Ratio Analysis Financial Statement

Worksheet 2010-2011

Financial Statement
Analysis
Prepared By:- MFM 2011-14

Harshad Khambale 11
Mahendra Gajarmal 56
Nayan Kshatriya 14
Vishal Rathod 33
Vijay Sethe 43
Financial Analysis
• Assessment of the firm’s past, present
and future financial conditions
• Done to find firm’s financial strengths
and weaknesses
• Primary Tools:
– Financial Statements
– Comparison of financial ratios to past,
industry, sector and all firms

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Financial Statements
• Balance Sheet
• Income Statement
• Cashflow Statement
• Statement of Retained Earnings

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Sources of Data
• Annual reports
– Via mail, SEBI or company websites
• Published collections of data
– Newspapers, magazines etc.
• Investment sites on the web
– Examples
• http://moneycontrol.com
• http://www.indiainfoline.com
• http://scribd.com
• http://www.dabur.com
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Why needed ?
• Lenders’ need it for carrying out the
following
• Technical Appraisal
• Commercial Appraisal
• Financial Appraisal
• Economic Appraisal
• Management Appraisal

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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
Prof. Anjali Kulkarni 6
Five Major Categories of Ratios
and Their Implications
• Liquidity: Can we make required payments?

• Asset management: right amount of assets vs. sales?

Also known as Turnover/ Activity Ratios.

• Debt management: Right mix of debt and equity? Also

known as Leverage/ Capital Structure Ratios.

• Profitability: Do sales prices exceed unit costs, and are

sales high enough as reflected in PM, ROE, and ROA?

• Market value: Do investors like what they see as

reflected in P/E and M/B ratios? Also known as Valuation
Ratios.

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Classification of Ratios
Balance Sheet P&L Ratio or Balance Sheet
Ratio Income/Revenue and Profit &
Statement Ratio Loss Ratio
Financial Ratio Operating Ratio Composite Ratio
Current Ratio Gross Profit Ratio Fixed Asset
Quick Asset Operating Ratio Turnover Ratio,
Ratio Expense Ratio Return on Total
Proprietary Ratio Net profit Ratio Resources Ratio,
Debt Equity Ratio Stock Turnover Return on Own
Ratio Funds Ratio,
Earning per Share
Ratio, Debtors’
Turnover Ratio,
Prof. Anjali Kulkarni 8
Review: Income Statement
• Gross Profit = Sales - Costs of Goods Sold
• EBITDA
= Gross Profit - Cash Operating Expenses
• EBIT = EBDIT - Depreciation - Amortization
• EBT = EBIT - Interest
• NI or EAT = EBT- Taxes
• Net Income is a primary determinant of the firm’s
cash flows and, thus, the value of the firm’s shares

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 Ratios : Liquidity
1. Current Ratio : It is the relationship between the current
assets and current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities

If the Current Assets and Current Liabilities of a concern are

Rs.4,00,000 and Rs.2,00,000 respectively, then the Current
Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1

The ideal Current Ratio preferred by Banks is 1.33 : 1

2. Net Working Capital : This is worked out as surplus of

Long Term Sources over Long Term Uses, alternatively it
is the difference of Current Assets and Current Liabilities.
NWC = Current Assets – Current Liabilities

Prof. Anjali Kulkarni 10

 Ratios : Liquidity
3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current
Assets and Current Liabilities.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6

months + Quickly realizable securities such as Govt. Securities or
quickly marketable/quoted shares and Bank Fixed Deposits.

Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example :
Cash 50,000
Debtors 1,00,000
Inventories 1,50,000 Current Liabilities 1,00,000
Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000 = 3:1

Quick Ratio => 1,50,000/1,00,000 = 1.5 : 1
Prof. Anjali Kulkarni 11
Ratios: Leverage
4. DEBT EQUITY RATIO : It is the relationship between borrower’s
fund (Debt) and Owner’s Capital (Equity).

Debt
DER = -----------
Equity

Debentures + Long Term loans

= -------------------------------------------------------------------------------------
Equity Shares+ Preference Shares + Reserves and Surplus
For instance, if the Firm is having the following :

Capital = Rs. 200 Lacs

Free Reserves & Surplus = Rs. 300 Lacs
Long Term Loans/Liabilities = Rs. 800 Lacs

Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1

Prof. Anjali Kulkarni 12

Ratios : Leverage
5. PROPRIETARY RATIO : This ratio indicates the extent to which
Tangible Assets are financed by Owner’s Fund.
Proprietary Ratio = (Tangible Net Worth/Total Tangible
Assets) x 100

The ratio will be 100% when there is no Borrowing for purchasing of

Assets.

6. GEARING RATIO Debt + Preference Shares

= ---------------------------------------
Equity
7. INTEREST COVERAGE RATIO: Extent of earnings available to
pay off interest burden. Is given by
Earnings Before Interest and Taxes (EBIT )
ICR = -------------------------------------------------------
Interest
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Ratios: Profitability
8. 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.

Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

Alternatively , since Gross Profit is equal to Sales minus

Cost of Goods Sold, it can also be interpreted as below :

Gross Profit Ratio = [ (Sales – Cost of goods sold)/ Net

Sales] x 100
A higher Gross Profit Ratio indicates efficiency in
production of the unit.

Prof. Anjali Kulkarni 14

Ratios : Profitability
9. OPERATING PROFIT RATIO :
It is expressed as => (Operating Profit / Net Sales ) x 100

Higher OP ratio indicates higher operational efficiency

Operating Profit = NP + Non-operating Expenses – Non-operating

Income

10. NET PROFIT RATIO :

It is expressed as => ( Net Profit / Net Sales ) x 100

It measures overall profitability.

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 Ratios : Turnover
11. STOCK/INVENTORY TURNOVER RATIO :

COGS
STR = -----------------------------
Average Inventory
(Opening Stock + Closing Stock)
Average Inventory or Stocks = -------------------------------------------------
2
COGS = Sales – GP or OS+ Purchases – CS

This ratio indicates the number of times the inventory

is rotated during the relevant accounting period

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Ratios : Turnover
12. DEBTORS TURNOVER RATIO : This ratio reflects the
relationship between credit sales and debtors.
Credit Sales
DTR = -----------------------------
Average Debtors
365
Average Collection Period = ----------------
DTR

13. CREDIT TURNOVER RATIO : This ratio indicates the

intention of the firm to pay quickly to its creditors

Credit Purchases
CTR = --------------------------------
Average Creditors
365
Average Payment Period = -------------
CTR
Prof. Anjali Kulkarni 17
Ratios : Turnover
14. CURRENT ASSET TURNOVER RATIO :

CATR = Net Sales / Current Assets

15. FIXED ASSET TURNOVER RATIO :

FATR = Net Sales /Fixed Assets

16. TOTAL ASSETS TURNOVER RATIO :

TATR = Net Sales / Total Assets

Prof. Anjali Kulkarni 18

 Ratios : Profitability
16. RETRUN ON ASSETS : Net Profit after Taxes/Total
Assets

17. 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.

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