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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 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

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