Test Your Knowledge - Ratio Analysis

8/3/2019 Test Your Knowledge - Ratio Analysis

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Test yourKnowledge


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Assignment

1. Work out the ratios Current, Quick, Turn overratio, Net working capital, Defensive interval ratiofor Reliance. The balance sheet and Profit and lossare as given in Khan and Jain

2. Interpret your results

3. Collect further data for years 2009, 2010, 2011 and

work out the ratios. What are your observations Isthere any Change


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Reliance a critical lookLiquidity Ratio

1. Current Ratio = CA/CL = 40133.24/30078 = 1.33

2. Acid Test = Liquid Assets/ CL = 13866.02/ 30078= 0.46

3. Inventory Turn over = COGS/ Average FG Inventory= 107100.52/ 4008.69 = 26.714. Debtors turn over = Net credit sales / Average debtors = 139269. 46/ 4980 = 27.97 times

5. Creditors Turn over Ratio = Total credit Purchases/ Average creditors

= 94232.68/ 18 528.84 = 5.09 times assumed all purchases are credit

Solvency Ratio6. Debt Equity = Long term debt/ Share holders equity = 30439.23/ 81448.60= 0.377. Propriety Ratio = Proprietors fund/ Total Assets = 81448.60 / 149338.91= 0.54

8. Interest Coverage = EBIT/Interest = 24087.50/ 1077.36 = 22.36

9. Total Cash flow coverage = EBIT + Depreciation / Interest = (24087.50+6627.85)/ 1077.36= 28.55 times


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Testing on Concepts1. What you understand by high current and acid test

ratio ? Is it relevant to whom ?High ratio may be relevant to creditors. But it also points funds have unnecessarilyaccumulated and not profitably used as per the company point of view

2. What is the meaning of high inventory turn over- ?A firm is loosing customer by failing to maintain adequate level of inventory ( COG/

Average Inventory)

3. What is the debtor turn over ratio?Debtor Turn over Ratio = Net credit sales/ Average debtors , This indicates how fasterthe collection is made. High ratio shorter time lag between credit sales and cashcollection. That also indicates strict credit policy

4. Current ratio is used to assesa. Effective utilization of capitalb. Application of debt

c. Liquidity Position

d. Levels of inventory piled up different form

e. Prompt payment of long term liability


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5. Which of the following statements are truea. All other things remaining same issue of shares for cash improve current ratio

b. Average collection period evaluates all aspects of credit policyc. Ratio analysis is a technique of planning and control

d. All of the above

6. If a firm has realized its debtors and has paid off its creditors to

the same extenda. Current ratio will increase if it was less than 1 previously

b. Current ratio will decrease if it was more than 1 previously

c. Current ratio will remain same if it was equal to 1 previously

d. Both a and c above

e. All of a b and c above

7. If the current ratio of Great company is 0.77 in the year 2011 and0.67 in 2010 how the short term creditors and company shareholders view

Good news for short term creditors. But CA have carrying cost in the form of cost of profit

foregone and actual cost interest and insurance charges and bad debts. Not good for shareholders

Testing on Concepts


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8. Ratio Analysis isa. Not used for the interpretation of financial statements.b. Reduce large figures to an easily understandable relationship.c. Make conclusionsd. All the above

9. Which of the statement is truea. Acid test ratio is computed as a supplement to Quick ratio

b. All current assets are taken into account

c. The ratio should be minimum 1:1

d. All the above

e. a and c

10. 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 ..Is the statement true or false

True

11. Higher the debtor turn over ratio it is good - is the statement correct

Correct

Testing on Concepts


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Testing on Concepts

12. The Unilever debtors collection period for 2011 and 2010 are 14.33 days and16.47 days . What do you understand by this ?

Indicates improvement in debt collection . However to asses whether satisfactory we have to

look at credit terms. For example n/20 the company record of collection is good. If the terms

Are n/10 not good

13. Inventory turn over ratio of Unilever is 7.38 times in 2011 as compared to 6.98in 2010 ? What do you observe ?

This indicates number of times the inventory is turned into sales. Higher the ratio it indicates better

management


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LIABILITES ASSETS

Capital 180 Net Fixed Assets 400

Reserves 20 Inventories 150

Term Loan 300 Cash 50

Bank C/C 200 Receivables 150

Trade Creditors 50 Goodwill 50

Provisions 50800 800

EXERCISE 1

a. What is the Net Worth : Capital + Reserve = 200b. Tangible Net Worth is : Net Worth - Goodwill = 150c. Outside Liabilities : TL + CC + Creditors + Provisions =

600a. Net Working Capital : C A - C L = 350 - 250 = 50b. Current Ratio : C A / C L = 350 / 300 = 1.17 : 1c. Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1


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EXERCISE 2

LIABILITIES 2005-06 2006-07 2005-06 2006-07

Capital 300 350 Net Fixed Assets 730 750

Reserves 140 160 Security Electricity 30 30

Bank Term Loan 320 280 Investments 110 110

Bank CC (Hyp) 490 580 Raw Materials 150 170

Unsec. Long T L 150 170 S I P 20 30

Creditors (RM) 120 70 Finished Goods 140 170

Bills Payable 40 80 Cash 30 20

Expenses Payable 20 30 Receivables 310 240

Provisions 20 40 Loans/Advances 30 190

Goodwill 50 50

Total 1600 1760 1600 1760

1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390

2. Current Ratio for 2nd Year : (170 + 30 +170+20+ 240 + 190 ) / (580+70+80+70)820 /800 = 1.02

3. Debt Equity Ratio for 1st Year : 320+150 /390 = 1.21


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Exercise 3.

LIABIITIES ASSETS

Equity Capital 200 Net Fixed Assets 800

Preference Capital 100 Inventory 300

Term Loan 600 Receivables 150

Bank CC (Hyp) 400 Investment In Govt. Secu. 50

Sundry Creditors 100 Preliminary Expenses 100

Total 1400 1400

1. Debt Equity Ratiowill be : 600 / (200+100) = 2 : 1

2. Tangible Net Worth : Only equity Capital i.e. = 200

3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200= 11 : 2

4. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1


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LIABILITIES ASSETS

Capital + Reserves 355 Net Fixed Assets 265

P & L Credit Balance 7 Cash 1Loan From S F C 100 Receivables 125

Bank Overdraft 38 Stocks 128

Creditors 26 Prepaid Expenses 1

Provision of Tax 9 Intangible Assets 30

Proposed Dividend 15

550 550

Q. What is the Current Ratio Ans : (1+125 +128+1) / (38+26+9+15): 255/88 = 2.89 : 1

Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1.43 : 11

Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW= 100 / ( 362 30)= 100 / 332 = 0.30 : 1

Exercise 4.


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LIABILITIES ASSETS







550 550Q . What is the Proprietary Ratio ?Ans : (T NW / Tangible Assets) x 100

[ (362 - 30 ) / (550 30)] x 100

(332 / 520) x 100 = 64%

Q . What is the Net Working Capital ?Ans : C. A - C L. = 255 - 88 = 167

Q . If Net Sales is Rs.15 Lac, then What would be the Stock TurnoverRatio in Times ? Ans : Net Sales / Average Inventories/Stock

1500 / 128 = 12 times approximately

Exercise 4. contd


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LIABILITIES ASSETS







550 550

Q. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.

Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12= 1 month

Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ?Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0.3

months

Exercise 4. contd


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Exercise 5. : Profit to sales is 2% and amount of profit is say Rs.5 Lac. ThenWhat is the amount of Sales ?

Answer : Net Profit Ratio = (Net Profit / Sales ) x 1002 = (5 x100) /Sales

Therefore Sales = 500/2 = Rs.250 Lac

Exercise 6.A Company has Net Worth of Rs.5 Lac, Term Liabilities of Rs.10 Lac. FixedAssets worth RS.16 Lac and Current Assets are Rs.25 Lac. There is nointangible Assets or other Non Current Assets. Calculate its Net WorkingCapital.

AnswerTotal Assets = 16 + 25 = Rs. 41 LacTotal Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 LacCurrent Liabilities = 41 15 = 26 Lac

Therefore Net Working Capital = C. A C.L= 25 26 = (- )1 Lac


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Exercise 7 : Current Ratio of a concern is 1 : 1. What will be the Net Working Capital?

Answer : It suggest that the Current Assets is equal to Current Liabilities hence the NWCwould be NIL ( since NWC = C.A - C.L )

Exercise 8 : Suppose Current Ratio is 4 : 1. NWC is Rs.30,000/-. What is the amountof Current Assets ?

Answer : 4a - 1a = 30,000Therefore a = 10,000 i.e. Current Liabilities is Rs.10,000Hence Current Assets would be 4a = 4 x 10,000 = Rs.40,000/-

Exercise 9. The amount of Term Loan installment is Rs.10000/ per month, monthlyaverage interest on TL is Rs.5000/-. If the amount of Depreciation is Rs.30,000/-p.a. and PAT is Rs.2,70,000/-. What would be the DSCR ?

DSCR = (PAT + Depr + Annual Intt.) / Annual Intt + Annual Installment= (270000 + 30000 + 60000 ) / 60000 + 120000

= 360000 / 180000 = 2


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Exercise 10 : Total Liabilities of a firm is Rs.100 Lac and Current Ratio is1.5 : 1. If Fixed Assets and Other Non Current Assets are to the tune of Rs.70 Lac and Debt Equity Ratio being 3 : 1. What would be the Long TermLiabilities?

Ans : We can easily arrive at the amount of Current Asset being Rs. 30 Lac i.e.( Rs. 100 L - Rs. 70 L ). If the Current Ratio is 1.5 : 1, then Current Liabilities

works out to be Rs. 20 Lac. That means the aggregate of Net Worth and LongTerm Liabilities would be Rs. 80 Lacs. If the Debt Equity Ratio is 3 : 1 thenDebt works out to be Rs. 60 Lacs and equity Rs. 20 Lacs. Therefore the Long

Term Liabilities would be Rs.60 Lac.

Exercise 11 : Current Ratio is say 1.2 : 1 . Total of balance sheet being Rs.22Lac. The amount of Fixed Assets + Non Current Assets is Rs. 10 Lac. Whatwould be the Current Liabilities?

Ans : When Total Assets is Rs.22 Lac then Current Assets would be 22 10 i.eRs. 12 Lac. Thus we can easily arrive at the Current Liabilities figure whichshould be Rs. 10 Lac


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EXERCISE 12. A firm sold its stocks in CASH, in order to meet its liquidityneeds. Which of the following Ratio would be affected by this?

1. Debt Equity Ratio

2. Current Ratio3. Debt Service Coverage Ratio4. Quick Ratio

EXERCISE 13. A company is found to be carrying a high DEBT EQUITY

Ratio. To improve this, a bank may suggest the company to :

1. Raise long term interest free loans from friends and relatives2. Raise long term loans from Institutions3. Increase the Equity by way of Bonus Issue4. Issue Rights share to existing share holders.

EXERCISE 14. Which of the following is a fictitious Asset?

1. Goodwill2. Preliminary Expenses3. Pre-operative expenses

4. Book Debts which have become doubtful of recovery


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EXERCISE 15. Under which of the following methods of depreciation on FixedAssets, the annual amount of depreciation decreases?

1. Written Down Value method

2. Straight Line method3. Annuity method4. Insurance policy method

EXERCISE 16 Debt Service Coverage Ratio (DSCR) shows :

1. Excess of current assets over current liabilities2. Number of times the value of fixed assets covers the amount of loan3. Number of times the companys earnings cover the payment of interest

and repayment of principal of long term debt4. Effective utilisation of assets

EXERCISE 17. Which of the following is not considered a Quick Asset?

1. Cash and Bank balances2. Bank Fixed Deposits3. Current Book Debts

4. Loans and Advances


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Exercise 18. From the following financial statement calculate (i) Current Ratio (ii)Acid test Ratio (iii) Inventory Turnover (iv) Average Debt Collection Period (v)Average Creditors payment period.

C.AssetsSales 1500 Inventories 125Cost of sales 1000 Debtors 250Gross profit 500 Cash 225

C. LiabilitiesTrade Creditors 200

(i) Current Ratio : 600/200 = 3 : 1(ii) Acid Test Ratio : Debtors+Cash /Trade creditors = 475/200 = 2.4 : 1(iii) Inventory Turnover Ratio : Cost of sales / Inventories = 1000/125 = 8 times(iv) Average Debt collection period : (Debtors/sales) x 365 = (250/1500)x365 = 61

days

(v)Average Creditors payment period : (Trade Creditors/Cost of sales) x 365(200/100) x 365 = 73 days


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Questions on Fund Flow Statement

Q . Fund Flow Statement is prepared from the Balance sheet :

1. Of three balance sheets2. Of a single year3. Of two consecutive years4. None of the above.

Q. Why this Fund Flow Statement is studied for ?

1. It indicates the quantum of finance required2. It is the indicator of utilization funds by the concern3. It shows the money available for repayment of loan4. It will indicate the provisions against various expenses

Q . In a Fund Flow Statement , the assets are represented by ?

1. Application of Funds2. Sources of Funds3. Surplus of sources over application

4. Deficit of sources over application


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Q . In Fund Flow Statements the Liabilities are represented by ?

1. Sources of Funds2. Use of Funds

3. Deficit of sources over application4. All of the above.

Q . When the long term sources are more than long term uses, in thefund flow statement, it would suggest ?

1. Increase in Current Liabilities2. Decrease in Working Capital3. Increase in NWC4. Decrease in NWC

Q . When the long term uses in a fund flow statement are more than thelong term sources, then it would mean ?

1. Reduction in the NWC2. Reduction in the Working Capital Gap3. Reduction in Working Capital4. All of the above


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Q. How many broader categories are there for the Sources of funds, inthe Fund Flow Statement ?

1. Only One, Source of Funds2. Two, Long Term and Short Term Sources3. Three , Long, Medium and Short term sources4. None of the above.


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Vinyl Chemicals Limited

Vinyl Chemicals Ltd. is a midsized organic chemicalsmanufacturer owned by the

Pidilite Parekh group


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Common Size AnalysisVCL is more fixed asset intensive

VCL has less inventory levels than its

competitors

At VCL, there a decrease in the inventory

levels and increase in the receivables

At VCL, there is a decrease in the

investments of the company

What could be the reasons for such changes?What are the broad implications?


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Common Size AnalysisVCL is having less leverage than

competitors

During the year VCL has a increase inits long-term liabilities

Current Liabilities across the industries

seem to be stable

What could be the reasons for such

changes? What are the broad

implications?


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Common Size AnalysisWhat could be the reasons for the companies

turnaround?

Is it a decrease in raw materials orincrease in the sale prices or increase in the

sales volumes

Why is the company still lagging behind?

What could be the reason for the company

declaring dividend?


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How to analyze the FS Liquidity

Solvency

Profitability Stability

Quality of management

Safety and security

Test Your Knowledge - Ratio Analysis

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