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JAIIB CAIIB STUDY MATERAILS

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

  1. Current Ratio = Current Assets

Current Liabilities Ideal ratio: 2

Acceptable to Bank 1.33

  1. 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

  1. Return on Capital Employed
    1. Current Ratio
    2. Debt Equity Ratio
    3. Fixed Assets Turnover Ratio
    4. Inventory Turnover Ratio
    5. 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

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