Ratio Analysis Illustration 1 The following is the Balance sheet of a company as on 31-3-06 Liabilities Rs. Assets Rs. E. Shares Debentures Investments Long term loans Stock Creditors 8,00,000 Debtors Calculate Solution: (1) Current ratio = Current Asset / Current Liabil = 50,00,000 / 20,00,000 (2) Stock to working capital ratio = Stock / Inventory / Working capital = Current Assets - Current = 50,00,000 - 20,00,000 = 30,00,000 = 25,00,000 / 30,00,000 x 100 = 83.33% (3) Debt-Equity ratio = Debt / Equity Debt = Long term loans 30,00,000+50,00,000=80,00,000 Equity = = 40,00,000 + 20,00,000 = 60,00,000 = 80,00,000 / 60,00,000 = 1.33 40,00,00 Land & 40,00,00 Reserves & Surplus 20,00,00 0 Plant & machinery 40,00,00 0 30,00,00 30,00,00 50,00,00 25,00,00 15,00,00 Other current liabilities 12,00,00 0 Other current assets 10,00,00 0 1,60,000 00 1,60,000 00 (1) Current ratio (2) Stock to working capital ratio (3) Debt-Equity ratio (4) Net-worth ratio / proprietor/ ratio (5) Fixed assets to net worth ratio (6) Current assets to net worth ratio (7) Solvency ratio (8) Capital gearing ratio.
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Ratio Analysis
Illustration 1 The following is the Balance sheet of a company as on 31-3-06
Liabilities Rs. Assets Rs.
E. Shares 40,00,000 Land & building 40,00,000Reserves & Surplus 20,00,000 40,00,000
Solution:(1) Current ratio = Current Asset / Current Liabilities
= 50,00,000 / 20,00,000 = 2.5
(2) Stock to working capital ratio = Stock / Inventory / Working capital x 100
Working capital = Current Assets - Current Liabilities = 50,00,000 - 20,00,000 = 30,00,000= 25,00,000 / 30,00,000 x 100 = 83.33%
(3) Debt-Equity ratio = Debt / EquityDebt = Long term loans 30,00,000+50,00,000=80,00,000 Equity = Share capital + Reserves + Surplus= 40,00,000 + 20,00,000 = 60,00,000
= 80,00,000 / 60,00,000 = 1.33
Plant & machinery
Other current liabilities
Other current assets
(1) Current ratio(2) Stock to working capital ratio(3) Debt-Equity ratio(4) Net-worth ratio / proprietor/ ratio(5) Fixed assets to net worth ratio(6) Current assets to net worth ratio(7) Solvency ratio(8) Capital gearing ratio.
(4) Net worth or Proprietary ratio = Net worth (Equity) / Total assets(Net worth = Share capital + Reserves & Surplus)
= 60,00,000 / 1,60,00,000 = 0.375
(5) Fixed Assets to net worth ratio = Net fixed assets= 80,00,000 / 60,00,000 = 1.33
(6) Current assets to net worth ratio = Current assets / Net worth= 50,00,000 / 60,00,000 = 0.833
(7) Solvency ratio = Total assets / Total liabilities
Total assets = Total of asset side of balance sheet. Total liabilities = Both long-term and current liabilities.
= 1,60,00,000 / 1,00,00,000 = 1.6
8. Capital gearing ratio = Fixed dividend bearing lonas debentures + fixed dividend bearing preference shares / Equity share capital
= Debentures 30,00,000 + long term loan 50,00,000 / E.Sahre capital 40,00,000= 80,00,000 / 40,00,000 = 2
Debt = Long term loans 30,00,000+50,00,000=80,00,000 Equity = Share capital + Reserves + Surplus
8. Capital gearing ratio = Fixed dividend bearing lonas debentures + fixed dividend bearing preference shares / Equity share capital
(8) Average Collection Period 360 days 360---------------------------- = ----- = 30 days Debtors turnover 12
Calculate the following ratios – (1) Current ratio (2) Quick ratio (30 Debt-equity ratio (4) Interest coverage (5) Fixed charge coverage (6) Stock turnover (7) Debtors turnover (8) Average collection period (9) Gross profit margin (10) Net profit margin (11) Operating ratio (12) Return on capital employed (ROCE) (13) Earning per share (14) Return on shareholders’ equity (15) P/E ratio and (16) Earning yield
(9) G.P MarginSales – Cost of goods sold 15,00,000 – 11,00,000----------------------- = Sales 15,00,000
March, 2007 and the Balance Sheet as on that date:
= 6.36 times
= 6.8 times
= 12 times
Calculate the following ratios – (1) Current ratio (2) Quick ratio (30 Debt-equity ratio (4) Interest coverage (5) Fixed charge coverage (6) Stock turnover (7) Debtors turnover (8) Average collection period (9) Gross profit margin (10) Net profit margin (11) Operating ratio (12) Return on capital employed (ROCE) (13) Earning per share (14) Return on shareholders’ equity (15) P/E ratio and (16) Earning yield
= 4,46 times
11,00,000 + 35,000 + 25,000 + 50,000
--------------------------- X 100 = 26.67%
----------------------------------- X 100 = 19.93%
----------------------- X 100 = ----------------------------------------------- X 100 = 80.67%
1,500Price per share : RS. 15 industry’s average ratios are:
Current ratio 2.4 Debt equit 2:01Quick ratio 1.5 Times inte 6Sales to inventory 8.0 times Net profit 7%Average collection period 36 days Price to ea 15Debt to assets 40% Return to t 11%
Solutions:
Following is the balance sheet and income statement of Jaynagara Ltd. for the year ended 31st march, 2007 are as under: Income Statement for the year ended 31st March, 2007
Balance Sheet as on 31st March, 2007
From the above facts and figures, you are required to – (i) Calculate the relevant ratios and interpret them to identify the problems areas. (ii) Based on the ratio analysis, as a Company Secretary, prepare a report for consideration of your Board of Directors clearly bringing out the reason in respect of identified problem areas and giving suggestions to solve them.
Current LiabilitiesCreditors 180Bills payable 20Other Current liabilities 80
280
Current assets 700(1) Current Ratio = ---------------------- = ------ 2.5
Current liabilities 280
Liquid assets 300(2) Quick Ratio = ----------------------- = ----- 1.07
Current liabilities 280
Sales(3) Sales to Inventory = -------------- =
Inventory
Debtors 175(4) Average collection Period = ---------------------- ----- = 40 days
Average daily sale 4.4
Debts 700(5) Debts to Assets = ------------------- = ------- X 100
Total assets 1500
Debts 700(6) Debt-Equity Ratio = ---------------------- = ------ =
Shareholders funds 520
EBIT 250(7) Times Interest Earned -------------------- = ------------ =
Interest charges 45
Net Profit 123(8) Net Profit Margin = ------------------- X 100 = -------- X 100
Sales 1600
Price per share 15(9) Price to Earnings Ratio = --------------- = ---- 4.88
E.P.S 3.075
Net Profit 123(10) Return to Total Assets = ---------------- X 100 --------- 0.082
Total Assets 1500
Following is the balance sheet and income statement of Jaynagara Ltd. for the year ended 31st march, 2007 are as under: Income
1600------ = 4 times400
0.467
1.35
5.56
0.077
(i) Stock velocity: 6(ii) Capital turnover ratio (on cost of sales) : 2(iii) Fixed assets turnover ratio (on cost of sales) : 4(iv) Gross profit turnover ratio: 20 per cent.(v) Debtors' velocity: 2 months(vi) Creditors' velocity: 73 days
The gross profit was Rs. 60,000. Reserves and Surplus amount Rs. 20,000. Closing stock was Rs. 5,000 in excess of opening stock.Solution :
-1 Sales Gross profit
Gross profit ratio = -------------------- x 100 SalesIf Gross profit is Rs. 20, Sales = Rs. 100If Gross profit is Rs. 60,000, Sales = 60,000 x 100/20 = Rs. 3,00,000
-2 Stock: Cost of goods sold
Stock velo= --------------------------- = 6 Average stock
Cost of go ###= Rs. 3,00,000 - Rs. 60,000 = Rs. 2,40,000
2,40,000 = ----------------------- = 6 Average stock
6 x Averag = 2,40,000Average sto = 2,40,000 + 6 = Rs. 40,000
Creditors velocity = Creditors + Bills payable ---------------------------------- x No.of working days = 73 Credit purchasesCalculation of Purchases:Purchases = Cost of goods sold + Closing stock - Opening stock
The gross profit was Rs. 60,000. Reserves and Surplus amount Rs. 20,000. Closing stock was Rs. 5,000 in excess of opening stock.
Current ra 2.5Liquidity 1.5Net workinRs. 3,00,000
Stock turnover ratio (cost pf sales/ 6 timesGross profi 20%Debt colle2 months
Fixed assets turnover ratio, (on cost of sales) 2 timesFixed asse 0.8Reserve an 0.5
Solutions:
(a) Current assets: Current assets
Current rat= ------------------------ = 2.5 : 1 Current liabilities Working capital = Current assets - Current liabilities = 2.5 - 1 = 1.5If working capital is 1.5, current assets = 2.5[f working capital is Rs. 3,00,000, current assets
If working capital is 1.5, current liabilities = 1If working capital is Rs. 3,00,000, current liabilities 3,00,000 =--------------------- =Rs. 2,00,000
Cost of goods soldStock turn= ---------------------------- = 6
Closing stock Cost of goods sold
= --------------------------- = 6 2,00,000
Cost of go= 2,00,000 x 6 = Rs. 12,00,000
(5) Sales:Gross profit ratio 20% on salesSales - Gross profit = Cost of goods soldRs. 100 -R = Rs. 80If cost of goods sold is Rs. 80, sales = Rs. 100 If cost of goods sold is Rs. 12,00,000, sales 12 00 000 = ------------------- x 100 Rs. 15,00,000
80
(6) Debtors:
Debtors + Bills receivableDebtors turnover ratio = ----------------------------------- x 12 =2 Credit sales
There are no bills receivable. Hence, Debtors turnover ratio: Debtors = ---------------------- x 12 =2 months 15,00,000 By cross multiplication,
2 x 15,00,000Debtors = ------ = Rs. 2,50,000
12
(7) Fixed assets:Fixed assets turnover ratio (on cost of sales)
Cost of sales = ------------------------ =2
Fixed assets 12,00,000
= ------------------------ =2 Fixed assets
2 x Fixed = Rs. 12,00,000 12,00,000
Fixed asse= -------------------- = Rs. 6,00,0002
(8) Shareholders' Net worth (or Proprietory fund):Fixed assets to Shareholders' Net worth
-9Net Worth = Share Capital + Reserves and Surplus Reserves and Surplus to Capital = 0.50 : 1Net worth = 1 + 0.50 = 1.50If Net worth is 1.5, reserves and surplus = 0.50If Net worth is Rs. 7,50,000, reserves and surplus
7,50,000 = ------------------ x 0.5
1.5 = Rs. 2,50,000
(10) Share Capital:Net worth i.e. Share capital +Reserves = Rs. 7,50,000Less: Rese= Rs. 2,50,000
Share capi= Rs. 5,00,000
(11) Bank Balance:Rs.
Total Current assets 5,00,000Less: Stoc2,00,000 Deb 2,50,000
Reserves and Surplus:
------------
------------
4,50,000
Bank 50,000
Balance Sheet as on 31-12-2006-------------------------------------------------------------------------------------------------------Liabilitie Rs. Assets Rs.-------------------------------------------------------------------------------------------------------Share capi5,00,000 Fixed asse6,00,000Reserves a2,50,000 Stock 2,00,000Long-term loan. Debtors 2,50,000 (balan 1,50,000 Bank 50,000Current lia2,00,000
The following abridged report related to KSBS. Ltd.
Income statement for the year ended 31st December, 2006.
600
###
###
###
Sales (all credit)
(Rs. in lakhs)
(-) Cost of goods sold
Opening stock
Purchases
###450
150
114
36
16
20
174 Cash 60
16 120
10 160
50 130
Closing Stock
Gross Margin
Operating expenses
Profit before taxation
Provision for tax
Profit after tax
Balance Sheet as at 31st December, 2006Accounts payable
Provision for tax
Accounts receivable
Accrued expenses
Inventory
Mortgage loan
Land & Building
160 Plant 30
Reserves 60
30
500 500
Calculate the ratios which indicate
Solution:(i) Accounts receivable turnover
= Sales /Accounts receivable = 660/120 = 5 times
Averag ###= 365/5 = 73 days
(ii) Ability of meet current obligations= Current ratio = current assets / Current liabilities = 340/200 = 1.7:1= Quick ratio = Liquid assets / Current liabilities = 180/200 = 0.9 : 1
(iii) Mark-up###
(iv) Inventory turnover = Cost of goods sold / Average stock = 450/180 = 2.5 times.
(v) Quick ratio = Liquidity assets / Current liabilities = 180/200 = 0.9(vi) Equity to the total liabilities
= Shareholders funds / total liabilities = 250/500 = 0.5 or 50%
Paid up capital
Un appropriated profits
(i) the rapidity with which accounts receivable are collected(ii) the ability of the co. to met its current obligations(iii) what mark-up has been attained.(iv) the efficiency with which funds represented by inventories are being utilized and managed;(v) the ability of the co. to meet quickly demands for payment amounts due; and(vi) the relative importance of proprietorship and liabilities as sources of funds.
the efficiency with which funds represented by inventories are being utilized and managed;the ability of the co. to meet quickly demands for payment amounts due; andthe relative importance of proprietorship and liabilities as sources of funds.