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R K MOHANTY
FACULTY MEMBER, SIR SPBT COLLEGE, CENTRAL BANK OF INDIA, MUMBAI
WHY FINANCIAL ANALYSIS
Lenders· need it for carrying out the following ´ Technical Appraisal ´ Commercial Appraisal ´ Financial Appraisal ´ Economic Appraisal ´ Management Appraisal
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
As Proportion . As Pure Number /Times .00.000/.HOW A RATIO IS EXPRESSED? y As Percentage .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.1.The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4.and the sales is Rs.25.then the net profit can be said to be 25% of the sales.000/. For example if net profit is Rs. y y .such as 25% or 50% .
Return on Total Resources Ratio. Earning per Share 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. Debtors· Turnover Ratio. Return on Own Funds Ratio.
Preliminary or Preoperative expenses CURRENT LIABILTIES Bank Working Capital Limits such as CC/OD/Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable. Loans and Advances recoverable within 12 months INTANGIBLE ASSETS Patent. PLANT & Share Capital/Partner·s Capital/Paid up Capital/ MACHINERIES Owners Funds Original Value Less Depreciation Reserves ( General. Debit balance in P&L A/c.FG) Stores & Spares. assets which are not current or fixed in nature CURRENT ASSETS : Cash & Bank Balance. Book Debts/Sundry Debtors. Fixed Deposits. Stocks & inventory (RM. Prepaid expenses. Bills Receivables. Advance Payment of Taxes. Marketable/quoted Govt. Goodwill. or other securities. Short duration loans or deposits Expenses payable & provisions against various items .FORMAT OF BALANCE SHEET FOR RATIO ANALYSIS LIABILITIES ASSETS NET WORTH/EQUITY/OWNED FUNDS FIXED ASSETS : LAND & BUILDING. Unsecured Loans.SIP. 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. 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. Capital.
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 .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.
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. Investments in other securities are to be treated Current if they are quoted. Investments in allied/associate/sister units or firms to be treated as Non-current. 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. Securities to be treated current only if these are marketable and due.
2.00. Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are Rs.33 : 1 Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses.1. Current Ratio : It is the relationship between the current assets and current liabilities of a concern.00.000 and Rs.00. alternatively it is the difference of Current Assets and Current Liabilities.2.000 respectively. then the Current Ratio will be : Rs.4. .000/Rs.00.4.000 = 2 : 1 The ideal Current Ratio preferred by Banks is 1. NWC = Current Assets ² Current Liabilities 2.
000/1.000 Current Ratio = > Quick Ratio => 3.50.000 1.000/1.00.5 : 1 .000 Current Liabilities 1. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities.000 Debtors 1.00.000 Inventories 1. Securities or quickly marketable/quoted shares and Bank Fixed Deposits Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities Example : Cash 50.00.00.50.00.000 = 3:1 = 1. Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt.000 Total Current Assets 3.00.3.
Long Term Outside Liabilities / Tangible Net Worth Liabilities of Long Term Nature Total of Capital and Reserves & Surplus Less Intangible Assets For instance.e.4.6 : 1 . DEBT EQUITY RATIO : It is the relationship between borrower s fund (Debt) and Owner s Capital (Equity). 300 Lacs Long Term Loans/Liabilities = Rs. 800 Lacs Debt Equity Ratio will be => 800/500 i. if the Firm is having the following : Capital = Rs. 1. 200 Lacs Free Reserves & Surplus = Rs.
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. 6. Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100 The ratio will be 100% when there is no Borrowing for purchasing of Assets. 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 .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.
7. 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.
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 .
(Average Creditors/Purchases)x365 for days (52 for weeks & 12 for months) . DEBTORS TURNOVER RATIO : This is also called Debtors Velocity or Average Collection Period or Period of Credit given . CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio. (Average Debtors/Sales ) x 365 for days (52 for weeks & 12 for months) 11. which determines the creditor payment period. FIXED ASSET TURNOVER RATIO : Net Sales/Tangible Assets Net Sales /Fixed Assets 13. ASSET TRUNOVER RATIO : 12. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets 14.10.
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. RETRUN ON ASSETS : Net Profit after Taxes/Total Assets 16.
RETRUN ON EQUITY CAPITAL (ROE) : Net Profit after Taxes / Tangible Net Worth 18. Net profit after Taxes and Preference Dividend/ No. of Equity Shares 19. 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.Composite Ratio 17. Market Price Per Equity Share/Earning Per Share . PRICE EARNING RATIO : PE Ratio indicates the number of times the Earning Per Share is covered by its market price.
is Depreciation) . (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.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.
e.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.17 : 1 Quick Ratio : Quick Assets / C L = 200/300 = 0. c. f.C L = 350 . What is the Net Worth : Capital + Reserve = 200 Tangible Net Worth is : Net Worth . d. b.Goodwill = 150 Outside Liabilities : TL + CC + Creditors + Provisions = 600 Net Working Capital : C A .250 = 50 Current Ratio : C A / C L = 350 / 300 = 1.66 : 1 .
50 = 390 2. 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 = 1.21 .02 3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.EXERCISE 2 LIABILITIES Capital Reserves Bank Term Loan Bank CC (Hyp) Unsec.
Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1 . Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200 = 11 : 2 4.Exercise 3. = 200 3. Debt Equity Ratio will be : 600 / (200+100) = 2:1 2. 100 Preliminary Expenses 1400 800 300 150 50 100 1400 1. Secu. 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.e. Tangible Net Worth : Only equity Capital i.
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. What is the Debt Equity Ratio ? .43 : 11 Ans : LTL / Tangible NW = 100 / ( 362 ± 30) = 100 / 332 = 0.Exercise 4.30 : 1 Q.89 : 1 Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1.
15 Lac.C L. What is the Net Working Capital ? Ans : C.Exercise 4. = 255 . A .88 = 167 Q . If Net Sales is Rs. 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 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 . then What would be the Stock Turnover Ratio in Times ? Ans : Net Sales / Average Inventories/Stock 1500 / 128 = 12 times approximately .30 ) / (550 ± 30)] x 100 (332 / 520) x 100 = 64% Q .
What is the Creditors Velocity Ratio if Purchases are Rs. 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.10.5 Lac ? Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0. 15 Lac.Exercise 4.3 months . Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12 = 1 month Q.
10 Lac.5 Lac. 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.250 Lac Exercise 6.25 Lac. A Company has Net Worth of Rs. Term Liabilities of Rs. Calculate its Net Working Capital. There is no intangible Assets or other Non Current Assets.5 Lac. 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. A ± C.Exercise 5. Fixed Assets worth RS. Answer Total Assets = 16 + 25 = Rs.L = 25 ± 26 = (.16 Lac and Current Assets are Rs.)1 Lac .
40.2. Current Liabilities is Rs.000 Therefore x = 10.e. What would be the DSCR ? DSCR = (PAT + Depr + Annual Intt. and PAT is Rs.70. monthly average interest on TL is Rs.Exercise 7 : Current Ratio of a concern is 1 : 1.000 i. NWC is Rs.5000/-.30. What is the amount of Current Assets ? Answer : 4 x .a.p.1 x = 30. The amount of Term Loan installment is Rs.000/-.000 = Rs.10000/ per month. 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 : 1.30.10.000 Hence Current Assets would be 4x = 4 x 10.000/-.000/- Exercise 9.) / Annual Intt + Annual Installment = (270000 + 30000 + 60000 ) / 60000 + 120000 = 360000 / 180000 = 2 . If the amount of Depreciation is Rs.000/.
( Rs. Exercise 11 : Current Ratio is say 1. Total of balance sheet being Rs. Therefore the Long Term Liabilities would be Rs. What would be the Current Liabilities? Ans : When Total Assets is Rs. 80 Lacs. 30 Lac i.e.Rs. Thus we can easily arrive at the Current Liabilities figure which should be Rs. If Fixed Assets and Other Non Current Assets are to the tune of Rs. If the Current Ratio is 1. 20 Lacs.60 Lac. That means the aggregate of Net Worth and Long Term Liabilities would be Rs.22 Lac then Current Assets would be 22 ± 10 i.22 Lac.e Rs. What would be the Long Term Liabilities? Ans : We can easily arrive at the amount of Current Asset being Rs. 70 L ). If the Debt Equity Ratio is 3 : 1 then Debt works out to be Rs. 10 Lac. 100 L . 70 Lac and Debt Equity Ratio being 3 : 1. then Current Liabilities works out to be Rs.Exercise 10 : Total Liabilities of a firm is Rs.100 Lac and Current Ratio is 1.5 : 1. 10 Lac .2 : 1 . 20 Lac. The amount of Fixed Assets + Non Current Assets is Rs.5 : 1. 60 Lacs and equity Rs. 12 Lac.
4. 4. 3. Of three balance sheets Of a single year Of two consecutive years None of the above. Fund Flow Statement is prepared from the Balance sheet : 1. 2. 2.Questions on Fund Flow Statement Q . the assets are represented by ? 1. 3. In a Fund Flow Statement . Q. 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 . Application of Funds Sources of Funds Surplus of sources over application Deficit of sources over application . Why this Fund Flow Statement is studied for ? 1. 2. 3. 4.
2. Reduction in the NWC Reduction in the Working Capital Gap Reduction in Working Capital All of the above . 3. When the long term sources are more than long term uses. When the long term uses in a fund flow statement are more than the long term sources. 3. 2. 2. Q . the n it would mean ? 1. it would suggest ? 1. 4.Q . Increase in Current Liabilities Decrease in Working Capital Increase in NWC Increase in NWC Q . 4. Sources of Funds Use of Funds Deficit of sources over application All of the above. 4. In Fund Flow Statements the Liabilities are represented by ? 1. 3. in the fund flow statement.
Which of following item is not an application of funds in the . 3. 4. Medium and Short term sources None of the above. Source of Funds Two.Q. Long Term and Short Term Sources Three . Q. in the Fund Flow Statement ? 1. Only One. How many broader categories are there for the Sources of funds. Long. 2.
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