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RATIO ANALYSIS
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FINANCIAL STATEMENTS
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Management of the
Company :
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How the amount lent to the concern has been utilised, and so
on? 5
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3. COST OF SALES :
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4. GROSS PROFIT :
Net Sales – Cost of Sales
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Selling Expenses
Administrative Expenses
General Expenses
Provision for Bad Debts
Other Misc. Expenses
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LIABILITIES ASSETS
NET WORTH FIXED ASSETS
TERM LIABILITIES CURRENT ASSETS
CURRENT LIABILITIES OTHER NON CURRENT ASSETS
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TERM LOANS
DEBENTURE
TERM DEPOSITS
REDEEMABLE PREFERENCE SHARE CAPITAL
(Maturing with 12 years of Balance Sheet Date)
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Total of Term Liabilities + Current Liabilities is called Outside Liabilities and is the
Total Borrowings of the Firm
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Land
Building
Plant & Machineries
Furniture & Fixtures etc.
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Corporate Investments
Loans not recoverable within 1 year
Non Consumable Spares
Deferred Receivables
Advance for Capital Expenditure
Intangible Assets [ Goodwill, Patent, Trade Mark]
Preliminary & Pre-operative Expenses
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RATIO ANALYSIS
It’s 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
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RATIO ANALYSIS
Ratio is the indicated quotient of two mathematical expressions i.e. the
relationship between two or more things.
Ratio Analysis involves comparison for useful interpretation of the financial
statement. A single ratio does not indicate favourable or unfavourable
condition. It should be compared with some sort of standard. Standard of
comparison may consist of :
1. Ratios calculated from the past financial statements of the same firm.
2. Ratios developed using the projected financial statements of the same
firm.
3. Ratios of some selected firms, especially the most progressive and
successful at the same point of time; and
4. Ratios of the industry level to which the firm belongs.
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FORMAT OF BALANCE SHEET FOR RATIO ANALYSIS
LIABILITIES ASSETS
NET WORTH/EQUITY/OWNED FUNDS FIXED ASSETS : LAND & BUILDING, PLANT &
Share Capital/Partner’s Capital/Paid up Capital/ MACHINERIES
Owners Funds Original Value Less Depreciation
Reserves ( General, Capital, Revaluation & Other [Net Value or Book Value or Written down value]
Reserves)
Credit Balance in P&L A/c
LONG TERM LIABILITIES/BORROWED FUNDS : NON CURRENT ASSETS
Term Loans (Banks & Institutions) Investments in quoted shares & securities
Debentures/Bonds, Unsecured Loans, Fixed Old stocks or old/disputed book debts
Deposits, Other Long Term Liabilities Long Term Security Deposits
Other Misc. assets which are not current or fixed
in nature
CURRENT LIABILTIES CURRENT ASSETS : Cash & Bank Balance,
Bank Working Capital Limits such as Marketable/quoted Govt. or other securities,
CC/OD/Bills/Export Credit Book Debts/Sundry Debtors, Bills Receivables,
Sundry /Trade Creditors/Creditors/Bills Payable, Stocks & Inventory (RM,SIP,FG) Stores & Spares,
Short duration loans or deposits Advance Payment of Taxes, Prepaid expenses,
Expenses payable & provisions against various Loans and Advances recoverable within 12
items months
INTANGIBLE ASSETS
Patent, Goodwill, Debit balance in P&L A/c,
Preliminary or Preoperative expenses 25
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CLASSIFICATION OF RATIOS
Balance Sheet P&L Ratio or Balance Sheet and
Ratio Income/Revenue Profit & Loss Ratio
Statement Ratio
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Quick Current Assets : Quick assets are those which can be immediately
converted into cash without a loss of value. Cash & Bank balances are the most liquid
assets. Examples of quick Assets are : Cash/Bank Balances, Receivables upto 6
months, Quickly realizable securities such as Govt. Securities or quickly
marketable/quoted shares and Bank Fixed Deposits. Inventories are less liquid hence
the same is deducted from the Current Assets to arrive at Quick Assets.
Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities
Example :
Cash 50,000
Debtors 1,00,000
Inventories 1,50,000 Current Liabilities 1,00,000
Total Current Assets 3,00,000
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( Net Profit before Interest & Tax / Average Capital Employed) x 100
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Composite Ratio
18. EARNING PER SHARE : EPS indicates the quantum of net profit
of the year that would be ranking for dividend for each share of
the company being held by the equity share holders.
20. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most
important one which indicates the ability of an enterprise to
meet its liabilities by way of payment of installments of Term
Loans and Interest thereon from out of the cash accruals and
forms the basis for fixation of the repayment schedule in
respect of the Term Loans raised for a project. (The Ideal DSCR
Ratio is considered to be 2 )
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LIQUIDITY RATIOS : PROFITABILITY RATIOS :
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EXERCISE 1 12:26 AM
LIABILITES ASSETS
Capital 180 Net Fixed Assets 400
Reserves 20 Inventories 150
Term Loan 300 Cash 50
Bank C/C 200 Receivables 150
Trade Creditors 50 Goodwill 50
Provisions 50
800 800
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EXERCISE 2 12:26 AM
Exercise 3.
LIABIITIES ASSETS
Equity Capital 200 Net Fixed Assets 800
Preference Capital 100 Inventory 300
Term Loan 600 Receivables 150
Bank CC (Hyp) 400 Investment In Govt. Secu. 50
Sundry Creditors 100 Preliminary Expenses 100
Total 1400 1400
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550
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 46
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Exercise 4. contd…
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550
Q. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.
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2 = (5 x100) /Sales
Therefore Sales = 500/2 = Rs.250 Lac
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Answer
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Answer : 4a - 1a = 30,000
Therefore a = 10,000
Thus Current Liabilities is Rs.10,000
Hence Current Assets would be 4a = 4 x
10,000 = Rs.40,000/-
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That means the aggregate of Net Worth and Long Term Liabilities
would be Rs. 80 Lacs.
Given that Gross Profit margin is 15% means the Goods sold should be 85%
of the sales. So Cost of Goods Sold = Sales x 85% = 640000 x 85% =
544000
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Exercise 12 : Total Sales (all credit sales) of a firm is Rs.640000. It has
gross profit margin of 15% and a Current Ratio of 2.5. The firms Current
liabilities are Rs.96000, Inventories – Rs.48000 and Cash – Rs.16000.
If you deduct Inventory and Cash i.e. 48000 + 16000 = 64000 from Current
Assets, you get closing balance of Debtors,
So Closing Balance of Debtors is 240000 – 64000 = 176000
Therefore the average Debtors would be (80000 + 176000)/2 = 128000
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EXERCISE 13. A firm sold its stocks in CASH, in order to meet its liquidity
needs. Which of the following Ratio would be affected by this?
1. Raise long term interest free loans from friends and relatives
2. Raise long term loans from Institutions
3. Increase the Equity by way of Bonus Issue
4. Issue Rights share to existing share holders.
1. Goodwill
2. Preliminary Expenses
3. Pre-operative expenses
4. Book Debts which have become doubtful of recovery 57
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EXERCISE 16. Under which of the following methods of depreciation on
Fixed Assets, the annual amount of depreciation decreases?
1. Application of Funds
2. Sources of Funds
3. Surplus of sources over application
4. Deficit of sources over application 59
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1. Sources of Funds
2. Use of Funds
3. Deficit of sources over application
4. All of the above.
Q 23 . When the long term sources are more than long term uses, in the
fund flow statement, it would suggest ?
Q 24. When the long term uses in a fund flow statement are more than
the long term sources, then it would mean ?
Q 25. How many broader categories are there for the Sources of funds,
in the Fund Flow Statement ?
R K MOHANTY
email ID : rajendra2411@gmail.com,
rajendra2411@hotmail.com
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