** Ratio Analysis**

• Accounting ratios are relationship expressed in mathematical terms between accounting figures which for meaningful purpose.

• Classification: P & L Ratios

• Balance Sheet Ratios+

• Composite or Inter-Statement Ratios.

**Functional Classification**

• Profitability

• Turnover/Activity Ratios

Financial/Solvency Ratios

• Financial Ratios may be further classified as Short Term Ratios/Liquidity Ratios or Long

Term/ Solvency Ratios

Return on Capital Employed

• EBIT * 100

Capital Employed

Earnings before Interest & Tax

• Op. Profit means profit from the Operations of the Company plus Int(Long term) & Tax

• Capital Employed = Share Capital+ Reserves & Surplus+ Long Term loans –( Non- business

assets + Fictitious assets)

• Proper calculation gives us Return on Capital Employed

**Earnings Per Share (EPS)**

EPS = Net Profit after tax & Pref. Dividend/ No. of Equity Shares

This shows whether equity Capital of Co. is properly used or not Company’s capacity to pay Dividend.

EPS helps us at estimating Market Price of the Company

**Price Earning (P/E Ratio)**

Market Price of per Equity Share/EPS

Helps to decide whether to buy Share of a Company.

Gross Profit Ratio

Gross Profit* 100/Net Sales

It helps in Price decision & Profit from Op. before Charging all other expenses.

**Net Profit Ratio**

Net Operating Profit * 100/Net sales

**Solvency Ratios**

**Long Term Solvency Ratios**

• Fixed Assets Ratios : Fixed Assets/Long Term Funds

• The ratio should not be more than one.

• If it is less than one then it indicates part of the Working Capital Financed through Long term

Funds i.e. we may call Core Working Capital

**Debt- Equity Ratio**

• i) DE Ratio : Total Long Term Debt/Total Long Term Funds

• Ii) DE Ratio : Total Long Term Debt/Shareholders Funds

• Debt Service Coverage Ratio= Cash Profit available for debt service

Interest+ Instalment

**Short Term Solvency Ratio**

i**) Current Ratio** = Current Assets/Current Liabilities

Ideal ratio: 2

Acceptable to Bank 1.33

ii) **Liquidity Ratio/Acid Test or Quick Ratio=**

Liquid Assets/Current Liability

**Turnover Ratios**

Stock Turnover Ratio =

Cost of goods Sold during the year/Average Inventory

Debtors Turn over Ratios (Debtors Velocity) =

Credit Sales/Average Accounts Receivable

**Debtors Collection Period =**

Months or days in a year/Debtors turnover

or Accounts receivable/Average Monthly or daily Credit sales

Fixed Assets Turnover Ratio = Cost of Goods Sold /Net Fixed Assets

Calculate the following ratios for YE March 2018 & 2019

a) Return on Capital Employed

b) Current Ratio

c) Debt Equity Ratio

d) Fixed Assets Turnover Ratio

e) Inventory Turnover Ratio

f) Earning Per Share

Balance Sheets as at 31st March Rs. Lakhs

Liabilities 2013 2014 2015

Sh. Capital: Shares of Rs.10 each 800 1000 1000

Reserves & surplus 700 800 1000

Secured Term Loans 800 2000 2400

Cash Credits from bank 800 1000 1500

Sundry Creditors 1200 900 1100

4300 5700 7000

Balance Sheets as at 31st March Rs. Lakhs

Liabilities 2013 2014 2015

Fixed Assets: Gross Block 2800 3000 4000

Less : Dep(-) 920 1400 2000

Net Block 1880 1600 2000

Current Assets: Stock 1520 2400 2800

Debtors 480 500 900

Other Current Assets 420 1200 1300

2420 4100 5000

Total Assets 4300 5700 7000

EBIT * 100

Capital Employed

EBIT=Earnings before Interest & Tax

Ret. On Cap. Emp= Total Cap. Employed for March,2013 is Rs. 2300+Rs. 3800 for Mar,2014.So Av.

Cap. Employed is Rs.6100 /2= 3050 lakhs. EBIT is Rs.1020. So ROCE 1020*100/3050

= 33.34%

ROCE for March,2015

Total Cap. Employed for March,2014 is Rs. 3800+Rs. 4400 for Mar,2015.So Av. Cap. Employed is

Rs.8200 /2= 4100 lakhs. EBIT is Rs.1800. So ROCE is 1800*100= 43.90%

4100

Current Ratio = Current Assets/Current Liabilities

2014 2015

4100/900 =2.16 5000/2600 =1.92

**Debt Equity Ratio** = Total Long Term Debt/Total Long Term Funds

2014 2015

2000/1800 = 1.11 2400/2000= 1.2

**Fixed Assets Turnover Ratio** =

Cost of goods Sold during the year/Average Net Fixed Assets

We may take sales when Cost of goods figures are not available

4800/1740 =2.76 7200/1800 =4

Average Fixed Assets for March,2009 = 1880+1600=3480/2=1740

Average Fixed Assets for March,2010 = 1600+2000=3600/2=1800

**Stock Turnover Ratio** =

Cost of goods Sold during the year/Average Inventory

We may take sales when Cost of goods figures are not available

Sales 4800 =9.8 7200 = 10.29

Av Inv. 490 700

EPS = Net Profit after tax & Pref. Dividend/No. of Equity Shares

Net Profit after Tax for 2009 = Rs.300 Lakhs = Rs.3 =EPS

While no. of Eq. shares are 100 Lakhs

Net Profit after Tax for 2010 = Rs.600 Lakhs = Rs. 6 =EPS

While no. of Eq. shares are 100 Lakhs