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Par 100 posts (V.I.P)
CLASSIFICATION OF RATIOS
a) Liquidity Ratios
b) Profitability Ratios
c) Turnover Ratios
d) Leverage Ratios
e) Valuation Ratios
a) Liquidity ratio
Current Ratio Acid Test or Quick Ratio
= Current Assets = Quick Assets
Current Liabilities Current Liabilities
(2 : 1) (1 : 1)
Current Assets Cash, Bills Receivable, Inventories, Marketable Securities, prepaid items, etc.
Current Liabilities Bills Payable, Accounts payable, outstanding expenses payable, etc.
Quick Assets Current Assets – (Prepaid items + inventories)
b) Profitability ratio
In relation to sales In relation to investments
Gross profit Net Profit Return on Assets Return on Return on
Capital Employed Shareholder’s
Equity
Earning Dividend Earning Dividend pay- Return on total Return on
Per share per sha re & out ratio Shareholder’s ordinary
Dividend Equity Shareholder’s
yield Equity
A firm which generates a substantial amount of profit per rupee of sales can comfortably meet its operating expenses and provide minimum returns to its shareholders
Gross Profit Ratio = Gross profit 100
Net Sales
It measure efficiency of production as well as pricing
Net Profit Ratio = Net Profit 100
Net Sales
It measure overall efficiency i.e. production, administration, selling, tax management, etc,.
Return on Assets = Earning after taxes 100
Average total assets
It measures the profitability of the assets of the firm
Return on capital employed = Earning before interest and taxes 100
Average total capital employed
(Capital Employed = Long term funds invested by creditors & owners)
It indicates the efficiency with which the long term funds of a firm are utilized.
Return on total shareholders Equity = Earning after taxes 100
Average total shareholders equity
{Total shareholders equity = Preference share capital + Ordinary share capital + share premium + Reserves & surplus – Accumulated losses}
Return on ordinary = Earning after taxes – Preference dividend 100
Shareholders Equity Average Equity capital
{Total shareholders equity = Preference share capital + Ordinary share capital + share premium.}
Dividend per share = Dividend paid to ordinary shareholders
No.of ordinary shares
It shows how much is paid as dividend to the shareholders on each share held.
Earning per share = Net profits available to equity holders
No. of ordinary shares
It measures the profits available to the equity shareholders on each share held
Dividend Pay-out Ratio = Dividend per share 100
Earnings per share
It is the percentage share of net profits after taxes & after preference dividend has been paid to preference shareholders.
Earning & Dividend yield
Earning yield is the earning price ratio & is expressed in terms of market value per share
Earning yield = Earning per share 100
Market price per share
Dividend yield = Dividend per share 100
Market price per share
Dividend yield evaluates the performance of a company in stock market
C) Turnover/Operational ratios
Debtors Turn- Average collect- Inventory turn- Fixed Asset turn- Total asset Turn-
Over Ratio ion period over ratio over ratio over ratio
Debtors Turnover Ratio = Net Credit Sales
Average Debtors
This ratio shows how rapidly the debts are collected. The higher the ratio, the better it is for the organization.
Average Collection Period = 365 days
Accounts Receivable Turnover
Average collection period can be compared with the firm’s credit terms to judge the efficiency of a credit manager.
Inventory Turnover ratio = Cost of goods sold or Sales
Average Inventory Closing stock
Higher the ratio, the more efficient is the management of inventories & vice versa.
Fixed Assets Turnover Ratio = Net Sales
Average net Fixed assets
It measures the efficiency with which fixed assets are employed. Higher ratio, high degree of efficiency in asset utilization, while a low ratio, reflects inefficient utilization use of assets.
Total Assets Turnover = Net Sales
Total Assets
It measures how efficiently an organization is utilizing its assets
D) Leverage/Capital Structure Ratio
Ratios computed from Ratios computed from
Balance Sheet P& L A/c
Debt Equity Debt Asset Ratio Interest coverage Fixed Charge Debt Service Coverage
Ratio Coverage Ratio
Debt Equity = Debt
Equity
{Debt Short term & long term borrowings
Equity Networth (paid up equity capital + reserves & surplus) & Preference share capital}
The ratio measures relative proportions of debt & equity in financing the assets of a firm.
Debt Assets ratio = Debt
All Assets
Debt asset ratio measures the extent to which the borrowed funds support the firm’s assets.
Interest Coverage ratio = Profit before interest & taxes + Depreciation
Interest
It shows the long term debt capacity of the firm, higher the ratio it means the firm can easily meet its interest burden
Debt Service = PAT + depreciation +other non-cash expenses + Interest on term loan
Coverage ratio Interest on term loan + Repayment of term loan
1.5 or 2 is considered satisfactory
E) Valuation ratios
Price Earning ratio Market value to Book value ratio
Price Earning ratio = Market Price per share
Earning per share
It indicates the growth prospects, risk characteristics, degree of liquidity, sharholder’s orientation & corporate image of the company
Market Value to Book Value Ratio = Market price per share
Book value per share
It reflects the contribution of a company to the wealth of its shareholders. When the ratio is > 1, the company has contributed to the creation of the wealth of its shareholders.
Problems
1.The following are the ratios relating to the activities of Bharat Traders Ltd.
Debtors velocity 3 months
Stock velocity 8 months
Creditors velocity 2 months
Gross Profit Ratio 25 per cent
Gross Profit for the current year ended 31st December amounts to Rs.4,00,000. Closing Stock of the year is Rs.10,000 above the opening stock. Bills Receivable amount to Rs.25,000 and bills payable to Rs.10,000. Find out : (a) Sales (b) Sundry Debtors
(c) Closing Stock and (d) Sundry Creditors
2. From the following details, prepare the balance sheet of ABC Ltd.
Stock turnover 6
Capital turnover ratio 2
Fixed assets turnover ratio 4
Gross profit 20 per cent
Debt collection period 2 months
Creditors payment period 73 days
The gross profit was Rs.60,000. Closing stock was Rs.5,000 in excess of the opening stock.
3. The capital of XYZ Ltd is as follows:
9% preference shares, Rs.10 each Rs.3,00,000
Equity shares of Rs.10 each Rs.8,00,000
11,00,000
Additional information: Profit (after tax at 35 per cent), Rs .2,70,000; Depreciation Rs.60,000; Equity dividend paid,20 per cent; Market price of equity shares Rs.40.
You are required to compute the following, showing the necessary workings
a) Dividend yield on the equity shares
b) Cover for the preference & equity dividends
c) Earnings per shares
d) Price–earnings ratio.
4. Delta Manufacturing Co.Ltd. has drawn up the following profit and loss account for the year ended 31st March.
To Opening stock Rs.26,000 By Sales Rs.1,60,000
To Purchases 80,000 By Closing Stock 38,000
To Wages 24,000
To Manufacturing expenses 16,000
To Gross profit c/d 52,000
1,98,000 1,98,000
To Selling & distribution exp. 4,000 To Gross profit b/d 52,000
To Administrative expenses 22,800 By Compensation for 4,800
To Value of furniture lost by fire 800 acquisition of land
To General expenses 1,200
To Net Profit 28,000
56,800 56,800
You are required to find out the operating ratio and the ratio of operating net profit to net sales.
5.Using the following information, complete the balance sheet given below :
Total debt to net worth : 0.5 to 1.
Turnover of total assets (based on year-end sales figures): 2
Gross profit : 30 per cent
Average collection period (based on 360-day-year): 40 days
Inventory turnover (based on cost of goods sold and year-end inventory): 3 times
Acid test ratio: 0.75 :1
Balance Sheet
Cash Notes and accounts payable
Accounts Receivable Common Stock Rs.2,00,000
Inventory Retained Earnings 3,00,000
Plant and Equipment
Total Total
6. The financial statements of Bad Luck Ltd. for the current year ended reveal the following information:
Ratio of current assets to current liabilities 1.75 : 1.0
Liquidity ratio (debtors and bank balances to current liabilities), 1.25 :1.0
Issued capital in equity shares of Rs .10 each, Rs . 1,20,000
Net current assets (as over current liabilities) Rs.60,600
Fixed assets (net block)- % of shareholder’s equity as on the closing date,60%
Gross profit - % of turnover, 20 %
Annual rate of turnover of stock (based on cost at March 31), 5.26 times
Average age of outstanding debtors for the current year, 2 months
Net profit – percentage on issued share capital, 16 %
On March 31 the current assets consisted of stock, debtors and bank balances.
You are required to reconstruct, in as much detail as possible:
1. The balance sheet as on March 31, current year and
2. The Trading & Profit and Loss Account, for the current year ended March 31.
7. You have been supplied data for The Supreme Plastic Co.Ltd., and its industry averages;
Determine the indicated ratios for the Supreme Plastic Co.Ltd.
Balance Sheet as at March 31
Liabilities Amount Assets Amount
Equity Share Capital Rs.12,00,000 Net Fixed assets Rs.6,05,000
10% Debentures 2,30,000 Cash 2,20,000
Sundry Creditors 1,65,000 Sundry debtors 2,75,000
Bills Payable 2,20,000 Stock 8,25,000
Other current Liabilities 1,10,000
19,25,000 19,25,000
Statement of profit for the year ending March,31 current year
Sales Rs.27,50,000
Less Cost of goods sold:
Materials Rs.10,45,000
Wages 6,60,000
Factory overheads 3,24,500 20,29,500
Gross Profit 7,20,500
Less Selling and Distribution expenses 2,75,000
Less administrative and general expenses 3,07,000
Earnings before interest and taxes 1,38,500
Less Interest 23,000
Earnings before taxes 1,15,500
Less Income taxes (0.35) 40,425
Net Profit 75,075
Ratios
Industry Supreme Plastics
Current assets / current liabilities 2.4
Sales / debtors 8.0
Sales / stock 9.8
Sales / Total assets 2.0
Net Profit /Sales (per cent) 3.3
Net Profit / Total assets (per cent) 6.6
Net Profit / Net worth (per cent) 12.7
Total debt / total assets (per cent) 63.5
8. From the following particulars, prepare the balance sheet of Shri Mohan Ram and Co.Ltd. as at 31 March current year.
Current Ratio, 2
Working capital, Rs.4,00,000
Capital block to current assets,3:2
Fixed asset to turnover, 1:3
Sales cash /credit, 1:2
Debentures / share capital, 1:2
Stock velocity, 2 months
Creditors velocity, 2 months
Debtors velocity, 2 months
Gross profit ratio, 25 per cent (to sales)
Capital Block:
Net Profit,10 per cent of turnover
Reserve, 2.5 per cent of turnover
9. As the manager of a financial services company, you have received a proposal seeking a loan of Rs.300 lakh, from a firm planning an investment in fixed assets of Rs.500 lakh in anew project. The loan is indicated to be repayable in three annual instalments commencing from the end of the second year. The following information concerning the project is available: (Rs. in lakhs)
Year
1 2 3 4
Gross profit (before depreciation) 75 100 150 150
Depreciation 50 45 40 35
Interest on term loan 25 45 30 15
Working capital borrowing (interest) 10 15 20 20
Provision for tax - - 10 30
Assuming other criteria to be satisfactory, you are required to:
a) Compute appropriate financial ratio which, in your opinion, would guide the financing decision
b) Interpret briefly the ratio so computed and give your views on the proposal.
10. Below are selected ratios for the two companies in the same industry, along with the industry average:
Ratio A B Industry
Current Ratio 221 561 241
Acid – test ratio 121 301 131
Debt-asset ratio 36 5 35
Operating expenses ratio 18 17.5 20
Number of times interest earned 6 12 5
Stock turnover 8.5 6.5 7
Debtors turnover 11 15 11.4
Rate of return on total assets 17 10 13.5
Can we say on the basis of above ratios and information that company B is better than company A because its ratios are bettering six out of eight areas (all except stock turnover and rate of return on total assets)? The company B is better than the industry average in the same six categories.
11.The Balance Sheet and the Profit & Loss A/c of ABC Ltd. are given below :
LIABILITIES AMOUNT ASSETS AMOUNT
30,000 Equity Shares of Rs.10 each
Long term debts
Accounts Payable
Other Liabilities
3,00,000
1,00,000
80,000
20,000 Fixed Assets
Inventory
Accounts Receivable
Cash in hand 3,50,000
65,000
60,000
25,000
5,00,000 5,00,000
Income Statement
Rs.
Sales 9,00,000
Less:
Cost of Goods Sold 4,00,000
General Admn. And Selling expenses 1,00,000
All other expenses 2,50,000 7,50,000
Net Income 1,50,000
You are required to calculate :
1) Current market price per share if the P/E ratio is 8
2) Current ratio
3) Net Working Capital Turnover ratio
12. The following data is available from the accounts of X Ltd. and Y Ltd. in the same industry for the year ended 31st March, 2005 :
Balance Sheet of X Ltd.
LIABILITIES AMOUNT ASSETS AMOUNT
Equity Share Capital
Retained earnings
10% Debentures
Sundry Credtiors 4,40,000
3,86,000
2,00,000
3,60,000
Plant & Machinery
Stock
Debtors
Cash 6,78,000
4,92,000
1,32,000
84,000
1,38,60,000 1,38,60,000
Balance Sheet of Y Ltd.
LIABILITIES AMOUNT ASSETS AMOUNT
Equity Share Capital
Retained earnings
10% Debentures
Sundry Credtiors 7,00,000
2,00,000
4,00,000
4,20,000 Plant & Machinery
Stock
Debtors
Cash 9,60,000
3,80,000
2,52,000
1,28,000
1,72,00,000 1,72,00,000
X Ltd Y Ltd.
Sales 2,24,00,000 3,28,00,000
Cost of Goods sold 1,60,00,000 2,58,00,000
Other operating expenses 32,00,000 34,40,000
Interest expenses 2,00,000 4,00,000
Income Tax 15,00,000 15,80,000
Dividend 4,00,000 7,20,000
You are required to calculate the relevant ratio to answer the following questions :
1) Which of the companies are able to meet its current debts in a better way ?
2) Which of the companies collects its debts faster assuming all sales are on Credit ?
3) Which of the companies is making more profitable use of the Shareholders money
4) If you purchase debentures of one of the companies, which company would you Prefer ?
5) Which Company retains a larger proportion of its income in the business ?
13. The actual ratios of a company compared to the industry standard are given below. Comment on each ratio and indicate in one or two sentences the nature of action to be taken by the company :
RATIO INDUSTRY STANDARD ACTUAL RATIO OF THE COMPANY
Current Ratio
Debtor’s turnover ratio
Stock turnover ratio
Net Profit ratio
Total Assets to Debt ratio 2.2
6
10
5%
7.5% 2.7
8
3
2.4%
40%
14. Following is the Balance Sheet of Y Ltd. :
LIABILITIES AMOUNT ASSETS AMOUNT
Equity Share Capital
6% Preference Shares
7% Debentures
8% Public Deposits
Bank Overdraft
Creditors
Outstanding Creditors
Proposed Dividend
Reserves
Provision for tax
Profit & Loss A/c 1,00,000
1,00,000
40,000
20,000
40,000
60,000
7,000
10,000
1,50,000
20,000
20,000 Cash in hand
Cash at Bank
Bills Receivable
Investment
Debtors
Stock
Furniture
Machinery
Land & Building
Goodwill
Preliminary expenses 2,000
10,000
30,000
20,000
70,000
40,000
30,000
1,00,000
2,20,000
35,000
10,000
5,67,000 5,67,000
During the year provision for taxation was Rs.20,000.Dividend was proposed at AGM for Rs. 10,000. Profit carried from the last year was Rs. 15,000. You are required to calculate and comment on the following ratios :
1) Short term solvency ratios
2) Long term solvency ratios
15.Using the following information complete the following Balance Sheet :
1) Total Assets to Networth ( Shareholders fund) 1:2
2) Total Assets turnover 2 times
3) Gross Profit 30%
4) Average Collection period (Year 360 days) 40 Days
5) Inventory turnover ratio 3 times
6) Acid test ratio 3:4
Balance Sheet
As on ------------------
LIABILITIES AMOUNT ASSETS AMOUNT
Equity Share Capital
Reserves & Surplus 2,00,000
3,00,000 Plant & Machinery & other fixed assets
Inventory
Accounts receivable
Cash in hand & at Bank
16. The Assets of XYZ Ltd. consist of Fixed and Current assets while the Current Liabilities consist of Bank Credit and Trade credit in the ratio of 2:1. From the following information relating to a company for the year ended 2005 prepare the Balance Sheet showing details working :
Share Capital Rs. 1,99,500
Working Capital Rs. 45,000
Gross margin 20%
Inventory turnover 6 times
Average Collection period 2 months
Current ratio 1.5 times
Quick ratio 0.9 times
Reserves & Surplus to Cash 3 times
a) Liquidity Ratios
b) Profitability Ratios
c) Turnover Ratios
d) Leverage Ratios
e) Valuation Ratios
a) Liquidity ratio
Current Ratio Acid Test or Quick Ratio
= Current Assets = Quick Assets
Current Liabilities Current Liabilities
(2 : 1) (1 : 1)
Current Assets Cash, Bills Receivable, Inventories, Marketable Securities, prepaid items, etc.
Current Liabilities Bills Payable, Accounts payable, outstanding expenses payable, etc.
Quick Assets Current Assets – (Prepaid items + inventories)
b) Profitability ratio
In relation to sales In relation to investments
Gross profit Net Profit Return on Assets Return on Return on
Capital Employed Shareholder’s
Equity
Earning Dividend Earning Dividend pay- Return on total Return on
Per share per sha re & out ratio Shareholder’s ordinary
Dividend Equity Shareholder’s
yield Equity
A firm which generates a substantial amount of profit per rupee of sales can comfortably meet its operating expenses and provide minimum returns to its shareholders
Gross Profit Ratio = Gross profit 100
Net Sales
It measure efficiency of production as well as pricing
Net Profit Ratio = Net Profit 100
Net Sales
It measure overall efficiency i.e. production, administration, selling, tax management, etc,.
Return on Assets = Earning after taxes 100
Average total assets
It measures the profitability of the assets of the firm
Return on capital employed = Earning before interest and taxes 100
Average total capital employed
(Capital Employed = Long term funds invested by creditors & owners)
It indicates the efficiency with which the long term funds of a firm are utilized.
Return on total shareholders Equity = Earning after taxes 100
Average total shareholders equity
{Total shareholders equity = Preference share capital + Ordinary share capital + share premium + Reserves & surplus – Accumulated losses}
Return on ordinary = Earning after taxes – Preference dividend 100
Shareholders Equity Average Equity capital
{Total shareholders equity = Preference share capital + Ordinary share capital + share premium.}
Dividend per share = Dividend paid to ordinary shareholders
No.of ordinary shares
It shows how much is paid as dividend to the shareholders on each share held.
Earning per share = Net profits available to equity holders
No. of ordinary shares
It measures the profits available to the equity shareholders on each share held
Dividend Pay-out Ratio = Dividend per share 100
Earnings per share
It is the percentage share of net profits after taxes & after preference dividend has been paid to preference shareholders.
Earning & Dividend yield
Earning yield is the earning price ratio & is expressed in terms of market value per share
Earning yield = Earning per share 100
Market price per share
Dividend yield = Dividend per share 100
Market price per share
Dividend yield evaluates the performance of a company in stock market
C) Turnover/Operational ratios
Debtors Turn- Average collect- Inventory turn- Fixed Asset turn- Total asset Turn-
Over Ratio ion period over ratio over ratio over ratio
Debtors Turnover Ratio = Net Credit Sales
Average Debtors
This ratio shows how rapidly the debts are collected. The higher the ratio, the better it is for the organization.
Average Collection Period = 365 days
Accounts Receivable Turnover
Average collection period can be compared with the firm’s credit terms to judge the efficiency of a credit manager.
Inventory Turnover ratio = Cost of goods sold or Sales
Average Inventory Closing stock
Higher the ratio, the more efficient is the management of inventories & vice versa.
Fixed Assets Turnover Ratio = Net Sales
Average net Fixed assets
It measures the efficiency with which fixed assets are employed. Higher ratio, high degree of efficiency in asset utilization, while a low ratio, reflects inefficient utilization use of assets.
Total Assets Turnover = Net Sales
Total Assets
It measures how efficiently an organization is utilizing its assets
D) Leverage/Capital Structure Ratio
Ratios computed from Ratios computed from
Balance Sheet P& L A/c
Debt Equity Debt Asset Ratio Interest coverage Fixed Charge Debt Service Coverage
Ratio Coverage Ratio
Debt Equity = Debt
Equity
{Debt Short term & long term borrowings
Equity Networth (paid up equity capital + reserves & surplus) & Preference share capital}
The ratio measures relative proportions of debt & equity in financing the assets of a firm.
Debt Assets ratio = Debt
All Assets
Debt asset ratio measures the extent to which the borrowed funds support the firm’s assets.
Interest Coverage ratio = Profit before interest & taxes + Depreciation
Interest
It shows the long term debt capacity of the firm, higher the ratio it means the firm can easily meet its interest burden
Debt Service = PAT + depreciation +other non-cash expenses + Interest on term loan
Coverage ratio Interest on term loan + Repayment of term loan
1.5 or 2 is considered satisfactory
E) Valuation ratios
Price Earning ratio Market value to Book value ratio
Price Earning ratio = Market Price per share
Earning per share
It indicates the growth prospects, risk characteristics, degree of liquidity, sharholder’s orientation & corporate image of the company
Market Value to Book Value Ratio = Market price per share
Book value per share
It reflects the contribution of a company to the wealth of its shareholders. When the ratio is > 1, the company has contributed to the creation of the wealth of its shareholders.
Problems
1.The following are the ratios relating to the activities of Bharat Traders Ltd.
Debtors velocity 3 months
Stock velocity 8 months
Creditors velocity 2 months
Gross Profit Ratio 25 per cent
Gross Profit for the current year ended 31st December amounts to Rs.4,00,000. Closing Stock of the year is Rs.10,000 above the opening stock. Bills Receivable amount to Rs.25,000 and bills payable to Rs.10,000. Find out : (a) Sales (b) Sundry Debtors
(c) Closing Stock and (d) Sundry Creditors
2. From the following details, prepare the balance sheet of ABC Ltd.
Stock turnover 6
Capital turnover ratio 2
Fixed assets turnover ratio 4
Gross profit 20 per cent
Debt collection period 2 months
Creditors payment period 73 days
The gross profit was Rs.60,000. Closing stock was Rs.5,000 in excess of the opening stock.
3. The capital of XYZ Ltd is as follows:
9% preference shares, Rs.10 each Rs.3,00,000
Equity shares of Rs.10 each Rs.8,00,000
11,00,000
Additional information: Profit (after tax at 35 per cent), Rs .2,70,000; Depreciation Rs.60,000; Equity dividend paid,20 per cent; Market price of equity shares Rs.40.
You are required to compute the following, showing the necessary workings
a) Dividend yield on the equity shares
b) Cover for the preference & equity dividends
c) Earnings per shares
d) Price–earnings ratio.
4. Delta Manufacturing Co.Ltd. has drawn up the following profit and loss account for the year ended 31st March.
To Opening stock Rs.26,000 By Sales Rs.1,60,000
To Purchases 80,000 By Closing Stock 38,000
To Wages 24,000
To Manufacturing expenses 16,000
To Gross profit c/d 52,000
1,98,000 1,98,000
To Selling & distribution exp. 4,000 To Gross profit b/d 52,000
To Administrative expenses 22,800 By Compensation for 4,800
To Value of furniture lost by fire 800 acquisition of land
To General expenses 1,200
To Net Profit 28,000
56,800 56,800
You are required to find out the operating ratio and the ratio of operating net profit to net sales.
5.Using the following information, complete the balance sheet given below :
Total debt to net worth : 0.5 to 1.
Turnover of total assets (based on year-end sales figures): 2
Gross profit : 30 per cent
Average collection period (based on 360-day-year): 40 days
Inventory turnover (based on cost of goods sold and year-end inventory): 3 times
Acid test ratio: 0.75 :1
Balance Sheet
Cash Notes and accounts payable
Accounts Receivable Common Stock Rs.2,00,000
Inventory Retained Earnings 3,00,000
Plant and Equipment
Total Total
6. The financial statements of Bad Luck Ltd. for the current year ended reveal the following information:
Ratio of current assets to current liabilities 1.75 : 1.0
Liquidity ratio (debtors and bank balances to current liabilities), 1.25 :1.0
Issued capital in equity shares of Rs .10 each, Rs . 1,20,000
Net current assets (as over current liabilities) Rs.60,600
Fixed assets (net block)- % of shareholder’s equity as on the closing date,60%
Gross profit - % of turnover, 20 %
Annual rate of turnover of stock (based on cost at March 31), 5.26 times
Average age of outstanding debtors for the current year, 2 months
Net profit – percentage on issued share capital, 16 %
On March 31 the current assets consisted of stock, debtors and bank balances.
You are required to reconstruct, in as much detail as possible:
1. The balance sheet as on March 31, current year and
2. The Trading & Profit and Loss Account, for the current year ended March 31.
7. You have been supplied data for The Supreme Plastic Co.Ltd., and its industry averages;
Determine the indicated ratios for the Supreme Plastic Co.Ltd.
Balance Sheet as at March 31
Liabilities Amount Assets Amount
Equity Share Capital Rs.12,00,000 Net Fixed assets Rs.6,05,000
10% Debentures 2,30,000 Cash 2,20,000
Sundry Creditors 1,65,000 Sundry debtors 2,75,000
Bills Payable 2,20,000 Stock 8,25,000
Other current Liabilities 1,10,000
19,25,000 19,25,000
Statement of profit for the year ending March,31 current year
Sales Rs.27,50,000
Less Cost of goods sold:
Materials Rs.10,45,000
Wages 6,60,000
Factory overheads 3,24,500 20,29,500
Gross Profit 7,20,500
Less Selling and Distribution expenses 2,75,000
Less administrative and general expenses 3,07,000
Earnings before interest and taxes 1,38,500
Less Interest 23,000
Earnings before taxes 1,15,500
Less Income taxes (0.35) 40,425
Net Profit 75,075
Ratios
Industry Supreme Plastics
Current assets / current liabilities 2.4
Sales / debtors 8.0
Sales / stock 9.8
Sales / Total assets 2.0
Net Profit /Sales (per cent) 3.3
Net Profit / Total assets (per cent) 6.6
Net Profit / Net worth (per cent) 12.7
Total debt / total assets (per cent) 63.5
8. From the following particulars, prepare the balance sheet of Shri Mohan Ram and Co.Ltd. as at 31 March current year.
Current Ratio, 2
Working capital, Rs.4,00,000
Capital block to current assets,3:2
Fixed asset to turnover, 1:3
Sales cash /credit, 1:2
Debentures / share capital, 1:2
Stock velocity, 2 months
Creditors velocity, 2 months
Debtors velocity, 2 months
Gross profit ratio, 25 per cent (to sales)
Capital Block:
Net Profit,10 per cent of turnover
Reserve, 2.5 per cent of turnover
9. As the manager of a financial services company, you have received a proposal seeking a loan of Rs.300 lakh, from a firm planning an investment in fixed assets of Rs.500 lakh in anew project. The loan is indicated to be repayable in three annual instalments commencing from the end of the second year. The following information concerning the project is available: (Rs. in lakhs)
Year
1 2 3 4
Gross profit (before depreciation) 75 100 150 150
Depreciation 50 45 40 35
Interest on term loan 25 45 30 15
Working capital borrowing (interest) 10 15 20 20
Provision for tax - - 10 30
Assuming other criteria to be satisfactory, you are required to:
a) Compute appropriate financial ratio which, in your opinion, would guide the financing decision
b) Interpret briefly the ratio so computed and give your views on the proposal.
10. Below are selected ratios for the two companies in the same industry, along with the industry average:
Ratio A B Industry
Current Ratio 221 561 241
Acid – test ratio 121 301 131
Debt-asset ratio 36 5 35
Operating expenses ratio 18 17.5 20
Number of times interest earned 6 12 5
Stock turnover 8.5 6.5 7
Debtors turnover 11 15 11.4
Rate of return on total assets 17 10 13.5
Can we say on the basis of above ratios and information that company B is better than company A because its ratios are bettering six out of eight areas (all except stock turnover and rate of return on total assets)? The company B is better than the industry average in the same six categories.
11.The Balance Sheet and the Profit & Loss A/c of ABC Ltd. are given below :
LIABILITIES AMOUNT ASSETS AMOUNT
30,000 Equity Shares of Rs.10 each
Long term debts
Accounts Payable
Other Liabilities
3,00,000
1,00,000
80,000
20,000 Fixed Assets
Inventory
Accounts Receivable
Cash in hand 3,50,000
65,000
60,000
25,000
5,00,000 5,00,000
Income Statement
Rs.
Sales 9,00,000
Less:
Cost of Goods Sold 4,00,000
General Admn. And Selling expenses 1,00,000
All other expenses 2,50,000 7,50,000
Net Income 1,50,000
You are required to calculate :
1) Current market price per share if the P/E ratio is 8
2) Current ratio
3) Net Working Capital Turnover ratio
12. The following data is available from the accounts of X Ltd. and Y Ltd. in the same industry for the year ended 31st March, 2005 :
Balance Sheet of X Ltd.
LIABILITIES AMOUNT ASSETS AMOUNT
Equity Share Capital
Retained earnings
10% Debentures
Sundry Credtiors 4,40,000
3,86,000
2,00,000
3,60,000
Plant & Machinery
Stock
Debtors
Cash 6,78,000
4,92,000
1,32,000
84,000
1,38,60,000 1,38,60,000
Balance Sheet of Y Ltd.
LIABILITIES AMOUNT ASSETS AMOUNT
Equity Share Capital
Retained earnings
10% Debentures
Sundry Credtiors 7,00,000
2,00,000
4,00,000
4,20,000 Plant & Machinery
Stock
Debtors
Cash 9,60,000
3,80,000
2,52,000
1,28,000
1,72,00,000 1,72,00,000
X Ltd Y Ltd.
Sales 2,24,00,000 3,28,00,000
Cost of Goods sold 1,60,00,000 2,58,00,000
Other operating expenses 32,00,000 34,40,000
Interest expenses 2,00,000 4,00,000
Income Tax 15,00,000 15,80,000
Dividend 4,00,000 7,20,000
You are required to calculate the relevant ratio to answer the following questions :
1) Which of the companies are able to meet its current debts in a better way ?
2) Which of the companies collects its debts faster assuming all sales are on Credit ?
3) Which of the companies is making more profitable use of the Shareholders money
4) If you purchase debentures of one of the companies, which company would you Prefer ?
5) Which Company retains a larger proportion of its income in the business ?
13. The actual ratios of a company compared to the industry standard are given below. Comment on each ratio and indicate in one or two sentences the nature of action to be taken by the company :
RATIO INDUSTRY STANDARD ACTUAL RATIO OF THE COMPANY
Current Ratio
Debtor’s turnover ratio
Stock turnover ratio
Net Profit ratio
Total Assets to Debt ratio 2.2
6
10
5%
7.5% 2.7
8
3
2.4%
40%
14. Following is the Balance Sheet of Y Ltd. :
LIABILITIES AMOUNT ASSETS AMOUNT
Equity Share Capital
6% Preference Shares
7% Debentures
8% Public Deposits
Bank Overdraft
Creditors
Outstanding Creditors
Proposed Dividend
Reserves
Provision for tax
Profit & Loss A/c 1,00,000
1,00,000
40,000
20,000
40,000
60,000
7,000
10,000
1,50,000
20,000
20,000 Cash in hand
Cash at Bank
Bills Receivable
Investment
Debtors
Stock
Furniture
Machinery
Land & Building
Goodwill
Preliminary expenses 2,000
10,000
30,000
20,000
70,000
40,000
30,000
1,00,000
2,20,000
35,000
10,000
5,67,000 5,67,000
During the year provision for taxation was Rs.20,000.Dividend was proposed at AGM for Rs. 10,000. Profit carried from the last year was Rs. 15,000. You are required to calculate and comment on the following ratios :
1) Short term solvency ratios
2) Long term solvency ratios
15.Using the following information complete the following Balance Sheet :
1) Total Assets to Networth ( Shareholders fund) 1:2
2) Total Assets turnover 2 times
3) Gross Profit 30%
4) Average Collection period (Year 360 days) 40 Days
5) Inventory turnover ratio 3 times
6) Acid test ratio 3:4
Balance Sheet
As on ------------------
LIABILITIES AMOUNT ASSETS AMOUNT
Equity Share Capital
Reserves & Surplus 2,00,000
3,00,000 Plant & Machinery & other fixed assets
Inventory
Accounts receivable
Cash in hand & at Bank
16. The Assets of XYZ Ltd. consist of Fixed and Current assets while the Current Liabilities consist of Bank Credit and Trade credit in the ratio of 2:1. From the following information relating to a company for the year ended 2005 prepare the Balance Sheet showing details working :
Share Capital Rs. 1,99,500
Working Capital Rs. 45,000
Gross margin 20%
Inventory turnover 6 times
Average Collection period 2 months
Current ratio 1.5 times
Quick ratio 0.9 times
Reserves & Surplus to Cash 3 times