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Ratio Analysis 2021
Ratio Analysis 2021
ACCOUNTING
(English Medium)
THEORY – 2022
Ratio Analysis
A ratio means,
Accounting ratios are classified as follows for the need of decision making.
1. Liquidity ratios
2. Leverage ratios
3. Profitability ratios
4. Efficiency ratios
5. Investment ratios
Ratio Analysis 1
Liquidity ratios
Liquidity ratios assess the ability of a business to pay its short term liabilities as they fall
due. Liquidity ratios are important to assess the short term solvency.
Liquidity ratios can be used to make decisions relating to short term financing of a
business by comparing them with previous year or similar business entity.
1. Current Ratio
The current ratio compares total current assets to total current liabilities and indicates
whether there are sufficient short term assets to pay the short term liabilities
Current ratio used to measure the short term liquidity.
It shows the ability of repaying current liabilities. Standard ratio for current ratio is 2 : 1
(current assets : current liabilities). Current ratio can be calculated as
Current assets
or Current assets : Current liabilities
Current liabilities
Quick ratio is obtained by comparing the amount remained after deducting inventory and
prepaid expenses from current assets with current liabilities.
Liquid assets
or Liquid assets : Current liabilities
Current liabilities
Ratio Analysis 2
Leverage ratios
The ratios which calculate long term financial stability of a business are leverage ratios.
Long term solvency can be studied by comparing equity capital and debt capital
1. Debt Ratio
Debt ratio is used to measure the percentage of debt capital from total capital. Long term
loans with fixed interest rate are considered under debt capital.
Debt capital
X 100
Total capital
2. Debt-Equity Ratio
Relationship between debt capital and equity capital is presented as Debt-equity ratio. If
debt capital is greater than equity capital it is recognized as high leverage where, debt
capital is lower than equity capital, it is referred as low leverage.
Debt capital
Debt capital : Equity capital or X 100
Equity capital
This ratio is considered whether business earned enough profit to cover the interest for long term
loans. High value for interest coverage ratio is exhibited the safety of loan provided.
113
Ratio Analysis 3
Profitability ratios
Ratios that measure ability of an entity to earn profits are named as profitability ratios.
This ratio shows the gross profit earned for every Rs. 100 of sales.
Gross profit
X 100
Sales income
This ratio shows the net profit earned for every Rs. 100 of sales.
Net profit
X 100
Sales income
Ratio Analysis 4
4. Return On Equity
Ratio Analysis 5
Activity ratios
Ratios that measure ability of an entity to earn profits are named as profitability ratios.
This ratio calculates the number of times a business sells and replaces its inventory in a
given period of time.
Cost of sales
Average inventory
This ratio calculates average number of days the inventory remained unsold
365
Inventory turnover
This ratio calculates the number of times trade receivable pay money to the business in a
given period of time.
Credit sales
Average Trade receivable
Ratio Analysis 6
4. Debt Collection Period
This ratio calculates time taken to receive cash from trade receivables
365
Trade receivable turnover
Investors ratios
Ratios that investors use for their investment decisions are investor ratio
It indicates how much of a company’s profit can be attributed to each ordinary share of a
company
Ratio Analysis 7
1 The following is an extract of statement of financial position of Nelaka PLC as at 31.03.2020 and
31.03.2021
31.03.2021 31.03.2020
(Rs.’000) (Rs.’000)
Inventory 450 500
Trade receivables 300 200
Cash and cash equivalents 150 300
Trade payables 250 350
Accrued expenses 50 50
Required:
Current ratio and quick ratio for two years separately
2 The following details relates to Hansini's business and its competitive business as at 31.03.2021
Hansini Ahinsa
(Rs.'000) (Rs.'000)
Inventories 6,000 7,000
Trade receivables 4,000 6,000
Prepaid expenses 2,000 3,000
Trade Payables 8,000 9,600
Accrued expenses 4,000 2,400
Cash and cash equivalents 6,000 8,000
Required:
1. Calculating following ratios from each business
• Current ratio
• Quick ratio
2. Which business is more efficient considering liquidity. Explain with reasons.
Ratio Analysis 8
Required:
Calculate the following ratios
1. Debt ratio
2. Debt equity ratio
3. Interest cover ratio
Ratio Analysis 9
5 The following details relates to Randika PLC
Randika PLC
Statement of Profit or Loss
31.03.2021 31.03.2020
(Rs.'000) (Rs.'000)
Sales 10 000 8 000
Cost of Sales (6 000) (5 600)
Gross Profit 4 000 2 400
Operating Expenses (1 500) (1 000)
Profit before tax 2 500 1 400
Income Tax (750) (420)
Profit for the Period 1 750 980
Randika PLC
Statement of Financial Position
31.03.2021 31.03.2020
(Rs.'000) (Rs.'000)
Non-current Assets 15,000 12,000
Current Assets 10,000 8,000
Ordinary Share Capital 12,000 10,000
Reserves 3,000 4,000
10% Long term Loans 2,000 2,000
Required
1. Gross profit ratio
2. Net profit ratio
3. Return on total assets
4. Return on equity
6 The following information were extracted from financial statements of Kalpani PLC, in which
financial year was ended at 31.03.2021
Rs.'000
Credit sales 90,000
Credit purchases 60,000
Inventory as at 01.04.2020 8,000
Trade receivable as at 01.04.2020 16,000
Inventory as at 31.03.2021 12,000
Trade receivable as at 31.03.2021 14,000
Operating expenses 9,000
Ratio Analysis 10
Required:
Calculate cost of sales for the year ending 31.03.2021
1. Inventory turnover ratio
2. Inventory holding period
3. Trade receivable turnover ratio
4. Debt collection period
7 Extracts of statement of changes in equity for the year ended 31.03.2020 at Dewmini PLC given
below.
Ordinary General Retained
share capital reserve earnings
Balance as at 01.04.2020 10,000 2,000 1,000
Profit for the year - - 4,000
Transfers to general reserve - 500 (500)
Dividend paid (1,000)
Balance as at 31.03.2021 10,000 2,500 3,500
Required:
1. Earnings per share
2. Dividend per share
Ratio Analysis 11
8 Income statement of Gagula Company prepared for the year ended 31st March 2021 is given below.
Income Statement
Rs. '000
Sales 1,200
Cost of sales (720)
Gross profit 480
Other incomes 20
500
Bank loan interest 80
Other operating expenses 180 260
Profit before tax 240
Income tax (48)
Profit for the year 192
Ratio Analysis 12
Calculate following accounting ratios
1. Gross profit ratio
2. Net profit ratio
3. Return on equity
4. Return on equity
5. Return on total assets
9 You have been provided the following information from financial statements of Dananjaya Co. Ltd.
Income statement
for the year ended 31st March 2021
Sales 8,000
Opening inventory 300
Purchases 3,900
4,200
Closing inventory (200) (4,000)
Gross profit 4,000
Bank loan interest 250
Other operating expenses 2,400 (2,650)
Profit before tax 1,350
Income tax (150)
Profit after tax 1,200
Ratio Analysis 13
Rs. 400,000 of the purchases are cash purchases. All sales were made on credit. Calculate the
following ratios in relation to the year 2020/2021.
1. Current ratio
2. Quick ratio
3. Inventory turnover ratio
4. Inventory resident period (inventory holding period)
5. Trade receivable turnover ratio
6. Average collection period
7. Debt ratio
8. Debt equity ratio
9. Interest cover ratio
Rs. Rs.
Current liabilities 150,000 Cash 30,000
15% Bank loan 200,000 Trade receivable 150,000
Stated ordinary share capital 400,000 Inventory 200,000
Revenue reserves 250,000 Fixed assets 620,000
1,000,000 1,000,000
Calculate:
1. Current ratio
2. Return on total assets
3. Inventory turnover
4. Debt equity ratio
Ratio Analysis 14
11 The following information has been taken from the Financial Statements of Saradha Ltd.
Rs.'000s Rs.'000s
Sales (all sales are on credit) 1,560
Less: cost of sales (936)
Gross profit 624
Add: Other Income:
Dividend Income 51
675
Less: Expenses
Operating expenses 408
Depreciation 52
Interest expenses 70
Loss on sale of motor vehicle 5 (535)
Net profit before tax 140
Less : Income tax for the year (45)
Net profit after tax 95
31.12.2020 31.12.2021
Rs.'000 Rs.'000
Trade receivable … 540 500
Inventory … 162 150
Prepaid operating expenses … 15 7
Trade payables … 566 490
Accrued interest … 40 10
Income tax payable … 20 15
Required:
Calculate the following for 2021, using the above information:
1. Gross Profit ration
2. Inventory turnover ratio
3. Current ratio
4. Interest cover ratio
5. Trade receivable collection period
Ratio Analysis 15
12 Statement of financial position of Anoma Co. Ltd. as at 31st December 2020 and income statement
for the year ending that date are given below.
Ratio Analysis 16
Rs. '000
(Note 1)
Revenue
Credit sales 2,000
Cash sales 3,000
5,000
(Note 2)
Cost of sales
Inventory 01.01.2020 150
Purchases - Cash 1,450
- Credit 2,500
4,100
Less:
Inventory 31.12.2020 300
3,800
Ratio Analysis 17
13 You have been provided the following details of Kanga PLC.
Ordinary shareholders have been paid a dividend of Rs. 800,000 during the year ended 31.03.2021.
Calculate for the year ended 31st March 2021.
1. Gross profit ratio 2. Net profit ratio
3. Return on equity 4. Return on total assets
5. Current ratio 6. Quick ratio
7. Inventory turnover ratio 8. Inventory resident period
9. Trade receivable turnover ratio 10. Debt collection period
11. Debt-equity ratio 12. Debt ratio
13. Interest cover ratio
Ratio Analysis 18
14 You have been provided the following details of Upul PLC.
Ratio Analysis 19
A dividend of Rs. 80,000 was paid during the year ended 31.03.2021.
15 Income statement prepared by Raveendra Ltd. for two years, 2019 and 2020 and statement of
financial position prepared at the end of the years are given below
2019 2020
Ratio Analysis 20
Statements of financial position as at 31st December
2019 2020
Fixed assets 400,000 440,000
Current assets
Inventory 80,000 160,000
Trade receivable 40,000 80,000
Bank balance 80,000 200,000 160,000 400,000
Total assets 600,000 840,000
Current liabilities
Trade payables 60,000 20,000
Tax and accrued expenses 40,000 100,000 60,000 80,000
Total equity and liabilities 600,000 840,000
Trade receivable and Trade payables balances as at 01.01.2019 were Rs. 85,000 and 100,000
respectively
Ratio Analysis 21
16 Income statements prepared by Senarathna Ltd. for two years, 2019 and 2020 and statement of
financial position prepared at the end of the years are given below
Summarized income statement for the years ended on 31st December
2019 2020
Current liabilities
Trade payables 40,000 80,000
Accrued expenses 60,000 100,000 220,000 300,000
Total equity and liabilities 800,000 1,200,000
Ratio Analysis 22
Trade receivable and Trade payables balances as at 01.01.2019 were Rs. 140,000 and 20,000
respectively
17 Financial statements of a Limited Company for the year ended 31.03.2021 are given below
Income statement
Rs.
Sales 240,000
Cost of sales
Inventory 01.04.2020 10,000
Purchases 180,000
190,000
Inventory 31.03.2021 (30,000) (160,000)
Gross profit 80,000
Expenses including bank loan interest (30,000)
Net profit before tax 50,000
Income tax (20,000)
Net profit after tax 30,000
Dividend (25,000)
Remaining profit 5,000
Ratio Analysis 23
Ratio Analysis 24
Calculate the followings:
a. i. Current ratio
ii. Quick ratio
18 Summary results of Jaya Isuru Ltd. for the year ended 31st March 2021 are given below.
Ratio Analysis 25
Required :
In relation to each of the ratios given in the following format indicate;
i. The formula for calculation
ii. Value of each ratio for Jaya Isuru Ltd.
iii. The purpose of each ratio
Ratio Formula Computation Purpose
1. Current ratio
2. Inventory turnover
3. Gross profit ratio
4. Return on capital employed
19 Following details were extracted from the books of two companies which are in the same industry
Dhara Company Wega Company
(Rs.) (Rs.)
Opening inventory 10,000 15,000
Closing inventory 20,000 25,000
Cost of sales 40,000 50,000
Sales 100,000 110,000
General expenses 40,000 45,000
Current assets at the end 50,000 40,000
Trade payables at the year end 20,000 15,000
Cash and cash equivalents 5,000 3,000
Ratio Analysis 26
20 The summarized income statements of Madura PLC and Sumudu PLC for the year ending 31.03.2021
are given below.
Madura PLC (Rs.' 000) Sumudu PLC (Rs.' 000)
Sales …………………………………………………………. 6 000 7 500
Cost of sales ….………………………………………….. (4 000) (5 800)
Gross profit ………………………………………………. 2 000 1 700
Expenses ….……………………………...………………. (1 100) -800
Profit before tax ….….………………………………… 900 900
Income tax ….……………………………………………. (300) (300)
Profit for the year …………………………………….. 600 600
The following information is also available for the year ending 31.03.2021
Madura PLC (Rs.' 000) Sumudu PLC (Rs.' 000)
Average inventory …………………………………….. 1,600 2,900
Average trade receivable ………………..………… 2,400 2,500
Equity as at 31.03.2021 …………………………….. 3,000 2,400
Long term loans as at 31.03.2021 ……………… 3,600 1,800
Loan interest included in expenses …………… 300 200
Requires:
1. The following ratios both companies:
i. Return on equity
ii. Interest cover
iii. Inventory turnover
iv. Trade receivable turnover (Assume all sales are made credits basis)
v. Debt equity
2. Based on the calculation in (1) above, state the following with reasons
i. The company that generates a higher return for the owners
ii. The company that uses more debt capital
iii. The company that takes a longer period to collect money from Trade receivable
iv. The company that sells inventory within a shorter period
v. The company that has a higher ability to pay interest on loans
Ratio Analysis 27
21 Financial statements of Rukshan Co. Ltd. relevant to year 2019 and 2020 are given below.
2019 2020
Sales 120,000 90,000
Less:
Cost of goods sold 78,000 56,000
Gross profit 42,000 34,000
Less:
Administration and selling expenses 24,000 22,000
Loan interest 3,000 2,000
Income tax 5,000 4,000
32,000 28,000
Net profit 10,000 6,000
Profit brought forward 2,000 3,000
12,000 9,000
Ordinary dividend paid 8,000 7,000
4,000 2,000
Rs. Rs.
Non current assets
Land and buildings 60,000 60,000
Machinery 40,000 20,000
Current assets
Inventory 26,000 14,000
Trade receivable 12,000 10,000
Cash 6,000 8,000
144,000 112,000
Ordinary share capital 50,000 40,000
General reserve 10,000 10,000
Retained profits 4,000 2,000
Long term loans 60,000 45,000
Current liabilities
Trade payables 20,000 15,000
144,000 112,000
Using above financial statements, calculate the following ratios for the year 2020
1. Current ratio
2. Quick ratio
3. Net profit ratio
4. Return on total assets
5. Return on equity
6. Inventory turnover
7. Average debt collection period
Ratio Analysis 28
22 The following information relates to Amal Plc. For the year ended 31.03.2021
i. An extract of the balance sheet as at 31.03.2021:
(Rs. million)
Stated capital 400
Retained earnings 600
Current liabilities 500
ii. Selected accounting ratios for the year ended 31st March, 2021
Non-current liabilities to equity ratio 0.5 : 1
Total sales (Rs. Million) 4,000
Gross profit ratio 30%
Inventory turnover 4 times
Quick assets ratio 0.75 : 1
Net profit ratio on sales 10%
Required:
1. Non current liabilities as at 31.03.2021
2. Cost of goods sold for the year ended 31.03.2021
3. Inventory as at 31.03.2021
4. Current assets as at 31.03.2021
5. Return on total assets for the year ended 31.03.2021
Required:
1. Debt collection period, inventory turnover ratio, asset turnover ratio and return on total
assets for the year ended 31st March 2021
2. Indicate whether there is an improvement in the following, when compared with the
previous year’s ratios.
i. Liquidity position
Ratio Analysis 29
ii. Total asset utilization efficiency
iii. Return on total assets
24 The following information has been extracted from the financial statements of Amila PLC for the
year ending 31.03.2021
Rs.'000
Stated ordinary share capital … 600
Retained earnings … 400
15% Bank loan … 500
Current liabilities … 300
Non-current assets … 1,250
Current assets
Inventory … 300
(Inventory as at 01.04.2020 - Rs. 500,000)
Trade receivable … 400
Cash and cash equivalent … 50
Sales … 3,000
Cost of sales … 2,200
Income tax for the year … 200
Profit for the year … 400
Required:
1. Quick Ratio
2. Inventory Turnover Ratio
3. Return on Total Assets Ratio
4. Debt-equity Ratio
5. Interest Cover Ratio
Ratio Analysis 30
25 Information given in the following table relates to three companies operating in a particular
industry.
Industry
A Ltd. B Ltd. C Ltd. Average
Total Assets (Rs. '000) 2,500 3,200 6,000 -
Profit before Tax (Rs. '000) 275 420 520 -
Interest Expenses (Rs. '000) 25 60 80 -
Net Assets (Rs. ‘000) 1,500 2,000 3,800 -
Return on Total Assets (Note 1) P 0.15 0.10 0.12
Total Assets Turnover Ratio 2.0 3.3 1.5 2.1
Debt to Equity (Note 2) 0.7 Q 0.6 0.6
Profit Margin 0.06 0.05 0.07 0.05
Interest Cover R 8.0 7.5 15
Current Ratio 2.0 1.2 2.8 1.8
Note 1 : Profit before tax and interest has been taken as the return for total assets.
Note 2 : Total liabilities have been considered as total debt.
Required:
1. Ratios represented by the letters P, Q and R in the above table.
2. The company which has relatively higher gearing.
3. With a reason, the company which is better in terms of Profitability.
4. Two reasons for ‘C Ltd.’ to have a low return on total assets.
5. Brief explanation on the debt servicing ability of ‘A Ltd.’ Compared to the industry and other
two companies.
Ratio Analysis 31
26 The following information is taken from the records of two companies in the same industry.
Balance Sheet Item : Company X Company Y
(Rs. '000) (Rs. '000)
Trade receivable 1,120 2,100
Plant and equipment 6,280 5,600
Trade payables 3,100 5,000
8% Bank loan 500 1,000
Stated ordinary share capital 3,000 5,000
Retained earnings 1,000 1,000
Required :
(a) Calculate the following ratios for companies X and Y.
1. Return on equity
2. Interest coverage ratio
3. Trade receivable turnover ratio assuming all sales as credit sales
(b) Answer the following questions based on the relevant ratios calculated above.
1. Which company collects its receivables faster?
2. Which company retains a larger proportion of profits in the business?
3. In which company would you invest, if you are an investor? Give a reason
Ratio Analysis 32
27 The following information relates to Anura PLC for the year ending 31.03.2021.
Rs.'000
Sales revenue 9,000
Profit for the year 600
Income tax expense 40
Interest expenses 80
Further, the following balances were available as at 31.03.2021.
Rs.’000
Ordinary share capital (total no. of shares issued 150 000) 4,200
Total assets 8,400
Total assets and retained earnings as at 01.04.2020 were Rs. 6,600,000 and Rs. 1,200,000
respectively.
Assume that the liabilities of the company as at 31.03.2021 consisted only of long-term loans.
Required :
Calculate the following ratios for the year ending 31.03.2021:
(1) Net profit
(2) Interest cover
(3) Return on equity
(4) Earnings per share
(5) Debt to equity
***
Ratio Analysis 33