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Formulas

1) Financial ratios

S.no Ratio Formula Ideal ratio Comments

1 Current ratio Current assets 2:1/1.33:1 Indicates firm’s

commitment to meet

Current liabilities

financial obligations.

Avery heavy ratio is not

desirable as it indicates

less efficient use of

funds

2 Quick ratio Quick assets 1:1 This ratio also indicates

short term solvency of a

Current liabilities

firm

3 Debt –Equity ratios long term debt 1:2 Indicates long term

solvency

equity

Higher ratio is riskier for

the creditors

4 Proprietary ratio Shareholders’ funds Variant of debt-equity

ratio

Total tangible

assets Shows the extent of

shareholders funds in the

total assets employed in

the business

Higher ratio indicates

relatively little danger to

creditors and vice versa

Rupa

Notes

1) Current assets are those assets which can be converted into cash within a

period of one year or normal operating cycle of the business whichever is

longer

Examples : Cash in hand, cash at bank ,stock, debtors, bills receivable,

prepaid expenses

2) Current liabilities are those liabilities payable within an year or operating

cycle

3) Quick assets = current assets – (stock+prepaid expenses)

4) Quick ratio is also known as the acid test ratio or liquidity ratio

5) Tangible assets are those assets which have physical existence

6) Long term debt /external funds/external equities =debentures+termloans

7) Share holders’ funds/internal funds/proprietary funds/owners funds=equity

share capital+preference share capital+reserves+profit and loss account-

fictitious assets

2) Profitability ratios

S.no Ratio Formula Ideal ratio comments

**1 Gross Profit Gross profit X 100 Higher the This ratio expresses the
**

Ratio ratio better relationship between

Net sales

it is gross profit and net

sales

**Gross profit should be
**

adequate to cover

operating expenses

2 Net Profit ratio Net profit X100 Higher the This ratio expresses the

ratio, better relationship between

Net sales

Rupa

it is net profit and Net sales

3 Net operating Higher ratio Helps in determining

profit ratio is better the efficiency with

(Net operating profit/net

which the affairs of the

sales)X100

business being

managed

**4 Operating Ratio Operating cost X100 Ratio This ratio is a test of
**

should be operating efficiency

net sales

low with which the

business is being

carried

5 Fixed charges PBIT 6 -7 times Important from

cover for an lender’s point of view

Interest

industrial

concern

It indicates whether the

business would earn

sufficient profits to pay

periodically the interest

charges

6 Debt Service PBIT/interest+ Indicates ability of the

coverage ratio (principal)/1-taxrate company to repay

principal

7 Overall Higher ratio Indicates the

profitability is better percentage return on

Operating profit

ratio/Return on capital employed in the

investment/return Capital employed X100 business

on capital

employed

8 Return on share Higher ratio Indicates the

holders’ funds is better percentage return on

Profit after tax(PAT)

Rupa

Share holders funds X100 share holders’ funds

**9 Return on Equity PAT-pref.dividend X100 Higher ratio Indicates the
**

share holders is better percentage return on

Eq.shareholders funds

Funds equity shareholders

funds

10 Price Earnings Market price per share Higher ratio Indicates the number of

Ratio is better times the earning per

Earnings per share

share is covered by the

market price

**Helps the investor in
**

deciding whether to

buy or not to buy the

shares

11 Earnings per PAT – pref.dividend Higher ratio Helps in estimating

share is better company’s capacity to

No of Equity shares

pay dividend to the

shareholders

Notes

1) Calculation of Gross profit

Gross profit = Sales- Cost of goods sold

Cost of goods sold (COGS) = opening stock +purchases+ all direct expenses

–closing stock

2) Operating profit = Gross profit-operating expenses

Operating expenses= COGS +administration expenses +selling and distribution

expenses

Note: does not include financial charges like interest and provision for tax

Rupa

3) Capital employed= sum total of all the long term funds employed in the

business

C E= Equity share capital+ preference share capital+ reserves+ profit and loss

account+ long term loans-fictitious assets

Shareholder’s funds= Equity share capital +preference share capital +reserves

+profit and loss account-fictitious assets

Equity share holder’s funds= equity share capital + reserves+ profit and loss

account-fictitious assets

3) Turnover ratios

**S.no Ratio Formula Ideal ratio comments
**

1 Fixed assets turn over Net sales Higher Indicates the extent to

ratios ratio is which investment in

Fixed Assets

better fixed assets contribute

towards sales

2 Working capital turnover Net sales Higher This ratio indicates

ratio ratio is whether or not working

Working capital

better capital has been

effectively utilized in

making sales

3 Debtors turnover Net credit sales Higher Average

ratio(DTR)/debtors ratio is debtors=(opening

Average debtors

velocity better debtors+opening bills

receivable+closing

debtors+closing bills

receivable)/2

**4 Debt collection period Months in a year Lower Indicates the extent to
**

ratio is which debts have been

better collected in time

Rupa

DTR

5 Creditors Turnover Credit purchases Higher Indicates the speed with

ratio(creditors velocity) ratio is which the payments for

Average creditors

better the credit purchases are

(CTR)

made

Average creditors=

opening creditors+bills

receivable+closing

creditors+closing bills

payable

6 Credit payment period Months in a year Low ratio Indicates the promptness

is better with which the payments

CTR

are made to the creditors

7 Stock turnover ratio Cost of goods sold Higher Indicates whether

ratio is investment in stock is

Average Stock

better efficiently used or not

**Average stock= (opening
**

stock+closing stock)/2

**Note : please do refer these links
**

http://www.zenwealth.com/BusinessFinanceOnline/RA/RatioCalc.html

www.capitaline.com

Exercise

Rupa

1) From the following information calculate current ratio and quick ratio

Cash in hand - Rs 2000

Bank overdraft - Rs 40000

Cash at Bank - Rs 10000

Bills receivable – Rs 30000

Creditors –Rs 60000

Outstanding expenses-Rs 7000

Proposed dividend- Rs10000

Debtors-Rs 70000

Stock –Rs 40000

Provision for taxation –Rs20000

2) From the following details calculate current ratio and liquidity ratio

**Current assets ,loans and Rs Rs
**

advances

Stock in trade 77500

debtors 46800

Cash in hand 6300

Loans and advances 13700

Prepaid expenses 700 145000

Current liabilities

Sundry creditors 23000

Interest accrued 1900

Rupa

Bills payable 7560

Dividend warrants issued 390

but not encashed

Provision for taxation 10150 43000

**3) Calculate the following ratios from the balance sheet given below
**

1) Current ratio

2) Quick ratio

3) Inventory turnover ratio

4) Average collection period assuming 360 days in a year

5) Debt- Equity ratio

6) Gross profit ratio

7) Fixed assets turnover ratio

8) Proprietary ratio

liabilities Rs Assets Rs

Share capital 200000 Goodwill 1,20,000

Reserves and 58000 Plant and 1,50,000

Surpluses machinery

debentures 1,00,000 stock 80000

creditors 40,000 debtors 45,000

Bills payable 20,000 cash 17000

Other current 2000 Misc.Current 8000

liabilities assets

4,20,000 4,20,000

Sales - Rs 400000

Gross profit – Rs 1,60,000

Rupa

1) Following is the Profit and Loss Account of Vector Limited for the year

ended March 31, 2008 and the Balance Sheet as on that date.

Profit and Loss Account for the year ended March 31, 2008

**Details Value in Rs Value in Rs
**

Sales 30,00,000

Less: Cost of Goods Sold 25,80,000

Gross Profit 4,20,000

Less Operating Expenses

Selling Expenses 22,000

Administrative Expenses 40,000

Rent of Office 28,000

Depreciation 1,00,000 1,90,000

Earnings before Interest and Tax 2,30,000

Less: Interest Expense

Interest on Bank Overdraft 3,000

Interest on Debentures 42,000 45,000

Operating Profit before tax 1,85,000

Add. Interest on Investment 15,000

Total Profit before tax 2,00,000

Taxes [ 50%] 1,00,000

Net Profit after taxes 1,00,000

Balance Sheet as on March 31, 2008

Details Value in Rs

Sources

Equity Share Capital 5,00,000

Rupa

Reserve and Surplus 4,00,000

7% Preference Share Capital 1,00,000

6% Mortgage Debentures 7,00,000

Current Liabilities

Sundry Creditors 60,000

Bills Payable 1,00,000

Outstanding Expenses 10,000

Provision Taxation 1,30,000

Total 20,00,000

Application

Fixed Assets [ Net of Depreciation] 13,00,000

Current Assets

Inventory 3,00,000

Sundry Debtors 2,00,000

Marketable Securities 1,50,000

Cash 50,000

Total 20,00,000

Calculate the following financial ratios and interpret the same [

**• Return on Investment • Return on equity
**

• Debt Collection Period shareholders funds

• Debt Equity Ratio • Gross profit ratio

• Current Ratio • Net profit ratio

• Inventory Turnover Ratio • Operating ratio

• Fixed assets turnover ratio

• Proprietary ratio

• Return on share holders’

funds

Rupa

1) Calculate earnings per share from the following data

Net profit before tax = Rs 100000

Tax rate= 50%

10% preference capital (Rs.10 each) = Rs 100000

Equity share capital (Rs 10 per share) = Rs 100000

**2) The following are the balance sheets of Robert Limited for the year 2005 and
**

2006

liabilities 2005 2006 assets 2005 2006

Share 100000 100000 Fixed 200000 250000

capital assets

General 50000 50000 stock 40000 60000

reserve

Profit & 50000 100000 debtors 30000 40000

loss A/c

8% 50000 80000 cash 20000 30000

debentures

Sundry 40000 50000 Prepaid 10000 20000

creditors expenses

Proposed 10000 20000

dividend

300000 400000 300000 400000

**Calculate the following ratios
**

a) Current ratio

b) Acid-Test ratio

c) Debt-equity ratio

d) Fixed assets-shareholders ratio

e) Proprietary ratio

Rupa

1) The current ratio is 2.5, liquid ratio 1.5 and working capital is Rs.100000.find

current assets, current liabilities and stock.

2) The average stock is Rs.80000 and the opening stock is 10000 less than the

closing stock. Find opening and closing stock.

3) It is given that the long term debt to equity ratio is 2:3 and the equity amount is

Rs 50000.compute the value of long term debt

4) The following financial data is given:

Sales for the year = Rs 200000

Stock – Rs 100000

Credit sales = Rs 150000

Debtors= Rs 75000

Total assets = Rs300000

Share capital(10000 shares of 10 each) = Rs 100000

Net profit = Rs 50000

**Market price per share is Rs 12.from the above information calculate and
**

give your opinion on each ratio

a) Stock turnover ratio

b) Debtors turnover ratio

c) Debt collection period

d) Price-earnings ratio

e) Earnings per share

**1) Gross profit ratio is 20% .gross profit is Rs 50000.calculate sales
**

2) Given below is the trading and profit and loss account

**Opening stock 120000 Cash sales 120000
**

Cash purchases 60000 Credit sales 480000

Rupa

Credit purchases 320000 Closing stock 80000

Gross profit 180000

Total 680000 Total 680000

General expenses 40000 By gross profit 180000

depreciation 20000

Income tax 30000

Net profit 90000

180000 180000

Balance Sheet

**Share capital 300000 Fixed assets 170000
**

General reserve 60000 stock 80000

Profit and loss 110000 investments 100000

account

creditors 80000 debtors 160000

Bills payable 20000 cash 60000

570000 570000

Compute:

a) Current ratio

b) Acid test ratio

c) Debt-equity ratio

d) Proprietary ratio

e) Stock turnover ratio

f) Creditors turnover ratio

g) Debtors turnover ratio

Rupa

h) Debt collection period

i) Credit payment period

j) Gross profit ratio

k) Net profit ratio

l) Return on share holders funds

**1) Below is the summarized balance sheet and profit and loss account of hero
**

limited for the year ended 31/3/08

(in lakhs)

liabilities Rs Assets Rs

Share capital(Rs 4 Fixed assets 11

10 each)

reserves 3 Liquid assets 3

overdraft 4 Other current 5

assets

Current liabilities 8

19 19

**Profit and Loss account
**

(in lakhs)

To opening capital 2 By sales less 28

returns

purchases 22 Closing stock 3

expenses 3

Net profit 4

31 31

Rupa

Calculate all the key ratios and comment on the financial position of the

company

**2) The following is the information of a textile company. Complete the proforma
**

balance sheet if the sales are 3200000

Sales to networth - 2.3 times

Current debt to networth – 42%

Total debt-networth – 75%

Current ratio – 2.9 times

Netsales to inventory – 4.7 times

Average collection period-64 days

Fixed assets to networth – 53.2%

**Proforma Balance Sheet
**

Networth ? Fixed assets ?

Long term debt ? Cash ?

Current debt ? Stock ?

Sundry debtors ?

Rupa

? ?

**3) From the following particulars calculate current assets current liabilities and
**

stock

Sales 1200000

GP ratio 25%

Current ratio 1.75

Quick ratio 1.25

Stock turnover ratio 9 times

**4) With the help of following details prepare balance sheet of the firm concerned:
**

Working capital 75000

Reserves and surpluses 100000

Bank overdraft 60000

Current ratio 1.75

Liquid ratio 1.15

Fixed assets-proprietary funds 0.75

Long term liabilities NIL

**5) With the help of following ratios regarding sujith films, draw a balance sheet of
**

the company for the year 2007:

Current ratio 2.5

Liquidity ratio 1.5

Net working capital Rs 300000

Stock turnover ratio(cost of sales/cl stock) 6 times

Rupa

Gross profit ratio 20%

Fixed assets turnover ratio(on cost of sales) 2 times

Debt collection period 2 months

Fixed assets to shareholders net worth 0.80

Reserve and surplus to capital 0.50

6) The following are the ratios extracted from the balance sheet of a firm

Current ratio -2.5

Working capital – 300000

Liquid ratio – 1.5

Stock turnover ratio – 6

Gross profit as a percentage of sales 20%

debt collection period – 2 months

share capital – Rs 500000

reserves and surpluses- 250000

fixed assets turnover -2

**7) From the following information prepare a balance sheet
**

Current ratio – 2.5

Liquid ratio- 1.5

Proprietary ratio (fixed assets/proprietary funds) 0.75

Working capital – Rs 60000

Reserves and surpluses –Rs 40000

Bank overdraft- Rs 10000

Rupa

There is no long term or fictitious assets

8)

Rupa

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