ratios analysis ppt
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RATIO ANALYSIS
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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 ARATIO 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 be
25% of the sales.y As Proportion - The above figures may be expressed
in terms of the relationship between net profit to salesas 1 : 4.
y As Pure Number /Times - The same can also beexpressed 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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FORMAT OF BALANCE SHEET FORRATIO 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 &
MACHI
NERIESOriginal 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 ofB
alance 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 of Funds
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 Current Assets 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
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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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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
EXERCISE 1
a. What is the Net Worth : Capital + Reserve = 200
b. Tangible Net Worth is : Net Worth - Goodwill = 150
c. Outside Liabilities : TL + CC + Creditors + Provisions = 600
d. Net Working Capital : C A - C L = 350 - 250 = 50
e. CurrentRatio : C A / C L = 350 / 300 = 1.17 : 1
f. Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1
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EXERCISE 2
LIABILITIES 2005-06 2006-07 2005-06 2006-07
Capital 300 350 Net Fixed Assets 730 750
Reserves 140 160 Security Electricity 30 30
Bank Term Loan 320 280 Investments 110 110
Bank CC (Hyp) 490 580 Raw Materials 150 170
Unsec. Long T L 150 170 S I P 20 30
Creditors (RM) 120 70 Finished Goods 140 170
Bills Payable 40 80 Cash 30 20
Expenses Payable 20 30 Receivables 310 240
Provisions 20 40 Loans/Advances 30 190
Goodwill 50 50
Total 1600 1760 1600 1760
1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390
2. CurrentRatio for 2nd Year : (170 + 20 + 240 + 2+ 190 ) / (580+70+80+70)
820 /800 = 1.02
3. Debt EquityRatio for 1st
Year : 320+150 / 390 = 1.21
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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
1.Debt Equity Ratio will be : 600 / (200+100) = 2 : 1
2. Tangible Net Worth : Only equity Capital i.e. = 200
3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200
= 11 : 2
4. CurrentRatio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1
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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 ofTax 9 Intangible Assets 30Proposed Dividend 15
550 550
Q . What is the Proprietary Ratio ? Ans : (T NW / Tangible Assets) x 100
[ (362 - 30 ) / (550 30)] x 100
(332 / 520) x 100 = 64%
Q . What is the Net Working Capital ?
Ans : C. A - C L. = 255 - 88 = 167
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
Exercise 4. contd
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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 ofTax 9
Intangible Assets 30
Proposed Dividend 15
550 550
Q. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.
Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12= 1 month
Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ?
Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0.3 months
Exercise 4. contd
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Exercise 5. : Profit to sales is 2% and amount of profit is say
Rs.5 Lac. Then What is the amount of Sales ?
Answer : Net ProfitRatio = (Net Profit / Sales ) x 1002 = (5 x100) /Sales
Therefore Sales = 500/2 = Rs.250 Lac
Exercise 6. A Company has Net Worth of Rs.5 Lac, Term
Liabilities of Rs.10 Lac. Fixed Assets worth RS.16 Lac and
Current Assets are Rs.25 Lac. There is no intangible Assetsor other Non Current Assets. Calculate its Net Working
Capital.
Answer
TotalAssets = 16 + 25 = Rs. 41 Lac
Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac
Current Liabilities = 41 15 = 26 Lac
Therefore Net Working Capital = C. A C.L
= 25 26 = (- )1 Lac
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Exercise 7 : Current Ratio of a concern is 1 : 1. What will be the Net
Working Capital ?
Answer: It suggestthatthe Current Assets is equalto Current Liabilitieshence the NWC would be NIL
Exercise 8 : Suppose Current Ratio is 4 : 1. NWC is Rs.30,000/-. What
is the amount of Current Assets ?
Answer : 4 x - 1 x = 30,000Therefore x = 10,000 i.e. Current Liabilities is Rs.10,000
Hence Current Assets would be 4x = 4 x 10,000 = Rs.40,000/-
Exercise 9. The amount of Term Loan installment is Rs.10000/ per
month, monthly average interest on TL is Rs.5000/-. If the amountofDepreciation is Rs.30,000/- p.a. and PAT is Rs.2,70,000/-. What
would be the DSCR ?
DSCR = (PAT + Depr + Annual Intt.) / Annual Intt + Annual Installment
= (270000 + 30000 + 60000 ) / 60000 + 120000
= 360000 / 180000 = 2
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Exercise 10 : Total Liabilities of a firm is Rs.100 Lac and Current Ratio
is 1.5 : 1. If Fixed Assets and Other Non Current Assets are to the tune
of Rs. 70 Lac and Debt Equity Ratio being 3 : 1. What would be the Long
Term Liabilities?
Ans : We can easily arrive at the amount of CurrentAsset being Rs. 30 Lac
i.e. ( Rs. 100 L - Rs. 70 L ). If the Current Ratio is 1.5 : 1, then Current
Liabilities works out to be Rs. 20 Lac. That means the aggregate of Net
Worth and Long Term Liabilities would be Rs. 80 Lacs. If the Debt Equity
Ratio is 3 : 1 then Debt works out to be Rs. 60 Lacs and equity Rs. 20 Lacs.
Therefore the Long Term Liabilities would be Rs.60 Lac.
Exercise 11 : Current Ratio is say 1.2 : 1 . Total of balance sheet being
Rs.22 Lac. The amount of Fixed Assets + Non Current Assets is Rs. 10
Lac. What would be the Current Liabilities?
Ans : When TotalAssets is Rs.22 Lac then CurrentAssets would be 22 10
i.e Rs. 12 Lac. Thus we can easily arrive at the Current Liabilities figure
which should be Rs. 10 Lac
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Questions on Fund Flow Statement
Q . Fund Flow Statement is prepared from the Balance sheet :
1. Of three balance sheets
2. Of a single year
3. Of two consecutive years
4. None of the above.
Q. Why this Fund Flow Statement is studied for ?
1. It indicates the quantum of finance required
2. It is the indicator of utilisation of Bank funds by the concern
3. It shows the money available for repayment of loan
4. It will indicate the provisions against various expenses
Q . In a Fund Flow Statement , the assets are represented by ?
1. Application of Funds
2. Sources of Funds
3. Surplus of sources over application
4. Deficit of sources over application
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Q . In Fund Flow Statements the Liabilities are represented by ?
1. Sources of Funds
2. Use of Funds3. Deficit of sources over application
4. All of the above.
Q . When the long term sources are more than long term uses, in the
fund flow statement, it would suggest ?
1. Increase in Current Liabilities
2. Decrease in Working Capital
3. Increase in NWC
4. Increase in NWC
Q . When the long term uses in a fund flow statement are more than the
long term sources, the n it would mean ?
1. Reduction in the NWC
2. Reduction in the Working Capital Gap
3. Reduction in Working Capital
4. All of the above
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