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# R K MOHANTY

## FACULTY MEMBER, SIR SPBT COLLEGE,

CENTRAL BANK OF INDIA, MUMBAI
Lenders’ need it for carrying out the
following
 Technical Appraisal

 Commercial Appraisal

 Financial Appraisal

 Economic Appraisal

 Management Appraisal
It’s a tool which enables the banker or
lender to arrive at the following factors :
 Liquidity position
 Profitability
 Solvency
 Financial Stability
 Quality of the Management
 Safety & Security of the loans & advances
to be or already been provided
As Percentage - such as 25% or 50% .
For example if net profit is Rs.25,000/- and
the sales is Rs.1,00,000/- then the net profit
can be said to be 25% of the sales.
 As Proportion - The above figures may be
expressed in terms of the relationship
between net profit to sales as 1 : 4.
 As Pure Number /Times - The same can
also be expressed in an alternatively way
such as the sale is 4 times of the net profit or
profit is 1/4th of the sales.
Balance Sheet P&L Ratio or Balance Sheet
Ratio Income/Revenue and Profit &
Statement Loss Ratio
Ratio
Financial Ratio Operating Ratio Composite Ratio
Current Ratio Gross Profit Ratio Fixed Asset
Quick Asset Ratio Operating Ratio Turnover Ratio,
Proprietary Ratio Expense Ratio Return on Total
Debt Equity Ratio Net profit Ratio Resources Ratio,
Stock Turnover Return on Own
Ratio Funds Ratio,
Earning per Share
Ratio, Debtors’
Turnover Ratio,
LIABILITIES ASSETS
NET WORTH/EQUITY/OWNED FUNDS FIXED ASSETS : LAND & BUILDING, PLANT
Share Capital/Partner’s Capital/Paid up& MACHINERIES
Capital/ Owners Funds Original Value Less Depreciation
Reserves ( General, Capital, Revaluation &Net Value or Book Value or Written down
Other Reserves) value
Credit Balance in P&L A/c
LONG TERM LIABILITIES/BORROWEDNON CURRENT ASSETS
FUNDS : Term Loans (Banks & Investments in quoted shares & securities
Institutions) Old stocks or old/disputed book debts
Debentures/Bonds, Unsecured Loans, FixedLong Term Security Deposits
Deposits, Other Long Term Liabilities Other Misc. assets which are not current or
fixed in nature

## CURRENT LIABILTIES CURRENT ASSETS : Cash & Bank Balance,

Bank Working Capital Limits such asMarketable/quoted Govt. or other
CC/OD/Bills/Export Credit securities, Book Debts/Sundry Debtors, Bills
Sundry /Trade Creditors/Creditors/BillsReceivables, Stocks & inventory
Payable, Short duration loans or deposits (RM,SIP,FG) Stores & Spares, Advance
Expenses payable & provisions againstPayment of Taxes, Prepaid expenses,
various items Loans and Advances recoverable within 12
months
INTANGIBLE ASSETS
Patent, Goodwill, Debit balance in P&L A/c,
Preliminary or Preoperative expenses
 Liabilities have Credit balance and Assets have Debit balance
 Current Liabilities are those which have either become due for
payment or shall fall due for payment within 12 months from
the date of Balance Sheet
 Current Assets are those which undergo change in their
shape/form within 12 months. These are also called Working
Capital or Gross Working Capital
 Net Worth & Long Term Liabilities are also called Long Term
Sources of Funds
 Current Liabilities are known as Short Term Sources of Funds
 Long Term Liabilities & Short Term Liabilities are also called
Outside Liabilities
 Current Assets are Short Term Use of Funds
 Assets other than Current Assets are Long Term Use of Funds
 Installments of Term Loan Payable in 12 months are to be taken as Current
Liability only for Calculation of Current Ratio & Quick Ratio.
 If there is profit it shall become part of Net Worth under the head Reserves
and if there is loss it will become part of Intangible Assets
 Investments in Govt. Securities to be treated current only if these are
marketable and due. Investments in other securities are to be treated
Current if they are quoted. Investments in allied/associate/sister units or
firms to be treated as Non-current.
 Bonus Shares as issued by capitalization of General reserves and as such do
not affect the Net Worth. With Rights Issue, change takes place in Net Worth
and Current Ratio.
1. Current Ratio : It is the relationship between the current
assets and current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern are
Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio
will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1
The ideal Current Ratio preferred by Banks is 1.33 : 1

## 2. Net Working Capital : This is worked out as surplus of Long

Term Sources over Long Tern Uses, alternatively it is the
difference of Current Assets and Current Liabilities.
NWC = Current Assets – Current Liabilities
3. ACID TEST or QUICK RATIO : It is the ratio between
Quick Current Assets and Current Liabilities.

## Quick Current Assets : Cash/Bank Balances + Receivables upto 6

months + Quickly realizable securities such as Govt. Securities or
quickly marketable/quoted shares and Bank Fixed Deposits

## Acid Test or Quick Ratio = Quick Current Assets/Current

Liabilities

Example :
Cash 50,000
Debtors 1,00,000
Inventories 1,50,000 Current Liabilities
1,00,000
Total Current Assets 3,00,000

## Current Ratio => 3,00,000/1,00,000

= 3:1
Quick Ratio => 1,50,000/1,00,000
4. DEBT EQUITY RATIO : It is the relationship between
borrower’s fund (Debt) and Owner’s Capital (Equity).

## Total of Capital and Reserves & Surplus Less

Intangible Assets

## Capital = Rs. 200 Lacs

Free Reserves & Surplus = Rs. 300 Lacs
Long Term Loans/Liabilities = Rs. 800 Lacs

## Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1

5. PROPRIETARY RATIO : This ratio indicates the extent
to which Tangible Assets are financed by Owner’s Fund.
Proprietary Ratio = (Tangible Net Worth/Total
Tangible Assets) x 100
The ratio will be 100% when there is no Borrowing for

## 6. GROSS PROFIT RATIO : By comparing Gross Profit

percentage to Net Sales we can arrive at the Gross Profit
Ratio which indicates the manufacturing efficiency as well as
the pricing policy of the concern.

x 100

## Alternatively , since Gross Profit is equal to Sales minus

Cost of Goods Sold, it can also be interpreted as below :

## Gross Profit Ratio = [ (Sales – Cost of goods

sold)/ Net Sales] x 100
7. OPERATING PROFIT RATIO :

Sales ) x 100

x 100

## It measures overall profitability.

9. STOCK/INVENTORY TURNOVER RATIO :

## (Average Inventory/Sales) x 365 for days

(Average Inventory/Sales) x 52 for weeks
(Average Inventory/Sales) x 12 for
months

## Average Inventory or Stocks = (Opening

Stock + Closing Stock)

-----------------------------------------

2
10. DEBTORS TURNOVER RATIO : This is also
called Debtors Velocity or Average Collection Period or
Period of Credit given .

(52 for weeks &
12 for months)

## 11. ASSET TRUNOVER RATIO : Net

Sales/Tangible Assets

## 12. FIXED ASSET TURNOVER RATIO : Net

Sales /Fixed Assets

## 13. CURRENT ASSET TURNOVER RATIO : Net

Sales / Current Assets

## 14. CREDITORS TURNOVER RATIO : This is also

called Creditors Velocity Ratio, which determines the
15. RETRUN ON ASSETS : Net Profit after
Taxes/Total Assets

## ( Net Profit before Interest & Tax / Average

Capital Employed) x 100

## Average Capital Employed is the average of the

equity share capital and long term funds
provided by the owners and the creditors of the firm
at the beginning and end of the accounting period.
Composite Ratio

## 17. RETRUN ON EQUITY CAPITAL (ROE) :

Net Profit after Taxes / Tangible
Net Worth

## 18.EARNING PER SHARE : EPS indicates the

quantum of net profit of the year that would be
ranking for dividend for each share of the company
being held by the equity share holders.

## Net profit after Taxes and Preference

Dividend/ No. of Equity Shares

## 19. PRICE EARNING RATIO : PE Ratio indicates the

number of times the Earning Per Share is covered
by its market price.
20. DEBT SERVICE COVERAGE RATIO : This ratio is
one of the most important one which indicates the
ability of an enterprise to meet its liabilities by way
of payment of installments of Term Loans and
Interest thereon from out of the cash accruals and
forms the basis for fixation of the repayment
schedule in respect of the Term Loans raised for a
project. (The Ideal DSCR Ratio is considered to be
2)

## PAT + Depr. + Annual Interest on Long

Term Loans & Liabilities

--------------------------------------------------------------
-------------------
Annual interest on Long Term Loans &
Liabilities + Annual Installments payable on
EXERCISE 1
LIABILITES ASSETS
Capital 180Net Fixed Assets 400
Reserves 20Inventories 150
Term Loan 300Cash 50
Bank C/C 200Receivables 150
Trade Creditors 50Goodwill 50
Provisions 50
800 800

## a. What is the Net Worth : Capital + Reserve = 200

b. Tangible Net Worth is : Net Worth - Goodwill = 150
c. Outside Liabilities : TL + CC + Creditors + Provisions = 600

## d. Net Working Capital : C A - C L = 350 - 250 = 50

e. Current Ratio : C A / C L = 350 / 300 = 1.17 : 1
f. Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1
EXERCISE 2
LIABILITIES 2005-06 2006-07 2005-062006-07

## Capital 300 350Net Fixed 730 750

Assets
Reserves 140 160Security 30 30
Electricity
Bank Term Loan 320 280Investments 110 110
Bank CC (Hyp) 490 580Raw Materials 150 170
Unsec. Long T L 150 170S I P 20 30
Creditors (RM) 120 70Finished Goods 140 170

## Bills Payable 40 80Cash 30 20

Expenses Payable 20 30Receivables 310 240

## Provisions 20 40Loans/Advances 30 190

1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390

## 2. Current Ratio for 2nd Year : (170 + 20 + Goodwill

240 + 2+ 190 ) / (580+70+80+70)
50 50
820 /800 = 1.02
Total 1600 1760 1600 1760
3. Debt Equity Ratio for 1 Year : 320+150 / 390 = 1.21
st
Exercise 3.

LIABIITIES ASSETS
Equity Capital 200Net Fixed Assets 800
Preference Capital 100Inventory 300
Term Loan 600Receivables 150
Bank CC (Hyp) 400Investment In Govt. 50
Secu.
Sundry Creditors 100Preliminary Expenses 100
Total 1400 1400

## 3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) /

200
= 11 : 2
4. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1
Exercise 4.
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7Cash 1
Loan From S F C 100Receivables 125
Bank Overdraft 38Stocks 128
Creditors 26Prepaid Expenses 1
Provision of Tax 9Intangible Assets 30
Proposed Dividend 15
550 550

## Q. What is the Current Ratio ? Ans : (125 +128+1+30) / (38+26+9+15)

: 255/88 = 2.89 : 1

## Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW

= 100 / ( 362 – 30)
= 100 / 332 = 0.30 : 1
Exercise 4. contd…
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7Cash 1
Loan From S F C 100Receivables 125
Bank Overdraft 38Stocks 128
Creditors 26Prepaid Expenses 1
Provision of Tax 9Intangible Assets 30
Proposed Dividend 15
550 550

## Q . What is the Proprietary Ratio ? Ans : (T NW / Tangible Assets) x 100

[ (362 - 30 ) / (550 – 30)] x 100
(332 / 520) x 100 = 64%
Q . What is the Net Working Capital ?
Ans : C. A - C L. = 255 - 88 = 167

Q . If Net Sales is Rs.15 Lac, then What would be the Stock Turnover
Ratio in Times ? Ans : Net Sales / Average Inventories/Stock
1500 / 128 = 12 times approximately
Exercise 4. contd…
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7Cash 1
Loan From S F C 100Receivables 125
Bank Overdraft 38Stocks 128
Creditors 26Prepaid Expenses 1
Provision of Tax 9Intangible Assets 30
Proposed Dividend 15
550 550

Q. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.

= 1 month

## Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ?

Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0.3 months
Exercise 5. : Profit to sales is 2% and amount of profit is say
Rs.5 Lac. Then What is the amount of Sales ?

## Answer : Net Profit Ratio = (Net Profit / Sales ) x 100

2 = (5 x100) /Sales
Therefore Sales = 500/2 = Rs.250 Lac
Exercise 6. A Company has Net Worth of Rs.5 Lac, Term
Liabilities of Rs.10 Lac. Fixed Assets worth RS.16 Lac and
Current Assets are Rs.25 Lac. There is no intangible Assets
or other Non Current Assets. Calculate its Net Working
Capital.
Total Assets = 16 + 25 = Rs. 41 Lac
Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac
Current Liabilities = 41 – 15 = 26 Lac

## Therefore Net Working Capital = C. A – C.L

= 25 – 26 = (- )1 Lac
Exercise 7 : Current Ratio of a concern is 1 : 1. What will be the Net
Working Capital ?

## Answer : It suggest that the Current Assets is equal to Current Liabilities

hence the NWC would be NIL

## Exercise 8 : Suppose Current Ratio is 4 : 1. NWC is Rs.30,000/-. What

is the amount of Current Assets ?

Answer : 4 x - 1 x = 30,000
Therefore x = 10,000 i.e. Current Liabilities is Rs.10,000
Hence Current Assets would be 4x = 4 x 10,000 = Rs.40,000/-

## Exercise 9. The amount of Term Loan installment is Rs.10000/ per

month, monthly average interest on TL is Rs.5000/-. If the amount
of Depreciation is Rs.30,000/- p.a. and PAT is Rs.2,70,000/-. What
would be the DSCR ?

## DSCR = (PAT + Depr + Annual Intt.) / Annual Intt + Annual Installment

= (270000 + 30000 + 60000 ) / 60000 + 120000
= 360000 / 180000 = 2
Exercise 10 : Total Liabilities of a firm is Rs.100 Lac and Current Ratio
is 1.5 : 1. If Fixed Assets and Other Non Current Assets are to the tune
of Rs. 70 Lac and Debt Equity Ratio being 3 : 1. What would be the Long
Term Liabilities?

Ans : We can easily arrive at the amount of Current Asset being Rs. 30 Lac
i.e. ( Rs. 100 L - Rs. 70 L ). If the Current Ratio is 1.5 : 1, then Current
Liabilities works out to be Rs. 20 Lac. That means the aggregate of Net
Worth and Long Term Liabilities would be Rs. 80 Lacs. If the Debt Equity
Ratio is 3 : 1 then Debt works out to be Rs. 60 Lacs and equity Rs. 20 Lacs.
Therefore the Long Term Liabilities would be Rs.60 Lac.

## Exercise 11 : Current Ratio is say 1.2 : 1 . Total of balance sheet being

Rs.22 Lac. The amount of Fixed Assets + Non Current Assets is Rs. 10
Lac. What would be the Current Liabilities?

Ans : When Total Assets is Rs.22 Lac then Current Assets would be 22 – 10
i.e Rs. 12 Lac. Thus we can easily arrive at the Current Liabilities figure
which should be Rs. 10 Lac
Questions on Fund Flow Statement

## 1.Of three balance sheets

2.Of a single year
3.Of two consecutive years
4.None of the above.

## 1.It indicates the quantum of finance required

2.It is the indicator of utilisation of Bank funds by the concern
3.It shows the money available for repayment of loan
4.It will indicate the provisions against various expenses

## Q . In a Fund Flow Statement , the assets are represented by ?

1.Application of Funds
2.Sources of Funds
3.Surplus of sources over application
4.Deficit of sources over application
Q . In Fund Flow Statements the Liabilities are represented by ?

1.Sources of Funds
2.Use of Funds
3.Deficit of sources over application
4.All of the above.

Q . When the long term sources are more than long term uses, in the
fund flow statement, it would suggest ?

## 1.Increase in Current Liabilities

2.Decrease in Working Capital
3.Increase in NWC
4.Increase in NWC

Q . When the long term uses in a fund flow statement are more than the
long term sources, the n it would mean ?

## 1.Reduction in the NWC

2.Reduction in the Working Capital Gap
3.Reduction in Working Capital
4.All of the above
Q. How many broader categories are there for the Sources of funds, in
the Fund Flow Statement ?

## 1. Only One, Source of Funds

2.Two, Long Term and Short Term Sources
3.Three , Long, Medium and Short term sources
4.None of the above.