Ratio Analysis Bank Class

7/31/2019 Ratio Analysis Bank Class

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RATIO ANALYSIS

Social Islami Bank Ltd.

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Ratio-analysis means the process ofcomputing, determining and presenting therelationship of related items and groups of

items of the financial statements.They provide in a summarized and conciseform of fairly good idea about the financial

position of a unit.They are important tools for financialanalysis.

RATIO ANALYSIS

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RATIO ANALYSIS

Its a tool which enables the banker or lender toarrive at the following factors :Liquidity position

ProfitabilitySolvencyFinancial Stability

Quality of the ManagementSafety & Security of the Finances & advances tobe or already been provided

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Before looking at the ratios there are a number of cautionarypoints concerning their use that need to be identified :

a. The dates and duration of the financial statements beingcompared should be the same. If not, the effects ofseasonality may cause erroneous conclusions to be drawn.

b. The accounts to be compared should have been preparedon the same bases. Different treatment of stocks ordepreciations or asset valuations will distort the results.

c. In order to judge the overall performance of the firm agroup of ratios, as opposed to just one or two should beused. In order to identify trends at least three years ofratios are normally required.

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The utility of ratio analysis will get furtherenhanced if following comparison ispossible.

1.Between the borrower and its competitor2.Between the borrower and the best

enterprise in the industry3.Between the borrower and the average

performance in the industry4.Between the borrower and the global

average

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HOW A RATIO IS EXPRESSED?

As Percentage - such as 25% or 50% . Forexample if net profit is Tk.25,000/- and the sales isTk.1,00,000/- then the net profit can be said to be25% of the sales.As Proportion - The above figures may beexpressed in terms of the relationship between netprofit to sales as 1 : 4.

As Pure Number /Times - The same can also beexpressed in an alternatively way such as the saleis 4 times of the net profit or profit is 1/4 th of thesales.

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CLASSIFICATION OF RATIOS

Balance SheetRatio

P&L Ratio orIncome/RevenueStatement Ratio

Balance Sheetand Profit & Loss

Ratio

Financial Ratio Operating Ratio Composite Ratio

Current RatioQuick Asset RatioProprietary RatioDebt Equity Ratio

Gross Profit RatioOperating RatioExpense RatioNet profit RatioStock Turnover Ratio

Fixed AssetTurnover Ratio,Return on TotalResources Ratio,Return on OwnFunds Ratio,Earning per ShareRatio, DebtorsTurnover Ratio,

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FORMAT OF BALANCE SHEET FOR RATIO ANALYSISLIABILITIES ASSETS

NET WORTH/EQUITY/OWNED FUNDSShare Capital/Partners Capital/Paid up

Capital/ Owners FundsReserves ( General, Capital, Revaluation &Other Reserves)Credit Balance in P&L A/c

FIXED ASSETS : LAND & BUILDING, PLANT& MACHINERIES

Original Value Less DepreciationNet Value or Book Value or Written down value

LONG TERM LIABILITIES/BORROWEDFUNDS : Term Finances (Banks &

Institutions)Debentures/Bonds, Unsecured Finances, FixedDeposits, Other Long Term Liabilities

NON CURRENT ASSETSInvestments in quoted shares & securities

Old stocks or old/disputed book debtsLong Term Security DepositsOther Misc. assets which are not current orfixed in nature

CURRENT LIABILTIESBank Working Capital Limits such asCC/OD/Bills/Export CreditSundry /Trade Creditors/Creditors/BillsPayable, Short duration Finances or depositsExpenses payable & provisions against variousitems

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, Prepaidexpenses, Finances and Advances recoverablewithin 12 months

INTANGIBLE ASSETSPatent, Goodwill, Debit balance in P&L A/c,Preliminary or Preoperative expenses 8


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1. Current Ratio : It is the relationship between thecurrent assets and current liabilities of a concern.

Current Ratio = Current Assets/Current Liabilities

If the Current Assets and Current Liabilities of a concernare Tk.4,00,000 and Tk.2,00,000 respectively, then theCurrent Ratio will be : Tk.4,00,000/Tk.2,00,000 = 2 : 1

The ideal Current Ratio preferred by Banks is1.33 : 1

2. Net Working Capital : This is worked out as surplus ofLong Term Sources over Long Tern Uses, alternatively itis the difference of Current Assets and CurrentLiabilities.

NWC = Current Assets Current Liabilities 9


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Current Assets : Raw Material, Stores, Spares, Work-in Progress. FinishedGoods, Debtors, Bills Receivables, Cash.

Current Liabilities : Sundry CreditoTk, Installments of Term Finance, DPG etc.payable within one year and other liabilities payable within one year.

This ratio must be at least 1.33 : 1 to ensure minimum margin of 25% of currentassets as margin from long term sources.

Current Ratio measures short term liquidity of the concern and its ability tomeet its short term obligations within a time span of a year.

It shows the liquidity position of the enterprise and its ability to meet currentobligations in time.

Higher ratio may be good from the point of view of creditors In the long run very

high current ratio may affect profitability ( e.g. high inventory carrying cost)Shows the liquidity at a particular point of time. The position can changeimmediately after that date. So trend of the current ratio over the years to beanalyzed.

Current Ratio is to be studied with the changes of NWC. It is also necessary tolook at this ratio along with the Debt-Equity ratio.

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3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities. The should be at least equal to 1.

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 1,00,000

Total 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 WorthLiabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets

For instance, if the Firm is having the following :

Capital = Tk. 200 LacsFree Reserves & Surplus = Tk. 300 LacsLong Term Finances/Liabilities = Tk. 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 purchasingof Assets.

6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to

Net 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 of Goods 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. 13


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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/INVENTORY TURNOVER 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 CreditorsVelocity 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 sharecapital and long term funds provided by the owners and thecreditors of the firm at the beginning and end of the accountingperiod.

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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 profitof 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 EquityShares

19. PRICE EARNING RATIO :PE Ratio indicates the number of timesthe 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 tomeet its liabilities by way of payment of installments of Term

Finances and Interest thereon from out of the cash accruals andforms the basis for fixation of the repayment schedule inrespect of the Term Finances raised for a project. (The Ideal DSCR Ratio is considered to be 2 )

PAT + Depr. + Annual Interest on Long Term Finances &Liabilities---------------------------------------------------------------------------------Annual interest on Long Term Finances & Liabilities + Annual

Installments payable on Long Term Finances & Liabilities

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

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EXERCISE 1


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LIABILITES ASSETSCapital 180 Net Fixed Assets 400

Reserves 20 Inventories 150

Term Finance 300 Cash 50

Bank C/C 200 Receivables 150

Trade CreditoTk 50 Goodwill 50

Provisions 50

800 800

EXERCISE 1

a. What is the Net Worth : Capital + Reserve = 200b. Tangible Net Worth is : Net Worth - Goodwill = 150c. Outside Liabilities : TL + CC + Creditors + Provisions = 600d. Net Working Capital : C A - C L = 350 - 250 = 50e. Current Ratio : C A / C L = 350 / 300 = 1.17 : 1f. Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1

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EXERCISE 2


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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 160Security Electricity

30 30Bank Term Finance 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 Finances/Advances 30 190

Goodwill 50 50Total 1600 1760 1600 17601. Tangible Net Worth for 1 st Year : ( 300 + 140) - 50 = 390

2. Current Ratio for 2 nd Year : (170 + 30 +170+20+ 240 + 190 ) / (580+70+80+70)820 /800 = 1.02

3. Debt Equity Ratio for 1 st Year : 320+150 / 390 = 1.21 21


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Exercise 3.

LIABIITIES ASSETS

Equity Capital 200 Net Fixed Assets 800

Preference Capital 100 Inventory 300

Term Finance 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. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1 22


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LIABILITIES ASSETS

Capital + Reserves 355 Net Fixed Assets 265

P & L Credit Balance 7 Cash 1Finance From S F C 100 Receivables 125

Bank Overdraft 38 Stocks 128

Creditors 26 Prepaid Expenses 1

Provision of Tax 9 Intangible Assets 30

Proposed Dividend 15

550 550

Q. What is the Current Ratio ? Ans : (1+125 +128+1) / (38+26+9+15): 255/88 = 2.89 : 1

Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1.43 : 11

Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW= 100 / ( 362 30)= 100 / 332 = 0.30 : 1

Exercise 4.

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Ratio Analysis Bank Class