CHAPTER OBJECTIVES

Ratio Analysis
Measure relationships between resources and financial flows Show ways in which firms situation deviates from
Its own past Other firms The industry

Ratio Analysis
The study and interpretation of the relationships between various financial variables, by investors or lenders.

Ratio Analysis - Significance

A single ratio by itself is not very meaningful.
The discussion of ratios will include the following types of comparisons.

Ratio Analysis - Purpose

To identify aspects of a businesss performance to aid decision making Quantitative process may need to be supplemented by qualitative factors to get a complete picture Standardize financial information for comparisons

Ratio Analysis - Significance

Provide the all-important early warning indications that allow us to solve our business problems before our business is destroyed by those problems.

Enables the business owner/manager to spot trends in a business

How a Ratio is expressed?

As Percentage - such as 25% or 50% . For
example if net profit is Rs.25,000/- and the sales is Rs.1,00,000/- then the net profit can be said to be 25% of the sales. As Proportion - The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4. As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4th of the sales.

Ratio Analysis

Ratio Analysis
1. 2. Liquidity the ability of the firm to pay its way Investment/shareholders information to enable decisions to be made on the extent of the risk and the earning potential of a business investment Gearing information on the relationship between the exposure of the business to loans as opposed to share capital Profitability how effective the firm is at generating profits given sales and or its capital assets Financial the rate at which the company sells its stock and the efficiency with which it uses its assets

3. 4. 5.

TERMS USED IN RATIO ANALYSIS

Current Assets Quick Assets Absolute Liquid Assets Working Capital Receivables Payables Fixed Assets Fictitious Assets Intangible Assets

TERMS USED IN RATIO ANALYSIS

Capital Employed Investments Current Liabilities Debt Equity Cost of Goods Sold Cost of Sales Long term funds Long term loans

Classification of Ratios
Balance Sheet Ratio P&L Ratio or Income/Revenue Statement Ratio
Operating Ratio

Balance Sheet and Profit & Loss Ratio

Composite Ratio

Financial Ratio

Current Ratio Quick Asset Ratio Debt Equity Ratio

Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio

Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors Turnover Ratio,

Format of balance sheet for ratio analysis

LIABILITIES
NET WORTH/EQUITY/OWNED FUNDS Share Capital/Partners Capital/Paid up Capital/ Owners Funds Reserves ( General, Capital, Revaluation & Other Reserves) Credit Balance in P&L A/c LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions) Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities

ASSETS
FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIES Original Value Less Depreciation Net Value or Book Value or Written down value

NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. assets which are not current or fixed in nature CURRENT ASSETS : Cash & Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks & inventory (RM,SIP,FG) Stores & Spares, Advance Payment of Taxes, Prepaid expenses, Loans and Advances recoverable within 12 months

CURRENT LIABILTIES Bank Working Capital Limits such as CC/OD/Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or deposits Expenses payable & provisions against various items

INTANGIBLE ASSETS Patent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses

Some important notes

Liabilities have Credit balance and Assets have Debit balance Current Liabilities are those which have either become due for payment or shall fall due for payment within 12 months from the date of Balance Sheet Current Assets are those which undergo change in their shape/form within 12 months. These are also called Working Capital or Gross Working Capital Net Worth & Long Term Liabilities are also called Long Term Sources of Funds Current Liabilities are known as Short Term Sources of Funds Long Term Liabilities & Short Term Liabilities are also called Outside Liabilities Current Assets are Short Term Use of Funds

Some important notes

Assets other than Current Assets are Long Term Use of Funds Installments of Term Loan Payable in 12 months are to be taken as Current Liability only for Calculation of Current Ratio & Quick Ratio. Investments in Govt. Securities to be treated current only if these are marketable and due. Investments in other securities are to be treated as Current if they are quoted. Investments in allied/associate/sister units or firms to be treated as Non-current. Bonus Shares as issued by capitalization of General reserves and as such do not affect the Net Worth. With Rights Issue, change takes place in Net Worth and Current Ratio.

Groups of Financial Ratios

Liquidity

Activity Debt
Profitability

Liquidity

Analyzing Liquidity
Liquidity

refers to the solvency of the firm's overall financial position, i.e. a "liquid firm" is one that can easily meet its short-term obligations as they come due. A second meaning includes the concept of converting an asset into cash with little or no loss in value.

1. Current Ratio : It is the relationship between the current assets and current liabilities of a concern. Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1

Current Ratio
Ideal level? 2 : 1 The ideal Current Ratio preferred by Banks is 1.33 : 1 A ratio of 5 : 1 would imply the firm has Rs.5 of assets to cover every Rs.1 in liabilities A ratio of 0.75 : 1 would suggest the firm has only 75p in assets available to cover every Rs.1 it owes Too high Might suggest that too much of its assets are tied up in unproductive activities too much stock, for example? Too low - risk of not being able to pay your way

2. ACID TEST or QUICK RATIO : It is the ratio between Quick Current

Assets and Current Liabilities.
Quick Current Assets : Cash/Bank Balances + Receivables upto 12 months + Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities (Current assets stock-prepaid expenses) : liabilities 1.5:1 seen as ideal The omission of stock gives an indication of the cash the firm has in relation to its liabilities (what it owes) A ratio of 3:1 therefore would suggest the firm has 3 times as much cash as it owes very healthy! A ratio of 0.5:1 would suggest the firm has twice as many liabilities as it has cash to pay for those liabilities. This might put the firm under pressure but is not in itself the end of the world!

3. ABSOLUTE LIQUIDITY TEST : It is the ratio between Absolute liquid

assets and Current Liabilities.
Quick Current Assets : Cash/Bank Balances + Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits Absolute Liquidity Ratio = Absolute Liquid Assets/Current Liabilities (Current assets stock-receivables) : liabilities 0.5:1 seen as ideal The omission of stock and receivables gives an indication of the cash the firm has in relation to its liabilities (what it owes) A ratio of 3:1 therefore would suggest the firm has 6 times as much cash as it owes very healthy! A ratio of 0.2:1 would suggest the firm has five times as many liabilities as it has ready cash to pay for those liabilities. This might put the firm under pressure but is not in itself the end of the world! 4. NET WORKING CAPITAL : Current Assets Current Liabilities

Example : Cash Debtors Inventories Total Current Assets

50,000 1,00,000 1,50,000 3,00,000

Current Liabilities

1,00,000

Current Ratio = > Quick Ratio => Absolute Liquidity Ratio = > Net Working Capital =>

3,00,000/1,00,000 1,50,000/1,00,000 50,000/1,00,000 300000-100000

= 3:1 = 1.5:1 = .5:1 = 200000

Analyzing Activity
Activity

is a more sophisticated analysis of a firm's liquidity, evaluating the speed with which certain accounts are converted into sales or cash; also measures a firm's efficiency

Five Important Activity Measures

Inventory Turnover (IT) IT = Cost of Goods Sold

Average Inventory
Accounts Receivable Annual Sales/360 Accounts Payable Annual Purchases/360 Sales Net Fixed Assets Sales

Average Collection Period (ACP)

ACP =

Average Payment Period (APP)

APP=

Fixed Asset Turnover (FAT)

FAT =

Total Asset Turnover (TAT)

TAT =

Total Assets

STOCK/INVENTORY TURNOVER RATIO :

STR = COGS/ Average Stock Average Conversion period = 365/12/52 STR (Opening Stock + Closing Stock) -----------------------------------------

Average Inventory or Stocks =

This ratio indicates the number of times the inventory is rotated during the relevant accounting period
A high stock turnover might mean increased efficiency. But: dependent on the type of business supermarkets might have high stock turnover ratios whereas a shop selling high value musical instruments might have low stock turnover ratio Low stock turnover could mean poor customer satisfaction if people are not buying the goods

DEBTORS TURNOVER RATIO : This is also called Debtors Velocity or Average Collection Period or Period of Credit given . DTR = Net Credit Sales/ Average Receivables Average Collection period (Debtors Days) = 365/52/12 DTR This ratio tells about the time taken to collect money from the debtors
ACP: Shorter the better Gives a measure of how long it takes the business to recover debts Can be skewed by the degree of credit facility a firm offers

CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio, which determines the creditor payment period. CTR = Net Credit Purchase/ Average Payables Average Payment period (Creditors Days) = 365/52/12 CTR This ratio tells about the time available to make payment to the creditors

APP: Higher the better Gives a measure of how long it takes the business to pay its debts

ASSET TURNOVER RATIO : Net Sales/Tangible Assets FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets

Asset Turnover
Asset Turnover = Sales turnover / assets employed Using assets to generate profit Asset turnover x net profit margin = ROCE

Profitability

Key Financial Ratios Profitability Ratios

Profitability ratios measure the overall performance of a firm and its efficiency in managing assets, liabilities, and equity.

Profitability ratios include

Key Financial Ratios Profitability Ratios

gross profit margin operating profit margin net profit margin cash flow margin return on total assets (ROA) or return on investment (ROI) return on equity (ROE) cash return on assets

Profitability
Gross Profit Margin = Gross profit / turnover x 100 The higher the better Enables the firm to assess the impact of its sales and how much it cost to generate (produce) those sales A gross profit margin of 45% means that for every 1 of sales, the firm makes 45p in gross profit

Profitability
Net Profit Margin = Net Profit / Turnover x 100 Net profit takes into account the fixed costs involved in production the overheads Keeping control over fixed costs is important could be easy to overlook for example the amount of waste - paper, stationery, lighting, heating, water, etc.
e.g. leaving a photocopier on overnight uses enough electricity to make 5,300 A4 copies. (1,934,500 per year) 1 ream = 500 copies. 1 ream = 5.00 (on average) Total cost therefore = 19,345 per year or 1 persons salary

Profitability
Operating Profit Margin = Operating Profit / Turnover x 100 Measures overall operating efficiency and incorporates all of the expenses associated with ordinary business activities

Profitability
Return on Capital Employed (ROCE) = Profit / capital employed x 100 Capital employed may be defined in a number of ways. However, two widely accepted definitions are "gross capital employed" and "net capital employed"

ROCE
Gross capital employed usually means the total assets, fixed as well as current, used in business, while

Net capital employed refers to total assets minus current liabilities.

On the other hand, it refers to total of capital, capital reserves, revenue reserves (including profit and loss account balance), debentures and long term loans.

ROCE
Gross capital employed = Fixed assets + Investments + Current assets Net capital employed = Fixed assets + Investments + Working capital*

Profitability Ratios
Overall Efficiency and Performance
Cash Flow Margin Measures ability to translate sales into cash Cash flow from operating activities Net sales

Profitability Ratios
Overall Efficiency and Performance
Return on Total Assets (ROA) or Return on Investment (ROI) Measures overall efficiency of firm in managing investment in assets and generating profits Net earnings Total assets

Profitability Ratios
Overall Efficiency and Performance
Return on Equity (ROE) Measures rate of return on stockholders investment Net earnings Stockholders equity

Profitability Ratios
Overall Efficiency and Performance
Cash Return on Assets Measures firms ability to generate cash from the utilization of its assets

Cash flow from operating activities Total assets

Operating Ratio
Thais ratio establishes relationships between operating cost & net sales. This ratio indicates the proportion that the cost of sales. Cost of sale included direct cost of good sold & as well as other operating expenses administration, selling & distribution expenses Operating ratio = Cost of good sold + operating expenses X 100 Net sale = Operating cost X 100 Net sale Cost of good sold = opening stock + purchase + direct expenses closing stock GP Operating expenses = administrative expenses + selling & distribution expenses

OBJECTIVE & SIGNIFICANCE

Operating ration is the test of the operational efficiency of the business .it shows the percentage of sales that is absorbed by the cost of sales & operating expenses.
This ratio serves following objective

1. To determine whether the cost content has increased or decreased in the figure of sales. 2. To determine which element of the cost has gone up.

Example:
Cost of good sales Operating expenses Sales Sales returns 6 lac 40,000 8,20,000 20,000

Operating Ratio = Cost of good sold + operating expenses X 100 Net Sales = 6 lac + 40000 X 100 820000-20000 = 640000 X 100 800000 = 80%

Profitability
The higher the better Shows how effective the firm is in using its capital to generate profit A ROCE of 25% means that it uses every Rs.1 of capital to generate 25p in profit Partly a measure of efficiency in organisation and use of capital

Key Financial Ratios Leverage Ratios

Leverage ratios measure the extent of a firms financing with debt relative to equity and its ability to cover interest and other fixed charges.

Key Financial Ratios Leverage Ratios

Leverage ratios include
Long-term debt to total capitalization Debt to equity Times interest earned Fixed charge coverage Cash flow adequacy

Analyzing Debt
Debt

is a true "double-edged" sword as it allows for the generation of profits with the use of other people's (creditors) money, but creates claims on earnings with a higher priority than those of the firm's owners. Financial Leverage is a term used to describe the magnification of risk and return resulting from the use of fixed-cost financing such as debt and preferred stock.

SOLVENCY RATIOS
The term solvency implies ability of an enterprise to meet its long-term indebtedness and thus, solvency ratios convey an enterprises ability to meet its long-term obligations. Some important solvency ratios are : Debt-Equity Ratio, Interest Coverage Ratio, Debt to Total Funds Ratio, Fixed Asset Ratio,

Debt Equity Ratio.

The debt-equity ratio is worked out to ascertain soundness of the long-term financial policies of the firm. The ratio ascertained as follows; Debt-Equity Ratio = Debt (Long-Term Loans) Equity (Shareholders Funds) Debt equity ratio indicates the proportion between shareholders funds and the long-term borrowed funds. A higher ratio indicates a risky financial position while a lower ratio indicates safer financial position.

Objective and Significance

This ratio is sufficient to assess the soundness of long-term financial position. It also indicates the extent to which the firm depends upon outsiders for its existence

Ascertain Debt-Equity ratio;

Equity share capital General reserve 10% debenture Current liabilities Preliminary expenses 2,00,000 1,60,000 1,50,000 1,00,000 10,000

Solution ;
Debt-equity Ratio = Debt Equity

Debt = debentures = Rs. 1,50,000 Equity= Equity Share Capital + General Reserve- Preliminary Expenses = 2,00,000+1,60,000-10,000 = 3,50,000 Debt-Equity ratio= 1,50,000 3,50,000 = 15:35= 3:7

Interest Coverage ratio:

when a business borrows money, the lender is interested in finding out whether the business would earn sufficient profit to pay periodically the interest charge. A ratio which expresses this is called Interest Coverage Ratio or Dept service Ratio or fixed charges cover. This ratio is determined by dividing profit before interest by the interest charges
Net profit before interest and tax Interest on fixed (long-term) loans or Debentures

Objective and Significance : This ratio indicates how many times the profit covers fixed interest. It measures the margin of safety for the lenders. The higher the number, more secure the lender is in respect of his periodical interest income.

Example:
The operating profit of Exe. Ltd. After charging interest on debentures and tax is Rs 1,00,000. The amount of interest is Rs 20,000 and the provision for tax has been made at Rs 40,000. Calculate the interest coverage ratio.

Solution:
Interest Coverage Ratio = Net profit before interest and tax Interest charges = 1,60,000 20,000

DEBT TO TOTAL FUNDS RATIO

The Debt to Total Funds Ratio is a measure for long term financial soundness.

Debt Total Funds Ratio =

Debt Equity + Debt

Objective and Significance: The main purpose of the ratio is to determine the relative stock of outsiders and shareholders.

Calculate Debt to Total Funds Ratio:

9% Pref. Share Capital Equity Share Capital Reserves 10% Debentures Loans From Industrial Finance corporation Current liabilities 10,00,000 20,00,000 10,00,000 30,00,000 20,00,000 8,00,000

Debt to Total Funds Ratio =

=

Long-term loans Shareholders funds + Long-term loans

30,00,000 + 20,00,000 10,00,000 + 20,00,000 + 10,00,000 + 30,00,000 + 20,00,000 = Rs. 50,00,000 = 5 : 9 or 0.56. Rs. 90,00,000

FIXED ASSETS RATIO

Fixed Assets Ratio = Shareholders funds + Long-term loans
Net Fixed Assets Objective and Significance. This ratio indicates as to what extent fixed assets are financed out of long-term solvency.

Calculate Fixed Assets Ratio:

Share capital Reserves 9% Debentures Trade Creditors Plant and Machinery Land and Building Furniture Trade Debtors Cash Balance Bills Payable Stock 2,00,000 50,000 2,00,000 75,000 2,00,000 2,00,000 50,000 60,000 40,000 24,000 80,000

Fixed Assets Ratio = Long-term Funds Fixed Assets

= 2,00,000 + 50,000 + 2,00,000 2,00,000 + 2,00,000 + 50,000 = 4,50,000 = 1 4,50,000

Investment/Shareholders

Key Financial Ratios Market Ratios

Market ratios measure returns to stockholders and the value the marketplace puts on a companys stock. Market ratios include earnings per common share price-to-earnings dividend payout dividend yield

Market Ratios Earnings per Common Share

Earnings per Common Share Provides the investor with a common denominator to gauge investment returns Net earnings Average shares outstanding

Market Ratios Price-to-Earnings

Price-to-Earnings Relates earnings per common share to the market price at which the stock trades, expressing the multiple that the stock market places on a firms earnings

Market price of common stock

Earnings per share

PEG Ratio
The market is usually more concerned about the future than the present, it is always looking for some way to figure out what is going to happen in the companies future. PEG = (P/E) / (projected growth in earnings)

 The lower the PEG number, the less you pay for each unit of future earnings growth. So even a stock with a high P/E, but high projected earning growth may be a good value.

You have a stock with a low P/E. Since the stock has a low P/E, you start do wonder why the stock has a low P/E. Is it that the stock market does not like the stock? Or is it that the stock market has overlooked a stock that is actually fundamentally very strong and of good value?

 If the PEG ratio is big (or close to the P/E ratio), kind of stock that the stock market thinks is of not much value. On the other hand, if the PEG ratio is small (or very small as compared to the P/E ratio, kind of fundamentally strong stock that the market has overlooked for some reason.

Market Ratios Dividend Payout

Dividend Payout Determined by the formula cash dividends per share divided by earnings per share Dividends per share Earnings per share

Market Ratios Dividend Yield

Dividend Yield Shows the relationship between cash dividends and market price Dividends per share

Market price of common stock

Analyzing the Data

There are five broad areas that would typically constitute a fundamental analysis of financial statements:
Background on the firm, industry, economy, and outlook Short-term liquidity Operating efficiency Capital structure and long-term solvency Profitability

Background: Economy, Industry, and Firm

Economic developments and the actions of competitors affect the ability of any business enterprise to perform successfully. It is necessary to evaluate the environment in which the firm conducts business. This process involves blending hard facts with guess and estimates.

Short-Term Liquidity
Especially important to creditors, suppliers, management, and others who are concerned with the ability of a firm to meet near-term demands for cash Should include analysis of selected financial ratios and a comparison with industry averages Predicts the future ability of the firm to meet prospective needs for cash

Operating Efficiency
Turnover ratios measure the operating efficiency of a firm. The efficiency in managing a companys accounts receivable, inventory, and accounts payable is discussed in the short-term liquidity analysis.

Capital Structure and Long-Term Solvency

Analytical process includes an evaluation of the amount and proportion of debt in a firms capital structure as well as the ability to service debt. Debt financing implies risk and leverage.

Profitability
Analysis of how well the firm has performed in terms of profitability, beginning with the evaluation of several key ratios

DuPont Framework
The DuPont framework was developed internally at DuPont around 1920. It provides a systematic approach to identifying general factors causing ROE to deviate from normal. It establishes a framework for computing financial ratios to yield more in-depth analysis of a companys areas of strength and weakness.

The The number of dollars number of dollars of assets a The number of in sales generated by company is able to pennies in profits dollar of assets each acquire using each generated from dollar invested by each dollar of sales stockholders

$180,000 $5,700,000

$5,700,000

$5,700,000 $2,278,000

$2,278,000

$2,278,000 $1,468,000

DuPont Framework

Colevilles ROE for 2011 is 12.3%. The ROE for 2010 would be calculated the same way.

Relating the Ratios The Du Pont System

Helpful to complete the evaluation of a firm by considering the interrelationship among the individual ratios Looks at how the various pieces of financial measurement work together to produce an overall return Helps analyst see how the firms decisions and activities over the course of an accounting period interact to produce overall return to shareholders

Relating the Ratios The Du Pont System

The first three ratios reveal that return on investment is a product of the net profit margin and the total asset turnover. The second three ratios show how the return on equity is the product of return on investment and financial leverage.

Relating the Ratios The Du Pont System

By reviewing this series of relationships, the analyst can identify strengths and weaknesses as well as trace potential causes of problems in the overall financial condition and performance of the firm. Analyst can evaluate changes in condition and performance. Evaluation can then focus on specific areas contributing to changes.

Projections and Pro Forma Statements

Pro forma financial statements are projections based on a set of assumptions regarding
future revenues expenses level of investment in assets financing methods and costs working capital management

Projections and Pro Forma Statements

Pro forma financial statements are used primarily for long-range planning and long-term credit decisions. Many firms have made up their own definitions of pro forma statements, which should not be confused with the pro forma statement described above.

Summary of Analysis
Analysis of any firms financial statements consists of a mixture of steps and pieces that interrelate and affect each other. No one part of the analysis should be interpreted in isolation. The last step of analysis is to integrate the separate pieces into a whole, leading to conclusions about the business enterprise.

EXERCISE 1 LIABILITES Capital Reserves Term Loan Bank C/C Trade Creditors Provisions ASSETS 180 Net Fixed Assets 20 Inventories 300 Cash 200 Receivables 50 Goodwill 50 800 800 400 150 50 150 50

a. b. c. d. e. f.

What is the Net Worth : Capital + Reserve = 200 Tangible Net Worth is : Net Worth - Goodwill = 150 Outside Liabilities : TL + CC + Creditors + Provisions = 600 Net Working Capital : C A - C L = 350 - 250 = 50 Current Ratio : C A / C L = 350 / 300 = 1.17 : 1 Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1

EXERCISE 2

LIABILITIES
Capital Reserves Bank Term Loan Bank CC (Hyp) Unsec. Long T L

2005-06
300 140 320 490 150

2006-07
350 Net Fixed Assets 160 Security Electricity 280 Investments 580 Raw Materials 170 S I P

2005-06
730 30 110 150 20

2006-07
750 30 110 170 30

Creditors (RM) Bills Payable

Expenses Payable Provisions

120 40
20 20

70 Finished Goods 80 Cash

30 Receivables 40 Loans/Advance s

140 30
310 30

170 20
240 190

Goodwill 50 50 1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390 Total 1600 1760 1600 1760 nd Year : (170 + 20 + 240 + 2+ 190 ) / (580+70+80+70) 2. Current Ratio for 2 820 /800 = 1.02 3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.21

Exercise 3. LIABIITIES Equity Capital Preference Capital ASSETS 200 Net Fixed Assets 100 Inventory 800 300

Term Loan Bank CC (Hyp)

Sundry Creditors Total

600 Receivables 400 Investment In Govt. Secu.

100 Preliminary Expenses 1400 = 2:1

150 50
100 1400

1. Debt Equity Ratio will be : 600 / (200+100)

2. Tangible Net Worth : Only equity Capital i.e. = 200 3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200 = 11 : 2 4. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1

Exercise 4. LIABILITIES Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors Provision of Tax Proposed Dividend 355 ASSETS Net Fixed Assets 265 1 125 128 1 30 550 7 Cash 100 Receivables 38 Stocks 26 Prepaid Expenses 9 Intangible Assets 15 550 Q. What is the Current Ratio ?

Ans : (125 +128+1+30) / (38+26+9+15) : 255/88 = 2.89 : 1

Q What is the Quick Ratio ?

Ans : (125+1)/ 88 = 1.43 : 11

Ans : LTL / Tangible NW = 100 / ( 362 30) = 100 / 332 = 0.30 : 1

Q. What is the Debt Equity Ratio ?

Exercise 4. LIABILITIES

contd ASSETS 355 Net Fixed Assets 265 1 125 128 1 30 550 7 Cash 100 Receivables 38 Stocks 26 Prepaid Expenses 9 Intangible Assets 15 550

Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors Provision of Tax Proposed Dividend

Q . What is the Proprietary Ratio ? Ans : (T NW / Tangible Assets) x 100 [ (362 - 30 ) / (550 30)] x 100 (332 / 520) x 100 = 64% Q . What is the Net Working Capital ? Ans : C. A - C L. = 255 - 88 = 167 Q . If Net Sales is Rs.15 Lac, then What would be the Stock Turnover Ratio in Times ? Ans : Net Sales / Average Inventories/Stock 1500 / 128 = 12 times approximately

Exercise 4.

contd

LIABILITIES
Capital + Reserves P & L Credit Balance Loan From S F C 355

ASSETS
Net Fixed Assets 265 1 125 7 Cash 100 Receivables

Bank Overdraft
Creditors Provision of Tax Proposed Dividend

38 Stocks
26 Prepaid Expenses 9 Intangible Assets 15

128
1 30

550

550

Q. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac. Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12 = 1 month Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ? Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0.3 months

Exercise 5. : Profit to sales is 2% and amount of profit is say Rs.5 Lac. Then What is the amount of Sales ? Answer : Net Profit Ratio = (Net Profit / Sales ) x 100 2 = (5 x100) /Sales Therefore Sales = 500/2 = Rs.250 Lac Exercise 6. A Company has Net Worth of Rs.5 Lac, Term Liabilities of Rs.10 Lac. Fixed Assets worth RS.16 Lac and Current Assets are Rs.25 Lac. There is no intangible Assets or other Non Current Assets. Calculate its Net Working Capital. Answer Total Assets = 16 + 25 = Rs. 41 Lac Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac Current Liabilities = 41 15 = 26 Lac Therefore Net Working Capital = C. A C.L = 25 26 = (- )1 Lac

Exercise 7 : Current Ratio of a concern is 1 : 1. What will be the Net Working Capital ?
Answer : It suggest that the Current Assets is equal to Current Liabilities hence the NWC would be NIL Exercise 8 : Suppose Current Ratio is 4 : 1. NWC is Rs.30,000/-. What is the amount of Current Assets ? Answer : 4 x - 1 x = 30,000 Therefore x = 10,000 i.e. Current Liabilities is Rs.10,000 Hence Current Assets would be 4x = 4 x 10,000 = Rs.40,000/-

Exercise 9. The amount of Term Loan installment is Rs.10000/ per month, monthly average interest on TL is Rs.5000/-. If the amount of Depreciation is Rs.30,000/- p.a. and PAT is Rs.2,70,000/-. What would be the DSCR ? DSCR = (PAT + Depr + Annual Intt.) / Annual Intt + Annual Installment = (270000 + 30000 + 60000 ) / 60000 + 120000 = 360000 / 180000 = 2

Exercise 10 : Total Liabilities of a firm is Rs.100 Lac and Current Ratio is 1.5 : 1. If Fixed Assets and Other Non Current Assets are to the tune of Rs. 70 Lac and Debt Equity Ratio being 3 : 1. What would be the Long Term Liabilities? Ans : We can easily arrive at the amount of Current Asset being Rs. 30 Lac i.e. ( Rs. 100 L - Rs. 70 L ). If the Current Ratio is 1.5 : 1, then Current Liabilities works out to be Rs. 20 Lac. That means the aggregate of Net Worth and Long Term Liabilities would be Rs. 80 Lacs. If the Debt Equity Ratio is 3 : 1 then Debt works out to be Rs. 60 Lacs and equity Rs. 20 Lacs. Therefore the Long Term Liabilities would be Rs.60 Lac.

Exercise 11 : Current Ratio is say 1.2 : 1 . Total of balance sheet being Rs.22 Lac. The amount of Fixed Assets + Non Current Assets is Rs. 10 Lac. What would be the Current Liabilities?

Ans : When Total Assets is Rs.22 Lac then Current Assets would be 22 10 i.e Rs. 12 Lac. Thus we can easily arrive at the Current Liabilities figure which should be Rs. 10 Lac

THANK YOU

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