4. Ratio-analysis is applied to
financial statements to analyze
the success, failure and progress
of a business.
RATIO ANALYSIS
5. Ratio-analysis means the process of
computing, determining and presenting the
relationship of related items and groups of
items of the financial statements. They
provide in a summarized and concise form a
fairly good idea about the financial position
of a unit. They are important tools for
financial analysis.
RATIO ANALYSIS
6. To know the areas of the business which need
more attention;
To know about the potential areas which can be
improved
To provide a deeper analysis of the profitability,
liquidity, solvency and efficiency levels in the
business;
To provide information for making cross-sectional
analysis by comparing the performance with the
best industry standards; and
To provide information derived from financial
statements useful for making projections and
estimates for the future.
7. Liquidity ratio
Capital Structure Ratio
Turnover/Activity Ratio
Profitability Ratio
8. Current ratio= Current Assets/Current
Liabilities
Liquid Ratio(Quick ratio)= Liquid
Assets/Current Liabilities
Quick Assets= Cash +Bank
Balances+Marketable Securities+Debtors
(Stock & Prepaid Exp. Not included)
9. Debt Equity Ratio = Long Term Debts/Shareholders
Equity
Proprietary Ratio = Shareholders Funds/Total Assets
Interest Coverage Ratio= Earning before Interest &
Taxes/ Fixed Interest charges
Capital Gearing Ratio= Fixed Income Securities/Equity
Shareholders Funds or
Loan Capital/Total Capital Employed*100
The shareholder funds include equity share capital, preference share
capital, reserves and surplus including accumulated profits. However
fictitious assets like accumulated deferred expenses etc should be
deducted from the total of these items to shareholder funds. The
shareholder funds so calculated are known as net worth of the business.
10. Inventory turnover Ratio= Cost of Goods
Sold/Average Inventory
Debtor Turnover Ratio= Net Credit Sales
/Average Debtor
Average Collection Period= Debtor/Credit
Sales* 365
11. Fixed Asset Turnover Ratio= Cost of Sales/
Fixed Assets
Capital Turnover Ratio= Cost of Sales/
Capital employed=(Eq.
Cap.+Pref.Cap.+Reserves+Debentures+Lon
g Term Loans – Fictitious Assets- Non
operating Investments)
13. Return on Investment (ROI)= Net Profit
before interest & taxes/Total Capital
Employed*100
Earning Per Share=net Profit after taxes-
Preference Dividends/ No. of Equity Share
Price Earning ratio= Market Price Per
Share/Earning Per share
Dividend Payout ratio= Dividend per
Share/Earning Per Share
14. The following is the Balance Sheet of Bharat Ltd. –
Liabilities Rs. Assets Rs.
Equity Capital 48,000 Plant & Machinery 90,000
P & L A/c 12,000 Debtors 18,000
Debentures 30,000 Stock 24,000
Sundry Creditors 46,800 Bank Balance 4,560
Provision for Taxation 1,200 Prepaid Insurance 1,440
1,38,000 1,38,000
Calculate Current Ratio & Liquid ratio.
15. The following is the Balance Sheet Of kalyani Ltd.-
Liabilities Rs. Assets Rs.
Equity Capital 3,00,000 Plant & Machinery 85,000
Bank Overdraft 5,000 Land & Building 1,50,000
Outstanding expenses 2,000 S.T. Investment 16,000
Sundry Creditors 48,000 Closing Stock 50,000
Bills Payable 10,000 Debtors 59,000
Cash 5,000
3,65,000 3,65,000
Calculate Current Ratio & Liquid ratio.
16. 1. X Ltd. has a current ratio of 4.5 :1,
and a Quick ratio of 3:1. If its
inventory is 60,000, Find its Total
Current assets & Current Liabilities?
2. A firm has a current ratio of 3:1. if its
net working capital is 2,00,000. you
are required to determine
i) Current Assets
ii) Current liabilities
iii) Liquid Assets if Inventory is
2,20,000.
17. Balance Sheet
Liabilities Rs. Assets Rs.
Eq. Capital 1,50,000 Goodwill 50,000
10% Preference Capital 50,000 Plant & Machinery 1,80,000
General Reserve 70,000 Land & Building 1,20,000
P & L A/c 30,000 Stock 95,000
9% Debentures 1,00,000 Investment 40,000
Creditors 95,000 Cash 15,000
Wages Outstanding 5,000
5,00,000 5,00,000
Calculate i) Debt equity Ratio ii) Proprietary Ratio
18. Interest Coverage Ratio
= EBIT/ Fixed Interest Charges
From the Following calculate-
Profit after charging interest on debentures
& tax= 25,000
Interest Charged= 5,000
Provision for Taxes= 10,000
19. Opening stock= 29,000
Purchases= 2,42,000
Sales= 3,20,000
Gross Profit = 25% of sales
Calculate Stock Turnover Ratio.
Solution- Prepare a Trading account and
calculate Closing Stock.
20. To Opening Stock 29,000 By sales 3,20,000
To purchases 2,42,000 By Closing Stock
(balancing figure)
31,000
To gross Profit (25% of
3,20,000)
80,000
3,51,000 3,51,000
Cost of Goods Sold= 3,20,000- 80,000=
2,40,000
OR = 29,000+2,42,000 -31,000= 2,40,000
Average Stock= 29,000+31,000/2= 30,000
Stock turnover Ratio=?
21. Credit sales for the Year= 5,40,000
Debtors at the End= 90,000
Calculate
i) Average Collection period
ii) Debtor Turnover Ratio
22. The following is the Balance Sheet of Goodluck Ltd. –
Liabilities Rs. Assets Rs.
Share Capital 2,30,000 Land & Building 3,00,000
General Reserve 1,00,000 Plant & Machinery 1,80,000
Debentures 2,20,000 Debtors 1,90,000
P & L A/c 1,70,000 Cash in Hand 12,000
Creditors 1,30,000 Cash at Bank 1,88,000
Bills Payable 50,000 Preliminary exp. 30,000
9,00,000 9,00,000
Sales during the year 2012 amounted to 4,80,000.
Calculate a) Fixed Assets Turnover Ratio
b) Capital Turnover Ratio
23. From the following information calculate : a) Gross Profit ratio b) net Operating
Profit ratio C) Net Profit ratio
Net sales 5,00,000
Cost of Goods Sold 3,50,000
Selling Expenses 12,000
Admin. Expenses 8,000
Interest Income 5,000
Loss on sale of old machine 12,000
Gross Profit= Sales- Cost of Goods Sold
Net Operating Profit= Gross profit- Operating Expenses
Net Profit= Net Operating Profit+ Non-operating incomes- Non operating
expenses
24. The following is the Trading & P & L Account of XYZ lts. For the
year ending 30th June, 2012.
To Opening Stock 38,000 By Sales 2,50,000
To Purchases 1,57,750 By Closing Stock 49,250
To Carriage Inwards 1,000
To wages 2,500
To Gross profit 1,00,000
2,99,250 2,99,250
To Admin. Exp. 50,500 By Gross profit 1,00,000
To Selling Exp. 9,500 By Dividend Received 3,000
To Interest paid 1,000
To Net profit 42,000
1,03,000 1,03,000
25. From the following Balance Sheet of Modi Steel Ltd., Calculate Return on
Investment-
Liabilities Rs. Assets Rs.
Share Capital 5,00,000 Land & Building 4,00,000
General Reserve 1,00,000 Plant & Machinery 3,00,000
Debentures 2,00,000 Stock 70,000
Creditors 50,000 Debtors 30,000
Cash at Bank 50,000
8,50,000 8,50,000
Net Profit for the year is 1,20,000 and sales for the year is 10,00,000.
26. Calculate the following ratios from the given Balance Sheet-
i) Current Ratio
ii) Fixed asset to Net Worth Ratio
iii) Debt Equity Ratio
iv) Return on Capital Employed
Liabilities Rs. Assets Rs.
600 shares of 100 each 60,000 Land 40,000
General Reserve 35,000 Plant 20,000
Dividend Equalisation Reserve 5,000 Machines 27,500
Long Term Loans 20,000 Investments 25,000
Bills Payable 30,000 Stock 30,000
Provision for Tax 5,000 B/R 13,500
P & L A/c
Balance 1,000
Current 20,000
21,000 Cash 12,000
Preliminary exp. 8,000
1,76,000 1,76,000
27. Current Ratio= Current Assets/Current Liabilities= 55,000/35,000= 1.56:1
Current Assets= Inventory+Bills payable+Cash and Bank
= 30,000+13,500+12,000= 55,000
Current Liabilities= Bills Payable+ Provision for Tax
30,000+5,000= 35,000
Fixed Assets to Net Worth Ratio= Fixed Assets/ Net Worth=
1,12,500/1,13,000= .99:1
Fixed Assets= Land + Plant+ Machines+ Investments
40,000+20,000+ 27,500+ 25,000= 1,12,500
Net Worth= Share Capital+ general reserve+ Dividend Reserve+ Profit &
Loss Account- Preliminary expenses
=60,000+ 35,000+ 5,000+ 21,000 – 8,000= 1,13,000
Debt Equity ratio= Long Term Debt/ Shareholders Funds
20,000/1,13,000= .17:1
Shareholders Funds= net Worth
Return on Capital Employed= Net Profit before Interest & Tax
Capital Employed
*100
= 25,000/1,33,000*100= 18.79%
Capital Employed= Sh. Cap.+ Gen. Res.+Div. Res.+ Long Term
Loan+ Profit- prel. Exp.= 133,000
