MEANING A ratio shows the relationship between two numbers.

Accounting ratio shows the relationship between two accounting figures. Ratio analysis is the process of computing and presenting the relationships between the items in the financial statement. It is an important tool of financial analysis, because it helps to study the financial performance and position of a concern. Classification of ratios based on function 1. Liquidity Ratios : show the relationship between the current assets and current liabilities of the concern. Examples are Liquid ratio and Current ratio. . Leverage Ratios: show the relationship between proprietor!s funds and debts used in financing the assets of the concern. Examples are Capital gearing ratio, "ebt#Equity ratio and $roprietary ratio. %hese are also &nown as Solvency ratios. '. Activity Ratios (also &nown as urnover ratios or !roductivity ratios) show the relationship between the sales and the assets. Examples are *toc& turno+er ratio, "ebtors turno+er ratio etc. ,. !rofitability ratio s"o# the relationship between Profits and sales- for example, .perating ratio, gross profit ratio, .perating net profit ratio, Expenses ratios etc.- or Profits and investments- for example, /eturn /eturn on capital employed., /eturn on in+estments, /eturn on equity capital etc. 0. Coverage ratios show the relationship between the profit on one hand and the claims of outsiders (di+idend, interest etc.) to be paid out of such profits. Examples are "i+idend payout ratio and "ebt ser+ices ratio. !rofit and loss account Ratio: GR$SS !R$%I RA I$ Meaning %his ratio compares gross profit with net sales. It is usually expressed in the form of percentage. %or&ula Gross 'rofit ( Gross !rofit ) *++ Net Sales %unction,!ur'ose 1ross profit is a profitability ratio, which shows the relationship between profits and sales. %his ratio helps to 2udge (i) how efficient the concern is in managing its production, purchase, selling and in+entory- (ii) how good its control is o+er the direct costs- (iii) how producti+e the concern is- and (i+) how much amount is left to meet other expenses and earn net profit. 1

$!ERA ING RA I$ Meaning .perating ratio expresses the relationship between total operating costs and net sales. It is expressed by way of percentage . %or&ula $'erating Ratio ( Cost of Goods Sold - $'erating E)'enses ) *++ Net Sales %unction,!ur'ose .perating ratio indicates cost of operations. Its purpose is to measure and to ascertain the efficiency of the management as regards operations. %his ratio helps to 2udge (i) how efficient the concern is in controlling its costs of production, administration, selling expenses- and (i+) how much amount out of sales re+enue is used up in carrying out the operations of the concern. E.!ENSES RA I$ Meaning %his ratio expresses the relationship between each item of expenditure and sales. It is expressed as a percentage. %otal of all Expenses ratios will be equal to operating ratio. %or&ula E)'ense Ratio ( E)'enditure ) *++ Net Sales e.g. Cost of goods *old ( 3actory cost) 4 C.1* 5 166 7et sales Administrati+e Expenses /atio 4 Administrati+e Expenses x 166 7et *ales 3inance expenses4 3inance expenses 8166 7et sales *elling Expenses /atio 4 *elling Expenses x 166 7et *ales

$!ERA ING !R$%I RA I$ Meaning .perating profit ratio indicates the relationship between .perating profit and the sales. %or&ula $'erating !rofit ( $'erating !rofit ) *++ ( Net Sales Co&'onents $'erating 'rofit /$!0 ( 1. 1ross $rofit . Less9 .perating expense :.E; %unction,!ur'ose .perating profit ratio is a profitability ratio, which shows the relationship between profits and sales. It indicates profits from operations. %his ratio helps to 2udge (i) how efficient the concern is in managing all its operations of production, purchase, in+entory, administration, selling, distribution etc.- and (ii) how much amount is left to meet non#operating expenses and earn net profits. NE !R$%I RA I$ Meaning 7et profit ratio indicates the relationship between net profit and the sales. It is usually expressed in the form of a percentage. Net !rofit ( 1alance S"eet Ratio C2RREN RA I$ Meaning %his ratio compares the current assets with the current liabilities. It is expressed in the form of a pure ratio e.g. 91 %or&ula Current Ratio ( Current Assets ( Current Liabilities CA CL Net !rofit ) *++ Net Sales

'

%unction,!ur'ose Current ratio is a liquidity/solvency ratio which indicates the ability of the concern to meet its short#term liabilities. It measures the short term sol+ency of the concern. It is used by a creditor to 2udge the safely margin a+ailable and to decide the amount and the terms of the credit. %he standard ratio is 9 1. LI32I4 RA I$ Meaning Liquid ratio compares the quic& assets with the quic& liabilities. It is measures the immediate sol+ency position of the company. It is also &nown as <uic& ratio or Acid test ratio. %or&ula Liquid ratio ( 3uic5 Assets 3uic5 Liabilities ( 3A 3L

Note: 3A(Current Assets less Closing Stoc5 less !re'ay&ent 3L(Current Liabilities less 1an5 $verdraft less inco&e received in advance 7ote 19 *toc& is excluded cash. 7ote 9 >an& o+erdraft is excluded because it is almost with ban& and not required to be paid bac& is full as long as the concern exists. because it is uncertain as to when and how much it will reali=e. $repayment (pre#paid expenses, ad+ances etc) are excluded because they cannot be con+erted into

S $C6 $ 7$R6ING CA!I AL RA I$ Meaning %or&ula: *toc& ?or&ing capital %his ratio shows the relationship between the closing stoc& and the wor&ing capital. It helps to 2udge the quantum of in+entories in relation to the wor&ing capital of the business. It is expressed as a percentage. It is also &nown as In+entory ?or&ing Capital /atio. 8166

If the stoc& to wor&ing capital is @6A. It means @6A of the wor&ing capital is bloc&ed in assets and '6A is bloc&ed in other current assets. !R$!RIE $R8 RA I$ Meaning $roprietory ratio compares proprietor!s funds with total assets. It is usually expressed in the form of percentage. %or&ula !ro'rietory Ratio ( !ro'rietors9 %unds or S"are"older9s Equity otal Assets Co&'onents $roprietor!s 3unds :$3; will include 1. $aid up Equity capital (EC) . /eser+es B *urplus (/*) including capital reser+es, re+enue reser+es, $ B L aCc Cr. >alance. Less9 Accumulated losses (i.e. $ B L aCc "r. >alance) Less9 3ictitious Assets li&e Discellaneous Expenditure not written off. '. $aid up $reference Capital ($C) %hus, $3 4 EC E /* E $C FDisc Exp %unction,!ur'ose $roprietory ratio is a solvency ratio which indicates (i) the long term sol+ency- and (ii) the extent of funds in+ested by the owners in relation to total funds employed in the business (i.e. pcapitalization). 4E1 : E32I 8 RA I$ Meaning %his ratio compares the long#term debt with shareholders! funds. It is usually expressed as a pure ratio. %or&ula 4ebt ( 1orro#ed %unds ( 1% . *++ ( !% . *++ A

Equity

!ro'rietors9 %unds

!%

!ur'ose,%unction "ebt Fequity ratio is a solvency ratio which indicates the proportion of debt and equity in financing of the assets of the concern. "ebt#equity ratio shows the (i) margin of safety for long term creditors- and (ii) the balance between debt and equity (i.e. capitali=ation). If the debt equity ratio is .09 1, it indicates that for e+ery .0 obtained from debt, the company has obtained /e 1 from the shareholder CA!I AL GEARING RA I$ Meaning ; May <++<= %he Capital 1earing ratio shows the relationship between two types of capital +i= (i) 3unds not bearing fixed rate of interest and di+idend# Equity capital including reser+es less fictitious asset . and (ii) . 3unds and di+idend bearing fixed rate of interest $reference capital and Long %erm >orrowing. %his is also &nown as GCapital *tructure ratio!. ?hen the ratio is more than 1, the company is said to highly geared and when the ratio is less than 1 the company lowly geared. It shows that out of total capital employed, on how much funds the company ha+e to pay fixed rate of interest and di+idend. %or&ula( %unds bearing fi)ed rate of interest and dividend %unds not bearing fi)ed rate of interest and dividend !reference S"are ca'ital - 4ebenture - Long ter& 1an5 loan - !ublic de'osit Equity s"are ca'ital - Reserves and Sur'lus : Misc e)'enditure Co&bined Ratio: RE 2RN $N CA!I AL EM!L$8E4 ; MA8 <++>= Meaning %his ratio measures the relationship between net profit (before interest and tax) and the capital employed to earn it. It is expressed as a percentage . %his ratio is also &nown as G/eturn on In+estment! :/.I; %or&ula /eturn on Capital Employed 4 $rofit (before Interest, %ax) Capital Employed

x 166

Co&'onents $rofit (before Interest, %ax) :$>I%; 4 1. $rofit before interest on long term borrowing tax B di+idends. . Less abnormal, non#recurring items. Ca'ital E&'loyed ;CE= ( 1 Equity capital . Add. $reference capital E /eser+es B *urplus '. Add. Long term >orrowings (%erms loans E "ebentures) ,. Less 9 3ictitious assets li&e Discellaneous Expenses not written off 0. Less 9 $rofit B loss ACc. "r. >alance (loss). Note : Capital employed may be ta&en to mean Assets Employed, in which case, Ca'ital E&'loyed /CE0 can also be computed as 1. 3ixed Assets (Less depreciation) ( including in+estments) . Add 9 Current Assets '. Less 9 Current Liabilities ,. Exclude 3ictitious assets. %unction , !ur'ose /eturn on capital employed ratio is a profitability ratio, which shows the relationship between profits and in+estments. Its purpose is to measure the o+erall profitability from the total funds made a+ailable by the owners and lenders. %his ratio helps to 2udge how efficient the concern is in managing the funds at its disposal. RE 2RN $N !R$!RIE $RS9 %2N4S Meaning %his ratio measures the relationship between net profit (after interest and tax) and the proprietors! capital. It is usually expressed as a percentage. It is also &nown as /eturn on $roprietor!s Equity or /eturn on 7et ?orth %or&ula Return on !ro'rietor9s %unds ( Net !rofit ;after a)= !ro'rietor9s %unds RE 2RN $N E32I 8 S?ARE?$L4ER %2N4 Meaning %his ratio measures the relationship between net profit (after interest, tax and preference di+idend) and the equity shareholders funds. It is usually expressed as a percentage. %or&ula ) *++ ( N!A !% ) *++

Return on Equity Ca'ital ( Co&'onents :

N!A : !refrence dividend . *++ Equity S"are"older9s %unds

Equity shareholders Funds [EF] = Equity capital :EC; /eser+es and *urplus :/*; Less9 3ictitious assets li&e Discellaneous Expenses not written off Less9 $rofitB Loss ACc "r. >alance(loss) 4E1 $RS 2RN$@ER Meaning %his ratio shows the relationship between net credit sales and a+erage trade debtors .It is expressed as a times. Actual debtors turno+er ratio of H times indicates that debtors turno+er H times during the year %or&ula 4ebtors urnover ( Net Credit Sales Avg Accounts Receivable - Avg 1ills receivable

4ebtors @elocity ;4ebt Collection !eriod= "ebtors +elocity means the period (months or days) ta&en by the debtors for settlement of their bills. It shows the number of days for which credit sales remain outstanding ( >AB days, *< &ont"s 4ebtors urnover Ratio %unction , !ur'ose "ebtors turno+er ratio is a turnover ratio, which shows the relationship between credit sales and debtors. Its purpose is to (I) calculate the speed with which debtors get settled on an a+erage during the year- (ii) calculate the debtors +elocity to indicate the period of credit allowed to a+erage debtor- and (iii) 2udge how efficiently the debtors are managed. CRE4I $RS 2RN$@ER RA I$ Meaning Creditors turno+er ratio shows the relationship between the net credit purchases and the a+erage trade creditors. Actual debtors turno+er ratio of H times indicates that debtors turno+er H times during the year

%or&ula Creditors %urno+er 4 Credit $urchases 4 Accounts $ayable 7et Credit $urchases A+g Creditors E A+g >ills $ayable

Creditors @elocity ;4ebt !ay&ent !eriod= Creditors +elocity means the period (months or days) ta&en by the concern to pay off its creditors. Credit !eriod EnCoyed 4 'H0 days or 1 months Creditors %urno+er %unction , !ur'ose Creditors turno+er ratio is a turnover ratio, which shows the relationship between credit purchases and creditors. Its purpose is to (i) calculate the speed with which creditors are paid off on an a+erage during the year- (ii) calculate the creditors +elocity to indicate he period ta&en by the a+erage creditor to be paid off- and (iii) 2udge how efficiently the creditors are managed. S $C6 2RN$@ER RA I$ *toc& turno+er ratio shows the relationship between the cost of goods sold and the a+erage stoc&. %his ratio is normally expressed as a Grate! %or&ula A. Stoc5 urnover Ratio ( Cost of Goods Sold Average Stoc5

%unction, !ur'ose *toc& turno+er ratio is an acti+ity ratio, which shows the relationship between sales and stoc&. Its purpose is to (i) calculate the speed at which stoc& is being turned o+er into sales- (ii) calculate the stoc& +elocity to indicate he period ta&en by the a+erage stoc& to be sold out- and (iii) 2udge how efficiently the stoc&s are managed and utili=ed to generate sales. Actual Ratio 3or example, a *toc& turno+er ratio of I, indicates that the stoc& is being turned into sales cI times during the year. %he In+entory cycle ma&es I rounds during the year. It also helps to wor& out the *toc& Jolding $eriod (stoc& +elocity). If the *toc& turno+er is I times, the *toc& Jolding $eriod is 1.0 months (1 months / *toc& turno+er ratio 4 1 / I). %his indicates that it ta&es 1.0 months for the stoc& to be sold out. *toc& +elocity shows the duration of the in+entory cycle. Interest Coverage Ratio:

%his ratio indicates sufficiency or deficiency of earnings to pay interest falling due within the period co+ered under profits. Interest co+erage /atio4 7$>I% Interest 4E1 SER@ICE C$@ERAGE RA I$ Note : "ebt *er+ice Co+erage /atio (which deals with the capacity to pay interest as well as loan installment) is different from "ebt *er+ice /atio Meaning "ebt *er+ice Co+erage /atio shows the relationship between net profits and interest E installments payable on loans. It is expressed as a pure number. "ebt *er+ice means the payment of interest E installments on loans. Co+erage means the a+ailability of profits for debt ser+icing. %or&ula 4ebt Service Coverage Ratio ( Net 'rofit - 4e'reciation - Interest on er& loan Interest - Install&ent due on loans %unction , !ur'ose "ebt *er+ice Co+erage /atio ("*C/) is a type of coverage ratio. A co+erage ratio shows the relationship between the profit and the claims of outsiders to be paid out of such profits. %he purpose of "*C/ is to measure the debt#ser+icing capacity of the company. 4I@I4EN4 !A8$2 RA I$ Meaning "i+idend $ayout /atio shows the relationship between the di+idend paid to equity shareholders out of the profits a+ailable to the equity shareholders. It shows how much percentage of earnings are gi+en as di+idend %or&ula "i+idend payout ratio 4 EARNING !ER S?ARE: E!S( N!A D !reference dividend No of Equity s"ares "i+idend per share Earning per share x 166

16

Earning per share is most widely used financial data. Jigher the ratio indicates that the company may pay di+idend at a higher rate. It shows how much percentage of earnings are gi+en as di+idend !rice :Earning ratio ;!,E ratio= 9 %his ratio is the mar&et price of shares expressed as multiple of Earning per share9 $CE ratio9 Dar&et price per share Earnings per share %his ratio indicates the mar&et price is how many times as the earning, A higher $CE ratio is good. In+estor should in+est in the company ha+ing low $CE ratio 4ividend yield ratio Mar5et 'rice 'er s"are Earning 'er s"are It means the di+idend is how percentage of mar&et price per share A4@AN AGES $% RA I$ ANAL8SIS Advantages : 2seful in analysis of financial state&ents. /atio analysis is the most important tool a+ailable for analysing the financial statements i.e. $rofit and Loss Account and >alance *heet. *uch analysis is made not only by the management but also by outside parties li&e ban&ers, creditors, in+estors etc. 2seful in i&'roving future 'erfor&ance. /atio analysis indicates the wea& spots of the business. %his helps management in o+ercoming such wea&nesses and impro+ing the o+erall performance of the business in future. 2seful in interDfir& co&'arison. Comparison of the performance of one firm with another can be made only when absolute data is con+erted into comparable ratios. If A firm is earning a net profit of /s. 06,666 while another firm > is earning /s. 1.66,666, it does not necessarily mean that firm > is better off unless this profit figure is con+erted into a ratio and then compared. 2seful in Cudging t"e efficiency of a business. As stated earlier, accounting ratios help in 2udging the efficiency of a business. Liquidity, sol+ency, profitability etc. of a business can be easily e+aluated with the help of +arious accounting ratios li&e current ratio, liquid ratio, debt# equity ratio, net profit ratio, etc. *uch an e+aluation enables the management to 2udge the operating efficiency of the +arious aspects of the business. 2seful in si&'lifying accounting figures. Complex accounting data

11

presented in $rofit and Loss Account and >alance *heet is simplified, summarised and systematised with the help of ratio analysis so as to ma&e it easily understandable. 3or example, gross profit ratio, net profit ratio, operating ratio etc. gi+e a more easily understandable picture of the profitability of a business than the Absolute figures.

Li&itations of Ratio Analysis /atio analysis is a +ery useful technique. >ut one should be aware of its limitations as well. %he following limitations should be &ept in mind white ma&ing use of
ratio analysis in interpreting the financial statements. *. Reliability of ratios de'ends u'on the correctness of the basic data. /atios ob+iously will be only as reliable as the basic data on which they are based. If the balance sheet or profit and loss account figures are themsel+es unreliable, it will be a mista&e to put any reliance on the ratios wor&ed out on the basis of that >alance *heet or $rofit and Loss Account. *. An individual ratio &ay by itself be &eaningless. Except in a few cases, an accounting ratio may by itself be meaningless and acquires significance only when compared with rele+ant ratios of other firms or of the pre+ious years. In fact, ratios yield their best ad+antage on comparison with other similar firms- also if ratios for a year are compared with ratios in the pre+ious years, it will be a useful exercise. Comparison is the essential requirement for using ratios for interpreting a gi+en situation in a firm or industry. <. /atios are not al#ays co&'arable. ?hen the ratios of two firms are being compared, it should be remembered that different firms may follow different accounting practices. 3or example, one firm may charge depreciation on straight line basis and the other on diminishing +alue. *imilarly, different firms may adopt different methods of stoc& +aluation. *uch differences will not ma&e some of the accounting ratios strictly comparable. Jowe+er, use of accounting standards ma&es ratio comparable. *. Ratios so&eti&es give a &isleading picture. .ne company produces 066 units in one year and 1,666 units the next year- the progress is 166A. Another firm produces ,,666 units in one year and 0,666 in the next year, the progress is 0A. %he second firm will appear to be less acti+e than the first firm, if only the rate of increase or ratio is compared. It will be much more useful if absolute figures are also compared along with rate of increaseLunless the firms being compared are equal in all respects. In fact, one should be extremely careful while comparing the results of one firm with those of another firm if the two figures differ in any significant manner, say in si=e, location, degree of automation or mechanisation. <. Ratios ignore qualitative factors. /atios are as a matter of fact, tools of quantitati+e analysis. It ignores qualitati+e factors which sometimes are equally or rather more important than the quantitati+e factors. As a result of this, conclusions from ratio analysis may be distorted. 3or example, despite the fact that credit may be granted to a customer on the basis of information regarding the financial position of business as disclosed by certain ratios, but the grant of credit ultimately depends upon the credit standing, reputation and managerial ability of the customer, which cannot be expressed in the form of ratios. >. C"ange in 'rice levels &a5es ratio analysis ineffective. Changes in price le+els often ma&e comparison of figures for a number of years difficult. 3or example, the ratio of sales to fixed assets in 66' would be much higher than in 1KK0 due to rising prices because fixed assets are stilt being expressed on the basis of cost incurred a number of years ago while sates are being expressed at their current prices. <. "ere is no single standard for co&'arison. /atios of a company ha+e meaning only when they are compared with some standard ratios. Circumstances differ from firm

to firm and the nature of each industry is different. %herefore, the standards will differ for each industry and the circumstances of each firm will ha+e to be &ept in mind. It is difficult to find out a proper basis of comparison. %herefore, the performance of one industry may not be properly comparable with that of another. Msually it is recommended that ratios should be compared with the a+erage of the industry. >ut the industry a+erages are not easily a+ailable. >. Ratios based on 'ast financial state&ents are no indicators of future. Accounting ratios are calculated on the basis of financial statements of past years. /atios thus indicate what has happened in the past. *ince past is quite different from what is li&ely to happen in future, it is difficult to use ratios for forecasting purposes. %he financial analyst is more interested in what will happen in future. %he management of a company has information about the companyNs future plans and, policies and is, therefore, able to predict future to a certain extent. >ut an outsider analyst has to rely only on the past ratios which may not necessarily reflect the firms future financial position and performance.

RATIO ANALYSIS Q1) Following is the Balance Sheet of X Ltd. as on 31st March 2011. You are required to convert the sa e in !ertical for ats and. calculate the following ratios" 1# $urrent %atio 2# Liquid %atio& 3# Stoc' to (or'ing $a)ital %atio& *# +ro)rietor, %atio& -# $a)ital .earing %atio& /# 0e1t 2quit, %atio Liabilities Rs. Assets Rs. 2quit, Share $a)ital 3%s. 2&00&000 Land ; Bldg at (0! 1&00&000 10 each# +lant ; Mach at (0! 1&20&000 104 +reference Share 1&00&000 Long 8er 7nvest ents <0&000 $a)ital $a)ital (7+ :-&000 .eneral %eserve 2&00&000 7nventories 2&00&000 124 Ban' loan 1&00&000 Boo' 0e1ts 2&00&000 5ccounts +a,a1le 1&/0&000 $urrent 7nvest ents -0&000 Ban' 6verdraft 1&00&000 +re)aid 29) 10&000 5cce)tances given :-&000 $ash at Ban' *0&000 7nco e received in 2-&000 5dvance 8a9 30&000 5dvance Bills %eceiva1le =-&000 +rovision for 8a9ation 20&000 +rovision for grauitit, 20&000 10&00&000 10&00&000 8he following is the +rofit ; Loss 5>c. of X Ltd. for the ,ear ended 31st March 2011. You are required to convert the sa e in a suita1le for for anal,sis and calculate the following ratios" 1# .ross +rofit %atio& 2 # 6)erating +rofit %atio? 3# @et +rofit %atio. *#2B7085 Particulars Rs. Particulars Rs. 8o 6)ening Stoc' 1&-0&000 B, Sales 20&00&000 8o +urchases 10&-0&000

1'

8o Factor, 29)enses 8o de)reciation 8o .ross +rofit 8o Salar, )aid 8o 5d inistrative 29)enses 8o %ent 8o 7nterest )aid on loan 8o Selling 29)enses 8o 5dvertise ent 8o Loss 1, fire 8o Legal e9)ense 8o +rovision for 8a9 8o @et +rofit

*&-0&000 -0&000 B, $losing Stoc' -&00&000 22&00&000 -0&000 1&20&000 30&000 12&000 1-&000 10&000 30&000 *0&000 1&:1&-00 1&:1&-00 /&-0&000 B, .ross +rofit B, Bad 0e1ts %ecover, B, 0ividend> 7nt. received B, )rofit on sale of asset

2&00&000 22&00&000 -&00&000 -0&000 2-&000 :-&000

/&-0&000

8he $o )anies shares are quoted on stoc' e9change at %s **./0. 5ssu e the )rinci)al )a, ent is %s 20&000.0ividened declared is 204 Fro the financial state ents given a1ove are required to calculate the following ratios" Overall Profitability Ratios: 1# %eturn on $a)ital 2 )lo,ed& 2# %eturn on Shareholders fund& 3# %eturn on 2quit, Shareholders fund *# .ross )rofit ratio -# @et )rofit ratio /# 6)erating ratio :# 2B7085 Margin Turnover Ratios: 1# Stoc' 8urnover ratio and inventor, holding )eriod& 2# 0e1tors 8urnover ratio ; 0e1tors !elocit,& 3# $reditors 8urnover ratio ; $reditors !elocit,& *# Fi9ed 5sset 8urnover %atio& -# 8otal 5sset 8urnover ratio . Ratios relate to !"uity S#ares: 1# 2arning +er Share 32+S#& 2# +rice 2arning %atio 3+>2 ratio#& 3# 0ividend +er Share 30+S#& *# 0ividend +a,out %atio 30>+ ratio#& -# 0ividend Yield %atio /# Boo' value )er share :# +rice to Boo' value )er share $overa%e Ratio: 1# 7nterest $overage %atio& 2# 0ividend $overage %atio Solvency ratio 1) "ebt equity ratio ) Current ratio ') <uic& ratio 3.<= 3rom the following information calculate Current ratio, <uic& ratio, "ebtors turno+er and net collection period , Creditor!s %urno+er ratio and net payment period in+entory turno+er ratio and in+entory holding period of A Ltd. and > Ltd. !articulars A Ltd. 1 Ltd.

1,

.pening stoc& Closing *toc& "ebtors Cash %rade Creditors >ills $ayable >an& .+erdraft Creditors for Expenses %otal $urchases Cash $urchases *ales >ills recei+able $lant and Dachinery Land and >uilding

,,66,666 I,66,666 1,@6,666 '6,666 ,I6,666 6,666 ,6,666 H6,666 K,'6,666 '6,666 0,66,666 1,66,666 1,06,666 1,66,666

1,66,666 1,66,666 1,,6,666 H6,666 1,06,666 16,666 '6,666 16,666 H,H6,666 6,666 @,06,666 06,666 1,H0,666 06,666

3>= %he following data of %ata Ltd. Is a+ailable for the year ending '1C6'C 66 . $articulars /s. (In Lacs) *hare Capital 6,66,666 Equity shares of /s 16 each 66.66 1eneral /eser+e 106.66 $rofit and Loss account 06.66 16A $reference *hare capital @0.66 $roposed "i+idends 16.66 $ro+ision for %ax ,,.66 10A Long term loan '66.66 $rofit before interest and tax 1,6.66 Calculate the following ratios from abo+e (i) /eturn on Capital Employed, (ii) /eturn on 7et worth or shareholders funds (iii) /eturn on equity share holders fund. (i+) "ebt equity ratio

<,) 3ollowing information is a+ailable relating to A Ltd. and > Ltd !articulars A Ltd. 1 Ltd. ;Rs. in ;Rs. in La5"s= La5"s= Equity *hare Capital (/s. 16) 66 06 16A $reference *hare Capital I6 166 /eser+es ,0 06 10A "ebentures 6 H6 $rofit before Interest and %axes H6 I6 $roposed "i+idend 6 0 10

$ro+ision for tax 1@ 1 Dar&et $rice per share /s. 06 /s. H6 Oou are required to calculate (i) E$*, (ii) $CE /atio, (iii) "i+idend $ayout /atio, (i+) "i+idend yield (+) >oo& +alue per share (+i) $rice to >oo& +alue per share ?o&e #or5 section 3B= Calculate from the following details furnished by pardeshi ltd a) Current ratio b) Liquid ratio c)Credit turno+er and a+erage credit period d)"ebtors turno+er ratio and A+erage credit period e)*toc& turno+er ratio *toc& F/s 1,66,666 "ebtors#/s 1,,6,666 Cash F/s H6,666 Creditors F/s 1,H6,666 >an& o+erdraft#/s '6,666 .utstanding expenses# /s 16,666 %otal purchases#/s H,H6,666 Cash purchases F/s 6,666 1ross profit#''1C' A
Ratios :- Current Ratio = (1)
=
CA =

CA CL

1,00,000 + 1,40,000 + 60,000 1,60,000 + 30,000 + 10,000

3,00,000 2,00,000

= 1.50 :

1
CA - *to + - 're(a)#ent

(2)
= =

Li,uid Ratto =

CL $%& "n o#e re eiveo! in advan e

',66,666 # 1,66,666 # 7il ,66,666 '6,666 7il ,66,666 1,@6,666 =1.1@

(3) Creditors turnover ratio - Avera.e Credit 'eriod

C3R = = Credit 'ur 2ases Av. Creditors + Av. $1' = 4 ti#es

6,40,000 1,60,000 + /i0

Av. (a)#ent (eriod =

&3R = = Credit sa0es

360 C3R

360 4

= 40 da)s

Av. &e6tor7s + Av. $1R = 5.05 ti#es

4,40,000 1,40,000 + /i0

C%8* - 8ross 'ro!it = sa0es 66.669. - 33.339. = 100

1H

6,60,000 = 4,40,000 %(enin. - 0osin. sto + is assu#ed to Rs. 1,00,000 &e6t o00e t (eriod =
360 5.05 = 51 da)s

(e) *to + turnover Ratio = s

= 6,60,000 1,00,000 = 6.6 ti#e

C%8* Av. sto +

Av. *to + =
= 2

.pening stoc& +closing stoc&

1,00,000 + 1,00,000

= 1,00,000

3A=%he Capital of A>C Ltd. consists of KA $reference *hares of /s. 16 each, /s. ',66,666, Equity *hares of /s. 16 each, /s. I,66,666. %he profit after tax is /s ,@6,666, Equity "i+idend is 6A and mar&et price of Equity *hares /s. ,6. Oou are required to calculate following ratios and comment on them, (a) "i+idend Oield, (b) "i+idend Co+er, (c) Earnings $er *hare and (d) $rice#Earnings /atio.
Q7: (a) &ividend )ie0d =
= 2 40

&'* :'*

100

100 = 5;

(6) 're!eren e and <,uit) dividend over = 're!eren e dividend over = <,uit) dividend over
7$A% # $reference di+idend Equity di+idend
= 2,50,000 25,000 1,60,000

,@6,666 @,666

(',66,666 KA ) = 10 ti#es

= 1.51 ti#es ( )
=

<'* =

/'A3 - 're!eren edividend /o. o! <,uit) *2ares

@666

,@6,666 # I6,666

='.6' per share

(d)

'ri e - <arnin. ratio =

:'* <'*

40 3.03

=13.20 ti#es

1@

3E= :DCs. 1reen a >lue Ltd. has presented its financial information for year 66H as follows9>alance *heet on '1st Darch, 66H Liabilities Amount Assets Amount /s. /s. *hare Capital 1 ,66,666 3ixed Assets I,H6,666 /eser+es and I,66,666 *toc& in Jand 1K,I6,666 *urplus 16 A Long %erm ,@6,666 *. "ebtors 1H,06,666 "ebt Current Liabilities ',06,666 Cash and >an& >alance 1,'6,666 %otal HH, 6,666 %otal HH, 6,666 Income *tatement for the ended '1st Darch, 66H A&ount Rs. 7et *ales 1,6 ,66,666 Cost of 1oods *old @K, 6,666 *elling and Administrati+e Expenses 10,,0,H66 7et $rofit before tax @,',,,66 (1) %ax /ate is '6A. CompanyNs Capital is, di+ided in 1, 6,666 shares of /s. 16 each ( ) Company has declared di+idend P 0A (') Dar&et $rice of the share is /s. 06 Oou are required to e+aluate in+estment in Company on the basis of9 (i) "i+idend Oield. (ii) E$*. (iii) $CE ratio. (i+)/.CE (+) "ebt equity (+i)>oo& +alue per share (+ii)$rice to boo& +alue per share (Qiii) "i+idend payout ratio.
Solution:

1I

(1) &ividend )ie0d ratio = = (2)

=

&'* :'*
2.5 50

100

100 = 5;

<'* =

/'A3 - 're!eren edividend /o o! <,uit) s2ares

= Rs. 6.12 (er s2are

5,34,400 - /i0 1,20,000

(3) '1< ratio = (4) R%C< =

= 4,60,400 42,50,000

:'* <'*

50 6.12

= =.16 ti#es

/'$"3 Ca(ita0 e#(0o)ed

100

100 = 4.44;

/'$"3 > "/3 = /'$3 /'$"3 -2,25,000 = 5,34,400 /'$"3 = 5,34,400 - 2,25,000 = 4,60,400

1K