JAIIB AFB 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   *   100
    Capital Employed
   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

1. Fixed Assets Ratios :  Fixed Assets
                                  Long Term Funds
2. The ratio should not be more than one.
3. 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

1. i) DE Ratio :      Total Long Term Debt
                           Total Long Term Funds  
2. Ii) DE Ratio :      Total Long Term Debt
                              Shareholders Funds   
3. Debt Service Coverage Ratio= Cash Profit available for debt service

                                                                                Interest+ Instalment                                           

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

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           
Average Monthly or daily Credit sales                                  

Fixed Assets Turnover Ratio =
Cost of Goods Sold
Net Fixed Assets

Calculate the following ratios for YE March2014 & 2015

1. Return on Capital Employed
2. Current Ratio
3. Debt Equity Ratio      
4. Fixed Assets Turnover Ratio 
5. Inventory Turnover Ratio
6. 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       
Sundry Creditors                             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        
Total Assets                                   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 Av. Cap. 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 Av. Cap. 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