Ratios Analysis Ppt

8/8/2019 Ratios Analysis Ppt

1/30

RATIO ANALYSIS


2/30

WHY FINANCIAL ANALYSIS

Lenders need it for carrying out the following

Technical Appraisal

Commercial Appraisal Financial Appraisal

Economic Appraisal

Management Appraisal


3/30

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


4/30

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.


5/30


6/30

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


7/30

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


8/30

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.


9/30

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


10/30

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


11/30

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


12/30

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.


13/30

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.


14/30

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


15/30

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)


16/30

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.


17/30

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


18/30

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)


19/30

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


20/30

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


21/30

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


22/30


23/30

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


24/30

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


25/30

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


26/30

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


27/30

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


28/30

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


29/30

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


30/30

Documents

Ratios Analysis Ppt