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Dr Amit Kumar Sinha email@example.com, firstname.lastname@example.org
WHY FINANCIAL ANALYSIS
Managers’ need it for carrying out the following Technical Appraisal Commercial Appraisal Financial Appraisal Economic Appraisal Management Appraisal
It’s a tool which enables the Manager and Investors to arrive at the following factors : Liquidity position Profitability Solvency Financial Stability Quality of the Management
00.then the net profit can be said to be 25% of the sales.such as 25% or 50% . For example if net profit is Rs.1.HOW A RATIO IS EXPRESSED? As Percentage . .and the sales is Rs.000/. As Pure Number /Times .000/.The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4. As Proportion .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.25.
CLASSIFICATION OF RATIOS Balance Sheet Ratio P&L Ratio or Income/Revenue Statement Ratio Operating Ratio Balance Sheet and Profit & Loss Ratio Composite Ratio Financial Ratio Current Ratio Quick Asset Ratio Proprietary Ratio Debt Equity Ratio Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio Fixed Asset Turnover Ratio. . Return on Total Resources Ratio. Debtors’ Turnover Ratio. Return on Own Funds Ratio. Earning per Share Ratio.
Short duration loans or deposits Expenses payable & provisions against various items . Preliminary or Preoperative expenses CURRENT LIABILTIES Bank Working Capital Limits such as CC/OD/Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable. Prepaid expenses. Stocks & inventory (RM. Bills Receivables. Goodwill. Other Long Term Liabilities ASSETS FIXED ASSETS : LAND & BUILDING. or other securities.SIP.FORMAT OF BALANCE SHEET FOR RATIO ANALYSIS LIABILITIES NET WORTH/EQUITY/OWNED FUNDS Share Capital/Partner’s Capital/Paid up Capital/ Owners Funds Reserves ( General. Debit balance in P&L A/c. Unsecured Loans. Advance Payment of Taxes. Capital. Fixed Deposits. assets which are not current or fixed in nature CURRENT ASSETS : Cash & Bank Balance. Book Debts/Sundry Debtors. Revaluation & Other Reserves) Credit Balance in P&L A/c LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions) Debentures/Bonds. Marketable/quoted Govt. Loans and Advances recoverable within 12 months INTANGIBLE ASSETS Patent.FG) Stores & Spares. PLANT & MACHINERIES Original Value Less Depreciation Net Value or Book Value or Written down value NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc.
SOME IMPORTANT NOTES 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 Short Term Sources of Funds Long Term Liabilities & Short Term Liabilities are also called .
With Rights Issue. 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. If there is profit it shall become part of Net Worth under the head Reserves and if there is loss it will become part of Intangible Assets Investments in Govt. change takes place in Net Worth and Current Ratio. Bonus Shares as issued by capitalization of General reserves and as such do not affect the Net Worth.SOME IMPORTANT NOTES 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. . Investments in allied/associate/sister units or firms to be treated as Non-current.
Current Ratio : It is the relationship between the current assets and current liabilities of a concern.2.1.4. alternatively it is the difference of Current Assets and Current Liabilities. Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses.00.000 and Rs.33 : 1 2.4.2. then the Current Ratio will be : Rs.00.000/Rs. Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are Rs.00.000 respectively. NWC = Current Assets – Current Liabilities .000 = 2 : 1 The ideal Current Ratio preferred by Banks is 1.00.
3.000/1.00. Securities or quickly marketable/quoted shares and Bank Fixed Deposits Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities Example : Cash 50.00.000 = 3:1 = 1.00.000 Debtors 1.000 Inventories 1. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities.000 Total Current Assets 3.00.5 : 1 .000 Current Liabilities 1.50.000/1.00.00.000 1.000 Current Ratio = > Quick Ratio => 3.50. Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt.
6 : 1 . 1.4. 200 Lacs Free Reserves & Surplus = Rs. 300 Lacs Long Term Loans/Liabilities = Rs.e. 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. DEBT EQUITY RATIO : It is the relationship between borrower’s fund (Debt) and Owner’s Capital (Equity). 800 Lacs Debt Equity Ratio will be => 800/500 i.
PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owner’s Fund. since Gross Profit is equal to Sales minus Cost of Goods Sold.5. 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. Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100 The ratio will be 100% when there is no Borrowing for purchasing of Assets. . 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. Gross Profit Ratio = (Gross Profit / Net Sales ) x 100 Alternatively . 6.
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.7.
9. This ratio indicates the number of times the inventory is rotated during the relevant accounting period . 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 .
10. CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio. (Average Creditors/Purchases)x365 for days (52 for weeks & 12 for months) . which determines the creditor payment period. (Average Debtors/Sales ) x 365 for days (52 for weeks & 12 for months) 11. DEBTORS TURNOVER RATIO : This is also called Debtors Velocity or Average Collection Period or Period of Credit given . FIXED ASSET TURNOVER RATIO : Net Sales/Tangible Assets Net Sales /Fixed Assets 13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets 14. ASSET TRUNOVER RATIO : 12.
RETRUN ON ASSETS : Net Profit after Taxes/Total Assets 16.15. . 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.
PRICE EARNING RATIO : PE Ratio indicates the number of times the Earning Per Share is covered by its market price. 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. RETRUN ON EQUITY CAPITAL (ROE) : Net Profit after Taxes / Tangible Net Worth 18. Market Price Per Equity Share/Earning Per Share . Net profit after Taxes and Preference Dividend/ No. of Equity Shares 19.Composite Ratio 17.
is Depreciation) .20. + 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. 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.
f. d.17 : 1 Quick Ratio : Quick Assets / C L = 200/300 = 0.C L = 350 . What is the Net Worth : Capital + Reserve = 200 Tangible Net Worth is : Net Worth . c. e.66 : 1 . b.Goodwill = 150 Outside Liabilities : TL + CC + Creditors + Provisions = 600 Net Working Capital : C A .EXERCISE 1 LIABILITES Capital Reserves ASSETS 180 Net Fixed Assets 20 Inventories 400 150 Term Loan Bank C/C Trade Creditors Provisions 300 Cash 200 Receivables 50 Goodwill 50 800 50 150 50 800 a.250 = 50 Current Ratio : C A / C L = 350 / 300 = 1.
50 = 390 2. Tangible Net Worth for 1st Year : ( 300 + 140) .EXERCISE 2 LIABILITIES 2005-06 2006-07 2005-06 2006-07 Capital Reserves Bank Term Loan Bank CC (Hyp) Unsec. Current Ratio for 2nd Year : (170 + 20 + 240 + 2+ 190 ) / (580+70+80+70) 820 /800 = 1. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1. Long T L Creditors (RM) Bills Payable Expenses Payable Provisions 300 140 320 490 150 120 40 20 20 350 Net Fixed Assets 160 Security Electricity 280 Investments 580 Raw Materials 170 S I P 70 Finished Goods 80 Cash 30 Receivables 40 Loans/Advances Goodwill 730 30 110 150 20 140 30 310 30 50 1600 750 30 110 170 30 170 20 240 190 50 1760 Total 1600 1760 1.02 3.21 .
e. 100 Preliminary Expenses 1400 300 150 50 100 1400 1. LIABIITIES Equity Capital ASSETS 200 Net Fixed Assets 800 Preference Capital Term Loan Bank CC (Hyp) Sundry Creditors Total 100 Inventory 600 Receivables 400 Investment In Govt. Debt Equity Ratio will be : 600 / (200+100) = 2:1 2. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200 = 11 : 2 4.Exercise 3. Tangible Net Worth : Only equity Capital i. Secu. = 200 3. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1 .
89 : 1 Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1. LIABILITIES Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors 355 ASSETS Net Fixed Assets 265 1 125 128 1 7 Cash 100 Receivables 38 Stocks 26 Prepaid Expenses Provision of Tax Proposed Dividend 9 Intangible Assets 15 30 550 550 Q.43 : 11 Ans : LTL / Tangible NW = 100 / ( 362 – 30) = 100 / 332 = 0. What is the Debt Equity Ratio ? . What is the Current Ratio ? Ans : (125 +128+1+30) / (38+26+9+15) : 255/88 = 2.30 : 1 Q.Exercise 4.
then What would be the Stock Turnover Ratio in Times ? Ans : Net Sales / Average Inventories/Stock 1500 / 128 = 12 times approximately . = 255 . A . If Net Sales is Rs.C L.30 ) / (550 – 30)] x 100 (332 / 520) x 100 = 64% Q . What is the Net Working Capital ? Ans : C.15 Lac. What is the Proprietary Ratio ? Ans : (T NW / Tangible Assets) x 100 [ (362 . LIABILITIES contd… ASSETS 355 Net Fixed Assets 265 1 125 128 1 7 Cash 100 Receivables 38 Stocks 26 Prepaid Expenses Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors Provision of Tax Proposed Dividend 9 Intangible Assets 15 30 550 550 Q .88 = 167 Q .Exercise 4.
What is the Creditors Velocity Ratio if Purchases are Rs.3 months .Exercise 4. What is the Debtors Velocity Ratio ? If the sales are Rs. Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12 = 1 month Q.5 Lac ? Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0.10. contd… LIABILITIES Capital + Reserves 355 ASSETS Net Fixed Assets 265 P & L Credit Balance Loan From S F C 7 Cash 100 Receivables 1 125 Bank Overdraft Creditors 38 Stocks 26 Prepaid Expenses 128 1 Provision of Tax Proposed Dividend 9 Intangible Assets 15 550 30 550 Q. 15 Lac.
: Profit to sales is 2% and amount of profit is say Rs. Calculate its Net Working Capital. 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. A Company has Net Worth of Rs.16 Lac and Current Assets are Rs.5 Lac.Exercise 5.L = 25 – 26 = (. Term Liabilities of Rs. There is no intangible Assets or other Non Current Assets. A – C.250 Lac Exercise 6. Answer Total Assets = 16 + 25 = Rs.5 Lac.10 Lac.25 Lac. 41 Lac Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac Current Liabilities = 41 – 15 = 26 Lac Therefore Net Working Capital = C.)1 Lac . Fixed Assets worth RS.
000/.000 Hence Current Assets would be 4x = 4 x 10.2. monthly average interest on TL is Rs. The amount of Term Loan installment is Rs. NWC is Rs.000 i.Exercise 7 : Current Ratio of a concern is 1 : 1.5000/-.30.) / Annual Intt + Annual Installment = (270000 + 30000 + 60000 ) / 60000 + 120000 = 360000 / 180000 = 2 .1 x = 30.a. What would be the DSCR ? DSCR = (PAT + Depr + Annual Intt. 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 : 1.000/-. and PAT is Rs. What is the amount of Current Assets ? Answer : 4 x .10.000 Therefore x = 10.40.30.000 = Rs.000/- Exercise 9.e.70. Current Liabilities is Rs.p.000/-. If the amount of Depreciation is Rs.10000/ per month.
2 : 1 . 60 Lacs and equity Rs. then Current Liabilities works out to be Rs. 20 Lacs.22 Lac then Current Assets would be 22 – 10 i. If the Debt Equity Ratio is 3 : 1 then Debt works out to be Rs.22 Lac.e. What would be the Long Term Liabilities? Ans : We can easily arrive at the amount of Current Asset being Rs. Total of balance sheet being Rs.5 : 1. That means the aggregate of Net Worth and Long Term Liabilities would be Rs. 100 L . 12 Lac.60 Lac. ( Rs. Exercise 11 : Current Ratio is say 1. 70 Lac and Debt Equity Ratio being 3 : 1. 10 Lac. The amount of Fixed Assets + Non Current Assets is Rs.Exercise 10 : Total Liabilities of a firm is Rs.5 : 1. 10 Lac . 80 Lacs. Therefore the Long Term Liabilities would be Rs. If the Current Ratio is 1. 20 Lac. If Fixed Assets and Other Non Current Assets are to the tune of Rs. 70 L ). What would be the Current Liabilities? Ans : When Total Assets is Rs. Thus we can easily arrive at the Current Liabilities figure which should be Rs.Rs.e Rs.100 Lac and Current Ratio is 1. 30 Lac i.
3. Q. 4. the assets are represented by ? 1. 2. 4. Application of Funds Sources of Funds Surplus of sources over application Deficit of sources over application .Questions on Fund Flow Statement Q . 3. 3. 4. Fund Flow Statement is prepared from the Balance sheet : 1. 2. Of three balance sheets Of a single year Of two consecutive years None of the above. It indicates the quantum of finance required It is the indicator of utilisation of Bank funds by the concern It shows the money available for repayment of loan It will indicate the provisions against various expenses Q . In a Fund Flow Statement . Why this Fund Flow Statement is studied for ? 1. 2.
Sources of Funds Use of Funds Deficit of sources over application All of the above. the n it would mean ? 1. In Fund Flow Statements the Liabilities are represented by ? 1. Increase in Current Liabilities Decrease in Working Capital Increase in NWC Increase in NWC Q .Q . 3. 2. When the long term uses in a fund flow statement are more than the long term sources. 3. 4. 3. Reduction in the NWC Reduction in the Working Capital Gap Reduction in Working Capital All of the above . 4. When the long term sources are more than long term uses. in the fund flow statement. 2. Q . 4. it would suggest ? 1. 2.
How many broader categories are there for the Sources of funds. 2. Q. Long Term and Short Term Sources Three .Q. 3. in the Fund Flow Statement ? 1. 4. Only One. Medium and Short term sources None of the above. Source of Funds Two. Which of following item is not an application of funds in the . Long.