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Ratio Analysis

Its a tool which enables the banker or lender to arrive at the


following factors :

Liquidity position
Profitability
Solvency
Financial Stability
Quality of the Management
Safety & Security of the loans & advances to be or already
been provided.
How a Ratio is expressed?

As Percentage

As Proportion

As Pure Number /Times


Classification of items for Ratio Analysis
Shareholders Fund:
Share Capital
Reserves

Long term liabilities:


Term Loans (Banks & Institutions)
Debentures/Bonds,
Unsecured Loans, Fixed Deposits, Other Long Term Liabilities

Capital Employed: Shareholders Fund or Net worth + Long


term liabilities:
Classification of items for Ratio Analysis
Fixed assets:
Land & Building, Plant & Machineries etc.
Patent, Goodwill
Original Value Less Depreciation
Net Value or Book Value or Written down value

Investments or non current assets :


Investments in shares & securities
Long Term Security Deposits
Current assets :
Cash & Bank Balance,
Marketable securities,
Book Debts/Sundry Debtors, Bills Receivables,
Stocks (RM,WIP,FG) Stores & Spares,
Prepaid expenses,
Loans and Advances recoverable within 12 months

Current liabilities:
Cash Credit/OD/Export Credit
Sundry Creditors/Bills Payable
Short duration loans or deposits
Expenses payable &
Provisions against various items

Working Capital: Current assets - Current liabilities


1. Liquidity ratios

2. Leverage/ Capital Structure ratios


a. Asset Based
b. Income Based

3. Profitability ratios
a. Related to sales
b. Related to total Investments
c. Related to equity funds
d. Overall profitability/ Earning power

4. Turnover ratios
Liquidity Ratio
Current ratio shows the proportion of current assets of
a business in relation to its current liabilities.
current assets/ current liabilities

Acid Test ratio/ Quick Ratio = (Current Assets Stock


Prepaid Expenses)/ Current Liabilities or
(cash + marketable securities + Debtors)/ Current
Liabilities
Leverage/ Capital Structure ratios -
Asset Based/ Income Based
1. Debt equity ratio: Long term Debt + long term provisions/
shareholders funds (equity share capital + preference share
capital+ reserves and surplus)

2. Debt to total asset ratio = Long Term debt + long term


provisions/ total asset (Non current assets + current assets)

3. Proprietary ratio = shareholders fund/ total assets

4. Interest Coverage ratio = earnings before interest and


taxes(EBIT)/ Interest
Leverage/ Capital Structure ratios

5. Capital gearing ratio = (Preference share capital +


Debentures + other Borrowed funds)/ Equity capital +
reserves and surplus

6. Debt service coverage ratio = (earnings after tax +


depreciation + other non cash exp. + interest)/ repayment
installment amount + interest
Profitability ratios - Related to sales
1. Gross Profit Ratio = Gross Profit/ Revenue from Operations

2. Operating Profit Ratio = Net Operating Profit/ Revenue


from Operations

3. Net Profit Ratio = Earning after taxes/ Net Revenue from


Operations

4. Operating Ratio = (Cost of Goods sold + Operating


Expenses ) / Net Revenue from Operations
Profitability ratios - Related to total
Investments

1. Return on total assets = (Earnings after tax + Interest)/


Total assets*100

2. Return on Capital employed = EBIT/ total capital


employed*100

3. Return on Shareholders Fund = EAT/ shareholders


fund *100
Profitability ratios
Related to equity funds
1. Return on Equity Fund = (EAT Pref. Dividend)/ Equity
Shareholders Funds*100

2. Earnings Per Share (EPS) = net profit available to equity


shareholders (EAT preference dividend)/ no. of equity shares

3. Dividend per share (DPS) = dividend paid to equity


shareholders / number of equity shares.

4. Earnings Yield = EPS/ MPS*100

5. Dividend yield = DPS/ MPS


6. Dividend payout Ratio = DPS/ EPS

7. Price earning ratio = MPS / EPS

Profitability ratios - Overall profitability or


Earning power

. Return on investment = EAT / Total assets


Turnover ratios
1. Inventory turnover ratio = cost of revenue from
Operation / average inventory

2. Inventory holding period = 12 or 52 or 365/ Inventory


turnover ratio

3. Receivables turnover ratio = credit revenue from


operation/ Avg. Receivables

4. Average Collection period = 12 or 52 or 365/


Receivables turnover ratio
Turnover ratios
5. Payable turnover ratio = credit purchases/ Avg.
Payables

6. Average Payment period = 12 or 52 or 365/ Payables


turnover ratio

7. Total assets turnover = cost of revenue from


ope1ration / Total assets

8. Fixed Assets turnover = cost of revenue from operation /


avg. fixed assets
Particulars Amt (in Lakhs.)
Sales 1500
Less: Cost of Goods Sold (Purchases 420, Op 900
stock - 50)
Gross Profit 600
Add: Operating Income 10
Less: Operating Expenses 150
(Depreciation 20, Other Op exp - 130 )
Operating Profit ( Profit before Interest and Tax) 460
Less: Interest Expenses 10
Net Profit Before Tax 450
Less: Tax ( 20%) 90
Net Profit After Tax 360
Less: Preference Dividend 10
Profit available for Equity shareholders 350
Less: Equity Dividend 300
Particulars Amt (in Lakhs)
SOURCES OF FUNDS:
A. Shareholders Funds:
1.Share Capital
Equity Capital (Face value Rs. 10 per share) 300
(Market Price per share : Rs. 40)
10% Preference Capital 100
Add: 2. Reserves and Surplus
Reserves 90
P/L a/c 120
Less: 3. Misc. Expenditure
Share Issue exp. (10)
Total Shareholders fund 600
B. Borrowed Fund
Secured Loan 100
Unsecured Loan 50
Total Capital Employed (A+B) 750
Particulars Amt (in Lakhs)
APPLICATIONS OF FUNDS:
A. Fixed Assets:
Gross Block 500
Less: Prov. For Depreciation 50
Net Block 450
B. Long Term Investment 100
C. Working Capital
Current assets
400
(Stock -100, Prepaid Exp 20, Debtors 120,
B.R. - 60, other C.A 100)

Less: Current Liabilities 200


(200)
(Creditors 100, B.P 40, other C.L. 60)
Total Capital Applied 750