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R K MOHANTY
FACULTY MEMBER, SIR SPBT COLLEGE,
CENTRAL BANK OF INDIA, MUMBAI
Lenders’ need it for carrying out the following
 Technical Appraisal
 Commercial Appraisal
 Financial Appraisal
 Economic Appraisal
 Management Appraisal
It’s a tool which enables the banker or lender to
arrive 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
As

Percentage

- such as 25% or 50% . For

example if net profit is Rs.25,000/- and the sales is
Rs.1,00,000/- then the net profit can be said to be
25% of the sales.
 As Propor tion
- The above figures may be
expressed in terms of the relationship between net
profit to sales as 1 : 4.
 As Pure Number /Times - The same can also be
expressed in an alternatively way such as the sale is 4
times of the net profit or profit is 1/4th of the sales.
Balance Sheet
P&L Ratio or
Ratio
Income/Revenue
Statement Ratio
Financial Ratio

Current Ratio
Quick Asset Ratio
Proprietary Ratio
Debt Equity Ratio

Operating Ratio

Gross Profit Ratio
Operating Ratio
Expense Ratio
Net profit Ratio
Stock Turnover Ratio

Balance Sheet
and Profit &
Loss Ratio
Composite Ratio

Fixed Asset Turnover
Ratio, Return on
Total Resources
Ratio,
Return on Own
Funds Ratio, Earning
per Share Ratio,
Debtors’ Turnover
Ratio,
LIABILITIES

ASSETS

NET WORTH/EQUITY/OWNED FUNDS
Share Capital/Partner’s Capital/Paid up Capital/
Owners Funds
Reserves ( General, Capital, Revaluation & Other
Reserves)
Credit Balance in P&L A/c

FIXED ASSETS : LAND & BUILDING, PLANT &
MACHINERIES
Original 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, Fixed
Deposits, Other Long Term Liabilities

NON CURRENT ASSETS
Investments in quoted shares & securities
Old stocks or old/disputed book debts
Long Term Security Deposits
Other Misc. assets which are not current or fixed
in nature

CURRENT LIABILTIES
Bank Working
Capital Limits such as
CC/OD/Bills/Export Credit
Sundry /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













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 of Balance 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 Shor t Term Sources of
Funds
Long Term Liabilities & Short Term Liabilities are also called
Outside Liabilities
Current Assets are Shor t Term Use of Funds









Assets other than Current Assets are Long Term Use of Funds
Installments of Term 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 Wor th under the head
Reserves and if there is loss it will become part of Intangible
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.
1.

Current Ratio : It is the relationship between the current
assets 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 the
Current 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
Long Term Sources over Long Tern Uses, alternatively it is
the difference of Current Assets and Current Liabilities.
NWC = Current Assets – Current Liabilities
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/quoted
shares and Bank Fixed Deposits
Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example :
Cash
Debtors
Inventories
Total Current Assets

Current Ratio = >
Quick Ratio
=>

50,000
1,00,000
1,50,000
3,00,000

Current Liabilities 1,00,000

3,00,000/1,00,000
1,50,000/1,00,000

= 3:1
= 1.5 : 1
4. DEBT EQUITY RATIO : It is the relationship between
borrower’s fund (Debt) and Owner’s 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 Lacs
Free Reserves & Surplus
= Rs. 300 Lacs
Long Term Loans/Liabilities = Rs. 800 Lacs
Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1
5. PROPRIETARY RATIO : This ratio indicates the extent to which
Tangible Assets are financed by Owner’s Fund.
Proprietary Ratio = (Tangible Net Worth/Total Tangible
Assets) x 100
The ratio will be 100% when there is no Borrowing for
purchasing of Assets.
6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to
Net Sales we can arrive at the Gross Profit Ratio which indicates the
manufacturing 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.
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.
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 is
rotated during the relevant accounting period
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)
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.
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
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)
EXERCISE 1
LIABILITES
Capital
Reserves

ASSETS
180 Net Fixed Assets
20 Inventories

Term Loan

300 Cash

Bank C/C

200 Receivables

Trade Creditors

50 Goodwill

Provisions

400
150
50
150

50
800

50
800

a.
b.
c.

What is the Net Worth : Capital + Reserve = 200
Tangible Net Worth is : Net Worth - Goodwill = 150
Outside Liabilities : TL + CC + Creditors + Provisions = 600

d.
e.
f.

Net Working Capital : C A - C L = 350 - 250 = 50
Current Ratio : C A / C L
= 350 / 300 = 1.17 : 1
Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1
EXERCISE 2
LIABILITIES

200506

2006-07

200506

200607

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

140

170

30

20

310

240

30

190

50

50

1600

1760

70 Finished Goods

Bills Payable

40

80 Cash

Expenses Payable

20

30 Receivables

Provisions

20

40 Loans/Advances
Goodwill

Total

1600

1760

1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390
2. Current Ratio for 2nd Year : (170 + 20 + 240 + 2+ 190 ) / (580+70+80+70)
820 /800 = 1.02
3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.21
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.

Sundry Creditors

100 Preliminary Expenses

Total

1400

1. Debt Equity Ratio will be : 600 / (200+100)

50
100
1400

= 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
Exercise 4.
LIABILITIES

ASSETS

Capital + Reserves

355

P & L Credit Balance

Net Fixed Assets

265

7 Cash

Loan From S F C

1

100 Receivables

125

Bank Overdraft

38 Stocks

Creditors

26 Prepaid Expenses

1

9 Intangible Assets

30

Provision of Tax
Proposed Dividend

15
550

Q. What is the Current Ratio ?
Q What is the Quick Ratio ?

128

550

Ans : (125 +128+1+30) / (38+26+9+15)
: 255/88 = 2.89 : 1

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.

contd…

LIABILITIES
Capital + Reserves
P & L Credit Balance
Loan From S F C

ASSETS
355

Net Fixed Assets

7 Cash
100 Receivables

265
1
125

Bank Overdraft

38 Stocks

Creditors

26 Prepaid Expenses

1

9 Intangible Assets

30

Provision of Tax
Proposed Dividend

128

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…

LIABILITIES
Capital + Reserves
P & L Credit Balance
Loan From S F C

ASSETS
355

Net Fixed Assets

7 Cash
100 Receivables

265
1
125

Bank Overdraft

38 Stocks

Creditors

26 Prepaid Expenses

1

9 Intangible Assets

30

Provision of Tax
Proposed Dividend

128

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 5. : Profit to sales is 2% and amount of profit is say
Rs.5 Lac. Then What is the amount of Sales ?
Answer : Net Profit Ratio = (Net Profit / Sales ) x 100
2
= (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 Assets
or other Non Current Assets. Calculate its Net Working
Capital.
Answer
Total Assets
= 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
Exercise 7 : Current Ratio of a concern is 1 : 1. What will be the Net
Working Capital ?
Answer : It suggest that the Current Assets is equal to Current Liabilities
hence 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 = 30,000
Therefore 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 amount
of Depreciation 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
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 Current Asset 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 Total Assets is Rs.22 Lac then Current Assets 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
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
Q . In Fund Flow Statements the Liabilities are represented by ?
1.Sources of Funds
2.Use of Funds
3.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
Q. How many broader categories are there for the Sources of funds, in
the Fund Flow Statement ?
1. Only One, Source of Funds
2.Two, Long Term and Short Term Sources
3.Three , Long, Medium and Short term sources
4.None of the above.
Q. Which of following item is not an application of funds in the

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Financial Ratio Analysis Tool for Lenders

  • 1. R K MOHANTY FACULTY MEMBER, SIR SPBT COLLEGE, CENTRAL BANK OF INDIA, MUMBAI
  • 2. Lenders’ need it for carrying out the following  Technical Appraisal  Commercial Appraisal  Financial Appraisal  Economic Appraisal  Management Appraisal
  • 3. It’s a tool which enables the banker or lender to arrive 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. As Percentage - such as 25% or 50% . For example if net profit is Rs.25,000/- and the sales is Rs.1,00,000/- then the net profit can be said to be 25% of the sales.  As Propor tion - The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4.  As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4th of the sales.
  • 5. Balance Sheet P&L Ratio or Ratio Income/Revenue Statement Ratio Financial Ratio Current Ratio Quick Asset Ratio Proprietary Ratio Debt Equity Ratio Operating Ratio Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio Balance Sheet and Profit & Loss Ratio Composite Ratio Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors’ Turnover Ratio,
  • 6. LIABILITIES ASSETS NET WORTH/EQUITY/OWNED FUNDS Share Capital/Partner’s Capital/Paid up Capital/ Owners Funds Reserves ( General, Capital, Revaluation & Other Reserves) Credit Balance in P&L A/c FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIES Original 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, Fixed Deposits, Other Long Term Liabilities NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. assets which are not current or fixed in nature CURRENT LIABILTIES Bank Working Capital Limits such as CC/OD/Bills/Export Credit Sundry /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.        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 of Balance 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 Shor t Term Sources of Funds Long Term Liabilities & Short Term Liabilities are also called Outside Liabilities Current Assets are Shor t Term Use of Funds
  • 8.      Assets other than Current Assets are Long Term Use of Funds Installments of Term 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 Wor th under the head Reserves and if there is loss it will become part of Intangible 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. 1. Current Ratio : It is the relationship between the current assets 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 the Current 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 Long Term Sources over Long Tern Uses, alternatively it is the difference of Current Assets and Current Liabilities. NWC = Current Assets – Current Liabilities
  • 10. 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/quoted shares and Bank Fixed Deposits Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities Example : Cash Debtors Inventories Total Current Assets Current Ratio = > Quick Ratio => 50,000 1,00,000 1,50,000 3,00,000 Current Liabilities 1,00,000 3,00,000/1,00,000 1,50,000/1,00,000 = 3:1 = 1.5 : 1
  • 11. 4. DEBT EQUITY RATIO : It is the relationship between borrower’s fund (Debt) and Owner’s 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 Lacs Free 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. 5. PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owner’s Fund. Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100 The ratio will be 100% when there is no Borrowing for purchasing of Assets. 6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to Net Sales we can arrive at the Gross Profit Ratio which indicates the manufacturing 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. 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. 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 is rotated during the relevant accounting period
  • 15. 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. 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. 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. 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. EXERCISE 1 LIABILITES Capital Reserves ASSETS 180 Net Fixed Assets 20 Inventories Term Loan 300 Cash Bank C/C 200 Receivables Trade Creditors 50 Goodwill Provisions 400 150 50 150 50 800 50 800 a. b. c. What is the Net Worth : Capital + Reserve = 200 Tangible Net Worth is : Net Worth - Goodwill = 150 Outside Liabilities : TL + CC + Creditors + Provisions = 600 d. e. f. Net Working Capital : C A - C L = 350 - 250 = 50 Current Ratio : C A / C L = 350 / 300 = 1.17 : 1 Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1
  • 20. EXERCISE 2 LIABILITIES 200506 2006-07 200506 200607 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) 120 140 170 30 20 310 240 30 190 50 50 1600 1760 70 Finished Goods Bills Payable 40 80 Cash Expenses Payable 20 30 Receivables Provisions 20 40 Loans/Advances Goodwill Total 1600 1760 1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390 2. Current Ratio for 2nd Year : (170 + 20 + 240 + 2+ 190 ) / (580+70+80+70) 820 /800 = 1.02 3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.21
  • 21. 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. Sundry Creditors 100 Preliminary Expenses Total 1400 1. Debt Equity Ratio will be : 600 / (200+100) 50 100 1400 = 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. Exercise 4. LIABILITIES ASSETS Capital + Reserves 355 P & L Credit Balance Net Fixed Assets 265 7 Cash Loan From S F C 1 100 Receivables 125 Bank Overdraft 38 Stocks Creditors 26 Prepaid Expenses 1 9 Intangible Assets 30 Provision of Tax Proposed Dividend 15 550 Q. What is the Current Ratio ? Q What is the Quick Ratio ? 128 550 Ans : (125 +128+1+30) / (38+26+9+15) : 255/88 = 2.89 : 1 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
  • 23. Exercise 4. contd… LIABILITIES Capital + Reserves P & L Credit Balance Loan From S F C ASSETS 355 Net Fixed Assets 7 Cash 100 Receivables 265 1 125 Bank Overdraft 38 Stocks Creditors 26 Prepaid Expenses 1 9 Intangible Assets 30 Provision of Tax Proposed Dividend 128 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
  • 24. Exercise 4. contd… LIABILITIES Capital + Reserves P & L Credit Balance Loan From S F C ASSETS 355 Net Fixed Assets 7 Cash 100 Receivables 265 1 125 Bank Overdraft 38 Stocks Creditors 26 Prepaid Expenses 1 9 Intangible Assets 30 Provision of Tax Proposed Dividend 128 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
  • 25. 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 Profit Ratio = (Net Profit / Sales ) x 100 2 = (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 Assets or other Non Current Assets. Calculate its Net Working Capital. Answer Total Assets = 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. Exercise 7 : Current Ratio of a concern is 1 : 1. What will be the Net Working Capital ? Answer : It suggest that the Current Assets is equal to Current Liabilities hence 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 = 30,000 Therefore 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 amount of Depreciation 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. 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 Current Asset 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 Total Assets is Rs.22 Lac then Current Assets 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. 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. Q . In Fund Flow Statements the Liabilities are represented by ? 1.Sources of Funds 2.Use of Funds 3.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. Q. How many broader categories are there for the Sources of funds, in the Fund Flow Statement ? 1. Only One, Source of Funds 2.Two, Long Term and Short Term Sources 3.Three , Long, Medium and Short term sources 4.None of the above. Q. Which of following item is not an application of funds in the