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Ratio Analysis

IMT Nagpur - 2012-14

Ratio Analysis
Q 1. A very high current ratio will:

A)
B)
C)
D)

Increase the Profitability;


Adverse impact on Profitability;
Not affect the Profitability;
None of the above

IMT Nagpur - 2012-14

Ratio Analysis
Q 2. A very high current ratio may be due to:

A) Piling up of inventory;
B) Inefficiency in collection of debtors ;
C) High balances in cash and bank without proper
investment;
D) All of the above
E) None of the above

IMT Nagpur - 2012-14

Ratio Analysis
Q 3. One of the following is not an absolute liquid
asset:
A)
B)
C)
D)
E)

Cash in hand;
Cash at bank ;
Bills Receivables;
Marketable securities
None of the above

IMT Nagpur - 2012-14

Ratio Analysis
Q 4. Fixed interest bearing funds do not include one of
the following:
A)
B)
C)
D)

Debentures;
Preference Share Capital ;
Long Term Investments;
Public deposits

IMT Nagpur - 2012-14

Ratio Analysis
Q 5. Following ratios have been extracted from the
audited records of a large sized industrial company:
Particulars

2008

2009

2010

2011

2012

Current Ratio

1.8

1.9

2.1

2.2

2.9

Acid Test Ratio

1.7

1.2

0.9

0.7

0.6

Interpret the trend of these interrelated ratios for judging the


short term liquidity and solvency of the company.
IMT Nagpur - 2012-14

Ratio Analysis
Current Ratio has increased from 1.8 to 2.9 in a span of 5
years. The ideal ratio is 2:1. This improvement in CR means
improvement of short term solvency.
But when we analyze the Acid Test Ratios, it is fallen from
1.7 to 0.6 in 2009. This mean that most of the CA are
locked in Inventory. Ideal standard Acid test ratio is 1:1. It
means that company is not in a position to meet its
immediate current liabilities.

Hence, steps should be taken to reduce the investment in


inventory and see that the ratio is above the level of 1:1.
IMT Nagpur - 2012-14

Ratio Analysis
Q 6. Which of the following firms would have the least
liquidity:
A)
B)
C)
D)

Current Ratio = 2.2 and Quick Ratio = 1.6;


Current Ratio = 2.2 and Quick Ratio = 1.1 ;
Current Ratio = 1.2 and Quick Ratio = 0.6;
Current Ratio = 1.2 and Quick Ratio = 0.8

IMT Nagpur - 2012-14

Ratio Analysis
Q 7. If the current ratio and Liquid Ratio of a firm are
2.2 and 0.8 respectively and its Current Liabilities is
R. 10 lacs. The value of stock held by the firm is
lacs :
A)
B)
C)
D)

12
14
16
None of the above

IMT Nagpur - 2012-14

Ratio Analysis
Q 8. The current ratio of BM Limited is 2:1, while quick
ratio is 1.80 : 1. If the current liabilities are Rs.
40,000, the value of stock will be:
A)
B)
C)
D)

Rs. 6,400
Rs. 8,000
Rs. 10,000
Rs. 12,000

IMT Nagpur - 2012-14

Ratio Analysis
Q 9. Warfield Company having net working capital of
Rs. 3 lacs has the current ratio of 1.8 and liquid ratio
of 1.6. Its value of stock is:
A)
B)
C)
D)

Rs. 55,000
Rs. 65,000
Rs. 75,000
Rs. 85,000

IMT Nagpur - 2012-14

Ratio Analysis
Q 10. Consider the following information relating to
NMC Limited. Networth Rs. 250 lacs; Total Assets
Rs. 600 lacs; Long Term debt Rs. 200 lacs; Current
Liabilities Rs. 150 lacs. The debt equity ratio of
company is:

A)
B)
C)
D)

0.583
0.333
0.800
1.400

IMT Nagpur - 2012-14

Ratio Analysis
Q Calculate the Net worth from the following balance
sheet
Particulars

Amount

Particulars

Amount

Equity Share
Cap

2,00,000

Fixed Assets

5,00,000

Pref. Share Cap

1,00,000

Current Assets

3,00,000

Reserve &
Surplus

1,00,000

Long Term
Liability

3,00,000

Current Liability

1,00,000

TOTAL

8,00,000
IMT Nagpur - 2012-14

8,00,000

Ratio Analysis
Net Worth = Fixed Assets + Current Assets (Long
Term Loan + Current liabilities )
= 500000+300000-(300000 +100000)
= 400000
Net Worth = Equity Share Capital + Pref Share Capital
+R&S
= 200000+100000 + 100000
= 400000

IMT Nagpur - 2012-14

Ratio Analysis
Different
Kinds of
Ratios

Liquidity
Ratios

Leverage
Ratios

Asset
Management
Ratios

IMT Nagpur - 2012-14

Operating
Ratios

Market
Based
Ratios

Ratio Analysis

Asset Management Ratios

IMT Nagpur - 2012-14

Ratio Analysis
Asset Management Ratios

Asset Management Ratios measure how


effectively the firm employs its resources.
These ratios are also called turnover ratios
which involve comparison between the level of
sales and investment in various accounts
inventories, debtors, fixed assets etc.

IMT Nagpur - 2012-14

Ratio Analysis
Asset Management Ratios

Assets Management Ratios are used to measure


the speed with which various accounts are
converted into sales or cash.

IMT Nagpur - 2012-14

Ratio Analysis
Asset Management Ratios
The important asset management ratios are :
1.
2.
3.
4.
5.
6.
7.
8.
9.

Inventory Turnover Ratio


Debtors Turnover Ratio
Debtors Collection Period
Bad debts to Sales Ratio
Creditors Turnover Ratio
Creditors Payment Period
Fixed Assets Turnover Ratio
Total Assets Turnover Ratios
Sales to Capital Employed

Ratio Analysis
Inventory Turnover Ratio

Inventory Turnover Ratio =

Sales
Average Inventory

Cost of Goods Sold


Average Inventory

Average Inventory = Opening Stock + Closing Stock) / 2


Sales = Sales Sales Return
Cost of good sold = opening stock + purchase + direct expenses closing stock
IMT Nagpur - 2012-14

Ratio Analysis
Inventory Turnover Ratio

A considerable amount of a companys capital may be tied


up in the financing of raw materials, work in progress and
finished goods.

It is important to keep the level of the inventory as low as


possible.

IMT Nagpur - 2012-14

Ratio Analysis
Inventory Turnover Ratio
Interpretation
If the inventory turnover ratio has decreased from past, it
means that either inventory is growing or sales are
dropping.
The higher the Inventory Turnover ratio, the better.

IMT Nagpur - 2012-14

Ratio Analysis
Q. The summarized balance sheet of R.K. Limited as on
31.03.2012 is given below with other relevant details:
LIABILITIES

AMOUNT

ASSETS

AMOUNT

Equity share capital


Reserves & Surplus
Trade Creditors

40,00,000
6,00,000
14,00,000

Fixed Assets (Net)


Cash
Debtors
Inventories

28,00,000
2,40,000
18,60,000
11,00,000
60,00,000

60,00,000

Other Information:
Sales
Less: Cost of Goods Sole
Less: Selling and Distribution Expenses
Net Profit

52,00,000
36,00,000
16,00,000
12,50,000
3,50,000

Ratio Analysis
Inventory Turnover Ratio
Inventory Turnover Ratio =
Sales
Average Inventory

= 52,00,000/11,00,000 = 4.73

IMT Nagpur - 2012-14

Ratio Analysis
Debtors Turnover Ratio

Debtors Turnover Ratio =

Credit Sales
Average Debtors

IMT Nagpur - 2012-14

Ratio Analysis
Debtor Turnover Ratio

Measures whether the amount of resources tied up in debtors


is reasonable and whether the company has been efficient
in converting into cash.

The higher the ratios, the better the position.

IMT Nagpur - 2012-14

Ratio Analysis
Debtors Turnover Ratio
Debtors Turnover Ratio =
Credit S a l e s
Average Debtors

= 52,00,000/18,60,000 = 2.80

IMT Nagpur - 2012-14

Ratio Analysis
Debtors Collection Period

Debtors Collection Period =

Average Debtors * 365


Credit Sales

IMT Nagpur - 2012-14

Ratio Analysis
Debtor Collection Period

Measures how long it take to collect amount from


debtors.

The higher the ratios, indicates inefficiency in collection of


debts.

IMT Nagpur - 2012-14

Ratio Analysis
Q. The summarized balance sheet of R.K. Limited as on
31.03.2012 is given below with other relevant details:
LIABILITIES

AMOUNT

ASSETS

AMOUNT

Equity share capital


Reserves & Surplus
Trade Creditors

40,00,000
6,00,000
14,00,000

Fixed Assets (Net)


Cash
Debtors
Inventories

28,00,000
2,40,000
18,60,000
11,00,000
60,00,000

60,00,000

Other Information:
Sales
Less: Cost of Goods Sold
Less: Selling and Distribution Expenses
Net Profit

52,00,000
36,00,000
16,00,000
12,50,000
3,50,000

Ratio Analysis
Debtors Collection Period
Debtors Collection Period =
Average Debtors * 365
Credit Sales
= 11,00,000* 365
52, 00,000

= 77.21 = 77 days

Average collection period is 77 days.


IMT Nagpur - 2012-14

Ratio Analysis
Bad debts to Sales

Bad Debts to Sales =

Bad debts * 100


Sales

IMT Nagpur - 2012-14

Ratio Analysis
Bad debts to Sales Ratio

Measures the proportion of bad debts to sales.

This ratio indicates the efficiency of the credit control


procedures of the company.

IMT Nagpur - 2012-14

Ratio Analysis
Creditors Turnover Ratio

Creditors Turnover Ratios =

Credit Purchases
Average Creditors

Average Creditors = Trade Creditors + Bills Payable


IMT Nagpur - 2012-14

Ratio Analysis
Creditors Payment Period

Creditors Payment Period =

Average Creditors * 365


Credit Purchases

IMT Nagpur - 2012-14

Ratio Analysis
Creditors Payment Period

This ratio shows the average time taken to pay for goods
and services purchased by the company.

The longer the credit period achieved the better, because


delays in payment means that the operations of the company
are being financed interest free by suppliers of the materials.

IMT Nagpur - 2012-14

Ratio Analysis
Q. The summarized balance sheet of R.K. Limited as on
31.03.2012 is given below with other relevant details:
LIABILITIES

AMOUNT

ASSETS

AMOUNT

Equity share capital


Reserves & Surplus
Trade Creditors

40,00,000
6,00,000
14,00,000

Fixed Assets (Net)


Cash
Debtors
Inventories

28,00,000
2,40,000
18,60,000
11,00,000
60,00,000

60,00,000

Other Information:
Sales
Less: Cost of Goods Sold (Total Purchase Rs. 28,00,000)
Less: Selling and Distribution Expenses
Net Profit

52,00,000
36,00,000
16,00,000
12,50,000
3,50,000

Ratio Analysis
Creditors Payment Period
Creditors Payment Period =
Average Creditors * 365
Credit Purchases
= 14,00,000* 365
28, 00,000

= 182.5 = 182 days

Average payment period is 182 days.


IMT Nagpur - 2012-14

Ratio Analysis
Fixed Assets Turnover Ratio

Fixed Asset Turnover Ratios =


Sales
Fixed Assets

Sales = Sales Sales Return


Fixed Assets = Fixed Assets - Depreciation

IMT Nagpur - 2012-14

Ratio Analysis
Fixed Assets Turnover Ratios

This ratio indicates the extent to which investment in fixed


assets contribute towards sales.

If there is increase in the ratio it will indicate that there is


improvement in the utilization of fixed asset & a decline in
ratio will indicate that fixed assets have not been used
efficiently by the firm.

IMT Nagpur - 2012-14

Ratio Analysis

From the following data, calculate the Fixed Assets


Turnover Ratio:
1. Gross Fixed Assets = Rs. 3,00,000
2. Accumulated Depreciation = Rs. 1,00,000
3. Total Sales = Rs. 8,50,000
4. Sales Returns = Rs. 50,000.

Ratio Analysis
NET SALES = Total Sales Sales Returns
= Rs. 8,50,000 Rs. 50,000
= Rs. 8,00,000
Net Fixed Asset = Gross Fixed Assets Accumulated
Depreciation
= Rs. 3,00,000 Rs. 1,00,000
= Rs. 2,00,000
Fixed Assets Turnover Ratio = Sales / Net Fixed Assets
= Rs. 8,00,000 - Rs. 2,00,000
= 4 Times

Ratio Analysis
Total Assets Turnover Ratio

Total Asset Turnover Ratios =


Sales
Total Assets

IMT Nagpur - 2012-14

Ratio Analysis
Total Assets Turnover Ratios

This ratio indicates the number of times total assets are being
tuned over in a year.

The higher the ratio, indicates overtrading of total assets,


while a low ratio indicates idle capacity.

IMT Nagpur - 2012-14

Ratio Analysis
Sales to Capital Employed

Sales to Capital employed =


S
a l e s
Capital Employed

IMT Nagpur - 2012-14

Ratio Analysis
Sales to Capital Employed

Net Sales = Sales Sales returns

Capital Employed = Fixed assets + CA CL


Capital Employed = Shareholder funds (Eq Sh Cap + Pref
Fictitious Assets) + Long term debts (Debentures + Loans + Public Deposits)

IMT Nagpur - 2012-14

Sh Cap + R&S

Ratio Analysis
Sales to Capital Employed

This ratio indicates, efficiency in utilization of capital


employed in generating revenue.

The ratio determines how efficiently the capital employed is


being used.

IMT Nagpur - 2012-14

Ratio Analysis
Q. From the following Balance sheet of S Ltd. For the year
ended 31st December, 2011, calculate Sales to Capital
Employed Ratio:
LIABILITIES

AMOUNT ASSETS

AMOUNT

Equity share capital


Profit for the year
Reserves
Trade Creditors

75,000
47,000
25,000
76,000

40,000
90,000
86,000
7,000

Fixed Assets
Stock
Debtors
Cash

2,23,000

Sales for the year amounted to Rs. 3,50,000.

2,23,000

Ratio Analysis

Capital employed = Fixed Assets + Working capital (CA-CL).


=40,000+90,000+86,000+7,000-76,000
=Rs. 1,47,000
Capital Turnover Ratio = Net sales / Capital employed
= 3,50,000 / 1,47,000
= 2.38 times

THANK YOU

IMT Nagpur - 2012-14