RATIO - ANALYSIS

SUMMARY BALANCE SHEET:

Liabilies:
NET-WORTH: (NW) 400000
LONG -TERM LIABILITES (LTL) 600000
CURRENT - LIABILITES (CL) 520000
Assets:
FIXED ASSETS: (FA) 440000
NON- CURRENT ASSETS: 50000
INTANGIBLE ASSETS: 50000
CURRENT ASSETS: (CA) 980000
QUICK ASSETS: (QA) 390000
Tangible Net worth: (TNW) 350000
Debtors 320000
STOCKS 560000
NET - SALES 86000
Cost of sales ( Cost of Goods sold) 54000
GROSS PROFIT 32000
OPERATING PROFIT 23000
PROFIT BEFORE INTEREST & TAX 24000
NET PROFIT BEFORE TAX 24000
NET PROFIT AFTER TAX 12000
DEPRECIATION 2000
TERM LOAN INTEREST 30000
TERM LOAN INSTALMENT 70000
Average Receivables 320000
Average Payables 180000
Credit Sales per day: 2000
Credit Purchases per Day: 2000
 RATIO CALCULATIONS FORMULAS BENCH-MARK RATIO'S AS CALCULATED:

SOLVENCY RATIOS
1 NET WORKING CAPITAL: Current Assets - Current Liabilites 460000

( Total Tangible Assets )

______________________ No- Bench mark
1 SOLVENCY RATIO: ( Total Outside Liabilites) 1.3125

Current Assets 1.33:1

__________________
2 CURRENT - RATIO: Current Liabilites 1.88:1

Quick Assets No- Bench mark

_______________
3 ACID TEST - RATIO ( QUICK RATIO): Current Liabilites 0.75:1
LEVERAGE RATIOS

Long Term Debts (or) Deferred Liabilites

4 DEBT - EQUITY RATIO: ___________________________________ 2:1 1.71:1
Tangible Net Worth

Total outside Liabilites ( Current Liability + Long term

TOTAL OUTSIDE LIABILITES RATIO Liabilites)
5 OR ____________________________________ No- Bench mark 3.20:1
TOTAL INDEBTEDNESS RATIO : Tangible Networth

Share Holders Fund

6 PROPRIETARY RATIO: _____________________ X 100 16%
Total Tangible Assets

PROFITABILITY RATIOS

Gross Profit
7 GROSS PROFIT RATIO: ______________ X 100 37%
Net Sales

Operating Profit
8 OPERATING PROFIT RATIO: ______________ X 100 27%
Net Sales

Net Profit
9 NET PROFIT RATIO: ______________ X 100 14%
Net Sales
 Net Profit After Tax
10 RETURN ON NET WORTH: ___________________ X 100 3%
Tangible Net Worth

Profit Before Interest & Tax

__________________________ X 100
11 RETURN ON CAPITAL EMPLOYED: Capital Employed 2%
***( Capital Employed = Tangible Networth + Term
Liabilites + Current Liabilites)

Profit Before Interest & Tax

12 RETURN ON INVESTMENT ( ROI ) __________________________ X 100 2%
Total Tangible Assets

ACTIVITY RATIOS

Cost Of Sales ( Cost of Goods sold)

_______________________________
INVENTORY TURNOVER RATIO: Average Inventory 0.10- Times in a year
13

DEBTORS TURNOVER RATIO: Average outstanding of receivables

or ________________________________ 160 Days
Debtors Velocity Credit sales per Day
14
CREDITORS TURNOVER RATIO: Average outstanding of Payables
or ________________________________ No- Bench mark 90 Days
Creditors Velocity Credit purchases per Day
15

NET-PROFIT TO SALES RATIO: Net-Profit/ Net sales X 100 13.95%

16

RETURN ON EQUITY RATIO: (Net-Profit / TNW) X 100 3.43%

17

RETURN ON INVESTMENT
(OR) Return on Capital Employed
(Net-Profit / (TNW + LTL)) X 100 No- Bench mark 1.26%
18
(NP + DEPR.+ TL-Interest)
DEBT -SERVICE COVERAGE RATIO (DSCR): _________________________ 2 0.44:1
(TL-instl + TL-interest)
19
 BREAK-EVEN POINT ANALYSIS

Break even point is the amount of sales at which a unit makes no profit or no loss.
It is the level of sale at which sales revenue is equal to the cost of the units sold.
A unit can earn profit only if its level of sale is above the break-even point.

1 Fixed Cost ( Incurred Per Month ): It is incurred even if there is no production or Sale

Deprication: 10000

Rent: 6000

Manager's salary 15000

Interest on Term Loan 6000

Power / Electricity 2000

Total Fixed Costs: 39000

It varies directly with Sales/ Production , as sales or

2 Variable Cost ( Incurred per Month ): Production increases this cost also increases.
Raw material 0
Articles Purchased for Sale 30000
wages 0
Fuel/Power 0
Interest on working capital 0

Total Variable Costs: 30000

Contribution = Total Sales - Variable Costs At Break even Point Contribution is equal to fixed Cost.
3 or Contribution increases as sale increases and falls down as sales falls.
Contribution Per Unit = Sale price per unit - Break-Even Point of a Firm is the point, where
variable cost per unit *** Sales = Costs ( Variable + Fixed )

A Firm Operating :
1. Above Break-even point > Earns Profit.
2. Below Break-even Point > Incurs Loss.
3. At Break-even point > No Profit No Loss.
4 Calculation of Break-even Point (BEP):

Contribution Per Unit Sale Price per unit - Variable cost per unit 0

Contribution in Amount Total Sales - Variable cost

56000

Fixed Costs
1. In terms of number of Units ___________________
Contribution Per Unit

BEP in units X Sales price per unit

or
2. In terms of amount of sale in Rupees
Fixed Cost
_______________ X Total sale in Rs.
Total Contribution
59893

Fixed Cost
3. In terms of capacity utilisation. _______________ X Projected Capacity utilisation at
Total Contribution ( Optimum sales level)

Total Contribution
4. P/V ratio ( Profit Volume ratio) __________________ X 100 65.12
Total Sales
 Re-Classification of Balance Sheet Items:

The Liability side of company balance sheet consists of :

1) Share capital
2) Reserves & Surplus
3) Secured Loan
4) Unsecured Loan
5) Current Liability & Provisions

The Asset side of company balance sheet grouped into:

1) Fixed Assets
2) Investments
3) Current Assets
4) Misc. Expenditure , Losses

The objective of a banker in analysing the balance sheet is to findout the liabilites
which are payable in the short term and to compare them same to the short term assets for
ensuring that all short term liabilites are covered by sufficient short term assets.

CLASSIFICATION OF LIABILITIES:
Items in the Liability side are reclassified into 03-Groups :
a) Net- Worth
b) Term Liability
c) Current Liabilities

A) NET-WORTH : Net-Worth consists of :

a) Paid-up Capital ( Equity & Preference ):

b) Free Reserves.( Retained profits)

c) Surplus.
Current Liabilites : Current Liabilites represent the short term source of fund
for the business and should be utilised only for financing
current assets.

Note: For the purpose of calculating MPBF ( Maximum permissible Bank Finance )
Term Loan installments falling due within next 12-months need not be treated as
current Liability. However for calculating the current ratio it will be treated as
current liability.

Current Assets can be broadly divided into 03-categories :

1) Inventories : Include (i) Raw-Materials (ii) Work in progress (iii) Finished Goods
All these items are classified as current Assets.
*** Slow moving / Obsolete inventories are classified as Other Non-Current Assets ( ONCA).

2) Receivables : Include (i) Sundry Debtors (ii) Biils - Receivables

*** Old Receivables Beyond 06-months should not be classified as current assets
( Should be treated as ONCA)

3) Other Current Assets: Include (i) Cash & Bank Balances, (ii) Investments ( Satisfying RBI - Guidelines)
(iii) Advance given for purchase of Raw-Materials (iv) Advance payment of Tax
(v) Interest - Accrued on Investments (vi) Pre-Paid Expenses.

TERMS - EXPLAINED :

Net- sales = Gross sales ( Total sales ) - Excise Duty.

Raw-material Consumed = Opening Stock of Raw - materials + Purchases made during the year -
Closing stock of Raw-Materials.

Cost Of Production = Raw Materials consumed + Manufacturing Expenses ( Including depreciation ) +

Opening Stock in process - Closing Stock in process.

Cost Of Sales = Cost of Production + opening Stock of Finished goods - Closing stock of finished goods.
Gross Profit = Net sales - Cost of sales
Operating Profit = Gross Profit - Operating Expenses
Net Profit = Operating Profit + Non Operating Incomes - Non Operating Expenses

The Study of Financial Statement involves the study of the following five major aspects of the concern :

1) Solvency
2) Liquidity
3) Leverage
4) Profitability
5) Activity

(1) Study of Solvency :

A unit is said to be solvent if its tangible assets are more than its outside liabilites.
Tangible Assets Means: All assets excluding Intangible Assets
Outside Liabilites means ( Term Liabilites + Current Liabilites )
Tangible Net Worth ( TNW ) = Net Worth - Intangible Assets
or
= Total Tangible Assets - Total Outside Liabilites

Solvency Ratio = ( Total tangible Assets ) / ( Total Outside Liabilites)

Where this ratio is more than one , the unit is solvent.

( 2 ) LIQUIDITY :
Paid-up capital is the amount which is actually paid
by the share holders out of the amount subscribed by them
Free Reserve include : General Reserves,
Capital reserves ( Excluding Revaluation reserves )
Capital Redemption Reserve
Dividend Equalisation Reserve ( Reserves created for declaraing
dividend in a year of no/less profit )
Current Liabilites inculde:
a) Bank Cash credit , Overdrafts,
b) Sundry Creditors for Trade
c) Advance Payment from Customers
d) Out-Standing expenses ( Rent , Insurance due but not paid)
e) Provision for Taxes or Dividends or other statutory dues.
f) Instalments of Term - Loans.