CAF-01 (FAR-1)
Some possible reasons of variations in different ratios
Ratio
name
ROCE This ratio tells us that
company is earning Rs. __
per Rs. 100 invested in
business / capital
employed.
ROE This ratio tells us that
company is earning Rs. __
per Rs. 100 invested in
ordinary share capital /
by shareholders.
ROA This ratio tells us that
company is earning Rs. __
per Rs. 100 invested in
total assets.
Asset This ratio tells us that
turnover company is earning Rs. __
of sale per Re. 1 invested
in business / capital
employed.
Gross This ratio tells us that
profit company is earning Rs. ___
ratio gross profit per Rs. 100 of
sales.
Net This ratio tells us that
company is earning Rs. ___
profit
net profit per Rs. 100 of
ratio
sales.
Debtor This ratio tells us that the
days debtors of company are
converted into cash in ___
days.
Creditor This ratio tells us that the
days creditors of company are
paid in ___ days.
Inventory This ratio tells us that the
days inventory of company is
converted into sales in ___
days.
Umair Sheraz Utra, ACA
High ratio
• Higher profitability
• Efficient funds management
• Higher profitability
• Efficient funds management
• Reduction in tax rates.
• Reduction in interest rates. •
• Decrease in equity which
might be due to buyback of
shares.
• Decrease in equity which
may be due to Distribution
of profits as dividend.
• Higher profitability
• Efficient asset management
• Efficient utilization of asset
• High productivity of asset
• Increase in selling price
• Reduction in Raw material
purchase or production costs
• Economies of scale obtained
• Undervaluation of opening
stock or overvaluation of
closing stock
• Tight control over operating
expenses
• Increase in other income
• Low finance cost
• Higher gross profit margin
• Inefficient collection
• Longer credit periods given
• Less discounts offered
• Late payments to supplier
• Less credit worthiness
• Less discounts availed
• Inefficient inventory
management
• Lower sales
Ratios
Low ratio
• Lower profitability
• Inefficient funds management
• Lower profitability
• Inefficient funds management
• Increase in tax rates.
Increase in interest rates
• Increase in equity which
might be due to issuance of
new shares
• Lower profitability
• Inefficient asset management
• Inefficient use of asset
• Low productivity
• Deliberate decrease in selling
price
• Increase in Raw material prices
• Higher production costs due to
inefficiencies
• Inability to obtain economies of
scale
• Overvaluation of opening stock
or
undervaluation of closing stock
• Uncontrolled expenses
• Decrease in other income
• High finance cost
• Higher gross profit margin
• Efficient collection
• Shorter credit periods
• More discounts offered
• Timely payments to supplier
• Credit worthiness
• More discounts availed
• Efficient inventory management
• Higher sales
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 CAF-01 (FAR-1)
Working This ratio tells us the length
capital of time between company’s
cycle payment for purchases and
receipt of cash from
debtors.
Current This ratio tells us that to
ratio pay Re. 1 current liability,
company has Rs. ___
current assets available.
Quick This ratio tells us that to
ratio pay Re. 1 current liability,
company has Rs. ___ quick
assets* available.
*QA = CA – Invent. – Prep.
Gearing This ratio tells us the
ratio dependence of company on
external debt as compared
to the equity of company.
Interest This ratio tells us that to
cover pay Re. 1 interest, company
has Rs. ___ of interest
available.
Umair Sheraz Utra, ACA
• Lower inventory turnover /
poor inventory management
• Higher credit days to debtors
/ poor control over debtors
• Failure to obtain extended
credit limits / timely
payments to suppliers
• Larger inventories which
may be indicative of slow
moving or obsolete stock
• Increase in credit period of
debtors which may be
indicative of difficulty in
recovery and bad / doubtful
debts
• Less credit purchase /
reduction in credit period
allowed by the creditors
• Better liquidity position
• Longer debtors credit period
• Higher debts than equity
• Further debt obtained during
the period
• Decrease in equity which
might be due to buyback of
shares.
• Decrease in equity which
may be due to Distribution
of profits as dividend.
• Higher profitability
• Less use of debts
• Ability to take further debts
Ratios
• High inventory turnover / better
inventory management
• Lower credit days to debtors /
better control over debtors
• Extended credit limit obtained
from creditors / late payments
to suppliers
• Running finance facility
obtained to fund operations
• Long term loan payment might
have become due in the next 12
months (current portion)
• Better inventory management
• Reduction in credit period of
debtors
• Extended credit period allowed
by creditors
• Financial difficulty
• Lower inventories
• Shorter debtors credit period
• Lower debts than equity /
difficulty in raising long term
loans from banks
• Debt repaid during the period
• Increase in equity which might
be due to issuance of new
shares
• Lower profitability
• More use of debts
• Less credit worthiness
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