Ratios

Analysis of finanacial statements

Profitability ratios / Performance ratios

Gross profit margin Gross profit / Sales *100 %

Operating profit margin PBIT / Sales *100 %
Return on capital employed PBIT / Capital employed*100 %
Capital employed Total equity + Long term debt Long term debt should include both current liability
Capital employed Total assets - Current liabilities
Net asset turnover Sales / Capital employed

Return on equity Profit after tax and preference dividends or ordinary share capital + Reserves

Short term liquidity and efficiency ratios

Current ratio Current assets / Current liability 1.5-2

Acid test ratio / Quick ratio Current assets - Inventory / Current liability Inventory not considered in curr
Recievable collection period Trade recievable / Credit sales * 365
Payables payment period Trade payables / Credit purchase or Cost of sales * 365
Inventory holding period Closing inventory / Cost of sales * 365

Long term liquidity / Gearing

Gearing Debt / Debt + Equity * 100 Debt % of capital employed
Interest bearing debt / Interest bearing debt + Equity * 100
Interest cover PBIT / Interest

Investors' ratio
Dividend yield EPS / Dividend per share EPS - Profit per share
Dividend cover
Price / Earnings (P/E) ratio Market price per share / Earnings per share High PE companies are overvalu
clude both current liability and non current liability

tal + Reserves

ory not considered in current asset

High gearing companies are riskier for equity share holders

DPS can be given only if there is EPS EPS / DPS

E companies are overvalued companies in market - Market expect the companies to grow in future
KAPLAN 447

Profitability/Performance

ROCE has been decreased from 8.7 to 3.6 .

One of the major reasons for this decrease may be reduction in operating profit.
Operating profit has been decresed from 18600 to 12300.
The reduction in sales might have resulted in reduction in profit.
Mowair Co had same flight in 20X6 and 20X7, so reduction in flight booking can a reason for reduction or company might have

Company is having a cost of debt of 6% but ROCE is only 3.6%.

As a result equity holders are not getting any return from the fund raised through debt.
In addition company might be using retained earning to pay the cost of debt as ROCEis only 3.6%.
Increase in revaluation surplus might have drastically increased capital employed.
Capital employed calculated without revalution surplus would have been 6.2% which represents a decrease in performance

Increase in revaluation surplus might have resulted in increased capital employed

Still it is lower than previous year.However with ROCE 6.2%equity holders are getting

The decrese in sale might have caused decrease in margin

Might
Can be
May be

Quantity margine effect cheyunilla

Calculation Margin
1 unit 2/10 20
10 unit 20/100 20
5 unit 10/50 20

Price kurachal margin change aavum

5 unit 10/45 22.22222222

Loan thirich adachath kond capital employed kuranj which lead to increase in asset turnover
Asset turn over increase when sales increase or capital employed decrease

HW
 Why this happened
Implication of this decrease or increase

1) Quantification
2) Implication

ction or company might have reduced the price of the flight tickets.

a decrease in performance
Inventory write off
Cost 1200
NRV 600
Write off 600
Cost of sales 70600
Gross profit 30200
Operating profit 12560
Reatined earnings 9880

Adjusted profit
Ratio Equation Bun Co Sector
ROCE PBIT/Capital employed 26.56514 18.60%
Operating profit margin PBIT/Sales 12.46032 8.60%
Inventory holding period Closing inventory/COS 17.3711 4 days
Debt to equity Debt/Equity 43.79562 80%
Asset turnover Sales /Capital employed 2.13198 2.01

ROCE of Bun Co is higher than Sector which indicates that the company's capital is employed well compared to the Sector.
It might be because they have reduced the selling price which would have resulted in reduced profits.
Also the company's operating profit margin is higher than the overall sector which shows Bun Co is out performing the Sector
It shows great performance of th ecompany.
Inventory holding period have increased to 17 days which is not that good indication since holding inventory increase compan
Debt to equity ratio have almost decreased to half which is a really good indication as it reduces the risk of the comapany.

ROCE of sector is 18.6% and ROCE of Bun Co is 26.56% which is significantly higher than the sector.
ROCE of Bun Co may not be comparable with the sector average as Bun Co is having revalaution surplus in its equity .
Without revalaution surplus ROCE will be increased further

Net asset turnover of the Bun Co is relatively same to the sector average which means increase in margin can be the reason fo
Discount sale might have helped Bun Co to maintain the net asset turnover similar to the sector

Operating profit margin of sector is 8.6% and Bun co is 12.46% which is significantly higher than th esector average
Operatin profit margin of Bun co is 12.46% which is significantly hiher than the sector average of 8.6%
The discount sale might have reduced the write off of inventory due to the perishable nature which in result would have incre
Providing discount sale is advisable if it reduce inventory holding days

PERFORMANCE

Bun Co has better control over its cost as it owns 80% of its non current asset in the form of property which can be let out to r
But Bun Co's competitors may prefer to lease premises

Company is having a brand name which worth 20% of its total non current asset, this might have helped Bun Co to achieve hig
Bun Co is having higher inventory holding period, Bun Co might be purchasing in bulk quantities and this can be the reason for
FINANCIAL POSITION

There is no lease or loan which reduces the debt to equity ratio.

Loan interest % is higher than ROCE % then the difference belong to equity shareholders
So repaying loan is not necessary as taking loan is beneficial here
Bun co is having capacity to take further loan as Bun co is having owned tangible non current asset of 80%

CONCLUSION
Compared to preivious year company's profit would have decreased but in comparison with sector Bun co is having strong pro
 Quantification
Meaning of ratio
Reason for change
Impication

well compared to the Sector.

Co is out performing the Sector and doing well in the market.

lding inventory increase company's risk and increase cowst of holding inventory.
es the risk of the comapany.

on surplus in its equity .

e in margin can be the reason for higher ROCE

an th esector average

which in result would have increased margin

roperty which can be let out to rent

ave helped Bun Co to achieve higher margin on their sale

es and this can be the reason for hihger holding period
asset of 80%

ector Bun co is having strong profitability

Xpand Co

Return on capital employed 31.01266

Profit margin 12.25
Trade payable payment period 23.3689
Gearing 64.55696

Return on capital employed of Kovert is less than Kandid which shows the resources of Kovert
bpp