payable 200
Savins Accounts 500 Ta!es Payable "00
Marketable Securities: Accrued Salaries Payable #00
Treasury bills $000 %&'loyer Provided (ene)its Payable *00
Stoc+ 'urchased/
Tradin securities #000 ,nearned -evenues "000
Other short ter& invest&ents "500 Current Portion o) .on Ter& /ebt #00
Accounts -eceivables/Trade
/ebtor *000 Others Accrued %!'enses 0Accruals1 200
3nventory/Stoc+ "200 TOTAL CURRENT LIABILITIES 4000
Pre'aid %!'enses "#00
TOTAL CURRENT ASSETS 22000 Fixed/Non Current Liabilities
.on Ter& /ebt/(ond//ebenture "0000
Fixed/Non Current Assets 4ortae Note 2000
.and 5 (uildins 6000 "0 years ban+ loan 6000
4achinery and %7ui'&ents *000 /e)erred 3nco&e Ta! "*00
8urniture and 8i!tures 2000 Others lon ter& liabilities 2200
9ehicles 6000 TOTAL FIXED LIABILITIES 27000
Gross 30000 or: TOTAL LONG TERM DEBT
.ess;Accu&ulated /e'reciation 2000 TOTAL LIABILITIES 31000
Net Property, Plant &
Equipments 28000
Others .on Ter& 3nvest&ents 5500 Shareholders' or owners' Equity:
3ntanible Assets 6500 Conr!"#$% C&'!&()
TOTAL FIXED ASSETS 40000
Co&&on Stoc+ <(oo+ 0'ar1 9alue Stoc+ =
<"0 Par/Stated 9alue: #:000 shares authori>ed:
2:000 shares issued: and ":6*0 shares
outstandin =
20000
<$"0 ! 2000=
Ca'ital in e!cess o) 'ar /Additional Paid in
Ca'ital 0 're&iu& ? $ 51
"0000
<$5 ! 2000=
Ca'ital -eserve 0-evaluation o) )i!ed assets1 *00
-etained %arnins $00
.ess@ Treasury Stoc+: at cost
0-e'urchase o) 20 Shares1
200
< $ "0 ! 20 =
TOTAL STOC*HOLDERS+ E,UIT- 31000
TOTAL ASSETS .2000 TOTAL LIABILITIES AND E,UITIES .2000
Notes:
Total no. of shares issued 2000 @ $ 15 per share where $10 is face/Par value and $ 5 is premium
Outstanding hares ! Total issued" #epurchase $treasur% stoc&' !2000"20!1()0
*nding #etained *arnings ! +et ,ncome - .ash dividends / 0eginning #etained *arnings
EASTERN FASHIONS LTD.
Copyright2012, Dewan Muktadir-Al-Mukit 1
Pg-2 Supplementary Sheets on Ratio Analysis-1
INCOME STATEMENT
For /$ 0$&r $n%$% 31 D$1$2"$r3 2011
$
Sales Revenue
Total Sales 200:000
less@ Sales -eturns 2:000
less@ Sales discounts ":000
N$ S&($s R$4$n#$ 1573000
Less: Cost of oo!s Sol!:
(einnin Stoc+ o) -aA 4aterials 6:000
0B1 Purchase o) -aA 4aterials ":500
0B1 /irect 9ariables Cost 2:500
0B1 /irect 8i!ed Cost #:000
0;1 %ndin Stoc+ o) -aA 4aterials 2:000
Cos o6 Goo%s So(% 113000
Gross 7ro6!82&r9!n 18.3000
Less: "peratin# E$penses:
Sellin %!'enses@
Sales&enCs salaries 5 Aaes "5:000
Advertisin *:000
Co&&issions 2:000
-ent o) Sho' 22:000
Deneral 5 Ad&inistrative %!'enses@
O))ice Salary 20:000
O))ice -ent 25:000
O))ice su''lies 5:000
,tilities 2:$00
/e'reciation 5 A&orti>ation e!'enses 2:000
.eal e!'enses 600
To&( O'$r&!n9 E:'$ns$s 1023000
O'$r&!n9 7ro6!8 EBIT 843000
"t%ers income & E$penses:
0B1 Dain o) sale o) invest&ent/e7ui'&ent $:000
0B1 3nterest recei't ":500
0;1 .oss on sale o) invest&ent/e7ui'&ent $0:000
0;1 3nterest %!'ense/8inancial Cost 5500
0;1 Contribution to Eor+ersC 'ro)it
Partici'ation/Eel)are 8und 0EPE81 #6:000
N$ O/$rs In1o2$ &n% E:'$ns$s ;7.3000<
N$ In1o2$ B$6or$ T&:8 E&rn!n9s B$6or$ T&:
;EBT< 83000
.ess@ 3nco&e Ta! < ?#0F= 2:$00
E&rn!n9s or In1o2$ A6$r T&: ;EAT<8 N$ In1o2$ =3.00
Cash /ividends 5:#00
-etained %arnins0-%1 at the beinnins "00
Copyright2012, Dewan Muktadir-Al-Mukit 1
Pg-3 Supplementary Sheets on Ratio Analysis-1
Hypothetical INDUSTRY AVERAGE
In%#sr0 A49
L!>#!%!0 R&!os
Current -atio 2G50
Huic+ -atio "G#
Cash -atio #
A1!4!08E66!1!$n10 R&!os
3nventory Turnover -atio "" ti&es
Accounts -eceivable Turnover -atio 22 ti&es
Av Collection Periods/ /SO #0 days
8i!ed Asset Turnover -atio $ ti&es
Total Asset Turnover -atio 5 ti&es
L$4$r&9$ R&!os
/ebt to Asset -atio or /ebt -atio #5 F
/ebt to %7uity -atio 20 F
Ti&es 3nterest %arned $ ti&es
7ro6!&"!(!0 R&!os
Dross Pro)it 4arin 50 F
O'eratin Pro)it 4arin -atio 20 F
Net Pro)it 4arin -atio 5 F
-OA * F
-O% "5 F
How to Calculate Industy A!ea"e:
uppose %ou are calculating ratio of 2onno .eramic 3td. 4our calculated .urrent ratio
for 2onno .eramic 3td. is 1.). +ow %ou have to find out the same ratio of others
companies $5ere .eramics .ompan%' in same industr%. 3i&e now %ou have to calculate
the .urrent ratio of 6u"7ang .eramic 3td.8 #9: .eramics 3td.8 hinepu&ur .eramics
3td. and tandard .eramic 3td. which are 1.58 1.(8 2 and 0.) respectivel% $9ssumption'.
+ow %ou have to ma&e average all .urrent ratios to get the industr% average. ,n this case
it will ;e $1.)/ 1.5/1.(/2/0.)'/5 or 1.<. o8 the industr% average for .eramics industr% is
1.<. ,f %ou have time or data availa;ilit% constraints then %ou can ta&e some
representative companies in the same industr% ;ut not all companies.
Copyright2012, Dewan Muktadir-Al-Mukit 1
Pg- Supplementary Sheets on Ratio Analysis-1
Copyright2012, Dewan Muktadir-Al-Mukit 1
Pg-! Supplementary Sheets on Ratio Analysis-1
Ratio Calculation
Gi!en
Industy
A!"
Co##ent
LIQUIDITY RATIOS
Cuent Ratio
! Total .urrent 9sset / Total .urrent 3ia;ilities
! $ 228000/ $ =8000 ! 5.50 2.50
*astern 6ashions 3td. has a greater a;ilit% to use their
current assets to pa% short term lia;ilities compared to
others companies within the same industr%. 2oreover
.urrent #atio is greater than minimum accepta;le level
of $:% which indicates the greater margin of safet% for
creditors.
&uic' Ratio
!$.urrent assets - ,nventories' / .urrent lia;ilities
!$ $ 228000"$18200'/ $ =8000 ! 5.20 1.>
*astern 6ashions 3td. has a greater a;ilit% to use their
current assets $e?cluding inventor%' without rel%ing
heavil% on its inventor% to pa% short term lia;ilities
compared to others companies within the same
industr%. 2oreover @uic& #atio is greater than
minimum accepta;le level of %:% which indicates the
greater margin of safet% for creditors.
Cash Ratio
! $.ash/ .ash eAuivalents or 2ar&eta;le securities'/
.urrent 3ia;ilities
!$ $ 28000/ $500/ $ =8000/ $ >8000' / $ =8000 ! 2.>)
>
9lthough the *astern .ompan%Bs .ash ratio is ;elow
the industr% average ;ut it is greater than 1 which
indicates that it has enough a;ilit% to repa% current
lia;ilities ;% onl% using its cash and cash eAuivalents
ACTIVITY/ EFFICIENCY RATIOS
In!entoy
Tuno!e Ratio

! .C / 9vg ,nventor%
! $ 118000/ $ 18200 ! (.1D times 11 times
The ratio for *astern 6ashions 3td. is lower than the
industr% average. o8 *astern .ompan% has more
mone% Etied upE in inventor% than other firms within
the same industr%. 6urthermore8 the compan% is most
li&el% not selling its inventor% as Auic&l% as other
competing firms. ,t must need to improve its inventor%
management polic%.
Accounts
Recei!a(le
Tuno!e Ratio
! +et .redit ales /9vg 9ccounts #eceiva;les
! $ 18(D8000/ $ )8000 ! 2=.<> times 22 times
The ratio for *astern 6ashions 3td. is greater than the
industr% average which indicates that the compan% is
more efficient in collecting cash on credit sales than
others firms in the same industr%
Copyright2012, Dewan Muktadir-Al-Mukit 1
Pg-" Supplementary Sheets on Ratio Analysis-1
A!" Collection
)eiods
! ><0 / $.redit sales / 9vg 9ccounts #eceiva;les'
! ><0 / $ $ 18(D8000/ $)8000' ! 15 Fa%s
>0 da%s
,t ta&es shorter time period for *astern compan% to
collect pa%ment on credit sales than others firms in the
same industr% which indicates that the compan% is
managing its collection of accounts receiva;les
efficientl%.
*i+ed Asset
Tuno!e Ratio
! +et ales / +et 6i?ed 9ssets
! $ 18(D8 000 / $ =08000 ! =.(> times = times
9s the ratio is greater than the industr% average so it
can ;e said that *astern compan% is using its plant and
eAuipment G others fi?ed assets effectivel% to generate
sales.
Total Asset
Tuno!e Ratio
! +et ales / Total 9ssets
! $ 18(D8 000 / $ <28000 ! >.1) times
5 times
9s the ratio is lower than the industr% average so it can
;e said that *astern compan% is not managing its all
assets effectivel% to generate sales
LEVERAGE RATIOS
De(t to Asset Ratio
o De(t Ratio
! Total 3ia;ilities/ Total 9ssets
! $ >18000 / $ <28000 ! 0.50 H100 ! 50 I >5 I
The ratio indicates that 50I of the compan%Bs assets
are financed ;% creditors. The ratio for *astern
compan% is higher than the industr% average. That
means *astern 3td. will have higher principal
pa%ments and interest charges relative to other firms in
the industr% which will ultimatel% reduce the
compan%Bs cash flow and net income.
De(t to E,uity
Ratio
! 3ong Term Fe;t/ Total *Auit%
! $ 2D8000 / $ >18000 ! 0.)D10H100! )D.10 I D0I
,t states that for ever% $1.00 invested ;% the
shareholders into the compan% then the creditors have
invested D1 cents into the compan%. Though
hareholders/owners of others firms in same industr%
and also of the *astern compan% investing more than
creditors ;ut ;oth significantl% rel% on creditors.
Ti#es Inteest
Eaned
! *0,T / ,nterest *?pense
! $ )=8000 / $ 58500 ! 15.2D times
= times
*astern compan%Js operating profit is sufficient
enough to pa% its de;t service through interest pa%ing.
2oreover8 its ratio is higher than industr% average
telling that it has more de;t a;sor;ing capacit% than
others firms in same industr%.
Copyright2012, Dewan Muktadir-Al-Mukit 1
Pg-# Supplementary Sheets on Ratio Analysis-1
PROFITABILITY RATIOS
Goss )o-it
.a"in
! Cross Profit / +et ales
! $ 18)<8000 / $ 18(D8000 ! 0.(==2H100 ! (=.=2 I 50I
,t means for $100 of sales $$100"$(=.=2' or $5.5) goes
for direct production cost and rest $(=.=2 left over to
spend on other ;usiness operations and to pa% non"
production costs. 9s the ratio for *astern compan% is
higher than the industr% average so the firm is doing
well in setting of pricing polic% and also in controlling
production costs.
/peatin" )o-it
.a"in Ratio
! Operating Profit or *0,T / +et ales
! $ )=8000 / $ 18 (D8 000 ! 0.=2<=H100 ! =2.<= I
20I
,t means for $100 of sales $$100"$=2.<=' or $5D.><
goes for direct production cost and others operating
e?penses and rest $=2.<= left over to spend on fi?ed
charge li&e interest and also ta?. The ratio for *astern
compan% is higher than the industr% average which is
an indication of ;etter pricing strateg% and operating
efficienc% of *astern compan%.
Net )o-it .a"in
Ratio
! +et ,ncome/ ales
! $ 58<00 / $ 18(D8000 ! 0.02)= H100 ! 2.)= I 5 I
,t means for $100 of sales $$100"$2.)=' or $(D.1< goes
for production8 operating and others e?penses and rest
$ 2.)= remains in the compan% as retained earnings8 or
is availa;le to ;e distri;uted to the owners of the
compan% as dividend. 9s it is lower than industr%
average so it can ;e said that its e?penses is higher
than others compan%. 0ut earlier we saw that Cross
profit margin and operating margin is greater than
industr% average. 6or this case the lower ratio is mostl%
attri;uted ;% loss on sale of fi?ed asset.
R/A
! +et ,ncome / Total 9ssets
! $ 58<00 / $ <28000 ! 0.0(0> H100 ! (.0> I ) I
9s the ratio is greater than the industr% average so it
can ;e said that *astern compan% is using its total
assets effectivel% to generate net income.
R/E ! +et ,ncome / Total *Auit%
! $ 58<00 / $ >18000 ! 0.1)0< H100 !1).0< I
15 I
The #eturn on *Auit% ratio measures how well a
compan% is using ownerBs investments to generate after
ta? profits. The higher ratio indicates that owners of
the *astern compan% are more ampl% rewarded than
others shareholders in the same industr%
Copyright2012, Dewan Muktadir-Al-Mukit 1