Accounting for Managers

Semester 1, Activity 2
GURNOOR SINGH,2023BBE1026
Objective - The objective of this activity/assignment is to do the ratio analysis of the company with the help
of the annual report which was taken in the previous activity. The company taken is GODREJ Limited and the
annual report is of the year 2021-22.

Ratio Analysis:
 Ratio Analysis is a method of accounting that uses a company’s financial statements to gain insights
into its financial health. It can be used to determine various aspects of a business such as Profitability,
Liquidity, Solvency, Efficiency etc.
 Ratio Analysis is conducted using the figures presented in a company’s financial statements, such as its
Income Statement and Balance Sheet.
 It can be used to make both Internal & External comparison.
 It was pioneered by Alexander Wall, who presented a system

Types of Ratios:
i. Liquidity ratios: It measures the ability of the firm to meet its current obligations. This ratio
maintains a relationship between cash and current assets to current obligations.
ii. Solvency ratios: This ratio is also otherwise known as leverage ratio and financial ratio. The
term solvency implies the ability of the enterprise to meet its long-term obligations on the due
date.
iii. Activity ratios: This ratio is also known as turnover ratio. It is concerned with determining the
efficiency with which asset is managed. These ratios are important in calculating whether a
company’s management is doing enough job of generating revenues, cash etc. out of its
resources.
iv. Profitability ratios: These ratios are calculated to measure the operating efficiency of the
company. Creditors and owners are interested in the profitability of the concern.
Balance sheet of GODREJ LTD
STATEMENT OF PROFIT AND
LOSS
 Ratio Analysis of Indigo Paints Limited:

1. Current ratio - It is calculated by dividing Current Assets by Current Liabilities.

Current Ratio = Current Assets/Current Liabilities

Current Assets = ₹57,238.97 Lakhs
Current Liabilities = ₹ 24,422.19 Lakhs

Current Ratio = 57,238.97/24,422.19

= 2.34:1

2. Quick ratio - It is calculated by dividing Quick Assets by Current Liabilities.

Quick Ratio = Quick Assets/Current Liabilities

Quick Assets = Current Assets - Prepaid Expenses - Inventories
Prepaid Expenses = ₹101.02 Lakhs
Inventories = ₹11,771.93 Lakhs

Quick ratio = (57,238.97-101.02-11,771.93)/24,422.19

= 1.86:1

3. Debt-Equity ratio - The debt equity ratio shows the proportion of equity and debt a firm is using to
finance its assets and the ability of shareholder equity to fulfil obligations to creditors.

Debt-Equity Ratio = Debt/Equity

Debt = Long term borrowings = ₹ 3.28 Lakhs
 Equity = Shareholders Fund = ₹ 56,348.97 Lakhs

Debt-Equity Ratio = 3.28/56,348.97

Debt-Equity = 0.00:1

4. Interest Coverage ratio - This ratio measures the ability of a company to pay the interest on its
outstanding debts. This measurement is used by creditors, lenders and investors to determine the risk
of lending funds to a company.
Interest Coverage Ratio = Earnings before interest and tax (EBIT)/Interest on long term debt
EBIT = (11,562.61 Lakhs)
Since the company does not have any long term debts in 2022, the interest coverage ratio cannot be
calculated.

5. Proprietary ratio - This ratio measures a relationship between equity and total assets. It provides the
rough estimate of the amount of capitalization currently used to support a business.

Proprietary Ratio = (Total Shareholder Fund/Total Assets) * 100

Shareholder Funds = ₹4,756.90 Lakhs
Total Assets = ₹91,988.55 Lakhs

Proprietary Ratio = (4,756.90/91,988.55)*100

Proprietary Ratio = 5.17%

6. Trade Receivable Turnover ratio - It is calculated by dividing credit sales by Trade receivables.

Trade Receivable Turnover Ratio (TRTR) = Credit Sales/Avg. Trade Receivable

Trade Receivables (Opening) = ₹12,119.16 Lakhs
Trade Receivables (Closing) = ₹17,165.25 Lakhs
Credit Sales = ₹90,597.48 Lakhs

Avg. TR = ₹ (12,119.16 + 17,165.25)/2

Avg. TR = ₹14,642.20 Lakhs

TRTR = 90,597.48/14,642.20
TRTR = 6.19 times

7. Inventory Turnover ratio - It establishes the relationship between COGS during a given period and the
Avg. Inventory. It also represents the number of times the rotation of Avg. stock is held.

ITR = Cost of goods sold/Average Inventory

COGS = 51,485.45 Lakhs
 Avg. Inventory = (9,467.47+11,771.93)/2
Avg. Inventory = 10,619.7 Lakhs

ITR = 51,485.5/10,619.7
ITR = 4.84

8. Trade Payable Turnover Ratio (TPTR) - It establishes a relationship between net credit purchases and
avg. trade creditors.

Trade Payable Turnover ratio (TPTR) = Net credit purchases/Average Trade Payables
Net credit purchases = Gross credit purchases – purchase return
Net credit purchases = 53,656.92

Avg. trade payables = (18,557.11+20,141.02)/2

Avg. trade payables = 19,349.07

TPTR = 53,656.92/19,349.07
TPTR = 2.77

9. Current Asset Turnover Ratio - This ratio establishes a relationship between net sales and current
assets.

Current Asset Turnover Ratio = Net Sales/Current Assets

Current Asset Turnover Ratio = 90,597.48/57,238.97
Current Asset Turnover Ratio = 1.58:1

10. Working Capital Turnover ratio - This ratio establishes a relationship between net sales and working
capital.

Working Capital Turnover Ratio = Net Sales/Working Capital

Working Capital = Current Asset – Current Liabilities
Working Capital = 57,238.97-24,422.19
Working Capital = ₹32,815.81

WCTR = 90,597.48/32,815.81
WCTR = 2.76:1

11. Fixed Asset Turnover Ratio - It measures efficiency of long-term capital investment. It tells the
relationship between sales and fixed assets.
FATR - Revenue from Operation/Fixed Assets
FATR - 90,597.48/30,431
FATR - 2.97
12. Gross Profit Ratio – This is the ratio which establishes a relationship between gross profit and net
sales. It is expressed as percentage of sales.

Gross Profit Ratio = (Gross Profit/Net Sales) * 100

Gross Profit = Revenue from Operations - Purchase of Stock in Trade
Gross Profit = 90,597.48-1,926
Gross Profit = ₹88,671.48

Gross Profit Ratio = (88,671.48/90,597.48)*100

Gross Profit Ratio = 97.8%

13. Net Profit/Loss Ratio – This ratio establishes the relationship between Net Profit/Loss and Net Sales.

Net Profit Ratio = (Net Profit after Tax/Net Sales) * 100

Net Profit Ratio = (8,418.16/90,597.48) * 100
Net Profit Ratio = 9.28%