Unit: - V Ratio Analysis Financial statements aim at providing financial information about a business enterprise to meet the information information needs of the decision-makers. decision-makers. Financial statements prepared by a business enterprise in the corporate sector are published and are available to the decision-makers. These statements provide financial data which require analysis, comparison and interpretation for taking decision by the external as well as internal users of accounting information. The act is termed as financial statement analysis.
Meaning of Accounting Ratios As stated earlier, accounting ratios are an important tool of financial statement analysis. A ratio is a mathematical number calculated as a reference to relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, percentage, and a number of times. Objectives of Ratio Analysis:-
1. To know the areas of the business which need more attention? 2. To know know about about the potentia potentiall areas areas which which can be impro improved ved with the effort effort in the desired desired direction? 3. To provide a deeper analysis analysis of the profitability, profitability, liquidity, solvency solvency and efficiency efficiency levels in the business; 4. To provide information for making cross sectional analysis by comparing the performance with the best industry standards; 5. To provide information derived from financial statements useful for making projections and estimates for the future.
Classification Classification of Ratio by Statement
Balance Sheet
Profit & Loss
1. Curr Curren entt Ratio atio
1. Gross Gross Profit Profit Ratio Ratio
2. Liq Liquid uid Ra Ratio tio
2. Net Net Profit Profit Ratio Ratio
3. Ab Abso solu lute te Liq Liqui uid d Rati Ratio o
3. Operatin Operating g Profit Profit Ratio Ratio
4. Debt Debt Equ Equit ity y Rati Ratio o
7. Asset Assets-P s-Prop roprie rietor torshi ship p
1. Stoc Stock k Turn Turnov over er Rat Ratio io 2. Debtor Debtors s Turnov Turnover er Ratio Ratio 3. Cred Credit itor ors s Tur Turno nove verr Ratio 4. Fixe Fixed d As Asse sets ts Turn Turnov over er Ratio
5. Prop Propri riet etar ary y Rat Ratio io 6. Capi Capita tall Geari Gearing ng Rat Ratio io
Profit and Loss Account
1. Profit Profit sale sale of of Assets Assets or Investment. 1. Office Offi ce & Adminis Administrat trative ive
2.Expenses. Intere Int erest st on Recei Re ve.Ass 1. Loss Lo ss sale sale Assets ets or or = Current Assets - ceive. (Stock+ Prepaid Prepa i d b y M r . R u p e s h D a h a k e Liquid/Quick Non-Operating Operating
5. Retu Return rn on Equi Equity ty 6. Return on Shareholder’s Shareholder’s fund
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Current Assets 1.
Cash in Hand
2.
Cash at Bank
3.
Sundry Debtors
4.
Bills Receivable
5. Marketable Securities 6. Other Short Term Investment
Current Liability 1. Sundry Creditors (Account Payable) 2.
Bills Payable
3. Outstanding and Accrued Expenses 4.
Income Tax Payable
5. Short-Term Advances
Liquidity Ratios:Current Assets 1. CurrentCurrent Ratio=
Liquid Assets 2. Quick Ratio/Acid Test Ratio/Liquid(Current Ratio =Assets – Stock & Prepaid Expenses) Current Liabilities
Absolute Liquid Assets (Marketable Absolute Liquid Ratio = Securities+Cash+Bank) Liquid Liabilities –
Ex.1. you are given the following information:Cash in hand Rs.10000, Cash at bank Rs.15000, Sundry Debtors Rs.75000, Stock Rs. 60000, Bills Payable Rs. 25000, Bills Receivable Rs. 30000, Sundry Creditors Rs. 40000, Outstanding Expenses Rs. 20000, Prepaid Exp. Rs.10000, Dividend Payable Rs.15000, Land Rs.200000, Goodwill Rs.100000.
Calculate: a) Current Ratio b) Liquid/Quick Ratio c) Absolute Liquidity Ratio
Prepaid by Mr. Rupesh Dahake
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PROFITABILITY RATIO Gross Profit 1.Gross Profit Ratio =
X
Sales
2.Net Profit Ratio =
3.Operating Ratio =
Net Profit Sales
X
Cost of Goods Sold + Operating Expenses
X
Or = 100 – Net Profit Ratio
Net Profit + Non-Operating Exp – Non4.Operating Profit Ratio = Operating Exp.
X
Or =100 – Operating Ratio
Related 5.Expanses Ratio = Expenses
X
Net Profit (after interest and tax) Shareholders’ Fund or Investment (Equity Share + Preference Share + Reserve & Surplus –
6.Return on Investment Ratio =
Net Profit (after interest and tax) Gross Capital Employed 7.Return on Capital Employed = (Fixed Assets + Current Assets)
X
X
Ex.1 Calculate Gross Profit Ratio, Operating Ratio, Operating Profit Ratio, Net Profit Ratio, Stock Turnover Ratio.
Prepaid by Mr. Rupesh Dahake
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Trading and Profit and Loss Account of Rajesh & Co. for the Year 31st Dec 2011 Particular
Amt
To Opening Stock
Amt 40000 0
60000 By Sales 27500 0 By closing Stock 25000 11500 0 47500 0
To Purchases To Wages To Gross Profit c/d
Ex.2
Particular
75000
47500 0 11500 0 10000
To Administrative Exp 45000 By Gross Profit b/d To Selling & Distribution Exp 10000 By Interest on Investment To Office Exp. 5000 To Non-Operating Exp. 15000 To Trading Net Profitand Profit and Loss50000 Account of Ramesh & Co. for the 12500 Year 31st Dec 2011 0 Particualr
Amt
To Opening Stock
Particular
10000
To Purchases
Amt 11000 0
By Sales
60000
To Wages
12500 0
By closing Stock
15000
5000
To Gross Profit c/d
50000 1250 00
To Administrative Exp
15000
12500 0 By Gross Profit b/d
50000
To Selling & Distribution Exp
5000
By Interest on Investment
5000
To Office Exp.
5000
By Profit on sale of assets
1000
To Loss on sale of Assets
1000
By Dividen Received
4000
To Net Profit
34000 6000 0
60000
Balance Sheet As on 31 st Dec 2011 Liabilities Share Capital Reserves
Amt
Assets
15000
Cash in Hand
2000
3000
Cash at Bank
3000 5000
Debenture
12000
Marketable Securities
Current Liabilities
20000
Inventories
Profit and Loss A/c
Amt
5000
15000
Sundry Debtors
6000
Prepaid Expenses
4000
Land & Building
20000
5500 0
55000
Ex.3 The following is the Balance Sheet of M/s Sharma Ltd. For the year ending Dec.31 2009
Balance Sheet As on 31 st Dec 2011 Liabilities Equity Share Capital Preference Share Capital Prepaid by Mr. Rupesh Dahake
Amt Assets 200000 Goodwill 200000 Building
Amt 150000 200000 Page 4
Reserves Profit and Loss A/c Debenture Secured Loans Creditors Provision for Tax Bills Payable
40000 80000 100000 100000 80000 50000 40000
Machinery Stock Sundry Debtors Bills Receivables Cash At Bank Preliminary Exp.
89000 0
250000 80000 60000 40000 50000 60000
89000 0
You are required to calculate: 1. Current Ratio Profit Ratio
6. Net
2. Liquid Ratio Ratio
7. Stock Turn
3. Absolute Ratio
Turnover Ratio:Cost of goods 1. Stock Turnover Ratio = sold
i.
Average Stock =Opening Stock + Closing Stock
Net Credit Sales 2. Debtors Turnover Ratio = Average
I.
II.
Opening Receivable + Closing Receivable Average Accounts Receivable =
Debt Collection Period Ratio =
Net Credit Sales 3. Creditors Turnover Ratio =Average
Prepaid by Mr. Rupesh Dahake
Opening Payable + Closing Payable
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i.
Average Accounts Payable =
ii.
Months Average Payment Period Ratio = or Days in a year Creditor Turnover
Net Sales 4. Working Capital Turnover Ratio =Working Capital (Current Assets – Current
of Goods Sold 5. Fixed Assets Turnover Ratio Cost = Total Fixed Assets
6. Capital Turnover Ratio =
Cost of Goods Sold Shareholders’ Funds
Solvency Ratios:-
Outsider’s Funds 1. Debt Equity Ratio = Shareholders’ Funds Shareholders’ Funds 2. Proprietary Ratio = Total Assets
Equity Share Capital 3. Capital Gearing Ratio = (Equity share Capital + Reserves and Surplus) Fixed Interest Bearing Funds (Debenture + Preference share Capital + other long
Ex. Given- Gross Profit Ratio=25%, Net Profit Ratio=12% , Stock Turnover Ratio=10 Times, Sales =Rs.21600, What more information you can derive from the above?
Ex. The following information is supplied to you for the year ending 31 st Dec 2011. Prepaid by Mr. Rupesh Dahake
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Gross Profit Ratio = 20% EPS =Rs.2 No. of Shares (Rs.10) =25000 Profit =25 % Current Ratio = 3:1 Quick Ratio = 1.5:1 Quick Assets = Rs.30000 Operating Ratio = 90 % Closing stock is less by Rs. 6000 than opening Stock.
Prepaid by Mr. Rupesh Dahake
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