Three New Ratios included in CBSE Class XII Syllabus are discussed below : 1. Debt to Capital Employed Ratio : This ratio establishes a relationship between Lon; Employed. It is computed to ascertain the long-term financ; enterprise. Debt to Capital Employed Ratio = -L0"s term Debi, Capital Employed Long-term Debts include : ()) ‘Long-term Bérrowi Provisions’. (@ Long-term Borrowings are the borrowing date of Balance Sheet. These include the follo Debentures, Bonds, Mortgage Institutions, Public Deposit (i) Long-term Provisions visions payable after 12 months from the date of Balance Sheet. uC the following : Capital Employ Side Approach Following are deducted to determine Capital Employed under this approach: (i) Fictitious Assets (ii) Non-trade Investments Second Method (Assets Side Approach) : , Capital Employed = Non Current Assets + Working Capital Non Current Assets = Property, Plant and Equipment and Intangible Assets + Non Current Investments (except non-trade Investments) + Long term Loans and Advances © scanned with OKEN ScannerWorking Capital = Current Assets — Current Lial Notes : (1) Unless specified, it is assumed that all Non Current Investments are Trade Investments and hence will be included in Assets for calculating Capital Employed. 2) Whichever approach is followed (ie., either Liabilities Side approach or Assets Side approach, the amount of capital employed will be same. Objective and Significance : This ratio indicates the proportion of funds provided by long-ter comparison to the total capital employed in the business. A hi employed ratio shows a rather risky financial position as it indicat more and more funds invested in the business are provided by long-term ; the lenders are at high risk. The lower this ratio, the better it is f because they have higher safety cover. i Jenders i in ILLUSTRATION 1. Following is the Balance Sheet of X Ltd. as at Calculate Debt to Capital Employed Ratio. SOLUTION : . . __Long term Debt Debt to Capital Employed Ratio = Capital Employed = Long term Borrowings + Long term Provisions Long term Debt = %1,60,000 + %40,000 = %2,00,000 © scanned with OKEN ScannerCapital Employed (First Method) : Share Capital 5,00,000 Reserves & Surplus 1,00,000 Long-term Borrowings 160,000 Long-term Provisions 40,000 Capital Employed ¥,00,000 Capital Employed (Second Method) : Non Current Assets Add: Working Capital (Current Assets €3,30,000 less Current Liabilities 750,000) Capital Employed Debt to Capital Employed Ratio = Long em pete Soo Capital Emploved Note : Since Debt Equity Ratio is less than halfit i ILLUSTRATION 2. \¢ following information : z Share Capital 5,50,000 General Reserve 3,20,000 Securities Premium Reserve’ 60,000 Profit & Loss Balan: rr.) 30,000 8% Debentures 4,60,000 10% Loan from, 1,40,000 Current Liabjliti 50,000 «Long term Debt, Employed Ratio = Capital Employed bt = 8% Debentures + 10% Loan from Bank = %4,60,000 + 71,40,000 = %6,00,000 Calculation of Capital Employed following Liabilities Side Approach : We cannot adopt assets side approach since assets are not given. Capital Employed = Shareholder’s Funds + Non Current Liabilities Shareholder’s Funds = Share Capital + General Reserve + Securities Premium Reserve —Profit & Loss Dr. Balance = %5,50,000 + €3,20,000 + 60,000 — 30,000 = ¥9,00,000 ‘Non Current Liabilities (Long term Debt) = %6,00,000 © scanned with OKEN ScannerCapital Employed = £900,000 + %6,00,000 = %15,00,000 Debt to Capital Employed Ratio = £6,00,000_ 94: ploy z15,00,000 704°! Current Liabilities are ignored while calculating Capital Employed following Note : Liabilities Side Approach. LLUSTRATION 3. Calculate Debt to Capital Employed Ratio from the following partié 6% Debentures Provision for Employee Benefits (Gratuity) Land & Building Plant & Machinery Goodwill Non-Current Investments (Trade Investments) Inventory Trade Receivables Trade Payables —— SOLUTION : Debt to Capital Employed ft Liabilities Side approach since Share Capital is not given. Capital ed = Non Current Assets + Working Capital sets =Land & Building + Plant & Machinery + Goodwill + Non Current Investments = %7,70,000 + &1 ,80,000 + €1,50,000 + %2,00,000 = %13,00,000 ‘urrent Assets — Current Liabilities Trade Payables a raventory + Trade Receivables — = 5,80,000 + €3,60,000 ~ %2,40,000 = %7,00,000 Capital Employed = €13,00,000 + €7,00,000 = 20,00,000 26,40,000_ _ 932:1 Debt to Capital Employed Ratio = %79,00,0 © scanned with OKEN ScannerMLUSTRATION 4. From the following information, calculate Debt to Capital Employed Ratio : Total Debt 82% Long term Debt 360.000 Non Current Assets 9,60,000 Current Assets 2,80,000 Cash and Cash Equivalents 1,20,000 SOLUTION : Debt to Capital Employed Ratio = —Eene term Debt_ iQ Capital Employed eS Calculation of Capital Employed following Assets Side Apprpach : tall Capital Employed = Non Current Assets + Working’ Se =Non Current Assets + Currents a corn Liabilities = %9,60,000 + %2,80,0004%40,000t “> = %12,00,000 Debt to Capital Employed Ratio = = em » . Ve *Current Liabilities = Short term Débi(i.e., Total Debt — Long term Debt) = €4,00,000 3, O= 40,000 included in Current Assets. Note: Cash and Cash Equivaler Revenue from Operations (Net Sales) Net Fixed Assets = Fixed Assets — Depreciation. nd Significance : This ratio is of particular importance in ing concerns where the investment in fixed assets is quite high. This ratio reveals how efficiently the fixed assets are being utilised. Compared with the previous year, if there is increase in this ratio, it will indicate that there is better utilisation of fixed assets. If there is a fall in this ratio, it will show that fixed assets have not been used as efficiently, as they had been used in the previous year. For example : 2020 2021 z z i 4,00,000 _8,00,000 Fixed Assets ,00, Revenue from Operations (Net Sales) 20,00,000 24,00,000 £20,00,000 _ 5 Times. Fixed Assets Tumover Ratio for 2020 = eesnoo0 7 Tm © scanned with OKEN ScannerFixed Assets Turnover Ratio for 2021 = $24.00,000 _ 3 aia, %8,00,000 Even after increasing the investment in fixed assets from %4 Lac to %8 Lac, sales have increased only from %20 Lac to 24 Lac. This is reflected by a decline in fixed assets turnover ratio from 5 times to 3 times. It indicates that the fixed assets are not being used efficiently. es MLUSTRATION 5. Calculate Fixed Assets Turnover Ratio from the following a Plant & Machinery (Gross) Accumulated Depreciation Intangible Assets Average Inventory Inventory Turnover Ratio Gross Profit SOLUTION : Fixed Assets Tumover Ratio = ery — Accu ASets ° 1,20,000 + £40,000 Net Fixed Assets = PI. mulated Depreciation Cost of Revenu tions = Average Inventory x 5 = 27,20,000 x 5 = %36,00,000 Sellin 'e Cost Hence, Revenue from Operations = %36,00,000 x 129 - ¢43,20,000 100 2 43.20,000 =e =F 50.p00- = 7-2 Times 3. Net Assets Turnover Ratio (or Capital Employed Turnover Ratio) : ve: Ratio — Revenue from Operations (Net Sales) as lover Ratio = et Assets (or Capital Employed) Objective and Significance : This ratio reveals how efficiently Net Assets or Capital Employed has been utilised in making Revenue from Operations. In other words, it shows the number of times Net Assets have been rotated in producing Revenue from Operations. A high Net Assets turnover ratio shows efficient use of Net Assets resulting into higher profitability. A low Net Assets turnover ratio indicates under-utilisation of Net Assets. © scanned with OKEN ScannerSY HLUSTRATION 6. Calculate Net Assets Turnover Ratio from the following information : z Plant & Machinery 1,80,000 Intangible Assets (Goodwill) 20,000 Non Current Investments 40,000 Inventory (including Loose tools for %20,000) 1,50,000 Trade Receivables 1,00,000 Cash and Cash Equivalents 40,000 Trade Payables 30,0001 Cost of Revenue from Operations (Cost of Sales) 12,80,000 Gross Profit 25% on Cost ¥ —_—. SOLUTION : Net Assets or Capital Employed Tumover Ratio Net Assets Assets + Working Capital Non Current Assets = Plant fa hineryTftangible Assets ‘urrentYfivestments ,000 + %40,000 = %2,40,000 Working Capital Tade Receivables + Cash & Cash nts — Trade Payables 0,000 + 1,00,000 + 40,000 — %30,000 Net Assets = %2,40,000 + %2,60,000 = %5,00,000 Revenue, i = 12,80,000 x a = %16,00,000 . _ %16,00,000_.,.. Net Assei ‘over Ratio = %5,00,000 ~ 3.2 times ite Net Assets Turnover Ratio from the following : = Share Capital 4,00,000 General Reserve 1,00,000 Surplus i.e., Balance in Statement of Profit & Loss (Dr.) _ (20,000) Long term Borrowings 2,90,000 Long term Provisions 30,000 Current Liabilities 60,000 Current Assets 80,000 Cost of Revenue from Operations (Cost of Sales) 30,00,000 Gross Profit 25% of Revenue from Operations (Sales) © scanned with OKEN ScannerSOLUTION : Net Assets Turnover Ratio = Revenue from Operations (Net Sales) Net Assets (or Capital Employed) Net Assets = Shareholder’s Funds + Non Current Liabilities = %4,00,000 + %1,00,000 — 20,000 + %2,90,000 + %30,000 = %8,00,000 Gross Profit is 25% of Sales, hence goods costing ¥75 must have been sold for 100 : Hence, Revenue from Operations (Sales) = 30,00,000 x ” = %40,00,000 %8,00,000 Note: Current Assets and Current Liabilities will be ignored Shareholder’s Funds plus Non Current Liabilities, Net Assets Turnover Ratio = = 5 times © scanned with OKEN Scanner