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Dr Ritesh Srivastava
WHY FINANCIAL ANALYSIS
Lenders· need it for carrying out the following ´ Technical Appraisal ´ Commercial Appraisal ´ Financial Appraisal ´ Economic Appraisal ´ Management Appraisal
RATIO ANALYSIS It·s a tool which enables the banker or lender to arrive at the following factors : ´ Liquidity position ´ Profitability ´ Solvency ´ Financial Stability ´ Quality of the Management ´ Safety & Security of the loans & advances to be or already been provided .
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.The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4. As Proportion .00.1. As Pure Number /Times .HOW A RATIO IS EXPRESSED? y As Percentage .000/.such as 25% or 50% . y y .and the sales is Rs. For example if net profit is Rs.000/.then the net profit can be said to be 25% of the sales.25.
Debtors· Turnover Ratio.CLASSIFICATION OF RATIOS Balance Sheet Ratio P&L Ratio or Income/Revenue Statement Ratio Operating Ratio Balance Sheet and Profit & Loss Ratio Financial Ratio Composite 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. Earning per Share Ratio. . Return on Own Funds Ratio.
Capital. Book Debts/Sundry Debtors. Unsecured Loans. or other securities. Bills Receivables.FORMAT OF BALANCE SHEET FOR RATIO ANALYSIS LIABILITIES ASSETS NET WORTH/EQUITY/OWNED FUNDS FIXED ASSETS : LAND & BUILDING. Goodwill. assets which are not current or fixed in nature CURRENT ASSETS : Cash & Bank Balance. Marketable/quoted Govt. Preliminary or Preoperative expenses CURRENT LIABILTIES Bank Working Capital Limits such as CC/OD/Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable. Advance Payment of Taxes.FG) Stores & Spares. Revaluation & Other Net Value or Book Value or Written down value Reserves) Credit Balance in P&L A/c LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions) Debentures/Bonds. Prepaid expenses. Stocks & inventory (RM. Debit balance in P&L A/c.SIP. Fixed Deposits. PLANT & Share Capital/Partner·s Capital/Paid up Capital/ MACHINERIES Owners Funds Original Value Less Depreciation Reserves ( General. Other Long Term Liabilities NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. Loans and Advances recoverable within 12 months INTANGIBLE ASSETS Patent. Short duration loans or deposits Expenses payable & provisions against various items .
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 Outside Liabilities Current Assets are Short Term Use of Funds .
change takes place in Net Worth and Current Ratio. With Rights Issue.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. 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. Bonus Shares as issued by capitalization of General reserves and as such do not affect the Net Worth. Securities to be treated current only if these are marketable and due. .
000 and Rs.00. .000 respectively.00.2. NWC = Current Assets ² Current Liabilities 2. Current Ratio : It is the relationship between the current assets and current liabilities of a concern.000 = 2 : 1 The ideal Current Ratio preferred by Banks is 1.33 : 1 Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses.4.1.2.00. Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are Rs. then the Current Ratio will be : Rs.4. alternatively it is the difference of Current Assets and Current Liabilities.000/Rs.00.
Securities or quickly marketable/quoted shares and Bank Fixed Deposits Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities Example : Cash 50.00.000/1.50.000 = 3:1 = 1.00.000 Total Current Assets 3.3. Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt.000 Current Liabilities 1.00.000/1.00.00.000 Current Ratio = > Quick Ratio => 3.50.000 1. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities.5 : 1 .000 Debtors 1.00.000 Inventories 1.
Long Term Outside Liabilities / Tangible Net Worth Liabilities of Long Term Nature Total of Capital and Reserves & Surplus Less Intangible Assets For instance. 1. 800 Lacs Debt Equity Ratio will be => 800/500 i. DEBT EQUITY RATIO : It is the relationship between borrower s fund (Debt) and Owner s Capital (Equity).6 : 1 .4. 300 Lacs Long Term Loans/Liabilities = Rs.e. if the Firm is having the following : Capital = Rs. 200 Lacs Free Reserves & Surplus = Rs.
5. 6. since Gross Profit is equal to Sales minus Cost of Goods Sold. it can also be interpreted as below : Gross Profit Ratio = [ (Sales x 100 Cost of goods sold)/ Net Sales] A higher Gross Profit Ratio indicates efficiency in production of the unit. PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owner s Fund. . Gross Profit Ratio = (Gross Profit / Net Sales ) x 100 Alternatively . Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100 The ratio will be 100% when there is no Borrowing for purchasing of Assets. 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.
NET PROFIT RATIO : It is expressed as => ( Net Profit / Net Sales ) x 100 It measures overall profitability. . OPERATING PROFIT RATIO : It is expressed as => (Operating Profit / Net Sales ) x 100 Higher the ratio indicates operational efficiency 8.7.
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. which determines the creditor payment period. 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. (Average Debtors/Sales ) x 365 for days (52 for weeks & 12 for months) 11. ASSET TRUNOVER RATIO : 12. (Average Creditors/Purchases)x365 for days (52 for weeks & 12 for months) . CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio.
RETRUN ON ASSETS : Net Profit after Taxes/Total Assets 16. 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. .15.
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. of Equity Shares 19. Market Price Per Equity Share/Earning Per Share . RETRUN ON EQUITY CAPITAL (ROE) : Net Profit after Taxes / Tangible Net Worth 18.Composite Ratio 17. Net profit after Taxes and Preference Dividend/ No.
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. (The Ideal DSCR Ratio is considered to be 2 ) PAT + 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. is Depreciation) .
Goodwill = 150 Outside Liabilities : TL + CC + Creditors + Provisions = 600 Net Working Capital : C A .17 : 1 Quick Ratio : Quick Assets / C L = 200/300 = 0.EXERCISE 1 LIABILITES Capital Reserves Term Loan Bank C/C Trade Creditors Provisions ASSETS 180 Net Fixed Assets 20 Inventories 300 Cash 200 Receivables 50 Goodwill 50 800 800 400 150 50 150 50 a.250 = 50 Current Ratio : C A / C L = 350 / 300 = 1. d.C L = 350 . b.66 : 1 . What is the Net Worth : Capital + Reserve = 200 Tangible Net Worth is : Net Worth . f. c. e.
50 = 390 2.EXERCISE 2 LIABILITIES Capital Reserves Bank Term Loan Bank CC (Hyp) Unsec. Tangible Net Worth for 1st Year : ( 300 + 140) . Long T L Creditors (RM) Bills Payable Expenses Payable Provisions Total 2005-06 300 140 320 490 150 120 40 20 20 1600 2006-07 350 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 1760 2005-06 2006-07 730 30 110 150 20 140 30 310 30 50 1600 750 30 110 170 30 170 20 240 190 50 1760 1. Current Ratio for 2nd Year : (170 + 20 + 240 + 2+ 190 ) / (580+70+80+70) 820 /800 = 1.02 3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.21 .
LIABIITIES Equity Capital Preference Capital Term Loan Bank CC (Hyp) Sundry Creditors Total ASSETS 200 Net Fixed Assets 100 Inventory 600 Receivables 400 Investment In Govt. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200 = 11 : 2 4. Debt Equity Ratio will be : 600 / (200+100) = 2:1 2.e. = 200 3. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1 . 100 Preliminary Expenses 1400 800 300 150 50 100 1400 1. Tangible Net Worth : Only equity Capital i. Secu.Exercise 3.
89 : 1 Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1.43 : 11 Ans : LTL / Tangible NW = 100 / ( 362 ± 30) = 100 / 332 = 0.30 : 1 Q.Exercise 4. What is the Debt Equity Ratio ? . What is the Current Ratio ? Ans : (125 +128+1+30) / (38+26+9+15) : 255/88 = 2. LIABILITIES Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors Provision of Tax Proposed Dividend 355 ASSETS Net Fixed Assets 265 1 125 128 1 30 550 7 Cash 100 Receivables 38 Stocks 26 Prepaid Expenses 9 Intangible Assets 15 550 Q.
C L.88 = 167 Q . = 255 . A . What is the Net Working Capital ? Ans : C.15 Lac. LIABILITIES contd« ASSETS 355 Net Fixed Assets 265 1 125 128 1 30 550 7 Cash 100 Receivables 38 Stocks 26 Prepaid Expenses 9 Intangible Assets 15 550 Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors Provision of Tax Proposed Dividend Q . If Net Sales is Rs. What is the Proprietary Ratio ? Ans : (T NW / Tangible Assets) x 100 [ (362 . then What would be the Stock Turnover Ratio in Times ? Ans : Net Sales / Average Inventories/Stock 1500 / 128 = 12 times approximately .Exercise 4.30 ) / (550 ± 30)] x 100 (332 / 520) x 100 = 64% Q .
Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12 = 1 month Q.10.3 months . What is the Creditors Velocity Ratio if Purchases are Rs.5 Lac ? Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0. LIABILITIES contd« ASSETS 355 Net Fixed Assets 265 1 125 128 1 30 550 7 Cash 100 Receivables 38 Stocks 26 Prepaid Expenses 9 Intangible Assets 15 550 Capital + Reserves P & L Credit Balance Loan From S F C Bank Overdraft Creditors Provision of Tax Proposed Dividend Q. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.Exercise 4.
250 Lac Exercise 6. Calculate its Net Working Capital. A Company has Net Worth of Rs. 41 Lac Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac Current Liabilities = 41 ± 15 = 26 Lac Therefore Net Working Capital = C. : Profit to sales is 2% and amount of profit is say Rs.5 Lac. Term Liabilities of Rs. A ± C.L = 25 ± 26 = (.5 Lac. Fixed Assets worth RS. There is no intangible Assets or other Non Current Assets.Exercise 5. 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.10 Lac.16 Lac and Current Assets are Rs. Answer Total Assets = 16 + 25 = Rs.25 Lac.)1 Lac .
000/- Exercise 9.5000/-.30.000/.30.000 = Rs. The amount of Term Loan installment is Rs.a.Exercise 7 : Current Ratio of a concern is 1 : 1.000 Therefore x = 10.2.10000/ per month.000/-. What is the amount of Current Assets ? Answer : 4 x .000/-.) / Annual Intt + Annual Installment = (270000 + 30000 + 60000 ) / 60000 + 120000 = 360000 / 180000 = 2 . monthly average interest on TL is Rs.e.p.000 i. and PAT is Rs.70.10. If the amount of Depreciation is Rs. Current Liabilities is Rs. 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 : 1.40.1 x = 30.000 Hence Current Assets would be 4x = 4 x 10. What would be the DSCR ? DSCR = (PAT + Depr + Annual Intt. NWC is Rs.
60 Lac.5 : 1. If the Current Ratio is 1. 70 Lac and Debt Equity Ratio being 3 : 1.22 Lac then Current Assets would be 22 ± 10 i. If Fixed Assets and Other Non Current Assets are to the tune of Rs.e Rs. Total of balance sheet being Rs.5 : 1. 12 Lac.Rs.22 Lac. What would be the Long Term Liabilities? Ans : We can easily arrive at the amount of Current Asset being Rs. Therefore the Long Term Liabilities would be Rs. 80 Lacs. ( Rs.Exercise 10 : Total Liabilities of a firm is Rs. If the Debt Equity Ratio is 3 : 1 then Debt works out to be Rs. 100 L . The amount of Fixed Assets + Non Current Assets is Rs. 20 Lacs. Exercise 11 : Current Ratio is say 1. What would be the Current Liabilities? Ans : When Total Assets is Rs. 70 L ).100 Lac and Current Ratio is 1.e. 10 Lac. Thus we can easily arrive at the Current Liabilities figure which should be Rs. 10 Lac . 20 Lac. then Current Liabilities works out to be Rs. That means the aggregate of Net Worth and Long Term Liabilities would be Rs. 60 Lacs and equity Rs. 30 Lac i.2 : 1 .
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