Ratio Analysis Formulas 1) Financial ratios S.no
Ratio
Formula
Ideal ratio Comments
1
Current ratio
Current assets
2:1/ 2:1/1. 1.33 33:1 :1 Indic Indicat ates es firm firm’s ’s commitment to meet financial obligations.
Current liabilities
Avery heavy ratio is not desirable as it indicates less efficient use of funds 2
Quick ratio
Quick assets
1:1
This ratio also indicates short term solvency of a firm
1:2
Indicates long term solvency
Current liabilities 3
Debt –Equity ratios
long term debt equity
Higher ratio is riskier for the creditors 4
Proprietary ratio
Shareholders’ funds Total tangible assets
Variant of debt-equity ratio Shows the extent of shareholders funds in the total assets employed in the business Higher ratio indicates relatively little danger to creditors and vice versa
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Notes 1) Current Current assets are those those assets assets which can be converted converted into into cash within within a period of one year or normal operating cycle of the business whichever is longer Examples : Cash in hand, cash at bank ,stock, debtors, bills receivable, prepaid expenses 2) Current Current liabilities liabilities are those those liabilities liabilities payable payable within within an year or operating operating cycle 3) Quick assets assets = current current assets assets – (stock+prepa (stock+prepaid id expenses) expenses) 4) Quick ratio is also known as the acid test ratio or liquidity ratio 5) Tangible Tangible assets assets are those assets assets which have have physical physical existence existence 6) Long term debt /external /external funds/exte funds/external rnal equities equities =debentures+ =debentures+termlo termloans ans 7) Share holders’ holders’ funds/inte funds/internal rnal funds/propriet funds/proprietary ary funds/owners funds/owners funds=equity funds=equity share capital+preference share capital+reserves+profit and loss accountfictitious assets
2) Profitability ratios
S.no Ratio
Formula
Ideal ratio
comments
1
Gross ros s profi pr ofitt X 100 1 00
Higher the ratio better it is
This ratio expresses the relationship between gross profit and net sales
Gross Profit Ratio
Net sales
Gross profit should be adequate to cover operating expenses 2
Net Profit ratio
Net profit X100 Net sales
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Higher the ratio, better
This ratio expresses the relationship between
3
4
Net operating profit ratio
Operating Ratio
(Net operating profit/net sales)X100
Operating cost X100 net sales
5
Fixed charges cover
PBIT Interest
it is
net profit and Net sales
Higher ratio is better
Helps in determining the efficiency with which the affairs of the business being managed
Ratio should be low
This ratio is a test of operating efficiency with which the business is being carried
6 -7 times for an industrial concern
Important from lender’s point of view
It indicates whether the business would earn sufficient profits to pay periodically the interest charges 6
Debt Service coverage ratio
7
Overall profitability ratio/Return on investment/return on capital employed
8
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Return on share holders’ funds
PBIT/interest+ (principal)/1-taxrate
Operating profit Capital employed X100
Profit Pro fit afte a fterr tax (PAT) (PA T)
Indicates ability of the company to repay principal Higher ratio Indicates the is better percentage return on capital employed in the business
Higher ratio Indicates the is better percentage return on
9
Return on Equity share holders Funds
10
Price Earnings Ratio
Share holders funds X1 X100
share holders’ funds
PAT-pref.dividend X100
Higher ratio Indicates the is better percentage return on equity shareholders funds
Eq.shareholders funds
Market price per share Earnings per share
Higher ratio is better
Indicates the number of times the earning per share is covered by the market price
Helps the investor in deciding whether to buy or not to buy the shares 11
Earnings per share
PAT – pref.dividend No of Equity shares
Higher ratio is better
Helps in estimating company’s capacity to pay dividend to the shareholders
Notes 1) Calcul Calculati ation on of Gross Gross prof profit it Gross profit = Sales- Cost of goods sold Cost of goods sold (COGS) = opening stock +purchases+ all direct expenses –closing stock 2) Operating Operating profit profit = Gross profit-o profit-operati perating ng expenses expenses Operating expenses= COGS +administration expenses +selling and distribution expenses Note: does not include financial charges like interest and provision for tax Rupa
3) Capital Capital employed= employed= sum total total of all the long term term funds employed employed in the business C E= Equity share capital+ capital+ preference share capital+ capital+ reserves+ profit and and loss account+ long term loans-fictitious assets Shareholder’s funds= Equity share capital +preference share capital +reserves +profit and loss account-fictitious assets Equity share holder’s funds= equity share capital + reserves+ profit and loss account-fictitious assets
3) Turnover ratios
S.no
Ratio
Formula
Ideal ratio comments
1
Fixed assets turn over ratios
Net sales
Higher ratio is better
Indicates the extent to which investment in fixed assets contribute towards sales
Fixed Assets
2
Working capital turnover Net sales ratio Working capital
Higher ratio is better
This ratio indicates whether or not working capital has been effectively utilized in making sales
3
Debtors turnover ratio(DTR)/debtors velocity
Net credit sales
Higher ratio is better
Average debtors=(opening debtors+opening bills receivable+closing debtors+closing bills receivable)/2
Debt collection period
Months in a year
Lower ratio is better
Indicates the extent to which debts have been collected in time
4
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Average debtors
DTR 5
Creditors Turnover ratio(creditors velocity)
Credit purchases Average creditors
(CTR)
Higher ratio is better
Indicates the speed with which the payments for the credit purchases are made
Average creditors= opening creditors+bills receivable+closing creditors+closing bills payable 6
Credit payment period
Months in a year CTR
7
Stock turnover ratio
Cost of goods sold Average Stock
Low ratio is better
Indicates the promptness with which the payments are made to the creditors
Higher ratio is better
Indicates whether investment in stock is efficiently used or not
Average stock= (opening stock+closing stock)/2
Note : please do refer these links http://www.zenwealth. http://www. zenwealth.com/BusinessFina com/BusinessFinanceOnline/ nceOnline/RA/ RA/RatioCalc .html www.capitaline.com
Exercise Rupa
1) From the following following information information calculat calculatee current ratio and quick quick ratio Cash in hand
- Rs 2000
Bank overdraft - Rs 40000 Cash at Bank - Rs 10000 Bills receivable – Rs 30000 Creditors –Rs 60000 Outstanding expenses-Rs 7000 Proposed dividend- Rs10000 Debtors-Rs 70000 Stock –Rs 40000 Provision for taxation –Rs20000
2) From the following following details details calculate calculate current current ratio and liquidity liquidity ratio ratio
Current assets ,loans and advances
Rs
Stock in trade
77500
debtors
46800
Cash in hand
6300
Loans and advances
13700
Prepaid expenses
700
Current liabilities Sundry creditors
23000
Interest accrued
1900
Rupa
Rs
145000
Bills payable
7560
Dividend warrants issued but not encashed
390
Provision for taxation
10150
43000
3) Calculate Calculate the followin following g ratios from the balance balance sheet sheet given given below 1) Curr Curren entt rati ratio o 2) Qu Quic ick k rat ratio io 3) Inven Inventor tory y turnove turnoverr ratio ratio 4) Average Average collection collection period period assum assuming ing 360 days days in a year 5) DebtDebt- Equ Equity ity ratio ratio 6) Gross Gross profi profitt rati ratio o 7) Fixed assets assets turn turnover over ratio ratio 8) Propri Proprieta etary ry ratio ratio liabilities
Rs
Assets
Rs
Share capital
200000
Goodwill
1,20,000
Reserves and Surpluses
58000
Plant and machinery
1,50,000
debentures
1,00,000
stock
80000
creditors
40,000
debtors
45,000
Bills payable
20,000
cash
17000
Other current liabilities
2000
Misc.Current assets
8000
4,20,000
Sales - Rs 400000 Gross profit – Rs 1,60,000 Rupa
4,20,000
1)
Following is the Profit and Loss Account of Vector Limited for the year ended March 31, 2008 and the Balance Sheet as on that date.
Profit and Loss Account for the year ended March 31, 2008 Details
Value in Rs
Value in Rs
Sales
30,00,000
Less: Cost of Goods Sold
25,80,000 4,20,000
Gross Profit
Less Operating Expenses Selling Expenses
22,000
Administrative Expenses
40,000
Rent of Office
28,000
Depreciation
1,00,000
1,90,000 2,30,000
Earnings before Interest and Tax
Less: Interest Expense Interest on Bank Overdraft Interest on Debentures
3,000 42,000
45,000
Operating Profit before tax
1,85,000
Add. Interest on Investment
15,000
Total Profit before tax
2,00,000
Taxes [ 50%]
1,00,000
Net Profit after taxes
1,00,000
Balance Sheet as on March 31, 2008 Details
Value in Rs
Sources
Equity Share Capital
Rupa
5,00,000
Reserve and Surplus
4,00,000
7% Preference Share Capital
1,00,000
6% Mortgage Debentures
7,00,000
Current Liabilities
Sundry Creditors
60,000
Bills Payable
1,00,000
Outstanding Expenses
10,000
Provision Taxation
1,30,000
Total
20,00,000
Application
Fixed Assets [ Net of Depreciation]
13,00,000
Current Assets
Inventory
3,00,000
Sundry Debtors
2,00,000
Marketable Securities
1,50,000
Cash
50,000
Total
20,00,000
Calculate the following financial ratios and interpret the same
•
•
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Return on Investment Debt Collection Period Debt Equity Ratio Current Ratio Inventory Turnover Ratio Fixed assets turnover ratio Proprietary ratio Return on share holders’ funds
Return on equity shareholders funds Gross profit ratio Net profit ratio Operating ratio
[
1) Calculate Calculate earnings earnings per per share from from the following following data data Net profit before tax = Rs 100000 Tax rate= 50% 10% preference capital (Rs.10 each) = Rs 100000 Equity share capital (Rs 10 per share) = Rs 100000 2) The following following are the the balance balance sheets of Robert Robert Limited Limited for the year 2005 and and 2006 liabilities 2005 2006 assets 2005 2006 Share capital
100000
100000
Fixed assets
200000
250000
General reserve
50000
50000
stock
40000
60000
Profit & loss A/c
50000
100000
debtors
30000
40000
8% debentures
50000
80000
cash
20000
30000
Sundry creditors
40000
50000
Prepaid expenses
10000
20000
Proposed dividend
10000
20000
300000
400000
300000
400000
Calculate the following ratios a) Current ratio b) b) Acid Acid-Te -Test st rat ratio io c) Debt Debt-eq -equi uity ty rati ratio o d) Fixed Fixed assets-s assets-shar hareho eholde lders rs ratio e) Propr Proprie ieta tary ry rati ratio o
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1) The current ratio is 2.5, liquid ratio 1.5 and working capital capital is Rs.100000.find Rs.100000.find current assets, current liabilities and stock. 2) The average stock is Rs.80000 and the opening stock is 10000 less than the closing stock. Find opening and closing stock. 3) It is given that that the long term debt to equity equity ratio is 2:3 and the equity amount is Rs 50000.compute the value of long term debt 4) The followi following ng financia financiall data is given: given: Sales for the year
= Rs 200000
Stock – Rs 100000 Credit sales = Rs 150000 Debtors= Rs 75000 Total assets = Rs300000 Share capital(10000 shares of 10 each) = Rs 100000 Net profit = Rs 50000
Market price per share is Rs 12.from the above information calculate and give your opinion on each ratio a) b) c) d) e)
Stoc Stock k turn turnov over er rati ratio o Debtor Debtorss turno turnover ver rat ratio io Debt Debt coll collect ection ion perio period d Price-e Price-earn arning ingss ratio ratio Earn Earnin ings gs per per sha share re
1) Gross profit ratio is 20% .gross profit is Rs 50000.calculate sales
2) Given below below is the the trading trading and profit profit and loss loss account account
Opening stock
120000
Cash sales
120000
Cash purchases
60000
Credit sales
480000
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Credit purchases
320000
Closing stock
80000
Gross profit
180000
Total
680000
Total
680000
General expenses
40000
By gross profit
180000
depreciation
20000
Income tax
30000
Net profit
90000 180000
180000
Balance Sheet Share capital
300000
170000
stock
80000
General reserve
60000
Profit and loss account
110000
investments
100000
creditors
80000
debtors
160000
Bills payable
20000
cash
60000
570000
Compute: a) Curr Curren entt rati ratio o b) Acid Acid tes testt rati ratio o c) Debt Debt-e -equ quit ity y ratio ratio d) Proprietary ratio e) Stock Stock turno turnover ver ratio ratio f) Credit Creditors ors tur turnov nover er ratio ratio g) Debtor Debtorss turno turnover ver rati ratio o Rupa
Fixed assets
570000
h) i) j) j) k) l)
Debt Debt collect collection ion perio period d Cred Credit it paym paymen entt per perio iod d Gros Gr osss pro profi fitt rat ratio io Net profit profit ratio ratio Return Return on share share holder holderss funds funds
1) Below is the summarized balance sheet and profit and loss account of hero
limited for the year ended 31/3/08 (in lakhs) liabilities
Rs
Assets
Rs
Share capital(Rs 10 each)
4
Fixed assets
11
reserves
3
Liquid assets
3
overdraft
4
Other current assets
5
Current li liabilities
8 19
19
Profit and Loss account (in lakhs) To opening capital
2
By sales less returns
purchases
22
Closing stock
expenses
3
Net profit
3
4 31
Rupa
28
31
Calculate all the key ratios and comment on the financial position of the company
2) The following following is the information information of a textile company. company. Complete Complete the proforma proforma balance sheet if the sales are 3200000 Sales to networth -
2.3 times
Current debt to networth – 42% Total debt-networth – 75% Current ratio – 2.9 times Netsales to inventory – 4.7 times Average collection period-64 days Fixed assets to networth – 53.2%
Proforma Balance Sheet
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Networth
?
Fixed assets
?
Long term debt
?
Cash
?
Current debt
?
Stock
?
Sundry debtors
?
?
?
3) From the following particulars calculate calculate current assets current liabilities and stock Sales
1200000
GP ratio
25%
Current ratio Quick ratio
1.75 1.25
Stock turnover ratio 9 times
4) With the help of followin following g details prepare prepare balance balance sheet of the firm concerned: concerned: Working capital 75000 Reserves and surpluses 100000 Bank overdraft 60000 Current ratio 1.75 Liquid ratio 1.15 Fixed assets-proprietary funds 0.75 Long term liabilities NIL
5) With the help of following ratios ratios regarding sujith sujith films, draw draw a balance balance sheet of the company for the year 2007: Current ratio
2.5
Liquidity ratio
1.5
Net working capital
Stock turnover ratio(cost of sales/cl stock) Rupa
Rs 300000 6 times
Gross profit ratio Fixed assets turnover ratio(on cost of sales)
20% 2 times
Debt collection period
2 months
Fixed assets to shareholders net worth
0.80
Reserve and surplus to capital
0.50
6) The following following are the the ratios extracte extracted d from the balance balance sheet of a firm Current ratio -2.5 Working capital – 300000 Liquid ratio – 1.5 Stock turnover ratio – 6 Gross profit as a percentage of sales 20% debt collection period – 2 months share capital – Rs 500000 reserves and surpluses- 250000 fixed assets turnover -2
7) From the following information prepare a balance sheet
Current ratio – 2.5 Liquid ratio- 1.5 Proprietary ratio (fixed assets/proprietary funds) 0.75 Working capital – Rs 60000 Reserves and surpluses –Rs 40000 Bank overdraft- Rs 10000
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There is no long term or fictitious assets
8)
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