Ratio Analysis - 2
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Transcript of 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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
Q Calculate the Net worth from the following balance
sheet
Ratio Analysis
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
Ratio Analysis
Different
Kinds of
Ratios
Leverage
Ratios
Market
Based
Ratios
IMT Nagpur - 2012-14
Liquidity
Ratios
Asset
Management
Ratios
Operating
Ratios
Asset Management Ratios
Ratio Analysis
IMT Nagpur - 2012-14
Asset Management Ratios
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
IMT Nagpur - 2012-14
Asset Management Ratios
Assets Management Ratios are used to measure
the speed with which various accounts are
converted into sales or cash.
Ratio Analysis
IMT Nagpur - 2012-14
Asset Management Ratios
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
IMT Nagpur - 2012-14
Inventory Turnover Ratio
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
IMT Nagpur - 2012-14
Inventory Turnover Ratio
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
IMT Nagpur - 2012-14
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
Inventory Turnover Ratio =
S a l e s
Average Inventory
= 52,00,000/11,00,000 = 4.73
Ratio Analysis
IMT Nagpur - 2012-14
Debtors Turnover Ratio
Debtors Turnover Ratio =
C r e d i t S a l e s
Average Debtors
Ratio Analysis
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
Debtors Turnover Ratio
Debtors Turnover Ratio =
Credit S a l e s
Average Debtors
= 52,00,000/18,60,000 = 2.80
Ratio Analysis
IMT Nagpur - 2012-14
Debtors Collection Period
Debtors Collection Period =
Average Debtors * 365
Credit Sales
Ratio Analysis
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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 Sold 36,00,000
16,00,000
Less: Selling and Distribution Expenses 12,50,000
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
IMT Nagpur - 2012-14
Bad debts to Sales
Bad Debts to Sales =
Bad debts * 100
Sales
Ratio Analysis
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
Creditors Turnover Ratio
Creditors Turnover Ratios =
Credit Purchases
Average Creditors
Average Creditors = Trade Creditors + Bills Payable
Ratio Analysis
IMT Nagpur - 2012-14
Creditors Payment Period
Creditors Payment Period =
Average Creditors * 365
Credit Purchases
Ratio Analysis
IMT Nagpur - 2012-14
Creditors Payment Period
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
IMT Nagpur - 2012-14
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 Sold (Total Purchase Rs. 28,00,000) 36,00,000
16,00,000
Less: Selling and Distribution Expenses 12,50,000
Net Profit 3,50,000
Creditors Payment Period
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
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
IMT Nagpur - 2012-14
Sales to Capital Employed
Sales to Capital employed =
S a l e s
Capital Employed
Ratio Analysis
IMT Nagpur - 2012-14
Sales to Capital Employed
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
IMT Nagpur - 2012-14
Sales to Capital Employed
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
IMT Nagpur - 2012-14
Ratio Analysis
LIABILITIES AMOUNT ASSETS AMOUNT
Equity share capital
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
IMT Nagpur - 2012-14