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Ratio Analysis
Mini Case
are compared with past ratios for the same firm. It indicates the directi
Liquidity Ratios
Capital Structure Ratios
Profitability Ratios
Efficiency ratios
Integrated Analysis Ratios
Growth Ratios
Ratio is a measure of liquidity calculated dividing the current assets by the current li
Current Assets
Current Ratio =
Current Liabilities
Quick Assets
Acid-test Ratio =
Current Liabilities
Cash Rs 2,000
Debtors 2,000
Inventory 12,000
Total current assets 16,000
Total current liabilities 8,000
(1) Current Ratio 2:1
(2) Acid-test Ratio 0.5 : 1
ow fast inventory is sold. A high ratio is good from the viewpoint of liquidity and vice
ventory does not sell fast and stays on the shelf or in the warehouse for a long time.
f 20 per cent. The stock at the beginning and the end of the year was Rs 35,0
12 months
nventory holding period
= Inventory turnover ratio, (6) = 2 months
h ratio is indicative of shorter time-lag between credit sales and cash collecti
Net credit sales consist of gross credit sales minus returns, if any,
from customers.
g amount of debtors at the beginning and at the end of the year respe
Rs 2,40,000
Debtors turnover ratio
= (Rs 27,500 + Rs 32,500) ÷ 2 8=(times per year)
12 Months
Debtors collection period
= Debtors turnover ratio, (8) = 1.5 Months
ples has made credit purchases of Rs 1,80,000. The amount payable to the c
is Rs 42,500 and Rs 47,500 respectively. Find out the creditors turnover ratio
(Rs 1,80,000)
Creditors turnover ratio
= (Rs 42,500 Rs 47,500) ÷ 2 4=(times per year)
12 months
reditor’s payment period
= Creditors turnover ratio, (4) = 3 months
2 months
Inventory holding period
+ 1.5 months
Add: Debtor’s collection period
– 3 months
Less: Creditor’s payment period
0.5 months
horter is the cash cycle, the better are the liquidity ratios as measured above
Liquid assets
Defensive-interval ratio
=
Projected daily cash requirement
Rs 1,82,500
Projected daily cash requirement = = Rs 500
365
Rs 40,000
Defensive-interval ratio = = 80 days
Rs 500
• Debt-equity ratio
• Interest coverage ratio
• Debt-assets ratio
• Dividend coverage ratio
• Equity-assets ratio
If the D/E ratio is high, the owners are putting up relatively less
money of their own. It is danger signal for the lenders and
creditors. If the project should fail financially, the creditors would
lose heavily.
A low D/E ratio has just the opposite implications. To the creditors, a
relatively high stake of the owners implies sufficient safety
margin and substantial protection against shrinkage in assets.
Total debt
Debt to total capital ratio =
Permanent capital
Proprietary funds
Proprietary ratio = X 100
Total assets
n
∑ EATt + Interestt + Depreciationt + OAt
t=1
DSCR = n
∑ Instalmentt
t=1
he net profit has been arrived after charging depreciation of Rs 17.68 lakh every year
1 2 3 4 5 6 7 8
1 21.67 17.68 19.14 58.49 10.70 29.84 1.96
2 34.77 17.68 17.64 70.09 18.00 35.64 1.97
3 36.01 17.68 15.12 68.81 18.00 33.12 2.08
4 19.20 17.68 12.60 49.48 18.00 30.60 1.62
5 18.61 17.68 10.08 46.37 18.00 28.08 1.65
6 18.40 17.68 7.56 43.64 18.00 25.56 1.71
7 18.33 17.68 5.04 41.05 18.00 23.04 1.78
8 16.41 17.68 Nil 34.09 18.00 18.00 1.89
1. Sales Rs 2,00,000
2. Cost of goods sold 1,00,000
3. Other operating expenses 50,000
Rs 1,00,000
(1) Gross profit margin = = 50 per cent
Rs 2,00,000
Rs 50,000
(2) Net profit margin = = 25 per cent
Rs 2,00,000
i. Debtors
Inventoryturnover
Turnover Credit sales
i. = measures the activity/liquidity of inventory of
a firm; the speed with whichdebtors
Average inventory is sold bills receivable (B/R)
+ Average
Income-tax Plus
Current liabilities
i. Inventory Earning
Turnover after taxes
measures the Sales of inventory
activity/liquidity EAT of
Earning Power = x x
a firm; the speed with which
Sales inventory isTotal
sold Assets Total assets
Rs 4,00,000 Rs 40,00,000
Net sales
Less: Operating expenses 3,22,462 39,26,462
Earnings before interest and taxes (EBIT) 77,538 73,538
Less: Interest (8%) 16,000 12,000
Earnings before taxes (EBT) 61,538 61,538
Less: Taxes (35%) 21,538 21,538
Earnings after taxes (EAT) 40,000 40,000
Total assets 4,00,000 4,00,000
Debt 2,00,000 2,50,000
Equity 2,00,000 1,50,000
EAT/EBT (times) 0.65 0.65
EBT/EBIT (times) 0.79 0.84
EBIT/Sales (per cent) 19.4 1.84
Sales/Assets (times) 1 10
Assets/Equity (times) 2 1.6
ROE (per cent)
20 16
Limitations
Ratio analysis in view of its several limitations should be
considered only as a tool for analysis rather than as an end in
itself. The reliability and significance attached to ratios will largely
hinge upon the quality of data on which they are based. They are
as good or as bad as the data itself. Nevertheless, they are an
important tool of financial analysis.
to Profitability Analysis
22886.51 45073.88 49,743.54 56,247.03 73.164.10 89,124.46
manufacturing)
21290.91 45957.85 54,642.60 41,657.92 53,345.03 65,535.84
goods sold
5,597.48 9,123.85 9,388.26 10,982.88 14,260.84 14,982.01
ncluding other earnings)
4,032.37 6,307.71 6,551.17 7,735.86 10,537.34 11,581.10
2,786.00 4,434.17 4,982.75 6,301.14 9,068.68 10,704.06
2,646.50 3,242.17 4,106.85 5,160.14 7,571.68 9,069.34
1,215.55 1,827.84 1,555.4 1,434.72 1,468.66 877.04
19235.95 27,053.32 34,388.04 50,030.24 54,560.80 61,738.85
total capital employed
29622.14 43,325.86 60,415.77 52,764.91 57,292.51 65,428.89
total assets
10715.17 17,277.53 24,622.96 1,396.38 1,394.94 1,393.51
equity funds
24.46 20.24 18.87 18.41 19.40 17.43
rofit %
17.62 13.99 13.17 13.75 14.40 12.99
ng profit ratio %
11.56 7.19 8.26 9.95 11.48 11.21
it ratio %
93.03 101.96 109.85 80.34 80.92 81.03
goods sold ratio %
20.07 18.74 16.47 13.18 16.56 16.11
return on capital employed (ROCE)1 ROR (Total assets)2
13.03 11.7 9.37 12.4 15.77 15.20
quity funds)
24.70 18.77 16.68 16.26 20.09 20.08
ajor reason for the sharp difference in these two liquidity ratios may be ascribed to a sign
t liabilities during the 6 year period. The reliance on short-term bank borrowings, to such a
Solvency Analysis:
h its operating profits (EBIT) decline by more than nine-tenth (2006), it l would stil ha
al employed. It fell from 20.07 per cent in 2001 to 16.11 per cent by 2006. However, it i