Ratio Analysis -Relationship between items or groups of items in the financial statement. -What is financial statement?

Income statement Balance sheet -expressed in terms of another figure -mathematical yardstick- measures the relation ship between two figures I Balance Sheet Ratios: 1. Current Ratio = Current Assets / Current Liabilities Std 2:1 2. Liquid Ratio = Quick Assets / Quick Liabilities Std 1:1 3. Proprietary Ratio = Proprietors Fund* / Total Assets Std Neither be too high or too low *Equity + R.S + Pref+ Surplus - Miscellaneous 4.Stock working capital Ratio:= stock / Working capital Std 1:1 Higher ratio indicates weak working capital 5. Capital Gearing Ratio = Fixed income bearing securities /Non fixed income bearing securities High geared = fixed interest bearing securities are greater than equity shareholders fund Low geared = just opposite to the above Std 1:4 6. Debt Equity Ratio = Long term debts / Shareholders Funds Std 2:1 7. Fixed Assets Ratio = Fixed Assets / Long term funds II. Revenue Statement Ratios: 8.Gross Profit Ratio = Gross Profit / Net Sales 100 9.Operating Ratio = Operating Cost / Net Sales 100 Manufacturing Concern high Other firms -low 10.Expenses Ratio = Concerned Expense / Net Sales 100 11.Net Profit Ratio = Net profit / Net Sales 100 12.Net Operating Profit Ratio = Operating Profit / Net Sales 100 Operating profit = GP- all expenses including finance 13.Stock Turnover Ratio = Cost of Goods Sold/ Average Stock Std.: Seasonable based on nature of production

III Combined/ Composite Ratios: 14. Return on Capital Employed = NPBIT / Capital Employed 100 -indicate the management efficiency - productivity of capital utilized - overall efficiency. 15. Return on Proprietors Funds = NPAT / Proprietors Funds 100 16.Return on Equity Share capital = NPAT-Pref.Dividend / Equity share capital 17.Earnings per share = NPAT- Pref. Dividend / No of Equity Shares 18.Dividend / Payout Ratio = Divi. Per Equity share / EPS 19.Divi. Yield Ratio = Divi. Per share / Mkt price per share 20.Price Earning Ratio = Mkt. Price Per Share / EPS 21.Debt Service Ratio = NPBIT / Interest ( Interest coverage Ratio) 22.Creditors Turnover Ratio = Credit Purchase /Average Accounts Payable C.P.Period = days/ months in a year / CTR 23.Debtors Turnover Ratio = Credit Sales / Average Accounts Receivable D.C.Period = days/ months in a year / DTR 24.Fixed Assets Turnover Ratio = Sales / Fixed Assets 25.Total Assets Turnover Ratio = Sales / Total Assets 26.Working Capital Turnover Ratio = Sales / Working Capital 27.Capital Turnover Ratio = Sales/ Capital employed.

1. Profit and Loss A/C. and Balance Sheet of SIDHARTH LTD. For the year ended 31st March, 2007: Trading and Profit and Loss Account for the year ended 31st March 2007 Dr. Cr. Particulars Rs. Particulars Rs. To Opening Stock 70,000 By Sales 9,00,000 To Purchases 5,40,000 By Closing Stock 80,000 To Wages 2,14,000 To Gross profit c/d 1,56,000 9,80,000 9,80,000 To Salaries 26,000 By Gross profit b/d 1,56,000 To Rent 5,000 By Interest on Invt. 5,000 To Miscellaneous Expenses 15,000 To Selling Expenses 10,000 To Depreciation 30,000 To Interest 5,000 To Provision for Tax 20,000 To Net profit c /d 50,000 1,61,000 1,61,000 Balance Sheet as on 31st March 2007 Liabilities Rs. Assets Equity Share capital( RS.10) 1,50,000 Fixed Assets 1,60,000 (-) Depreciation 30,000 8% Pref. Share capital (Rs.100) 1,00,000 Investment Reserves & Surplus 62,000 Stock 10% Debenture 50,000 Debtors Bank Loan ( payable after 5 40,000 Bills Receivable years) Creditors 60,000 Cash Provision for Tax (C.Y) 20,000 Preliminary Expenses Bank Overdraft 20,000 Proposed Pref .Dividend 8,000 5,10,000 Rs. 1,30,000 1,00,000 80,000 60,000 50,000 85,000 5,000 5,10,000

Adjustments: Market value of Equity share is Rs.12 and Dividend Paid per Equity share is Rs.2.Calculate the following ratio:a) Acid Test Ratio b) Capital Gearing Ratio C) Operating Ratio d) Dividend Payout Ratio e) Debt Service Ratio f) Creditors Turn over Ratio g) Earning per share h) Stock Turnover Ratio.

Ans: Acid Test Cap G. Ratio Operating Ratio Div.Payout Debt Service CTR EPS STR Q.A/QL F F Int/ F Not. COGS+O.Exp/ Sales Div/EPS NPBT+Int/Interest Pur/Credit NPAT-.Div/ No. Shares COGS/Avg.stock 195000 190000 835000 2 75000 540000 42000 744000 88000 207000 900000 2.8 5000 60000 15000 75000 2.22 0.92 92.78 0.71 15 9 2.80 9.92

2. The following are the financial statements of S.Ltd. for the year 31st December 2006. Balance Sheet as on 31st December 2006 Liabilities Rs. Rs. Assets Rs. Rs.. Owners Equity Fixed Assets: 7% Preference Capital 2,00,000 Buildings 6,00,000 Equity Capital 8,00,000 Plant & Machinery 4,00,000 General Reserves 9,00,000 Furniture 2,00,000 Retained Earnings 25,000 19,25,00 Patents 50,000 12,50,000 Debt Equities: 0 Current Assets: 6% Debentures 1,00,000 Cash 2.20,000 Loan ( Long Term) 80,000 Bank 1,30,000 8% Bonds 20,000 Investment( Govt. Current Liabilities: Securities) 1,80,000 Creditors 60,000 2,00,000 Sundry Debtors 1,15,000 Bills Payable 20,000 Bills Receivable 80,000 Bank Overdraft 20,000 Stock 3,00,000 Outstanding Expenses 20,000 Prepaid Expenses 20,000 10,45,000 Proposed Dividend 50,000 22,95,000 1,70,000 22,95,00 0

Profit and Loss Account for the year ended 31st December 2006 Sales Less: Cost of goods sold Gross Profit Expenses Net Profit :24,00,000 :16,00,000 8,00,000 : 7,00,000 1,00,000

You are required to compute the following ratios: 1.Current Ratio 2.Acid Test Ratio 3. Gross profit Ratio 4.Return on Proprietors Fund 5.Debt Equity Ratio. 6.Fixed Assets to Net Tangible worth Ratio 7.Net profit Ratio 8.Current Assets to Proprietors Fund Ratio. 9. Total Assets Turnover Ratio 10.Operating Ratio 11. Return on Capital Employed.12.Fixed Assets Turnover Ratio. Ans. 1.Current Ratio = C.A / C.L = 10,45,000/ 1,70,000 = 6.15: 1 2.Acid Test Ratio =L.A /LL = 7,25,000 /1,50,000 = 5: 1 3.Gross Profit Ratio = GP / N.Sales100 = 8,00,000/24,00,000 =33.33% 4.Return on Proprietors Fund = N.Profit / Capital =1,00,000/19,25,000 =5.2% 5.Debt to Equity Ratio = Total Debt /Net worth 100 =3,70,000 /19,25,000 =19.22% 6.Fixed Assets to Net Tangible worth Ratio = F.A ( WDV) / P.Fund 100= 12,50,000/ 19,25,000 100= 64.9% 7.Current Assets to P.Fund= C.A/P.Fund100=10,45,000/ 19,25,000 =54.3% 8.Net Profit Ratio = N.P / N.Sales 100=1,00,000 /24,00,000 100= 4.16% 9.Total Assets Turnover Ratio =Sales/ Total Assets = 24,00,000 / 22,95,000 = 1.04% 10.Operating Ratio = COGS+ Operating Exp. / Net Sales 100= 23,00,000 /22,95,000100= 95.8% 11.Return on Capital Employed = N.P / Capital Employed i.e Total Assets100 1,00,000 /22,95,000100= 4.36% 12.Fixed Assets Turnover Ratio = Sales / Net F.Assets = 24,00,000/ 12,50,000 =2 times. 3.Following is the Balance Sheet of Poona Ltd. As on 31st March ,2006. Balance Sheet Liabilities Rs. Assets Equity Share Capital 20,000 Goodwill Capital Reserve 4,000 Fixed Assets 8% Loan on Mortgage 16,000 Stock Trade Creditors 8,000 Debtors Bank Overdraft 2,000 Investment Profit & Loss A/C Cash in Hand Profit 2002 after Taxation & Interest on Fixed Deposits12,000 Less: Trf to Reserve 4,000 8,000 60,000

Rs. 12,000 28,000 6,000 6,000 2,000 6,000

60,000

Sales amount Rs. 1,20,000 Calculate ratios for: a) Testing Liquidity or Short Term Solvency, b) Testing Solvency ( Long Term) c) Testing Profitability, and d) Testing Capital Gearing. Ans: a) Testing Liquidity: i) Current Ratio = 20,000 / 12,000 = 1.67 ii) Quick Ratio = 14,000 / 10,000 = 1.4 b) Testing Solvency: i) Solvency Ratio =Total Assets / Total Outside Liabilities = 60,000/28,000 =2.14 ii) Equity Ratio = Proprietors Fund / Total Assets 100 = 32,000 /60,000100 = 53.33% This ratio shows that 53.33% of the assets are financed by the shareholders, And for 46.67% the concern depends on external finance. iii) Debt Equity Ratio = Total Debt / Net worth 100= 28,000 /32,000 100= 87.5% 1:1 Ratio is preferred. Satisfactory c) Testing Profitability: i) Return on Total Assets = NPBTI / Total Assets 100= 8,000+2,000+1280 / 60,000100=18.80% ii) Return on Shareholders Fund= NP After I&T/Shareholders Funds 100= 12,000 /32,000100= 37.5% d) Testing Capital Gearing: =Pref.Share capital+ Debentures /Equity +Reserves& Surplus = 16,000 / 32,000 = 0.5 The ratio indicates low gearing.