Presentation on theme: "RATIO ANALYSIS R K MOHANTY FACULTY MEMBER, SIR SPBT COLLEGE,"— Presentation transcript:
1 RATIO ANALYSIS R K MOHANTY FACULTY MEMBER, SIR SPBT COLLEGE, CENTRAL BANK OF INDIA, MUMBAI
2 WHY FINANCIAL ANALYSIS Lenders’ need it for carrying out the followingTechnical AppraisalCommercial AppraisalFinancial AppraisalEconomic AppraisalManagement Appraisal
3 Ratio AnalysisIt’s a tool which enables the banker or lender to arrive at the following factors :Liquidity positionProfitabilitySolvencyFinancial StabilityQuality of the ManagementSafety & Security of the loans & advances to be or already been provided
4 How a Ratio is expressed? As Percentage - such as 25% or 50% . For example if net profit is Rs.25,000/- and the sales is Rs.1,00,000/- then the net profit can be said to be 25% of the sales.As Proportion - The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4.As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4th of the sales.
5 Classification of Ratios Balance Sheet RatioP&L Ratio or Income/Revenue Statement RatioBalance Sheet and Profit & Loss RatioFinancial RatioOperating RatioComposite RatioCurrent RatioQuick Asset RatioProprietary RatioDebt Equity RatioGross Profit RatioExpense RatioNet profit RatioStock Turnover RatioFixed Asset Turnover Ratio, Return on Total Resources Ratio,Return on Own Funds Ratio, Earning per Share Ratio, Debtors’ Turnover Ratio,
6 Format of balance sheet for ratio analysis LIABILITIESASSETSNET WORTH/EQUITY/OWNED FUNDSShare Capital/Partner’s Capital/Paid up Capital/ Owners FundsReserves ( General, Capital, Revaluation & Other Reserves)Credit Balance in P&L A/cFIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIESOriginal Value Less DepreciationNet Value or Book Value or Written down valueLONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions)Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term LiabilitiesNON CURRENT ASSETSInvestments in quoted shares & securitiesOld stocks or old/disputed book debtsLong Term Security DepositsOther Misc. assets which are not current or fixed in natureCURRENT LIABILTIESBank Working Capital Limits such as CC/OD/Bills/Export CreditSundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or depositsExpenses payable & provisions against various itemsCURRENT ASSETS : Cash & Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks & inventory (RM,SIP,FG) Stores & Spares, Advance Payment of Taxes, Prepaid expenses, Loans and Advances recoverable within 12 monthsINTANGIBLE ASSETSPatent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses
7 Some important notesLiabilities have Credit balance and Assets have Debit balanceCurrent Liabilities are those which have either become due for payment or shall fall due for payment within 12 months from the date of Balance SheetCurrent Assets are those which undergo change in their shape/form within 12 months. These are also called Working Capital or Gross Working CapitalNet Worth & Long Term Liabilities are also called Long Term Sources of FundsCurrent Liabilities are known as Short Term Sources of FundsLong Term Liabilities & Short Term Liabilities are also called Outside LiabilitiesCurrent Assets are Short Term Use of Funds
8 Some important notesAssets other than Current Assets are Long Term Use of FundsInstallments of Term Loan Payable in 12 months are to be taken as Current Liability only for Calculation of Current Ratio & Quick Ratio.If there is profit it shall become part of Net Worth under the head Reserves and if there is loss it will become part of Intangible AssetsInvestments in Govt. Securities to be treated current only if these are marketable and due. Investments in other securities are to be treated Current if they are quoted. Investments in allied/associate/sister units or firms to be treated as Non-current.Bonus Shares as issued by capitalization of General reserves and as such do not affect the Net Worth. With Rights Issue, change takes place in Net Worth and Current Ratio.
9 Current Ratio : It is the relationship between the current assets and current liabilities of a concern.Current Ratio = Current Assets/Current LiabilitiesIf the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1The ideal Current Ratio preferred by Banks is : 1Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses, alternatively it is the difference of Current Assets and Current Liabilities.NWC = Current Assets – Current Liabilities
10 Current Ratio = > 3,00,000/1,00,000 = 3 : 1 3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities.Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed DepositsAcid Test or Quick Ratio = Quick Current Assets/Current LiabilitiesExample :Cash ,000Debtors ,00,000Inventories ,50, Current Liabilities 1,00,000Total Current Assets 3,00,000Current Ratio = > ,00,000/1,00, = 3 : 1Quick Ratio = > ,50,000/1,00, = 1.5 : 1
11 DEBT EQUITY RATIO : It is the relationship between borrower’s fund (Debt) and Owner’s Capital (Equity).Long Term Outside Liabilities / Tangible Net WorthLiabilities of Long Term NatureTotal of Capital and Reserves & Surplus Less Intangible AssetsFor instance, if the Firm is having the following :Capital = Rs. 200 LacsFree Reserves & Surplus = Rs. 300 LacsLong Term Loans/Liabilities = Rs. 800 LacsDebt Equity Ratio will be => 800/500 i.e. 1.6 : 1
12 Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100 5. PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owner’s Fund.Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100The ratio will be 100% when there is no Borrowing for purchasing of Assets.6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to Net Sales we can arrive at the Gross Profit Ratio which indicates the manufacturing efficiency as well as the pricing policy of the concern.Gross Profit Ratio = (Gross Profit / Net Sales ) x 100Alternatively , since Gross Profit is equal to Sales minus Cost of Goods Sold, it can also be interpreted as below :Gross Profit Ratio = [ (Sales – Cost of goods sold)/ Net Sales] x 100A higher Gross Profit Ratio indicates efficiency in production of the unit.
13 7. OPERATING PROFIT RATIO : It is expressed as => (Operating Profit / Net Sales ) x 100Higher the ratio indicates operational efficiencyNET PROFIT RATIO :It is expressed as => ( Net Profit / Net Sales ) x 100It measures overall profitability.
14 2 (Average Inventory/Sales) x 52 for weeks 9. STOCK/INVENTORY TURNOVER RATIO :(Average Inventory/Sales) x for days(Average Inventory/Sales) x for weeks(Average Inventory/Sales) x for monthsAverage Inventory or Stocks = (Opening Stock + Closing Stock)2. This ratio indicates the number of times the inventory is rotated during the relevant accounting period
15 10. DEBTORS TURNOVER RATIO : This is also called Debtors Velocity or Average Collection Period or Period of Credit given .(Average Debtors/Sales ) x 365 for days(52 for weeks & 12 for months)11. ASSET TRUNOVER RATIO : Net Sales/Tangible Assets12. FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets14. CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio, which determines the creditor payment period.(Average Creditors/Purchases)x365 for days
16 15. RETRUN ON ASSETS : Net Profit after Taxes/Total Assets 16. RETRUN ON CAPITAL EMPLOYED :( Net Profit before Interest & Tax / Average Capital Employed) x 100Average Capital Employed is the average of the equity share capital and long term funds provided by the owners and the creditors of the firm at the beginning and end of the accounting period.
17 Composite Ratio17. RETRUN ON EQUITY CAPITAL (ROE) :Net Profit after Taxes / Tangible Net WorthEARNING PER SHARE : EPS indicates the quantum of net profit of the year that would be ranking for dividend for each share of the company being held by the equity share holders.Net profit after Taxes and Preference Dividend/ No. of Equity Shares19. PRICE EARNING RATIO : PE Ratio indicates the number of times the Earning Per Share is covered by its market price.Market Price Per Equity Share/Earning Per Share
18 20. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most important one which indicates the ability of an enterprise to meet its liabilities by way of payment of installments of Term Loans and Interest thereon from out of the cash accruals and forms the basis for fixation of the repayment schedule in respect of the Term Loans raised for a project. (The Ideal DSCR Ratio is considered to be 2 )PAT + Depr. + Annual Interest on Long Term Loans & LiabilitiesAnnual interest on Long Term Loans & Liabilities + Annual Installments payable on Long Term Loans & Liabilities( Where PAT is Profit after Tax and Depr. is Depreciation)
19 What is the Net Worth : Capital + Reserve = 200 EXERCISE 1LIABILITESASSETSCapital180Net Fixed Assets400Reserves20Inventories150Term Loan300Cash50Bank C/C200ReceivablesTrade CreditorsGoodwillProvisions800What is the Net Worth : Capital + Reserve = 200Tangible Net Worth is : Net Worth - Goodwill = 150Outside Liabilities : TL + CC + Creditors + Provisions = 600Net Working Capital : C A - C L = = 50Current Ratio : C A / C L = / 300 = : 1Quick Ratio : Quick Assets / C L = 200/300 = : 1
20 1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390 EXERCISE 2LIABILITIESCapital300350Net Fixed Assets730750Reserves140160Security Electricity30Bank Term Loan320280Investments110Bank CC (Hyp)490580Raw Materials150170Unsec. Long T LS I P20Creditors (RM)12070Finished GoodsBills Payable4080CashExpenses PayableReceivables310240ProvisionsLoans/Advances190Goodwill50Total160017601. Tangible Net Worth for 1st Year : ( ) = 3902. Current Ratio for 2nd Year : ( ) / ( )820 /800 =3. Debt Equity Ratio for 1st Year : / 390 = 1.21
21 Exercise 3.LIABIITIESASSETSEquity Capital200Net Fixed Assets800Preference Capital100Inventory300Term Loan600Receivables150Bank CC (Hyp)400Investment In Govt. Secu.50Sundry CreditorsPreliminary ExpensesTotal14001. Debt Equity Ratio will be : / ( ) = 2 : 12. Tangible Net Worth : Only equity Capital i.e. = 2003. Total Outside Liabilities / Total Tangible Net Worth : ( ) / 200= 11 : 24. Current Ratio will be : ( ) / ( ) = 1 : 1
22 Exercise 4.LIABILITIESASSETSCapital + Reserves355Net Fixed Assets265P & L Credit Balance7Cash1Loan From S F C100Receivables125Bank Overdraft38Stocks128Creditors26Prepaid ExpensesProvision of Tax9Intangible Assets30Proposed Dividend15550What is the Current Ratio ? Ans : ( ) / ( ): 255/88 = : 1Q What is the Quick Ratio ? Ans : (125+1)/ 88 = : 11Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW= 100 / ( 362 – 30)= / 332 = : 1
23 Exercise contd…LIABILITIESASSETSCapital + Reserves355Net Fixed Assets265P & L Credit Balance7Cash1Loan From S F C100Receivables125Bank Overdraft38Stocks128Creditors26Prepaid ExpensesProvision of Tax9Intangible Assets30Proposed Dividend15550Q . What is the Proprietary Ratio ? Ans : (T NW / Tangible Assets) x 100[ ( ) / (550 – 30)] x 100(332 / 520) x 100 = 64%Q . What is the Net Working Capital ?Ans : C. A - C L. = = 167Q . If Net Sales is Rs.15 Lac, then What would be the Stock Turnover Ratio in Times ? Ans : Net Sales / Average Inventories/Stock1500 / 128 = 12 times approximately
24 Exercise contd…LIABILITIESASSETSCapital + Reserves355Net Fixed Assets265P & L Credit Balance7Cash1Loan From S F C100Receivables125Bank Overdraft38Stocks128Creditors26Prepaid ExpensesProvision of Tax9Intangible Assets30Proposed Dividend15550What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12= 1 monthQ. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ?Ans : (Average Creditors / Purchases ) x = (26 / 1050) x 12 = 0.3 months
25 Exercise 5. : Profit to sales is 2% and amount of profit is say Rs Exercise 5. : Profit to sales is 2% and amount of profit is say Rs.5 Lac. Then What is the amount of Sales ?Answer : Net Profit Ratio = (Net Profit / Sales ) x 100= (5 x100) /SalesTherefore Sales = /2 = Rs.250 LacExercise 6. A Company has Net Worth of Rs.5 Lac, Term Liabilities of Rs.10 Lac. Fixed Assets worth RS.16 Lac and Current Assets are Rs.25 Lac. There is no intangible Assets or other Non Current Assets. Calculate its Net Working Capital.AnswerTotal Assets = = Rs. 41 LacTotal Liabilities = NW + LTL + CL = CL = 41 LacCurrent Liabilities = 41 – 15 = 26 LacTherefore Net Working Capital = C. A – C.L= 25 – 26 = (- )1 Lac
26 Exercise 7 : Current Ratio of a concern is 1 : 1 Exercise 7 : Current Ratio of a concern is 1 : 1. What will be the Net Working Capital ?Answer : It suggest that the Current Assets is equal to Current Liabilities hence the NWC would be NILExercise 8 : Suppose Current Ratio is 4 : 1. NWC is Rs.30,000/-. What is the amount of Current Assets ?Answer : 4 x - 1 x = 30,000Therefore x = 10,000 i.e. Current Liabilities is Rs.10,000Hence Current Assets would be 4x = 4 x 10,000 = Rs.40,000/-Exercise 9. The amount of Term Loan installment is Rs.10000/ per month, monthly average interest on TL is Rs.5000/-. If the amount of Depreciation is Rs.30,000/- p.a. and PAT is Rs.2,70,000/-. What would be the DSCR ?DSCR = (PAT + Depr + Annual Intt.) / Annual Intt + Annual Installment= ( ) /= / = 2
27 Exercise 10 : Total Liabilities of a firm is Rs Exercise 10 : Total Liabilities of a firm is Rs.100 Lac and Current Ratio is 1.5 : 1. If Fixed Assets and Other Non Current Assets are to the tune of Rs. 70 Lac and Debt Equity Ratio being 3 : 1. What would be the Long Term Liabilities?Ans : We can easily arrive at the amount of Current Asset being Rs. 30 Lac i.e. ( Rs. 100 L - Rs. 70 L ). If the Current Ratio is 1.5 : 1, then Current Liabilities works out to be Rs. 20 Lac. That means the aggregate of Net Worth and Long Term Liabilities would be Rs. 80 Lacs. If the Debt Equity Ratio is 3 : 1 then Debt works out to be Rs. 60 Lacs and equity Rs. 20 Lacs. Therefore the Long Term Liabilities would be Rs.60 Lac.Exercise 11 : Current Ratio is say 1.2 : 1 . Total of balance sheet being Rs.22 Lac. The amount of Fixed Assets + Non Current Assets is Rs. 10 Lac. What would be the Current Liabilities?Ans : When Total Assets is Rs.22 Lac then Current Assets would be 22 – 10 i.e Rs. 12 Lac. Thus we can easily arrive at the Current Liabilities figure which should be Rs. 10 Lac
28 Questions on Fund Flow Statement Q . Fund Flow Statement is prepared from the Balance sheet :Of three balance sheetsOf a single yearOf two consecutive yearsNone of the above.Q. Why this Fund Flow Statement is studied for ?It indicates the quantum of finance requiredIt is the indicator of utilisation of Bank funds by the concernIt shows the money available for repayment of loanIt will indicate the provisions against various expensesQ . In a Fund Flow Statement , the assets are represented by ?Application of FundsSources of FundsSurplus of sources over applicationDeficit of sources over application
29 Q . In Fund Flow Statements the Liabilities are represented by ? Sources of FundsUse of FundsDeficit of sources over applicationAll of the above.Q . When the long term sources are more than long term uses, in the fund flow statement, it would suggest ?Increase in Current LiabilitiesDecrease in Working CapitalIncrease in NWCQ . When the long term uses in a fund flow statement are more than the long term sources, the n it would mean ?Reduction in the NWCReduction in the Working Capital GapReduction in Working CapitalAll of the above
30 Q. How many broader categories are there for the Sources of funds, in the Fund Flow Statement ? Only One, Source of FundsTwo, Long Term and Short Term SourcesThree , Long, Medium and Short term sourcesNone of the above.Which of following item is not an application of funds in the