Unit – 15 : Ratio Analysis
- Accounting ratios are relationship expressed in mathematical terms between accounting figures which for meaningful purpose.
- Classification: P & L Ratios
- Balance Sheet Ratios
- Composite or Inter-Statement Ratios.
Functional Classification
- Profitability
- Turnover/Activity Ratios Financial/Solvency Ratios
- Financial Ratios may be further classified as Short Term Ratios/Liquidity Ratios or Long Term/ Solvency Ratios
Return on Capital Employed
- EBIT * 100
Capital Employed
Earnings before Interest & Tax
- Op. Profit means profit from the Operations of the Company plus Int(Long term) & Tax
- Capital Employed = Share Capital+ Reserves & Surplus+ Long Term loans –( Non- business assets + Fictitious assets)
- Proper calculation gives us Return on Capital Employed
Earnings Per Share (EPS)
EPS = Net Profit after tax & Pref. Dividend No. of Equity Shares
This shows whether equity Capital of Co. is properly used or not Company’s capacity to pay Dividend.
EPS helps us at estimating Market Price of the Company
Price Earning (P/E Ratio)
Market Price of per Equity Share EPS
Helps to decide whether to buy Share of a Company.
Gross Profit Ratio
Gross Profit* 100 Net Sales
It helps in Price decision & Profit from Op. before Charging all other expenses.
Net Profit Ratio
Net Operating Profit * 100 Net sales
Solvency Ratios
Long Term Solvency Ratios
- Fixed Assets Ratios : Fixed Assets
Long Term Funds
- The ratio should not be more than one.
- If it is less than one then it indicates part of the Working Capital Financed through Long term Funds i.e. we may call Core Working Capital
Debt- Equity Ratio
- i) DE Ratio : Total Long Term Debt
Total Long Term Funds
- Ii) DE Ratio : Total Long Term Debt
Shareholders Funds
- Debt Service Coverage Ratio= Cash Profit available for debt service
Interest+ Instalment
Short Term Solvency Ratio
- Current Ratio = Current Assets
Current Liabilities Ideal ratio: 2
Acceptable to Bank 1.33
- Liquidity Ratio/Acid Test or Quick Ratio: Liquid Assets
Current Liability
Turnover Ratios
Stock Turnover Ratio =
Cost of goods Sold during the year Average Inventory
Debtors Turn over Ratios (Debtors Velocity) = Credit Sales
Average Accounts Receivable
Debtors Collection Period = Months or days in a year
Debtors turnover or
Accounts receivable
Average Monthly or daily Credit sales
Fixed Assets Turnover Ratio =
Cost of Goods Sold Net Fixed Assets
Calculate the following ratios for YE March2014 & 2015
- Return on Capital Employed
- Current Ratio
- Debt Equity Ratio
- Fixed Assets Turnover Ratio
- Inventory Turnover Ratio
- Earning Per Share
| Balance Sheets as at 31st March | Rs. Lakhs | ||
| Liabilities | 2013 | 2014 | 2015 |
| Sh. Capital:Shares of Rs.10 each 800 1000 1000 | |||
| Reserves & surplus | 700 | 800 | 1000 |
| Secured Term Loans | 800 | 2000 | 2400 |
| Cash Credits from bank | 800 | 1000 | 1500 |
| Sundry Creditors | 1200 | 900 | 1100 |
| 4300 | 5700 | 7000 | |
| Balance Sheets as at 31st March | Rs. Lakhs | ||
| Liabilities | 2013 | 2014 | 2015 |
| Fixed Assets: Gross Block | 2800 | 3000 | 4000 |
| Less : Dep | 920 | 1400 | 2000 |
| Net Block | 1880 | 1600 | 2000 |
| Current Assets: Stock | 1520 | 2400 | 2800 |
| Debtors | 480 | 500 | 900 |
| Other Current Assets | 420 | 1200 | 1300 |
| 2420 | 4100 | 5000 | |
| Total Assets | 4300 | 5700 | 7000 |
EBIT * 100
Capital Employed EBIT=Earnings before Interest & Tax
Ret. On Cap. Emp= Total Cap. Employed for March,2013 is Rs. 2300+Rs. 3800 for Mar,2014.So Av. Cap. Employed is Rs.6100 /2= 3050 lakhs. EBIT is Rs.1020. So ROCE 1020*100= 33.34% 3050
ROCE for March,2015
Total Cap. Employed for March,2014 is Rs. 3800+Rs. 4400 for Mar,2015.So Av. Cap. Employed is Rs.8200 /2= 4100 lakhs. EBIT is Rs.1800. So ROCE is 1800*100= 43.90%
4100
Current Ratio = Current Assets
Current Liabilities
2014 2015
4100 =2.16 5000 =1.92
1900 2600
Debt Equity Ratio = Total Long Term Debt
Total Long Term Funds
2014 2015
2000 = 1.11 2400 = 1.2
1800 2000
Fixed Assets Turnover Ratio =
Cost of goods Sold during the year Average Net Fixed Assets
We may take sales when Cost of goods figures are not available
| 4800 =2.76 | 7200 | =4 |
| 1740 | 1800 |
Average Fixed Assets for March,2009 = 1880+1600=3480/2=1740 Average Fixed Assets for March,2010 = 1600+2000=3600/2=1800
Stock Turnover Ratio =
Cost of goods Sold during the year Average Inventory
We may take sales when Cost of goods figures are not available
| Sales | 4800 =9.8 | 7200 = 10.29 |
| Av Inv. | 490 | 700 |
EPS = Net Profit after tax & Pref. Dividend No. of Equity Shares
Net Profit after Tax for 2009 = Rs.300 Lakhs = Rs.3 =EPS
While no. of Eq. shares are 100 Lakhs
Net Profit after Tax for 2010 = Rs.600 Lakhs = Rs. 6 =EPS While no. of Eq. shares are 100 Lakhs