Ratio Analysis Rucha Trivedi

8/8/2019 Ratio Analysis Rucha Trivedi

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RATIO ANALYSISRATIO ANALYSIS

Rucha Trivedi

[email protected]


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Ratio AnalysisRatio Analysis

Its a tool which enables the banker orlender to arrive at the following factors :

Liquidity position

ProfitabilitySolvency

Financial Stability

Quality of the ManagementSafety & Security of the loans & advances

to be or already been provided


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How a Ratio is expressed?How a Ratio is expressed?

y As Percentage - such as 25% or 50% . Forexample if net profit is Rs.25,000/- and the salesis Rs.1,00,000/- then the net profit can be said tobe 25% of the sales.

y As Proportion - The above figures may beexpressed in terms of the relationship betweennet profit to sales as 1 : 4.

y As Pure Number /Times - The same canalso be expressed in an alternatively way such asthe sale is 4 times of the net profit or profit is1/4th of the sales.


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Format of balance sheet for ratio analysisFormat of balance sheet for ratio analysis

LIABILITIES ASSETS

NET WORTH/EQUITY/OWNED FUNDSShare Capital/Partners Capital/Paid up Capital/

Owners Funds

Reserves ( General, Capital, Revaluation & Other

Reserves)

Credit Balance in P&L A/c

FIXED ASSETS : LAND & BUILDING,PLANT &MACHINERIES

OriginalValue Less Depreciation

NetValue or BookValue or Written down value

LONG TERM LIAB

ILITIES/B

ORROWEDFUNDS : Term Loans (Banks & Institutions)

Debentures/Bonds, Unsecured Loans, Fixed

Deposits, Other Long Term Liabilities

NON CURRENT ASSETSInvestments in quoted shares & securities

Old stocks or old/disputed book debts

LongTerm Security Deposits

Other Misc. assets which are not current or fixed

in nature

CURRENT LIABILTIES

Bank Working Capital Limits such asCC/OD/Bills/Export Credit

Sundry /Trade Creditors/Creditors/Bills Payable,

Short duration loans or deposits

Expenses payable & provisions against various items

CURRENT ASSETS : Cash & Bank Balance,

Marketable/quoted Govt. or other securities, BookDebts/Sundry Debtors, Bills Receivables, Stocks &

inventory (RM,SIP,FG) Stores & Spares, Advance

Payment of Taxes, Prepaid expenses, Loans and

Advances recoverable within 12 months

INTANGIBLE ASSETS

Patent, Goodwill, Debit balance in P&L A/c,Preliminary or Preoperative expenses


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Some important notesSome important notes

` Liabilities have Credit balance and Assets have Debit balance

` Current Liabilities are those which have either become due for

payment or shall fall due for payment within 12 months from the

date of Balance Sheet` Current Assets are those which undergo change in their

shape/form within 12 months. These are also called Working

Capital or GrossWorking Capital

` Net Worth & Long Term Liabilities are also called Long Term

Sources of Funds

` Current Liabilities are known as Short Term Sources of Funds

` Long Term Liabilities & Short Term Liabilities are also called

Outside Liabilities

` CurrentAssets are Short Term Use of Funds


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Some important notesSome important notes

` Assets other than Current Assets are LongTerm Use of Funds

` Installments of Term Loan Payable in 12 months are to be taken as

Current Liability only for Calculation of Current Ratio & Quick

Ratio.

` If there is profit it shall become part ofNet Worth under thehead Reserves and if there is loss it will become part of

IntangibleAssets

` Investments in Govt. Securities to be treated current only if these

are marketable and due. Investments in other securities are to be

treated Current if they are quoted. Investments in

allied/associate/sister units or firms to be treated as Non-current.

` Bonus Shares as issued by capitalization of General reserves and as

such do not affect the Net Worth. With Rights Issue, change takes

place in NetWorth and Current Ratio.


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1. Current Ratio : It is the relationship between the currentassets and current liabilities of a concern.

Current Ratio = Current Assets/Current Liabilities

If the Current Assets and Current Liabilities of a concern

are Rs.4,00,000 and Rs.2,00,000 respectively, then theCurrent Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1

The ideal Current Ratio preferred by Banks is 1.33 : 1

2. Net Working Capital : This is worked out as surplus ofLong Term Sources over Long Tern Uses, alternatively it isthe difference of Current Assets and Current Liabilities.

NWC = Current Assets Current Liabilities


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3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months +Quickly realizable securities such as Govt. Securities or quickly marketable/quotedshares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example :Cash 50,000Debtors 1,00,000Inventories 1,50,000 Current Liabilities 1,00,000Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000 = 3 : 1Quick Ratio = > 1,50,000/1,00,000 = 1.5 : 1


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4. DEBT EQUITY RATIO : It is the relationship betweenborrowers fund (Debt) and Owners Capital (Equity).

Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets

For instance, if the Firm is having the following :

Capital = Rs. 200 LacsFree Reserves & Surplus = Rs. 300 Lacs

Long Term Loans/Liabilities = Rs. 800 Lacs

Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1


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LIABILITES ASSETS

Capital 180 Net Fixed Assets 400

Reserves 20 Inventories 150

Term Loan 300 Cash 50

Bank C/C Working capital 200 Receivables 150

Trade Creditors 50 Goodwill 50

Provisions 50

800 800

EXERCISE 1

a. What is the Net Worth ?

b. Tangible Net Worth ?c. Net Working Capital ?

d. Current Ratio ?

e. Acid Test Ratio / Quick Ratio ?

f. Debt equity ratio ?

g. Proprietary Ratio ?


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Answer : 1Answer : 1

Net Worth : Capital + Reserve

180 + 20 = 200

Tangible Net worth : Net worth Good will

200 50 = 150

Networking Capital : CA CL

350 300 = 50

Current Ratio : CA / CL

350 / 300 = 1.17 : 1

Quick Ratio : Quick Asset / CL

200 / 300 = 0.66 :1

Debt Equity Ratio : Debt / Equity

300 /200 = 1.5

Proprietary Ratio : Shareholders Fund / Total Assets

200 / 800 = 0.25

Ratio Analysis Rucha Trivedi

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