**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 31^{st} 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 31^{st} 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