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    RATIO ANALYSISON

    Submitted To:Professor Seema Dogra

    SUBMITTED BY:

    1. VISHAL GOYAL

    2. GLADWIN

    3.SUNNY GARG

    4. SANJEEV

    5. SONY

    6.SHIKSHA

    IIPMISBE(A),SEC -2

    HERO HONDA MOTORS

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    WHY FINANCIAL ANALYSIS

    Lenders need it for carrying out the following

    Technical Appraisal

    Commercial Appraisal Financial Appraisal

    Economic Appraisal

    Management Appraisal

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    RATIO ANALYSIS

    Its a tool which enables the banker or lender toarrive 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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    HOW A RATIO IS EXPRESSED?

    y As Percentage - such as 25% or 50% . For exampleif net profit is Rs.25,000/- and the sales isRs.1,00,000/- then the net profit can be said to be25% of the sales.

    y As Proportion - The above figures may be expressedin terms of the relationship between net profit to salesas 1 : 4.

    y As Pure Number /Times - The same can also be

    expressed in an alternatively way such as the sale is 4times of the net profit or profit is 1/4th of the sales.

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    CLASSIFICATION OF RATIOS

    Balance Sheet

    RatioP&L Ratio or

    Income/Revenue

    Statement Ratio

    Balance Sheet and

    Profit & Loss Ratio

    Financial Ratio Operating Ratio Composite Ratio

    Current Ratio

    Quick Asset Ratio

    Proprietary Ratio

    Debt Equity Ratio

    Gross Profit Ratio

    Operating Ratio

    Expense Ratio

    Net profit Ratio

    StockT

    urnover Ratio

    Fixed Asset Turnover

    Ratio, Return on

    Total Resources

    Ratio,

    Return on Own FundsRatio, Earning per

    Share Ratio, Debtors

    Turnover Ratio,

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    FORMAT OF BALANCE SHEET FOR RATIO ANALYSISLIABILITIES ASSETS

    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

    FIXED ASSETS : LAND & BUILDING, PLANT &

    MACH

    INERIESOriginal Value Less Depreciation

    Net Value or Book Value or Written down value

    LONG TERM LIABILITIES/BORROWED FUNDS :

    Term Loans (Banks & Institutions)

    Debentures/Bonds, Unsecured Loans, FixedDeposits, Other LongTerm Liabilities

    NON CURRENT ASSETS

    Investments in quoted shares & securities

    Old stocks or old/disputed book debtsLongTerm Security Deposits

    Other Misc. assets which are not current or fixed

    in nature

    CURRENT LIABILTIES

    Bank Working Capital Limits such as

    CC/OD/B

    ills/Export CreditSundry /Trade Creditors/Creditors/Bills Payable,

    Short duration loans or deposits

    Expenses payable & provisions against various

    items

    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

    INTANGIBLE ASSETS

    Patent, Goodwill, Debit balance in P&L A/c,

    Preliminary or Preoperative expenses

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    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 ofBalance 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 ofFunds

    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

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    SOME IMPORTANT NOTES

    Assets other than Current Assets are Long Term Use of Funds

    Installments ofTerm Loan Payable in 12 months are to be taken as

    Current Liability only for Calculation of Current Ratio & Quick Ratio.

    If there is profit it shall become part of Net Worth under the head

    Reserves and if there is loss it will become part ofIntangible Assets

    Investments in Govt. Securities to be treated current only if these are

    marketable and due. Investments in other securities are to be

    treated 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.

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    1. Current Ratio : It is the relationship between the currentassets 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 theCurrent Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1

    The ideal Current Ratio preferred by Banks is 1.33 : 1

    2. Net Working Capital : This is worked out as surplus of LongTerm Sources over Long Tern Uses, alternatively it is the

    difference of Current Assets and Current Liabilities.

    NWC = Current Assets Current Liabilities

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    3. ACID TEST or QUICK RATIO : It is the ratio between Quick CurrentAssets and Current Liabilities.

    Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months +Quickly realizable securities such as Govt. Securities or quickly marketable/quotedshares and Bank Fixed Deposits

    Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

    Example :Cash 50,000Debtors 1,00,000Inventories 1,50,000 Current Liabilities 1,00,000Total Current Assets 3,00,000

    Current Ratio = > 3,00,000/1,00,000 = 3 : 1Quick Ratio = > 1,50,000/1,00,000 = 1.5 : 1

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    4. DEBT EQUITY RATIO : It is the relationship betweenborrowers fund (Debt) and Owners Capital (Equity).

    Long Term Outside Liabilities / Tangible Net Worth

    Liabilities of Long Term Nature

    Total of Capital and Reserves & Surplus Less Intangible Assets

    For instance, if the Firm is having the following :

    Capital = Rs. 200 LacsFree Reserves & Surplus = Rs. 300 Lacs

    Long Term Loans/Liabilities = Rs. 800 Lacs

    Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1

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    5. PROPRIETARY RATIO : This ratio indicates the extent to whichTangible Assets are financed by Owners Fund.Proprietary Ratio = (Tangible Net Worth/Total Tangible

    Assets) x 100The ratio will be 100% when there is no Borrowing for purchasing

    of Assets.

    6. GROSS PROFIT RATIO : By comparing Gross Profit percentage toNet Sales we can arrive at the Gross Profit Ratio which indicates themanufacturing efficiency as well as the pricing policy of the concern.

    Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

    Alternatively , since Gross Profit is equal to Sales minus Cost ofGoods Sold, it can also be interpreted as below :

    Gross Profit Ratio = [ (Sales Cost of goods sold)/ Net Sales]x 100

    A higher Gross Profit Ratio indicates efficiency in production of the unit.

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    7. OPERATING PROFIT RATIO :

    It is expressed as => (Operating Profit / Net Sales ) x 100

    Higher the ratio indicates operational efficiency

    8. NET PROFIT RATIO :

    It is expressed as => ( Net Profit / Net Sales ) x 100

    It measures overall profitability.

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    9. STOCK/INVENTORYTURNOVER RATIO :

    (Average Inventory/Sales) x 365 for days(Average Inventory/Sales) x 52 for weeks(Average Inventory/Sales) x 12 for months

    Average Inventory or Stocks = (Opening Stock + Closing Stock)

    -----------------------------------------

    2

    . This ratio indicates the number of times the inventory isrotated during the relevant accounting period

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    10. DEBTORS TURNOVER RATIO : This is also called Debtors

    Velocity or Average Collection Period or Period of Credit given .

    (Average Debtors/Sales ) x 365 for days(52 for weeks & 12 for months)

    11. ASSET TRUNOVER RATIO : Net Sales/Tangible Assets

    12. FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets

    13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets

    14. CREDITORS TURNOVER RATIO : This is also called Creditors

    Velocity Ratio, which determines the creditor payment period.

    (Average Creditors/Purchases)x365 for days

    (52 for weeks & 12 for months)

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    15. RETRUN ON ASSETS : Net Profit after Taxes/Total Assets

    16. RETRUN ON CAPITAL EMPLOYED :

    ( Net Profit before Interest & Tax / Average Capital Employed) x 100

    Average Capital Employed is the average of the equity share

    capital and long term funds provided by the owners and the

    creditors of the firm at the beginning and end of the accounting

    period.

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    Composite Ratio

    17. RETRUN ON EQUITY CAPITAL (ROE) :Net Profit after Taxes / Tangible Net Worth

    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.

    Net profit after Taxes and Preference Dividend/ No. of Equity

    Shares

    19. PRICE EARNING RATIO : PE Ratio indicates the number of times

    the Earning Per Share is covered by its market price.

    Market Price Per Equity Share/Earning Per Share

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    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 )

    PAT + Depr. + Annual Interest on Long Term Loans & Liabilities

    ---------------------------------------------------------------------------------

    Annual interest on Long Term Loans & Liabilities + Annual

    Installments payable on Long Term Loans & Liabilities

    (Where PAT is Profit after Tax and Depr. is Depreciation)

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