In financial feasibility study bank demand bank statement, income tax return file, audited financial statement, projected financial statement and any other document necessary as per loan requirement. From this important ratio are calculated which are as under:
1) Liquidity Ratio:The liquidity ratio is shown the short cash rising capacity of company. It will show the liquid form of assets within organization which easily convertible into cash. It include:
A) Current Ratio:- Current Assets Current Liabilities It will indicate the short term liquidity position of the company. The bank provide working capital for business enterprises on basis of µWorking Capital Gap¶; this will also key indicator of µMargin Of Safety¶. According to Tandan Committee norms 1.33 is the desirable current ratio.
B) Quick ratio:- Quick Assets Quick Liabilities The quick ratio is shown the high liquid position of the company. It show the overnight cash generation capacity of the company. It take only cash and bank balance from view point of financial statement, but the practically we also required to consider credit worthiness in market by which the company generate cash in overnight. The standard quick ratio is the 1:1.
2) Leverage Ratio:The leverage ratio shown the efficiency level prevails in the processing activity of the company. This help to decide the earning capacity of business operations. It include:
A) Debtors¶ ratio:- Average Debtor *365 Credit Sales
Therefore comparisons should be made with the past trends of unit and the trends of other unit within the industry. No norms are stipulated. Like stock.Average Creditors *365 Credit Purchase
This ratio tells how many days¶ credit the firms receive from its suppliers. Is the firm paying its creditors too quickly and will it be possible to delay the payment a little without spoiling its reputation and will it be possible to negotiate for a discount. Generally.
. the level of debtors must also have reasonable proportion to sales an increasing trend in ratio indicate improvement in firm debtor¶s management. There is no as such standard ratio but for trading it will be ten to twelve times or for manufacturing it will be four to five times.
C) Stock Turnover Ratio:.This indicates the number of day¶s sales blocked up in receivables.
B) Creditors¶ ratio:.Cost of Goods Sold Average Inventory The stock turnover ratio shown at how much time stock gets move into the business. More and more credit sales with longer credit terms reduce the profit of the business and also increase chance of bad debts. ratios are calculated on the basis of last days figure appearing in balance sheet.
3) Profitability Ratio:The profitability ratio had shown the earning capacity of business which in return shows the repayment capacity of the business concern loan. Practical application An age wise analysis of debtors will help in understanding the problem in identifying the slow paymaster for vigorous follow up and recovery of dues. To ensure accuracy and to be more specific such ratio should be calculated on the basis of figures given on monthly stock/debtors statements submitted by borrower.
Net Profit *100 Sales The net profit ratio has shown the profit after tax. It include:
A) Debt-Equity = Debt Equity The debt equity is the most important ratio of determine the credit deployment to any borrower. In this take long term liability as well as short term liability of the company by the bank. The upward movements add point in the rating where as downward movement creates negative impact on credit assessment.
B) Gross Profit Ratio:.Gross Profit *100 Sales The gross profit is calculated on by subtracting cost of goods from the sales. The retention of profit in business also add positive point in the credit assessment. How much to lend? it defines the outer boundaries for giving term loan.
C) Operating Profit Ratio= Operating Profit *100 Sales The operating profit show the actual cash flow profit earned from the operation of business.A) Net Profit Ratio:. The trend in the profit and sales over period of time is also taking in the consideration. It is the important ratio it term of analyze the operational viability of business of company. Ratio gives the answer to key question.
4) Financial structure group ratio:These ratios measure the relationship between owned funds and borrowed funds. It also include the µQuasi Capital¶ which the relative borrower given. The
. The projection made are compare with the actual result which show the target achievement capacity of company. In equity it include the share capital plus reserve and profit and loss accumulated and subtracted the fictitious assets.
e. It is safer to lend to a firm with strong financial position.standard debt equity is deffer from the industry to the industry i. gross interest payable by the borrower. greater the cushion. In India maximum permissible debt/equity ratio is 2 for medium and large industries and 3 for small industries. projected income) and projected interest cost both on TL and WC finance i. The ICR measures the extent of the first risk.
B) Total outside Liability to Equity = Total outside Liability Equity Total outside liability:Means the total of the liability side of balance sheet minus the net worth. ICR of 3 or 4 times of gross interest can be considered to be satisfactory. The DSCR measures the extent of both risks in respect of TL. Higher the ratio. Low debt/equity ratio indicates strong financial position.
5) Risk Assessment Group:Lending banker faces two risks . e. Then medium and large industries can avail TL up to twice the amount of their net worth. SSI unit can avail TL up to three times of their net worth. for manufacturing it is the 3 times etc. e. When the burden of debt is heavy it reduces the safety margin of banker / lender.Non. Practical application:This ratio is used by bankers in credit appraisal.
B) Debt Service Coverage Ratio ( DSCR)=Profit after tax + depreciation + interest on TL Interest on TL + repayment
. A) Interest coverage ratio (ICR)= Profit Before Tax + Depreciation + Interest Gross interest (TL + WC) This measures the relationship between the projected profit before tax. especially TL appraisals. This is the amount the business owes to outsiders. ratio of less than 1 is unacceptable.payment of interest and Non-payment of installment (principal). interest and depreciation ( i.
Practical application:DSCR is a powerful tool used by the banker in assessing the risk.5 is accepted as standard and acceptable. It has widespread application in the appraisal of term loans. DCSR is around 2 is consider as satisfactory. namely character. 1.This ratio measures relationship between the projected profit after tax (after addition back depreciation and interest on TL) and the amount of interest and installment payable normally. capital and capacity of borrower before sanctioning of any loan. Ratio enables banker to judge the repaying capacity of borrower.
. Unlike most other ratios DSCR focuses on the future. Generally. less than 1 is not acceptable and indicates poor repaying capacity. Traditionally banker have to examine the 3 CS of leading.