Home JAIIB Accounting and Finance for Bankers AFB Unit – 15 : Ratio Analysis

# AFB Unit – 15 : Ratio Analysis

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226 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