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RATIO ANALYSIS
A. LIQUIDITY RATIOS - Short Term Solvency
Ratio
Formula
Numerator
Denominator
1. Current Ratio
Current Assets
Current Liabilities
Inventories
+ Debtors
+ Cash & Bank
+ Receivables / Accruals
+ Short terms Loans
+ Marketable Investments
Quick Assets
Quick Liabilities
Current Assets
Less : Inventories
Less : Prepaid Expenses
Less :
Less :
4. Interval Measure
(Casb+Marketable Securities)
Cash in Hand
Current Liabilities
+ Balance at Bank (Dr.)
+ Marketable Securities &
short term investments
Quick Assets
Cash Expenses Per Day
Current Assets
Less : Inventories
Less : Prepaid Expenses
Current Liabilities
Bank Overdraft
Cash Credit
Significance/Indicator
Ability to repay short-term
commitments promptly. (Short-term
Solvency) Ideal Ratio is 2:1.High
Ratio indicates existence of idle
current assets.
Ability to meet immediate
liabilities. Ideal Ratio is 1.33:1
Shareholder's Funds
Total Funds
Debt
Equity
B. CAPITAL STRUCTURE RATIOS - Indicator of Financing Techniques & long-term solvency Contd...
3. Capital Gearing
Ratio
Fixed Assets
Long Term Funds
5. Proprietary Ratio
(See Note below)
Proprietary Funds
Total Assets
Note : Proprietary Funds for B-5 can be computed through two ways from the Balance Sheet:
Liability Route : [Equity Share Capital + Preference Share Capital + Reserves & Surplus] Less: Accumulated losses
Assets Route : [Net Fixed Assets + Net Working Capital] Less: Long Term Liabilities.
3.
3. Preference Dividend
Coverage
Ratio
Earnings before Interest & Tax Earnings before Interest and Interest on Debt Fund
Taxes =Sales Less Variable
Interest
and Fixed Costs (excluding
interest) (or) EAT + Taxation
+ Interest
Earnings after Tax
Preference Dividend
Capital Turnover
Ratioz
i.
2.
Turnover
Fixed Assets
Working Capital
Turnover Ratio
Turnover
Net Working Capital
Q. Finished Goods or
Stock Turnover Ratio
For Manufacturers:
Opening Stock
+ Cost of Production
Less: Closing Stock
For Traders:
Opening Stock
+ Purchases
Less: Closing Stock
3.
Sales
Capital Employed
Factory Cost
Average Stock of WIP
Materials
+ Wages
Production Overheads
Opening Stock of RM
+Purchases
Less: Closing Stock
2
+
6. Raw Material
Turnover Ratio
7. Debtors Turnover
Ratio
Credit Sales
Credit Sales net of returns
Average Accounts Receivable
8. Credito,sTurnover
Ratio
Credit Purchases
Average Accounts Payable
Accounts'Payable=Creditors+B/P
Average Accounts Payable =
Opening bal. + Closing bal.
2
Operating Profit
Sales
Net Profit
Sales
Contribution
Sales
Assets Route:
Net Fixed Assets (including
intangible assets like patents, but
not fictitious assets like miscellaneous expenditure not w/of)
+Net working Capital
Liability Route :
Equity Share Capital
+ Preference Share Capital
+ Reserves R Surplus
+Debentures and Long Term Loans
Less: Accumulated Losses
Less: Non-Trade Investments
Total Earnings
Total Capital Employed
Dividends
Number of Equity Shares
Net Profit after taxes
Average Total Assets
Trading and Profit and Loss Account for the year ended 31st March
Amt.
Particulars
Amt.
Particulars
85,000
By Sales
To Materials Consumed:
Opening Stock
Purchases
Closing Stock
To Carriage Inwards
To Office Expenses
To Sales Expenses
To Financial Expenses
To Loss on Sale of Assets
To Net Profit
9,050
54,525
63,575
- (14,000)
600
300
49,575
1,425
15,000
3,000
1,500
400
15,000
85,900
Total
Total
85,900
Assets
Amt.
20,000
3,000
6,000
6,000
3,000
2,000
8,000
48,000
Fixed Assets :
Buildings
Plant
Current Assets:
Stock in Trade
Debtors
Bills Receivable
Bank Balances
Total
Amt.
15,000
8,000
14,000
7,000
1,000
3,000
48,000
17. 1 8
From the following information of Sukanya & Co. Ltd, prepare its financial statements for the year just ended.
Current Ratio - 2.5
Working Capital - Rs.1,20,000
Quick Ratio - 1.3
Bank Overdraft - Rs.15,000
Proprietary Ratio [Fixed Assets/Proprietary Fund] - 0.6 Share Capital - Rs.2,50,000
Gross Profit - 10% of Sales
Closing Stock - 10% more than Opening Stock
Debtors Velocity - 40 days
Net Profit - 10% of Proprietary Funds
Sales - Rs.7,30,000
Illustration 11 : Financial Statements Preparation
Below is given the Balance Sheet of Sunrise Ltd., as on 31st March, 20X1:
Liabilities
Rs.
Share Capital:
14% Preference Shares
Equity Shares
General Reserves
12% Debentures
Current Liabilities
Total
1,00,000
2,00,000
40,000
60,000
1,00,000
5,00,000
Assets
Fixed Assets
At Cost
Less : Depreciation
Stock in trade
Sundry Debtors
Cash
Total,
Rs.
5,00,000
1,60,000
3,40,000
60,000
80,000
20,000
5,00,000
1,121
8,950
74
171
6,667
10,071
245
10,316
93I
7,999
8,930
259
115
374
9,304
5,747
2, 5 6
Less : Depreciation
Net Block
Capital Work in progress
Investments
Current
Assets, Loans & Advances
Inventories
Sundry Debtors
Cash and Bank Balances
Loans and Advances
Less : Current Liabilities
Provisions
Net Current Assets
Net Deferred Tax Liability
3, 1 5 0
3,517
27
2,709
9,468
3,206
2, 0 4 3
17, 426
10,109
513
10,622
3,186
28
3,544
288
2,540
9,428
662
1,712
14,342
7,902
572
8, 4 7 4
-
(320)
Total
10,316
9,304
Profit and Loss Account for the year ended December 31, 2001
December 31, 2000
17,849
Income : Sales and Services
23,436
306
Other Income
320
23,756
Expenses : Cost of Materials
15,179
10,996
Personnel Expenses
2,543
2,293
Other Expenses
3,546
2,815
Depreciation Less : Th. from Revaln. Res.
383 - (6) = 377
419 - (7) = 412
Interest
21,844
164
88
Profit Before Tax
Provision for Tax : Current Tax
Deferred Tax
Profit After Tax
1,912
450
(6)
3,214
222
444
1,468
i. Compute and analyse the Return on Capital Employed (ROCE) in a Du-pont Control Chart Framework.
ii. Compute and analyse the average inventory holding period and average collection period.
iii. Compute and analyse the Return on Equity (ROE) by brining ourclearly the impact of financial leverage
18,155
16,569
1,586
371
-
371
1,215
SOLUTION: I
(a) Gross Profit Ratio
(b) Operating Profit Ratio
17.06%
Net Profit Ratio
(d) Current Ratio
Current Assets
Current Liabilities
(e) Liquid Ratio
Quick Assets
Quick Liabilities
(t) Debt Equity Ratio
Debt
Equity
(g) Return on Investment
Return
Capital employed
(h) Debtors Turnover
(i) Fixed Assets Turnover
II. SOLUTION :
(a) Inventory Turnover
Average inventory
Therefore Cost of goods sold
(b) Gross profit ratio
Therefore cost of goods sold
Hence sales
(c) Credit sales
(d) Debtors Turnover
Sudharshan Limited
= Gross Profit / Sales =
40%
= Operating Profit / Sales= [15,000+400 600 300] / 85,000
(Rs.)
=
=10.625 times
=3.69 times
(Rs.)
= 3,60,000
= 21,60,000
=
=
= 21,60,000 / 90%
= 20% of 24,00,000
= Credit sales / Average debtors =
10%
90%
= 24,00,000
= 4,80,000
=
2 times
= 180 days
4,80,000 / 2,40,000
III. Solution
Particulars
Operating profit
Less : Interest on loans
25 lakhs x 15 %
10 lakhs x 12.5%
3.75
1.25
20.00
10.00
10.00
IV. SOLUTION
(a) Current ratio
(Rs. in lakhs)
25.00
=75,000
Current assets
=2*75, 000=1,50000
(c) Quick ratio = Quick Assets / Quick liabilities = 1.5 Times
Current Assets Stock / Current Liabilities Overdraft = 1.5 Times
=1,50,000-Stock / 75000 10000=1.5
Therefore stock
1,50,000 - (1.5 x 65,000)
Since there are no loans or fictitious assets,
Capital employed = Proprietary fund = Fixed Assets +Working Capital
Proprietary Fund= Fixed Assets +75000
Proprietary Fund = 3/4th of Proprietary Funds + 75000
1/4th Proprietary Fund = 75000
Therefore Proprietary Fund = 75000 * 4 = 3,00,000
250000
Rs.4.00
12.5%
50000
3,00,000 50,000 = 2,50,000
3,00,000 X = 2,25,000
Share Capital
Reservres and Surplus
2,50,000
50,000
3,00,000
Application
Fixed Assets
Current Assets
2,25,000
Stock
Others
Bank Overdraft
65,000
52,500
97,500
10,000
(75000)
1,50,000
3,00,000
SOLUTION : V
(a) Working Capital
Current ratio
=
=
(Rs.)
1,35,000
2.5 times
1,35,000
= 1,35,000 / 1.5
= 90,000 X 2.5
Current assets - Stock / Current liabilities - Bank OD
2,25,000 - Stock / 90,000 - 30,000
2,25,000 -(1.5 X 60,000)
Proprietary funds / Total Assets
=
=
90,000
2,25,000
1.5 times
1.5
1,35,000
0.75 times
33,750
1,35,000
3,60,000
2,70,000
2,70,000
1,80,000
2:1
1,20,000
60,000
= 2 / 3 X 1,80,000
= 1 / 3 X 1,80,000
Equity Capital
Preference Capital
Reserves & Surplus
1,20,000
60,000
90,000
Application
1,35,000
- Stock
- Others
Less : Current Liabilities - Bank overdraft `
- Others
1,35,000
90,000
30,000
60,000
2,70.000
2,25,000
(90,000)
2,70,000
SOLUTION: VI
Liabilities
Amt.
(h)
(i)
(b)
Total
12.50
3.50
4.00
20.00
Assets
Fixed Assets
(f)
Current Assets
Stock
(c)
Debtors
(g)
Bank (10.00 - 9.00) (b/f)
Total
Workings
Amt.
10.00
4.00
5.00
1.00
10.00
20.00
Solution VII
Wise Limited
Balance Sheet (Amounts in Rs. lakhs)
Liabilities
Share Capital
Reserves
Long term loans
Current Liabilities
Amt.
(given)
(a)
(c)
(j)
Total
10.00
10.00
1.00
4.00
25.00
Assets
Fixed Assets
(1)
Current Assets
Stock
(h)
Debtors
(e)
Bank (10.00 - 9.00) (b/f)
Total
(Rs. in lakhs)
Workings
(a)
Reserves / Capital
Capital = 10 lakhs Therefore Reserves
(b) Net worth = Capital + Reserves
=
=
=
1 Time
10.00
20.00
(c)
=
=
=
=
=
=
=
=
=
=
20 Times
20.00/20
=
1.00
1.5 times
1.5 X 20.00
=
30.00
6 times
30.00 / 6
=
5.00
20% of Sales =
20% X 30.00 = 6.00
30.00 6.00 (Sales GP)
=
24.00
Cost of Goods Sold / Average Stock
=6 Times
24.00/6.00 = 4.00
Ann.
15.00
4.00
5.00
1.00
10.00
25.00
=
=
=
=
0.3 Times
20.00 X 0.3
=
6.00
Current Assets Current Liabilities = 6.00
Current Assets / Current Liabilities = 2.5 times
Current Assets = 2.5 Current Liabilities
Current Liabilities
Hence Current Assets
Acid Test Ratio
=
=
=
6.00 / 1.5
4.00 X 2.5
=
10.00
Current Assets Stocks
-------------------------------------------- = 1.5 Times
Current Liabilities Bank Overdraft
=
=
2 Times
30.00 / 2
= 15.00
SOLUTION. VIII
Wiser Limited
Balance Sheet
Liabilities
Net worth
Term liabilities
Current liabilities
Total
Amt
(a)
(d)
(b)
6,95,652
2,29,565
2,92,174
12,17,391
Assets
Fixed Assets
Current Assets
Stock
Debtors
Bank
Total
Amt
(bal.fig)
3,70,086
(f)
(g)
(h)
3,55,556
2,80,548
2,11,201
12,17,391
Workings :
(Rs)
= 42% X 6,95,652
2,92,174
= 75% X 6,95,652
5,21,739
6,95,652
2,29,565
2.9 times
8,47,305
Sales = 16,00,000
16,00,000 / 4.5
3,55,556
16,00,000 X 64 / 365
=
=
64 days
2,80,548
2,11,201
SOLUTION. IX
Sivaprakasam and Co.
Balance Sheet
Amt.
Liabilities
Share Capital
Reserves & Surplus
12 % Term loan
Current Liabilities
(I)
(m)
(i)
(b)
Total
Workings
(a) Current Ratio Hence
Net Working Capital
Current Liabilitites
Therefore Current Assets
(b) Current Assets / Stock
Therefore Stock
(c) Acid test Ratio
Therefore Bank overdraft
(d) Stock Turnover Ratio
Therefore Sales
5.00
15.00
50.00
5.00
75.00
Assets
Fixed Assets
Current Assets
Stock
Debtors
Others (15.00 - 14.17)
Other Assets
(bal.fig)
Total
Nil
=
=
= I Time
Amt.
(f)
41.67
(c)
(g)
10.00
4.17
0.83
18.33
75.00
=
=
1.2 times
=
=
30 days
Sales X 30 / 360 = 50.00 X 30 / 360
= 4.17
50.00
30.00
Contribution
20.00
Less :
Less:
Less :
Fixed Costs
EBIT
Interest
EBT (10% of sates)
Tax
EAT
(bal. fig)
(h)
9.00
1 l .00
6.00
5.00
Nil
5.00
10% X 50.00
EBIT / EBT
2.2 x 5.00
2.2
11.00
50.00
u)
= 55.00 / 2.75
= Net worth / Book value per share
= 20.00 / 40
=
55.00
= 2.75 times
=
20.00
50000 shares
=
5.00
15.00
SOLUTION. X
Sukanya & Co.
Profit and Loss Account
Particulars
To Opening Stock
To Purchases
Amt.
(d)
(bal.fig)
1,05,000
6,67,500
Particulars
By Sales
By Closing Stock
(given)
(c)
Amt.
7,30,000
1,15,500
To Gross Profit
(10 %)
73.000
8,45,500
43,000
30,000
73,000
(h)
8,45,50Q
73,000
73,000
Balance Sheet
Liabilities
Amt
Share Capital
(given)
Reserves & Surplus (3,00,000 2,50,000)
(Total Proprietary Funds = 3,00,000)
Current liabilities
Bank overdraft
(given)
Others
(80,000 - 15,000)
Total
2,50,000
50,000
15,000
65,000
3,80,000
Assets
(g)
Amt
1,80,000
(c)
(e)
(2,00,000 - 1,95,500)
1,15,500
80,000
4,500
Fixed Assets
Current Assets
Stock
Debtors
Bank
Total
3,80,000
Workings :
(Rs.)
1,20,000
2.5 times
Hence
Current Liabilities
Current Assets
(c) Quick Ratio
1,20,000
80,000
2,00,000
1.3 times
1,15,500/ 110%
= 7,30,000 X 40 / 360
1.3 times
1,15,500
1,15,500
1.05,000
40 days
80,000
0.60
0.40
= 1,20,000 / 0.4
= 3,00,000 X 0.6
3,00,000
1,80,000
30,000
SOLUTION XI
Sunrise Limited
Profit & Loss Appropriation Account
Less :
Less :
Less:
90,000
13,200
76,800
(i)
38,400
38,400
34,000
j)
4,400
Balance Sheet
Liabilities
Share Capital
Equity Capital
14% Preference Capital
Reserves & Surplus
P & L appropriation account
General Reserve
Secured loans - 12% Debentures
Current Liabilities
Creditors
(h)
Tax provision
Total
Amt.
2,00,000
1,00,000
4,400
40,000
1,10,000
72,000
38,400
5,64,800
Assets
Fixed Assets - Gross
6,00,000
Less: Depreciation
2,05,000
Current Assets
Stock
(f)
Debtors
(g)
Cash & Bank (bal. fig)
Total
=
=
=
=
Manufacturing
Overheads
Office
Overheads
Depreciation
3,95,000
33,750
1,00,000
36,050
5,64,800
Workings :
(a) Cost of fixed assets
Amt.
PBIT
Percentage
Amount in Lakhs
40%
3.6
Debtors
Creditors
Debenture Interest
Dividend paid -Pref & Equity
25%
2.25
10%
0.90
10%
0.90
5%
0.45
10%
0.90
3,95,000
6,75,000
=
=
14.4 times
46,875
46,875
33,750
1,00,000
72.000
13.200
34,000