JAIIB _ Accounting and Finance for Bankers Module C: 15 - COMPETZ - Makes You Compete

ACCOUNTING AND FINANCE FOR BANKERS
( AFB)

Unit 15: Ratio Analysis

JAIIB-AFB-MODULE-C- Ratio Analysis
Unit - 15 : Ratio Analysis
1. Accounting ratios are relationship expressed in mathematical terms between accounting figures which for meaningful purpose.
2. Classification: P & L Ratios
3. Balance Sheet Ratios
4. Composite or Inter-Statement Ratios.

Functional Classification
1. Profitability
2. Turnover/Activity Ratios
Financial/Solvency Ratios
3. Financial Ratios may be further classified as Short Term Ratios/Liquidity Ratios or Long Term/ Solvency Ratios
Return on Capital Employed :
1. EBIT  / Capital Employed *   100
Earnings before Interest & Tax
2.Op. Profit means profit from the Operations of the Company plus Int(Long term) & Tax
3. Capital Employed
= Share Capital+ Reserves & Surplus+ Long Term loans
– ( Non- business assets + Fictitious assets)
4. Proper calculation gives us Return on Capital Employed .

Earnings Per Share (EPS)
EPS = Net Profit after tax & Pref. Dividend
                             No. of Equity Shares
This shows whether equity Capital of Co. is properly used or not Company’s capacity to pay Dividend.
EPS helps us at estimating Market Price of the Company

Price Earning (P/E Ratio)
Market Price of per Equity Share
               EPS
Helps to decide whether to buy Share of a Company.

Gross Profit Ratio
Gross Profit* 100
Net Sales
It helps in Price decision & Profit from Op. before Charging all other expenses.

Net Profit Ratio
Net Operating Profit * 100
     Net sales

Solvency Ratios
Long Term Solvency Ratios
Fixed Assets Ratios :  Fixed Assets
Long Term Funds
The ratio should not be more than one. If it is less than one then it indicates part of the Working Capital Financed through Long term Funds i.e. we may call Core Working Capital
Debt- Equity Ratio
i) DE Ratio :      Total Long Term Debt
Total Long Term Funds
ii) DE Ratio :      Total Long Term Debt
Shareholders Funds
(iii)Debt Service Coverage Ratio
= Cash Profit available for debt service Interest+ Installment
Short Term Solvency Ratio
i) Current Ratio = Current Assets
Current Liabilities
Ideal ratio: 2
Acceptable to Bank 1.33

ii) Liquidity Ratio/Acid Test or Quick Ratio:
                Liquid Assets
Current Liability

Turnover Ratios
i) Stock Turnover Ratio
=   Cost of goods Sold during the year
Average Inventory

Debtors Turn over Ratios (Debtors Velocity)
=   Credit Sales
Average Accounts Receivable
Debtors Collection Period
=   Months or days in a year
Debtors turnover
OR
     Accounts receivable
AverageMonthly/daily Credit sales
Fixed Assets Turnover Ratio
=   Cost of Goods Sold
Net Fixed Assets

Calculate the following ratios for YE March 2014 & 2015
Return on Capital Employed
Current Ratio
Debt Equity Ratio
Fixed Assets Turnover Ratio
Inventory Turnover Ratio
Earning Per Share

Balance Sheets as at 31st March Rs.Lakhs
Liabilities 2013 2014         2015
Sh. Capital
:Shares of Rs.10 each 800 1000          1000
Reserves & surplus 700 800 1000
Secured Term Loans 800 2000 2400
Cash Credits from bank 800 1000          1500
SundryCreditors   1200        900          1100
4300 5700 7000
Balance Sheets as at 31st March Rs.Lakhs
Liabilities 2013       2014 2015
Fixed Assets:
Gross Block 2800       3000 4000
    Less : Dep   920       1400     2000
Net Block 1880 1600 2000
Current Assets:
Stock 1520      2400          2800
Debtors 480 500 900
Other Current Assets   420       1200         1300
                                   2420     4100        5000
TotalAssets 4300      5700 7000
EBIT   *   100
Capital Employed
EBIT=Earnings before Interest & Tax
Ret. On Cap. Emp
= Total Cap. Employed for March,2013 is
Rs. 2300+Rs. 3800 for Mar,2014.
So Average Capital Employed is Rs.6100 /2= 3050 lakhs.
EBIT is Rs.1020. So ROCE 1020100= 33.34%
3050
ROCE for March,2015
Total Cap. Employed for March,2014 is Rs. 3800+Rs. 4400 for Mar,2015.
So Average Capital Employed is Rs.8200 /2= 4100 lakhs.
EBIT is Rs.1800.
So ROCE is  1800100= 43.90%                        4100
Current Ratio = Current Assets
Current Liabilities
2014 2015
4100 =2.16          5000 =1.92 1900 2600

Debt Equity Ratio   = Total Long Term Debt
Total Long Term Funds

2014 2015
2000 = 1.11      2400 = 1.2
1800 2000

Fixed Assets Turnover Ratio
= Cost of goods Sold during the year
Average Net Fixed Assets
We may take sales when Cost of goods figures are not available
4800 =2.76         7200 =4
1740 1800
Average Fixed Assets for March,2009
= 1880+1600=3480/2=1740
Average Fixed Assets for March,2010
= 1600+2000=3600/2=1800

Stock Turnover Ratio
= Cost of goods Sold during the year
Average Inventory
We may take sales when Cost of goods figures are not available Sales 4800 =9.8 7200   = 10.29
Av Inv. 490 700

EPS = Net Profit after tax & Pref. Dividend
                No. of Equity Shares
Net Profit after Tax for 2009 = Rs.300 Lakhs = Rs.3 =EPS
    While no. of Eq. shares are     100 Lakhs

Net Profit after Tax for 2010 =Rs.600 Lakhs =Rs. 6 =EPS
    While no. of Eq. shares are 100 Lakhs

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