THE FINANCIAL

DETECTIVE
PRESENTED BY:
ISHITA(22039)
PREETI(22048)
RADHIKA BHATNAGAR(22051)
MOUSUMI MAZUMDAR(22068)

ELECTRONICS
In the following case study ,
There are two electronics companies are shown as companies I and
J.
Both produced semiconductors, but one specialized in their
manufacture and also produced small desktop and hand held
computing equipment.
About half its electronic components were sold to the defense industry.
The other firm was financially conservative .
It specialized in radio and television equipment and made
semiconductors as a secondary, but increasingly important, line of
business (over 30 % of revenues).

RETURN ON ASSETS RATIO

RETURN ON ASSETS RATIO=

RETURN ON ASSETS
RATIO

X
AVERAGE TOTAL
ASSETS
100

NET PROFIT AFTER TAX

 The higher values of return on assets shows that the

business is more profitable .

As an increased trend of Return On Assets indicates that
the profitability of company is improving , conversely, the
decreasing trend of Return on Assets indicates that the
profitability of company is deteriorating.
The company J has more return on assets ratio as
compare to Company I . Thus , it shows that company J
is returning higher profit than company I.
The management of company J is more efficient in
utilizing its assets base than company I.

RETURN ON EQUITY RATIO

RETURN ON EQUITY RATIO =

X
100

PAT PREFERANCE DIVIDEND

EQUITY SHAREHOLDERS

FUNDS

RETURN ON EQUITY

10

18

 A steadily increasing return on Equity is hint that the

management is giving shareholders more further money which is

represented by shareholder equity.
Return On Equity ratio indicates how well management is
employing the investor capital invested in company. A company
cannot grow earning faster than its current return on equity ratio
without raising additional cash.
So, return on equity is speed limit on companys growth rate. In
fact many specify 15% as minimum acceptable return on equity
ratio
That means
In our Scenario, Company J with 18% return on equity ratio is
growing faster and at acceptable rate. However, Company I which
has lower return on equity ratio that is 10% is lagging behind.

QUICK RATIO
QUICK RATIO = CASH & EQUIVALENTS+RECEIVABLES+ MARKETABLE
SECURITIES
TOTAL CURRENT LIABILITIES

FOR COMPANY I,
COMPANY J
QUICK RATIO= 5.8 +20.7/31.3 =0.84
15.6 + 19.9/29.3=1.21

FOR
QUICK RATIO=

CASH
&EQUIVALENT
S

RECEIVABLES

TOTAL
CURRENT
LIABLITIES

QUICK RATIO

5.8

20.7

31.3

0.84

15.6

19.9

29.3

1.21

QUICK RATIO specifies whether the assets can be quickly converted into cash
are sufficient cover current liabilities. Company aims to maintain a quick ratio
that provides sufficient leverage against liquidity risk given the level of
predictability volatility in specific business sector.
Electronic industry is comparatively stable and predictable in cash flows and
companies likes to keep quick ratio at low level.
As we see, company I is keeping its quick ratio is comparatively low at 0.84
unlike company J whose quick ratio is above at 1.21.Company I and J
must achieve the right balance between liquidity (from low quick ratio) and
risk of loss ( resulting from high quick ratio).
Company J with high quick ratio at 1.21 which is greater than 1 which is
normal industry average suggest that company J is investing too many
resources in working capital of business which may be profitable else where.

CURRENT RATIO
CURRENT RATIO =

TOTAL CURRENT ASSETS

TOTAL CURRENT LIABILITIES

IDEAL CURRENT RATIO IS

2.
If the current ratio is more than 2,then the company is
not using their current assets efficiently & they are more
dependent on long term sources of funds such as bonds,
debentures, Public deposits.

If the current ratio is less than 2 then the company may

have short-term obligations. If the current ratio is
2,then the company have good short term financial
strength

RECEIVABLE TURNOVER RATIO

RECEIVABLE TURNOVER RATIO = ANNUAL NET CREDIT SALES
AVERAGE DEBTORS OR
AVERAGE RECEIVABLES
AVERAGE DEBTORS = OPENING DEBTORS+ CLOSING DEBTORS
2
NET CREDIT SALES = TOTAL SALES CASH SALES SALES RETURN

6.09 times

6.60 times

AVERAGE COLLECTION PERIOD =

365
DTR

Avg collection period

60days

55days

If the credit policy of the firm is 60-65 days, then the average
collection period is of 60 days, then the collection period is
acceptable.
If the collection period is less then 60 days then it indicates
that the collection department is not operating efficiently. In
case of company I "the firm has collected its debtors in 60
days & in case of J they have collected their debtors in 55
days.

STOCK TURNOVER RATIO

STOCK TURNOVER RATIO = COST OF GOOD SOLD UPON AVERAGE
STOCK
AVERAGE STOCK
COST OF GOOD SOLD = OPENING STOCK PURCHASES CLOSING
STOCK
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK
2

DAYS OF INVENTORY HOLDING = 365 DAYS

IT RATIO

A low IT Ratio reflects over investment in stock.

A high IT ratio reflects under investment in stock & thus the
company sell their goods quickly.

7.38

7.57

DIVIDEND PAYOUT RATIO

The DP ratio is the relation between the DPS and EPS of the firm, i.e., it refers

to the proportion of the EPS which has been distributed by the company as
dividends.
=(Dividend Per Share/Earnings Per Share)*100
From Exhibit 1
Company I=27%
Company J=24%

 This ratio is an indicator of the amount of earnings

that have been ploughed back in the business.
The lower the DP ratio, the higher will be the
amount of earnings ploughed back in the business
and vice versa.
Comparing I & J, we can say that J is comparatively
profitable as only 24% of its earnings are being paid
as dividend and rest are further used in
diversification of business.

DEBT- EQUITY RATIO

The measures of identifying the degree of indebtedness attempt to establish the
relationship of the total liabilities with the shareholders funds or total assets of
the firm
=Total Long Term Debts/ Shareholders Funds
Company I
=6.5 /56.5
=0.115
= 0.11 * 100 = 11%

INTREPRETATION
Company J
=11.4/52.8
=0.215
= 0.22 * 100 = 22%
Here the ratios of the company I &J are less than 1.
Hence from creditors perspective, both companies are
favourable as they provide better security of money. Also
companies can raise funds from financial institutions very easily.

DIVIDEND PAYOUT RATIO

Thisratioisanindicatoroftheamountofearningsthat
havebeenploughedbackinthebusiness.
ThelowertheDPratio,thehigherwillbetheamountof
earningsploughedbackinthebusinessandviceversa.
=DPS/EPS*100
FOR COMPANY E =0%
FOR COMPANY F = 0%

Price/Earning Ratio
This ratio is defined as A valuation ratio of a company's
current share price compared to its per-share earnings.
It indicates the expectations of the equity investors about
the earnings of the firm.
= Market Price Per Share
Earnings Per Share

Price/Earning Ratio
From Exhibit 1 ,Price/Earning ration for
Company I = 22.7
Company J = 19.6
Company I has a high growth prospects as it has a higher PE ratio as
compared to Company J whose growth prospects is slower than company J.
A high PE ratio may indicate that the share has a low risk and therefore the
investors are content with low prospective return.

Market/Book Value Ratio

This ratio compares the market value of the share with its
book value.
It is used to determine if a stock is undervalued or
overvalued.
If a stock is undervalued, the price is expected to rise. If it
is overvalued, the price is expected to fall.
= Market Price Per Share
Book Value Per Share

Market/Book Value Ratio

From Exhibit 1, market/book value ratio for
Company I = 2.15
Company J = 2.43
This indicates that, Company I has a less value of market/book ratio
which means that Company I is not successful in creating shareholders value
compared to Company J.
Market Price per share of company J is greater than that of Company I.
Book value per share of Company J is less than that of Company I.