A73e4ratio Analysis

5. Premier Company's net profit margin is 8 percent, total assets turnover ratio is 2.
5
times, debt to total assets ratio is 0.6. What is the return on equity for Premier?
Solution:
Net profit
Return on equity =
Equity
= Net profit Net sales Total assets
x x
Net sales Total assets Equity
1
= 0.08 x 2.5 x = 0.5 or 50 per cent
0.4
Debt Equity
Note : = 0.6 So = 1- 0.6 = 0.4
Total assets Total assets
Hence Total assets/Equity = 1/0.4
6. The following information is given for Alpha Corporation

Sales 3500
Current ratio 1.5
Acid test ratio 1.2
Current liabilities 1000
What is the inventory turnover ratio?

Solution:
Current assets = Current liabilities x 1.5
= 1000 x 1.5 = 1500
Quick assets = Current liabilities x 1.2

= 1000 x 1.2 = 1200
Inventories = 300
3500
Inventory turnover ratio = = 11.7
300
7. The following information is given for Beta Corporation.

Sales 5000
Current ratio 1.4
Inventory turnover 5
ratio
Acid test ratio 1.0
What is the level of current liabilities?
Solution:
Inventory = 5000/5 = 1000
Current assets
Current ratio = = 1.4
Current liabilities
Current assets – Inventories

Acid test ratio = = 1.0
Current Liabilities
C.A - 1000
= 1.0
CL
CA 1000
- = 1.0
CL CL
1000
1.4 - = 1.0
CL
1000
0.4 = CL = 2500
CL
8. Safari Inc. has profit before tax of Rs.90 million. If the company's times interest
covered ratio is 4, what is the total interest charge?
Solution:
PBT = Rs.90 million

PBIT
Times interest covered = = 4
Interest
So PBIT = 4 x Interest
PBT = PBIT – interest

= 4 x interest - interest = 3 x interest = 90 million
Therefore interest = 90/3 = Rs.30 million
9. A has profit before tax of Rs.40 million. If its times interest covered ratio is 6, what
is the total interest charge?
Solution:
PBT = Rs. 40 million
PBIT
Interest
PBIT – Interest = PBT = Rs.40 million
6 x Interest – Interest = Rs. 40 million

5 x Interest = Rs.40 million
Hence Interest = Rs.8 million
10. McGill Inc. has profit before tax of Rs.63 million. If the company's times interest
covered ratio is 8, what is the total interest charge?
Solution:
PBT = Rs.63 million

PBIT
Interest
PBIT – Interest = PBT = Rs.63 million
8 x Interest – Interest = 7 x Interest = Rs.63 million
Hence Interest = Rs.9 million
11. The following data applies to a firm:
Interest charges Rs.200,000

Sales Rs.6,000,000
Tax rate 40 percent
Net profit margin 5 percent
What is the firm's times interest covered ratio?
Solution:
Sales = Rs.6,000,000
Net profit margin = 5 per cent
Net profit = Rs.6,000,000 x 0.05 = 300,000
Tax rate = 40 per cent
300,000
So, Profit before tax = = Rs.500,000
(1-.4)
Interest charge = Rs.200,000
So Profit before interest and taxes = Rs.700,000
Hence 700,000
Times interest covered ratio = = 3.5
200,000
Interest charges Rs.50,000

Sales Rs.300,000
Tax rate 25 percent

Solution:
Sales = Rs.300,000
Net profit = Rs.300,000 x 0.03 = 9,000
9,000
So, Profit before tax = = Rs.12,000
(1-.25)
Interest charge = Rs.50,000
So Profit before interest and taxes = Rs.62,000
Hence 62,000
50,000
Interest charges Rs.10,000,000

Sales Rs.80,000,000
Tax rate 50 percent
Solution:
Sales = Rs.80,000,000
Net profit = Rs.80,000,000 x 0.1 = 8,000,000

8,000,000
So, Profit before tax = = Rs.16,000,000
(1-.5)
Interest charge = Rs.10,000,000
So Profit before interest and taxes = Rs.26,000,000

Hence
26,000,000
10,000,000
14. A firm's current assets and current liabilities are 25,000 and 18,000 respectively.
How much additional funds can it borrow from banks for short term, without
reducing the current ratio below 1.35?
Solution:
CA = 25,000 CL = 18,000
Let BB stand for bank borrowing
CA+BB
= 1.35
CL+BB
25,000+BB
= 1.35
18,000+BB
1.35x 18,000 + 1.35 BB = 25,000 + BB
0.35BB = 25,000- 24,300 = 700
BB = 700/0.35 = 2,000
15. LNG’s current assets and current liabilities are 200,000 and 140,000 respectively.
How much additional funds can it borrow from banks for short term, without
reducing the current ratio below 1.33?
Solution:
CA = 200,000 CL = 140,000
CA+BB
= 1.33
CL+BB
200,000+BB
= 1.33
140,000+BB
1.33 x 140,000 + 1.33BB = 200,000 + BB
0.33 BB = 200,000- 186,200 = 13,800
BB =13,800/0.33 = 41,818
16. Navneet’s current assets and current liabilities are 10,000,000 and 7,000,000
respectively. How much additional funds can it borrow from banks for short term,
without reducing the current ratio below 1.4?
Solution:
CA = 10,000,000 CL = 7,000,,000
CA+BB
= 1.4
CL+BB
10,000,000+BB
= 1.4
7,000,000+BB
1.4 x 7,000,000 + 1.4BB = 10,000,000 + BB
0.4 BB = 10,000,000- 9,800,000 = 200,000
BB = 200,000/0.40 = 500,000
17. A firm has total annual sales (all credit) of 25,000,000 and accounts receivable of
8,000,000. How rapidly (in how many days) must accounts receivable be collected
if management wants to reduce the accounts receivable to 6,000,000?
Solution:
25,000,000
Average daily credit sales = = 68,493
365
If the accounts receivable has to be reduced to 6,000,000 the ACP must be:
6,000,000
= 87.6 days
68,493
500,000. How rapidly (in how many days) must accounts receivable be collected if
management wants to reduce the accounts receivable to 300,000?
Solution:
1,200,000
Average daily credit sales = = 3287.67
365
If the accounts receivable has to be reduced to 300,000 the ACP must be:
300,000
= 91.3 days
3287.67
20,000,000. How rapidly (in how many days) must accounts receivable be
collected if management wants to reduce the accounts receivable to 15,000,000?
Solution:
100,000,000
Average daily credit sales = = 273,972.6
365
If the accounts receivable has to be reduced to 15,000,000 the ACP must be:
15,000,000
= 54.8 days
273,972.6
20. The financial ratios of a firm are as follows.
Current ratio = 1.25

Acid-test ratio = 1.10
Current liabilities = 2000
Inventory turnover ratio = 10
What is the sales of the firm?
Solution:
Current assets = Current liabilities x Current ratio

= 2000 x 1.25 = 2500
Current assets - Inventories = Current liabilities x Acid test ratio
= 2000 x 1.10 = 2200
Inventories = 300
Sales = Inventories x Inventory turnover ratio

= 300 x 10 = 3000
Current ratio = 1.33

Current liabilities = 40,000
Solution:

= 40,000 x 1.33 = 53,200

= 40,000 x 0.80
= 32,000
Inventories = 21,200

= 21,200 x 6 = 127,200
Current ratio = 1.6

Current liabilities = 2,000,000

Solution:

= 2,000,000 x 1.6 = 3,200,000

= 2,000,000 x 1.2
= 2,400,000
Inventories = 800,000
= 800,000 x 5 = 4,000,000
23. Complete the balance sheet and sales data (fill in the blanks) using the following
financial data:
Debt/equity ratio = 0.80

Total assets turnover ratio = 2
Days' sales outstanding in
Accounts receivable = 30 days
Gross profit margin = 30 percent
Balance sheet
Equity capital 80,000 Plant and equipment ....

Retained earnings 50,000 Inventories ....
Short-term bank borrowings . . . . Accounts receivable ....
Cash ....
.... ....
Sales ....
Cost of goods sold ……..
Solution:
Debt/equity = 0.80
Equity = 80,000 + 50,000 = 130,000
So Debt = Short-term bank borrowings = 0.8 x 130,000 = 104,000
Hence Total assets = 130,000+104,000 = 234,000
Total assets turnover ratio = 2
So Sales = 2 x 234,000 = 468,000
Gross profit margin = 30 per cent
So Cost of goods sold = 0.7 x 468,000 = 327,600
Day’s sales outstanding in accounts receivable = 30 days
Sales
So Accounts receivable = x 30
360
468,000
= x 30 = 39,000
360
Cost of goods sold 327,600
Inventory turnover ratio = = = 6
Inventory Inventory
So Inventory = 54,600
As short-term bank borrowing is a current liability,
Cash + Accounts receivable
Acid-test ratio =
Current liabilities
Cash + 39,000
= = 1.1
104 ,000
So Cash = 75,400
Plant and equipment = Total assets - Inventories – Accounts receivable – Cash
= 234,000 - 54,600 - 39,000 – 75,400
= 65,000
Putting together everything we get
Balance Sheet
Equity capital 80,000 Plant & equipment 65,000

Retained earnings 50,000 Inventories 54,600
Short-term bank borrowings 104,000 Accounts receivable 39,000
Cash 75,400
234,000
234,000
Sales 468,000
Cost of goods sold 327,600
financial data:

Total assets turnover ratio = 2.5
Balance sheet
Equity capital 160,000,000 Plant and equipment--------

Retained earnings 30,000,000 Inventories
……… Short-term bank borrowings . . . …… Accounts
receivable ….. . . .
Cash ....
.... ....
Sales ....….
Cost of goods sold …….
Solution:
Debt/equity = 0.40
Equity = 160,000,000 + 30,000,000 = 190,000,000
So Debt = Short-term bank borrowings = 0.4 x 190,000,000 = 76,000,000
Hence Total assets = 190,000,000+ 76,000,000 = 266,000,000
So Sales = 2.5 x 266,000,000 = 665,000,000
So Cost of goods sold = 0.75 x 665,000,000 = 498,750,000
Sales
360
665,000,000
= x 25 = 46,180,556
360
Cost of goods sold 498,750,000
Inventory Inventory
So Inventory = 62,343,750
As short-term bank borrowings is a current liability,
Acid-test ratio =
Current liability
Cash + 46,180,556
= = 0.9
76,000 ,000
So Cash = 22,219,444
= 266,000,000 - 62,343,750 - 46,180,556 – 22,219,444
= 135,256,250

Balance Sheet
Equity capital 160,000,000 Plant & equipment 135,256,250

Retained earnings 30,000,000 Inventories 62,343,750
Short-term bank borrowings 76,000,000 Accounts receivable 46,180,556
Cash 22,219,444
266,000,000 266,000,000
Sales 665,000,000
financial data:
Balance sheet
Equity capital 600,000 Plant and equipment ....

Retained earnings 100,000 Inventories ....
Short-term bank borrowings . . . Accounts receivable ....
Cash ....
.... ....
Sales . . . …..
Cost of goods sold ………
Solution:
Debt/equity = 1.5
Equity = 600,000 + 100,000 = 700,000
So Debt = Short-term bank borrowings =1.5 x 700,000 = 1050,000
Hence Total assets = 700,000+1050,000 = 1,750,000
So Sales = 1.9 x 1,750,000 = 3,325,000
So Cost of goods sold = 0.72 x 3,325,000 = 2,394,000
Sales
360
3,325,000
= x 25 = 230,903
360
Inventory Inventory
So Inventory = 342,000
As short-term bank borrowings is a current liability,
Acid-test ratio =
Current liabilities
Cash + 230,903
= = 0.3
1050 ,000
So Cash = 84,097
= 1,750,000 – 342,000 – 230,903 – 84,097
= 1,093,000

Balance Sheet
Equity capital 600,000 Plant &equipment 1,093,000

Retained earnings 100,000 Inventories 342,000
Short-term bank borrowings 1050,000 Accounts receivable 230,903
Cash 84,097
1,750,000
1,750,000
Sales 3,325,000
26. Compute the financial ratios for Acme Ltd.
Evaluate Acme's performance with reference to the standards.
Acme Limited Balance Sheet, March 31, 20X7
Liabilities and Equity

Equity capital Rs.60,000,000
Reserves and surplus 45,000,000
Long-term debt 72,000,000
Short-term bank borrowing 40,000,000
Trade creditors 30,000,000
Provisions 15,000,000
Total 262,000,000
Assets
Fixed assets (net) Rs.110,000,000
Current assets
Cash and bank 30,000,000
Receivables 45,000,000
Inventories 61,000,000
Pre-paid expenses 10,000,000
Others 6,000,000
Total 262,000,000
Acme Limited Profit and Loss Account for the Year Ended March 31, 20X7
Net sales Rs.320,000,000

Gross profit 116,000,000
Operating expenses 50,000,000
Operating profit 66,000,000
Non-operating surplus 4,000,000
Profit before interest and tax 70,000,000
Interest 12,000,000
Profit before tax 58,000,000
Tax 20,000,000
Profit after tax 38,000,000
Dividends 4,000,000
Retained earnings 34,000,000
Acme Standard
Current ratio 1.3

Acid-test ratio 0.70
Debt-equity ratio 2.0
Times interest covered ratio 4.5
Inventory turnover ratio 5.0
Average collection period 45 days
Total assets turnover ratio 1.5
Net profit margin ratio 8%
Earning power 20 %
Return on equity 18 %
Solution:
a.
For purposes of ratio analysis, we may recast the balance sheet as under.
Let assume that ‘Others’in the balance sheet represents other current assets.

Equity capital .60,000,000
Assets Total 217,000,000

Fixed assets (net) 110,000,000
Current assets
Others 6,000,000 152,000,000
Less:
Current liabilities
Provisions 15,000,000 45,000,000
Net current assets 107,000,000
Total 217,000,000
Current assets
(i) Current ratio =
Current liabilities
152,000,000
= = 1.8
85,000,000
(Current liabilities here includes short-term bank borrowing also)
Current assets – Inventories 91,000,000

(ii) Acid-test ratio = = = 1.1
Current liabilities 85,000,000
Long-term debt + Short-term bank borrowing

(iii) Debt-equity ratio =
Equity capital + Reserves & surplus
72,000,000 + 40,000,000
= = 1.1
60,000,000 + 45,000,000
Profit before interest and tax

(iv) Times interest coverage ratio =
Interest
70,000,000
= = 5.83
12,000,000

(v) Inventory turnover period = = = 3.34
Inventory 61,000,000
365
(vi) Average collection period =
Net sales / Accounts receivable
365
= = 51.3 days
320,000,000/45,000,000
(vii)
Total assets =Equity + Total debt = (60,000,000 + 45,000,000)
+(72,000,000+40,000,000)
= 217,000,000
Net sales 320,000,000
Total assets turnover ratio = = = 1.5
Total assets 217,000,000

(ix) Net profit margin = = = 11.9%
Net sales 320,000,000
PBIT 70,000,000
(x) Earning power = = = 32.3 %
Equity earning 38,000,000

(xi) Return on equity = = = 36.2 %
Net worth 105,000,000
b.
The comparison of the Acme’s ratios with the standard is given below
Acme Standard
Current ratio 1.8 1.3
Acid-test ratio 1.1 0.7
Debt-equity ratio 1.1 2.0
Times interest covered ratio 5.8 4.5
Inventory turnover ratio 3.3 5.0
Average collection period 51.3 days 45 days
Total assets turnover ratio 1.5 1.5
Net profit margin ratio 11.9 % 8%
Earning power 32.3 % 20 %
Return on equity 36.2 % 18 %
27. Compute the financial ratios for Nainar Ltd. .
Evaluate Nainar's performance with reference to the standards.
Nainar Limited Balance Sheet, March 31, 20X7

Equity capital Rs.100,000,000
Provisions 19,000,000
Total 418,000,000
Assets
Fixed assets (net) Rs. 206,000,000
Current assets
Others 12,000,000
Total 418,000,000
Nainar Limited Profit and Loss Account for the Year Ended March 31, 20X7
Net sales Rs.740,000,000

Gross profit 220,000,000
Operating expenses 102,000,000
Operating profit 118,000,000
Non-operating surplus 12,000,000
Profit before interest and tax 130,000,000
Interest 22,000,000
Profit before tax 108,000,000
Tax 46,000,000
Dividends 20,000,000
Retained earnings 42,000,000
Nainar Standard
Current ratio 1.7
Acid-test ratio 1.0
Debt-equity ratio 1.4
Times interest covered ratio 5.5
Inventory turnover ratio 6.0
Average collection period 40 days
Total assets turnover ratio 2.0
Net profit margin ratio 8%
Earning power 30 %
Return on equity 35 %
Solution:
For purposes of ratio analysis, we may recast the balance sheet as under.
Let assume that ‘Others’ in the balance sheet represents other current assets.

Equity capital 100,000,000
Total 375,000,000
Assets
Fixed assets (net) 206,000,000
Current assets
Others 12,000,000 212,000,000
Less:
Current liabilities
Provisions 19,000,000 43,000,000
Net current assets 169,000,000
Total 375,000,000
Current assets
(i) Current ratio =
Current liabilities
212,000,000
= = 1.9
113,000,000
Current assets – Inventories 127,000,000

(ii) Acid-test ratio = = = 1.1
Current liabilities 113,000,000
Long-term debt + Short-term bank borrowing

(iii) Debt-equity ratio =
Equity capital + Reserves & surplus
140,000,000 + 70,000,000
= = 1.3
100,000,000 + 65,000,000
Profit before interest and tax
(iv) Times interest coverage ratio =
Interest
130,000,000
= = 5.9
22,000,000

(v) Inventory turnover period = = = 6.1
Inventory 85,000,000
365
(vi) Average collection period =
Net sales / Accounts receivable
365
= = 34.5 days
740,000,000/70,000,000
(vii)
Total assets = Equity + Total debt =(100,000,000 + 65,000,000 )
+(140,000,000+70,000,000)
= 375,000,000
Net sales 740,000,000

Total assets turnover ratio = = = 2.0

(ix) Net profit margin = = = 8.4 %
Net sales 740,000,000
PBIT 130,000,000
(x) Earning power = = = 34.7 %
Equity earning 62,000,000

(xi) Return on equity = = = 37.6 %
Net worth 165,000,000
The comparison of the Nainar’s ratios with the standard is given below
Nainar Standard
Current ratio 1.9 1.7

Acid-test ratio 1.1 1.0
Debt-equity ratio 1.3 1.4
Times interest covered ratio 5.9 5.5
Inventory turnover ratio 6.1 6.0
Average collection period 34.5 days 40 days
Total assets turnover ratio 2.0 2.0
Net profit margin ratio 8.4 % 8%
Earning power 34.7 % 30 %
Return on equity 37.6 % 35 %
28. The comparative balance sheets and comparative Profit and Loss accounts for
Nalvar Limited, are given below:
Comparative Balance Sheets, Nalvar Limited

(Rs. in million)
20X3 20X4 20X5 20X6 20X7

Share capital 1.6 1.6 1.8 1.8 2
Reserves and surplus 1.0 1.6 2.4 2.3 3
Long-term debt 1.4 1.5 1.8 1.6 1.4
Short-term bank borrowing 1.3 1.5 1.7 1.5 1.2
Current liabilities 1.1 1.3 1.5 1.6 1.8
Total 6.4 7.5 9.2 8.8 9.4
Assets
Net fixed assets 1.2 1.4 2 1.7 2
Current assets
Cash and bank 0.3 0.3 0.2 0.4 0.3
Receivables 1.8 2.1 2.5 2.4 2.5
Inventories 1.8 2.2 2.8 2.4 2.8
Other Assets 1.3 1.5 1.7 1.9 1.8

Total 6.4 7.5 9.2 8.8 9.4
Comparative Profit and Loss Accounts, Nalvar Limited
(Rs. in million)
20x3 20X4 20X5 20X6 20X7

Net sales 3.8 4.2 5.3 6.5 7.8
Cost of goods sold 2.6 3.1 3.9 4 4.8
Gross profit 1.2 1.1 1.4 2.5 3
Operating expenses 0.3 0.3 0.4 0.6 0.6
Operating profit 0.9 0.8 1 1.9 2.4
Non-operating surplus deficit 0.1 0.2 0.1 0.3 0.3
Profit before interest and tax 1 1 1.1 2.2 2.7
Interest 0.1 0.1 0.2 0.1 0.1
Profit before tax 0.9 0.9 0.9 2.1 2.6
Tax 0.05 0.08 1 1.2 1.2
Profit after tax 0.85 0.82 -0.1 0.9 1.4
Required: Compute the important ratios for Nalvar Limited for the years 20X3- 20X7.
You may assume that other assets in the balance sheet represent other current
assets.
• Current ratio
• Debt-equity ratio
• Total assets turnover ratio
• Net profit margin
• Earning power
• Return on equity
Solution
We will rearrange the balance sheets as under for ratio analysis. It is assumed that
‘Other assets’ are other current assets

20X3 20X4 20X5 20X6 20X7
Share capital 1.6 1.6 1.8 1.8 2
Reserves and surplus 1 1.6 2.4 2.3 3
Long-term debt 1.4 1.5 1.8 1.6 1.4
Short-term bank
borrowing 1.3 1.5 1.7 1.5 1.2
Total 5.3 6.2 7.7 7.2 7.6
Assets
Net fixed assets 1.2 1.4 2 1.7 2
Current assets
0.
Cash and bank 0.3 0.3 0.2 0.4 3
2.
Receivables 1.8 2.1 2.5 2.4 5
2.
Inventories 1.8 2.2 2.8 2.4 8
1.
Other current assets 1.3 5.2 1.5 6.1 1.7 7.2 1.9 7.1 8 7.4
Less: Current liabilities
1.
Other current liabilities 1.1 1.1 1.3 1.3 1.5 1.5 1.6 1.6 8 1.8
Net current assets 4.1 4.8 5.7 5.5 5.6
Total 5.3 6.2 7.7 7.2 7.6
The required ratios are as under:
20X1 20X2 20X3 20X4 20X5

• Current ratio 2.2 2.2 2.3 2.3 2.5
• Debt-equity ratio 1.0 0.9 0.8 0.8 0.5
• Total assets
turnover ratio 0.7 0.7 0.7 0.9 1.0
• Net profit margin(%) 22.4 19.5 -1.9 13.8 17.9
• Earning power (%) 18.9 16.1 14.3 30.6 35.5
• Return on equity (%) 32.7 25.6 -2.4 22.0 28.0
29. The comparative balance sheets and comparative Profit and Loss accounts for
Somani Limited, a machine tool manufacturer, are given below:
Comparative Balance Sheets, Somani Limited (Rs. in million)
20X 20X
20X3 4 5 20X6 20X7
Share capital 41 50 50 50 55
Reserves and surplus 16 36 72 118 150
Long-term debt 28 25 30 29 22
Short-term bank borrowing 35 30 36 38 38
Current liabilities 24 28 30 30 25
Total 144 169 218 265 290
Assets
Net fixed assets 72 80 75 102 103
Current assets
Cash and bank 8 9 15 12 11
Receivables 24 30 59 62 85
Inventories 35 42 55 75 79
Other Assets 5 8 14 14 12
Total 144 169 218 265 290
Comparative Profit & Loss Account of Somani Ltd
(Rs. in million)
20X 20X
20X3 4 5 20X6 20X7
Net sales 285 320 360 350 355
Cost of goods sold 164 150 170 175 174
Gross profit 121 170 190 175 181
Operating expenses 64 66 68 68 64
Operating profit 57 104 122 107 117
Non-operating surplus deficit 3 4 4 3 3
Profit before interest and tax 60 108 126 110 120
Interest 8 6 10 12 12
Profit before tax 52 102 116 98 108
Tax 15 26 30 26 29
Profit after tax 37 76 86 72 79
Compute the following ratios for years 20X3-20X7:

• Current ratio
• Debt-equity ratio
• Total assets turnover ratio
• Net profit margin
• Earning power
• Return on equity
For ratio analysis purpose, we will rearrange the balance sheet as under. It is
assumed that ‘Other assets’ are other current assets
20X3 20X4 20X5 20X6 20X7

Share capital 41 50 50 50 55
11
Reserves and surplus 16 36 72 8 150
Long-term debt 28 25 30 29 22
Short-term bank
borrowing 35 30 36 38 38
23
Total 120 141 188 5 265
Assets
10
Net fixed assets 72 80 75 2 103
Current assets
1 1
Cash and bank 8 9 5 12 1
3 5 8
Receivables 24 0 9 62 5
Inventories 35 4 5 75 7
2 5 9
1 16 1
Other assets 5 72 8 89 4 143 14 3 2 187
2 3 2
Less : Current liabilities 24 24 8 28 0 30 30 30 5 25
13
Net current assets 48 61 113 3 162
23
Total 120 141 188 5 265
The ratios worked out are as under:
20X3 20X4 20X5 20X6 20X7

• Current ratio 1.2 1.5 2.2 2.4 3.0
• Debt-equity ratio 1.1 0.6 0.5 0.4 0.3
• Total assets turnover ratio 2.4 2.3 1.9 1.5 1.3
• Net profit margin (%) 13.0 23.8 23.9 20.6 22.3
• Earning power (%) 50.0 76.6 67.0 46.8 45.3
• Return on equity (%) 64.9 88.4 70.5 42.9 38.5
29. The Balance sheets and Profit and Loss accounts of LKG Corporation are given
below.
Prepare the common size and common base financial statements
Balance Sheets (Rs. in million)

20x6 20x7
Shareholders' funds 256 262
Loan funds 156 212
Total 412 474
Fixed assets 322 330
Investments 15 15
Net current assets 75 129
Total 412 474
Profit & Loss Accounts (Rs. in million)

20x6 20x7
Net sales 623 701
Cost of goods sold 475 552
Gross profit 148 149
PBIT 105 89
Interest 22 21
PBT 83 68
Tax 41 34
PAT 42 34
Solution
Common Size statements:

Profit and Loss Account
Regular ( in
Rs. million) Common Size(%)
20x6 20x7 20x6 20x7
Net sales 623 701 100 100
Cost of goods sold 475 552 76 79
Gross profit 148 149 24 21
PBIT 105 89 17 13
Interest 22 21 4 3
PBT 83 68 13 10
Tax 41 34 7 5
PAT 42 34 7 5
Balance Sheet
Regular ( in
million) Common Size (%)
20x6 20x7 20x6 20x7
Shareholders' funds 256 262 62 55
Loan funds 156 212 38 45
Total 412 474 100 100
Fixed assets 322 330 78 70
Investments 15 15 4 3
Net current assets 75 129 18 27
Total 412 474 100 100
30. The Balance sheets and Profit and Loss accounts of Grand Limited are given below.
Prepare the common size and common base financial statements
Rs. in million
Balance Sheet
20x6 20x7
Shareholders’ fund 85 85
Loan funds 125 180
Total 210 265
Fixed assets 127 170
Investments 8 10
Net current assets 75 85
Total 210 265
Profit & Loss Account (Rs. in million)
20x6 20x7
Net sales 450 560
Cost of goods sold 320 410
Gross profit 130 150
PBIT 85 98
Interest 12 17
PBT 73 81
Tax 22 38
PAT 51 43
Solution:
Regular Common Size

Balance Sheet
(Rs. in million) (%)
20x6 20x7 20x6 20x7
Shareholders'
funds 85 85 40 32
Loan funds 125 180 60 68
Total 210 265 100 100
Fixed assets 127 170 60 64
Total 210 265 100 100
Profit & Loss Regular Common Size

Account (Rs. in million) (%)
20x6 20x7 20x6 20x7
Net sales 450 560 100 100
Gross profit 130 150 29 27
PBIT 85 98 19 18
Interest 12 17 3 3
PBT 73 81 16 14
Tax 22 38 5 7
PAT 51 43 11 8
Common base year statements
Regular Common base year
Balance Sheet (Rs. in million) (%)
20x6 20x7 20x6 20x7
Shareholders' funds 85 85 100 100
Loan funds 125 180 100 144
Total 210 265 100 126
Fixed assets 127 170 100 134
Total 210 265 100 126
Regular Common base

Profit & Loss Account (Rs. in million) year (%)
20x6 20x7 20x6 20x7
Net sales 450 560 100 124
Gross profit 130 150 100 115
PBIT 85 98 100 115
Interest 12 17 100 142
PBT 73 81 100 111
Tax 22 38 100 173
PAT 51 43 100 84

A73e4ratio Analysis

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A73e4ratio Analysis

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5. Premier Company's net profit margin is 8 percent, total assets turnover ratio is 2.

Hence Total assets/Equity = 1/0.4

6. The following information is given for Alpha Corporation

What is the inventory turnover ratio?

Quick assets = Current liabilities x 1.2

7. The following information is given for Beta Corporation.

Current assets – Inventories

PBT = Rs.90 million

PBT = PBIT – interest

Therefore interest = 90/3 = Rs.30 million

PBT = Rs. 40 million

6 x Interest – Interest = Rs. 40 million

Hence Interest = Rs.8 million

PBT = Rs.63 million

11. The following data applies to a firm:

Interest charges Rs.200,000

What is the firm's times interest covered ratio?

Interest charge = Rs.200,000

So Profit before interest and taxes = Rs.700,000

12. The following data applies to a firm:

Interest charges Rs.50,000

What is the firm's times interest covered ratio?

13. The following data applies to a firm:

Interest charges Rs.10,000,000

Net profit margin = 10 per cent

Net profit = Rs.80,000,000 x 0.1 = 8,000,000

Tax rate = 50 per cent

So Profit before interest and taxes = Rs.26,000,000

Let BB stand for bank borrowing

0.35BB = 25,000- 24,300 = 700

1.33 x 140,000 + 1.33BB = 200,000 + BB

0.33 BB = 200,000- 186,200 = 13,800

1.4 x 7,000,000 + 1.4BB = 10,000,000 + BB

0.4 BB = 10,000,000- 9,800,000 = 200,000

20. The financial ratios of a firm are as follows.

Current ratio = 1.25

What is the sales of the firm?

Current assets = Current liabilities x Current ratio

Sales = Inventories x Inventory turnover ratio

21. The financial ratios of a firm are as follows.

Current ratio = 1.33

What is the sales of the firm?

Current assets = Current liabilities x Current ratio

Current assets - Inventories = Current liabilities x Acid test ratio

Sales = Inventories x Inventory turnover ratio

22. The financial ratios of a firm are as follows.

Current ratio = 1.6

What is the sales of the firm?

Current assets = Current liabilities x Current ratio

Current assets - Inventories = Current liabilities x Acid test ratio

Sales = Inventories x Inventory turnover ratio

Debt/equity ratio = 0.80

Equity capital 80,000 Plant and equipment ....

= 234,000 - 54,600 - 39,000 – 75,400

Putting together everything we get

Equity capital 80,000 Plant & equipment 65,000

Debt/equity ratio = 0.40

Equity capital 160,000,000 Plant and equipment--------

Plant and equipment = Total assets - Inventories – Accounts receivable – Cash

= 266,000,000 - 62,343,750 - 46,180,556 – 22,219,444

Putting together everything we get

Equity capital 160,000,000 Plant & equipment 135,256,250