ratio analysis - 2

Ratio Analysis

IMT Nagpur - 2012-14

Q 1. A very high current ratio will:

A) Increase the Profitability;

B) Adverse impact on Profitability;

C) Not affect the Profitability;

D) None of the above

Ratio Analysis


Q 2. A very high current ratio may be due to:

A) Piling up of inventory;

B) Inefficiency in collection of debtors ;

C) High balances in cash and bank without proper

investment;

D) All of the above

E) None of the above

Ratio Analysis


Q 3. One of the following is not an absolute liquid

asset:

A) Cash in hand;

B) Cash at bank ;

C) Bills Receivables;

D) Marketable securities

E) None of the above

Ratio Analysis


Q 4. Fixed interest bearing funds do not include one of

the following:

A) Debentures;

B) Preference Share Capital ;

C) Long Term Investments;

D) Public deposits

Ratio Analysis


Q 5. Following ratios have been extracted from the

audited records of a large sized industrial company:

Interpret the trend of these interrelated ratios for judging the

short term liquidity and solvency of the company.

Ratio Analysis


Particulars 2008 2009 2010 2011 2012

Current Ratio 1.8 1.9 2.1 2.2 2.9

Acid Test Ratio 1.7 1.2 0.9 0.7 0.6

Current Ratio has increased from 1.8 to 2.9 in a span of 5

years. The ideal ratio is 2:1. This improvement in CR means

improvement of short term solvency.

But when we analyze the Acid Test Ratios, it is fallen from

1.7 to 0.6 in 2009. This mean that most of the CA are

locked in Inventory. Ideal standard Acid test ratio is 1:1. It

means that company is not in a position to meet its

immediate current liabilities.

Hence, steps should be taken to reduce the investment in

inventory and see that the ratio is above the level of 1:1.

Ratio Analysis


Q 6. Which of the following firms would have the least

liquidity:

A) Current Ratio = 2.2 and Quick Ratio = 1.6;

B) Current Ratio = 2.2 and Quick Ratio = 1.1 ;

C) Current Ratio = 1.2 and Quick Ratio = 0.6;

D) Current Ratio = 1.2 and Quick Ratio = 0.8

Ratio Analysis


Q 7. If the current ratio and Liquid Ratio of a firm are

2.2 and 0.8 respectively and its Current Liabilities is

R. 10 lacs. The value of stock held by the firm is

………………… lacs :

A) 12

B) 14

C) 16

D) None of the above

Ratio Analysis


Q 8. The current ratio of BM Limited is 2:1, while quick

ratio is 1.80 : 1. If the current liabilities are Rs.

40,000, the value of stock will be:

A) Rs. 6,400

B) Rs. 8,000

C) Rs. 10,000

D) Rs. 12,000

Ratio Analysis


Q 9. Warfield Company having net working capital of

Rs. 3 lacs has the current ratio of 1.8 and liquid ratio

of 1.6. Its value of stock is:

A) Rs. 55,000

B) Rs. 65,000

C) Rs. 75,000

D) Rs. 85,000

Ratio Analysis


Q 10. Consider the following information relating to

NMC Limited. Networth Rs. 250 lacs; Total Assets

Rs. 600 lacs; Long Term debt Rs. 200 lacs; Current

Liabilities Rs. 150 lacs. The debt equity ratio of

company is:

A) 0.583

B) 0.333

C) 0.800

D) 1.400

Ratio Analysis


Q Calculate the Net worth from the following balance

sheet

Ratio Analysis


Particulars Amount Particulars Amount

Equity Share

Cap

2,00,000 Fixed Assets 5,00,000

Pref. Share Cap 1,00,000 Current Assets 3,00,000

Reserve &

Surplus

1,00,000

Long Term

Liability

3,00,000

Current Liability 1,00,000

TOTAL 8,00,000 8,00,000

Net Worth = Fixed Assets + Current Assets – (Long

Term Loan + Current liabilities )

= 500000+300000-(300000 +100000)

= 400000

Net Worth = Equity Share Capital + Pref Share Capital

+R&S

= 200000+100000 + 100000

= 400000

Ratio Analysis


Ratio Analysis

Different

Kinds of

Ratios

Leverage

Ratios

Market

Based

Ratios


Liquidity

Ratios

Asset

Management

Ratios

Operating

Ratios

Asset Management Ratios

Ratio Analysis



Asset Management Ratios measure how

effectively the firm employs its resources.

These ratios are also called “turnover ratios”

which involve comparison between the level of

sales and investment in various accounts –

inventories, debtors, fixed assets etc.

Ratio Analysis



Assets Management Ratios are used to measure

the speed with which various accounts are

converted into sales or cash.

Ratio Analysis



The important asset management ratios are :

1. Inventory Turnover Ratio

2. Debtors Turnover Ratio

3. Debtors Collection Period

4. Bad debts to Sales Ratio

5. Creditors Turnover Ratio

6. Creditors Payment Period

7. Fixed Assets Turnover Ratio

8. Total Assets Turnover Ratios

9. Sales to Capital Employed

Ratio Analysis

Inventory Turnover Ratio

Inventory Turnover Ratio =

S a l e s Cost of Goods Sold

Average Inventory Average Inventory

Average Inventory = Opening Stock + Closing Stock) / 2

Sales = Sales – Sales Return

Cost of good sold = opening stock + purchase + direct expenses – closing stock

Ratio Analysis



A considerable amount of a company’s capital may be tied

up in the financing of raw materials, work in progress and

finished goods.

It is important to keep the level of the inventory as low as

possible.

Ratio Analysis



Interpretation

If the inventory turnover ratio has decreased from past, it

means that either inventory is growing or sales are

dropping.

The higher the Inventory Turnover ratio, the better.

Ratio Analysis


Ratio Analysis

LIABILITIES AMOUNT ASSETS AMOUNT

Equity share capital

Reserves & Surplus

Trade Creditors

40,00,000

6,00,000

14,00,000

60,00,000

Fixed Assets (Net)

Cash

Debtors

Inventories

28,00,000

2,40,000

18,60,000

11,00,000

60,00,000

Q. The summarized balance sheet of R.K. Limited as on

31.03.2012 is given below with other relevant details:

Other Information:

Sales 52,00,000

Less: Cost of Goods Sole 36,00,000

16,00,000

Less: Selling and Distribution Expenses 12,50,000

Net Profit 3,50,000


Inventory Turnover Ratio =

S a l e s

Average Inventory

= 52,00,000/11,00,000 = 4.73

Ratio Analysis


Debtors Turnover Ratio

Debtors Turnover Ratio =

C r e d i t S a l e s

Average Debtors

Ratio Analysis


Debtor Turnover Ratio

Measures whether the amount of resources tied up in debtors

is reasonable and whether the company has been efficient

in converting into cash.

The higher the ratios, the better the position.

Ratio Analysis


Debtors Turnover Ratio

Debtors Turnover Ratio =

Credit S a l e s

Average Debtors

= 52,00,000/18,60,000 = 2.80

Ratio Analysis


Debtors Collection Period

Debtors Collection Period =

Average Debtors * 365

Credit Sales

Ratio Analysis


Debtor Collection Period

Measures how long it take to collect amount from

debtors.

The higher the ratios, indicates inefficiency in collection of

debts.

Ratio Analysis


Ratio Analysis



Reserves & Surplus

Trade Creditors

40,00,000

6,00,000

14,00,000

60,00,000

Fixed Assets (Net)

Cash

Debtors

Inventories

28,00,000

2,40,000

18,60,000

11,00,000

60,00,000



Other Information:

Sales 52,00,000

Less: Cost of Goods Sold 36,00,000

16,00,000


Net Profit 3,50,000

Debtors Collection Period

Debtors Collection Period =

Average Debtors * 365

Credit Sales

= 11,00,000* 365

52, 00,000 = 77.21 = 77 days

Average collection period is 77 days.

Ratio Analysis


Bad debts to Sales

Bad Debts to Sales =

Bad debts * 100

Sales

Ratio Analysis


Bad debts to Sales Ratio

Measures the proportion of bad debts to sales.

This ratio indicates the efficiency of the credit control

procedures of the company.

Ratio Analysis


Creditors Turnover Ratio

Creditors Turnover Ratios =

Credit Purchases

Average Creditors

Average Creditors = Trade Creditors + Bills Payable

Ratio Analysis


Creditors Payment Period

Creditors Payment Period =

Average Creditors * 365

Credit Purchases

Ratio Analysis



This ratio shows the average time taken to pay for goods

and services purchased by the company.

The longer the credit period achieved the better, because

delays in payment means that the operations of the company

are being financed interest free by suppliers of the materials.

Ratio Analysis


Ratio Analysis



Reserves & Surplus

Trade Creditors

40,00,000

6,00,000

14,00,000

60,00,000

Fixed Assets (Net)

Cash

Debtors

Inventories

28,00,000

2,40,000

18,60,000

11,00,000

60,00,000



Other Information:

Sales 52,00,000

Less: Cost of Goods Sold (Total Purchase Rs. 28,00,000) 36,00,000

16,00,000


Net Profit 3,50,000


Creditors Payment Period =

Average Creditors * 365

Credit Purchases

= 14,00,000* 365

28, 00,000 = 182.5 = 182 days

Average payment period is 182 days.

Ratio Analysis


Fixed Assets Turnover Ratio

Fixed Asset Turnover Ratios =

S a l e s

Fixed Assets

Sales = Sales – Sales Return

Fixed Assets = Fixed Assets - Depreciation

Ratio Analysis


Fixed Assets Turnover Ratios

This ratio indicates the extent to which investment in fixed

assets contribute towards sales.

If there is increase in the ratio it will indicate that there is

improvement in the utilization of fixed asset & a decline in

ratio will indicate that fixed assets have not been used

efficiently by the firm.

Ratio Analysis


Ratio Analysis

From the following data, calculate the Fixed Assets

Turnover Ratio:

1. Gross Fixed Assets = Rs. 3,00,000

2. Accumulated Depreciation = Rs. 1,00,000

3. Total Sales = Rs. 8,50,000

4. Sales Returns = Rs. 50,000.

Ratio Analysis

NET SALES = Total Sales – Sales Returns

= Rs. 8,50,000 – Rs. 50,000

= Rs. 8,00,000

Net Fixed Asset = Gross Fixed Assets – Accumulated

Depreciation

= Rs. 3,00,000 – Rs. 1,00,000

= Rs. 2,00,000

Fixed Assets Turnover Ratio = Sales / Net Fixed Assets

= Rs. 8,00,000 - Rs. 2,00,000

= 4 Times

Total Assets Turnover Ratio

Total Asset Turnover Ratios =

S a l e s

Total Assets

Ratio Analysis


Total Assets Turnover Ratios

This ratio indicates the number of times total assets are being

tuned over in a year.

The higher the ratio, indicates overtrading of total assets,

while a low ratio indicates idle capacity.

Ratio Analysis


Sales to Capital Employed

Sales to Capital employed =

S a l e s

Capital Employed

Ratio Analysis



Net Sales = Sales – Sales returns

Capital Employed = Fixed assets + CA – CL

Capital Employed = Shareholder funds (Eq Sh Cap + Pref Sh Cap + R&S –

Fictitious Assets) + Long term debts (Debentures + Loans + Public Deposits)

Ratio Analysis



This ratio indicates, efficiency in utilization of capital

employed in generating revenue.

The ratio determines how efficiently the capital employed is

being used.

Ratio Analysis


Ratio Analysis



Profit for the year

Reserves

Trade Creditors

75,000

47,000

25,000

76,000

2,23,000

Fixed Assets

Stock

Debtors

Cash

40,000

90,000

86,000

7,000

2,23,000

Q. From the following Balance sheet of S Ltd. For the year

ended 31st December, 2011, calculate Sales to Capital

Employed Ratio:

Sales for the year amounted to Rs. 3,50,000.

Ratio Analysis

Capital employed = Fixed Assets + Working capital (CA-CL).

=40,000+90,000+86,000+7,000-76,000

=Rs. 1,47,000

Capital Turnover Ratio = Net sales / Capital employed

= 3,50,000 / 1,47,000

= 2.38 times

THANK YOU


ratio analysis - 2

Documents

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d current ratio

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current ratio of bm

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