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 92014002000 Net Block 18801600 2000 Current Assets: Stock 1520 2400 2800 Debtors 480 500 900 Other Current Assets 42012001300 24204100 5000 TotalAssets 430057007000 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 1020*100= 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 1800*100= 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