Ratio Analysis It’s a tool which enables the banker or lender to arrive at the following factors :  Liquidity position  Profitability  Solvency  Financial Stability  Quality of the Management  Safety & Security of the loans & advances to be or already been provided.

How a Ratio is expressed? As Percentage As Proportion As Pure Number /Times

Classification of items for Ratio Analysis Shareholders Fund/ Net worth: ◦ Share Capital ◦ Reserves (General, Capital, Revaluation,Other Reserves, Credit Balance in P&L A/c) ◦ Fictitious assets (Debit balance in P&L A/c, Preliminary or Preoperative expenses) Long term liabilities: ◦ Term Loans (Banks & Institutions) ◦ Debentures/Bonds, ◦ Unsecured Loans, Fixed Deposits, Other Long Term Liabilities Capital Employed: Shareholders Fund/ Net worth + Long term liabilities:

Classification of items for Ratio Analysis Current assets : ◦ Cash & Bank Balance, ◦ Marketable securities, ◦ Book Debts/Sundry Debtors, Bills Receivables, ◦ Stocks (RM,WIP,FG) Stores & Spares, ◦ Prepaid expenses, ◦ Loans and Advances recoverable within 12 months Current liabilities: ◦ Cash Credit/OD/Export Credit ◦ Sundry Creditors/Bills Payable ◦ Short duration loans or deposits ◦ Expenses payable & ◦ Provisions against various items Working Capital: Current assets - Current liabilities

Fixed assets: ◦ Land & Building, Plant & Machineries etc. ◦ Patent, Goodwill ◦ Original Value Less Depreciation ◦ Net Value or Book Value or Written down value Investments or non current assets : ◦ Investments in shares & securities ◦ Long Term Security Deposits

1. Liquidity ratios 2. Leverage/ Capital Structure ratios a.Asset Based b.Income Based 3. Profitability ratios a.Related to sales b.Related to total Investments c.Related to equity funds d.Overall profitability/ Earning power 4. Turnover ratios

Liquidity ratios Current ratio = current assets/ current liabilities Acid Test ratio/ Quick Ratio = (Current Assets – Stock – Prepaid Expenses)/ Current Liabilities or (cash + marketable securities + Debtors)/ Current Liabilities

Leverage/ Capital Structure ratios - Asset Based/ Income Based 1.Debt equity ratio: Long term Debt/ shareholders’ funds (equity share capital + preference share capital+ reserves and surplus) 2.Debt to total capital ratio = Long Term debt/ total capital employed (shareholders’ fund + long term debt) 3.Debt to total asset ratio = total debt/ total asset 4.Proprietary ratio = owners’ fund/ total assets 5.Interest Coverage ratio = earnings before interest and taxes(EBIT)/ Interest

Leverage/ Capital Structure ratios - Income Based 5.Capital gearing ratio = (Preference share capital + Debentures + other Borrowed funds)/ Equity Funds 6.Debt service coverage ratio = (earnings after tax + depreciation + other non cash exp. + interest)/ repayment installment amount + interest

Profitability ratios - Related to sales 1.Gross Profit Ratio = Gross Profit/ Net Sales 2.Operating Profit Ratio = Earnings Before Interest Tax/ Net Sales 3.Net Profit Ratio = Earning after taxes/ Net Sales 4.Cost of Goods sold ratio = Cost of Goods sold/ Net sales 5.Operating Expenses Ratio = (Administrative Exp + Selling Exp.)/ Net sales 6.Operating ratio = (Cost of Goods sold + Operating Expenses ) / Net sales

Profitability ratios - Related to total Investments 1.Return on total assets = (earnings after tax + interest)/ Total assets 2.Return on Capital employed = EBIT/ total capital employed 3.Return on Shareholders’ Equity = EAT/ shareholders’ equity

Profitability ratios – Related to equity funds 1.Return on Equity Fund = (EAT – Pref. Dividend)/ net worth 2.Earnings Per Share (EPS) = net profit available to equity shareholders (EAT – preference dividend)/ no. of equity shares 3.Dividend per share (DPS) = dividend paid to equity shareholders / number of equity shares. 4.Earnings Yield = EPS/ Market Price per share 5.Dividend yield = DPS/ Market Price per share

6.Dividend payout Ratio = EPS/ DPS 7.Price earning ratio = Market price of a share/ EPS Profitability ratios - Overall profitability or Earning power  Return on investment = EAT / Total assets

Turnover ratios 1. Inventory turnover ratio = cost of goods sold / average inventory 2. Inventory holding period = 12 or 52 or 365/ Inventory turnover ratio 3. Debtors turnover ratio = credit sales/ Avg. Drs + Avg. B.R 4. Average Collection period = 12 or 52 or 365/ Debtors turnover ratio

Turnover ratios 5. Creditors turnover ratio = credit purchases/ Avg. Crs + Avg. B.P 6. Average Payment period = 12 or 52 or 365/ Creditors turnover ratio 7. Total assets turnover = cost of goods sold / avg. total assets 8. Fixed Assets turnover = cost of goods sold / avg. fixed assets

ParticularsAmt (in Crores.) Sales1000 Less: Cost of Goods Sold (Op stock - 50)700 Gross Profit300 Add: Operating Income10 Less: Operating Expenses (Depreciation – 20, Interest – 10, Other Op exp ) 140 Operating Profit170 Add: Non Operating Income5 Less: Non Operating Expenses25 Net Profit Before Tax150 Less: Tax30 Net Profit After Tax120

ParticularsAmt (in Crores.) SOURCES OF FUNDS: A. Shareholders Funds: 1.Share Capital Equity Capital300 Preference Capital100 Add: 2. Reserves and Surplus Reserves90 P/L a/c120 Less: 3. Misc. Expenditure Share Issue exp.(10) Total Net Worth / Shareholders fund600 B. Borrowed Fund Secured Loan100 Unsecured Loan50 Total Capital Employed (A+B)750

ParticularsAmt (in Crores.) APPLICATIONS OF FUNDS: A. Fixed Assets: Gross Block 500 Less: Prov. For Depreciation 50 Net Block450 B. Long Term Investment100 C. Working Capital Current assets 400 (Stock -100, Prepaid Exp – 20, Debtors – 120, B.R. - 60, other C.A – 180) Less: Current Liabilities (200)200 (Creditors – 100, B.P – 40, other C.L. – 60) Total Capital Applied750