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RATIO ANALYSISON
Submitted To:Professor Seema Dogra
SUBMITTED BY:
1. VISHAL GOYAL
2. GLADWIN
3.SUNNY GARG
4. SANJEEV
5. SONY
6.SHIKSHA
IIPMISBE(A),SEC -2
HERO HONDA MOTORS
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WHY FINANCIAL ANALYSIS
Lenders need it for carrying out the following
Technical Appraisal
Commercial Appraisal Financial Appraisal
Economic Appraisal
Management Appraisal
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RATIO ANALYSIS
Its a tool which enables the banker or lender toarrive at the following factors :
Liquidity position
Profitability
Solvency
Financial Stability
Quality of the Management Safety & Security of the loans & advances to be
or already been provided
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HOW A RATIO IS EXPRESSED?
y As Percentage - such as 25% or 50% . For exampleif net profit is Rs.25,000/- and the sales isRs.1,00,000/- then the net profit can be said to be25% of the sales.
y As Proportion - The above figures may be expressedin terms of the relationship between net profit to salesas 1 : 4.
y As Pure Number /Times - The same can also be
expressed in an alternatively way such as the sale is 4times of the net profit or profit is 1/4th of the sales.
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CLASSIFICATION OF RATIOS
Balance Sheet
RatioP&L Ratio or
Income/Revenue
Statement Ratio
Balance Sheet and
Profit & Loss Ratio
Financial Ratio Operating Ratio Composite Ratio
Current Ratio
Quick Asset Ratio
Proprietary Ratio
Debt Equity Ratio
Gross Profit Ratio
Operating Ratio
Expense Ratio
Net profit Ratio
StockT
urnover Ratio
Fixed Asset Turnover
Ratio, Return on
Total Resources
Ratio,
Return on Own FundsRatio, Earning per
Share Ratio, Debtors
Turnover Ratio,
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FORMAT OF BALANCE SHEET FOR RATIO ANALYSISLIABILITIES ASSETS
NET WORTH/EQUITY/OWNED FUNDS
Share 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 &
MACH
INERIESOriginal Value Less Depreciation
Net Value or Book Value or Written down value
LONG TERM LIABILITIES/BORROWED FUNDS :
Term Loans (Banks & Institutions)
Debentures/Bonds, Unsecured Loans, FixedDeposits, Other LongTerm Liabilities
NON CURRENT ASSETS
Investments in quoted shares & securities
Old stocks or old/disputed book debtsLongTerm Security Deposits
Other Misc. assets which are not current or fixed
in nature
CURRENT LIABILTIES
Bank Working Capital Limits such as
CC/OD/B
ills/Export CreditSundry /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,
Book Debts/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 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 ofBalance Sheet
Current Assets are those which undergo change in their shape/form within
12 months. These are also called Working Capital or Gross Working Capital
Net Worth & Long Term Liabilities are also called Long Term Sources ofFunds
Current Liabilities are known as Short Term Sources of Funds
Long Term Liabilities & Short Term Liabilities are also called Outside
Liabilities
Current Assets are Short Term Use of Funds
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SOME IMPORTANT NOTES
Assets other than Current Assets are Long Term Use of Funds
Installments ofTerm 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 of Net Worth under the head
Reserves and if there is loss it will become part ofIntangible Assets
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 Net Worth 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 of LongTerm Sources over Long Tern Uses, alternatively it is the
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 CurrentAssets 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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5. PROPRIETARY RATIO : This ratio indicates the extent to whichTangible Assets are financed by Owners Fund.Proprietary Ratio = (Tangible Net Worth/Total Tangible
Assets) x 100The ratio will be 100% when there is no Borrowing for purchasing
of Assets.
6. GROSS PROFIT RATIO : By comparing Gross Profit percentage toNet Sales we can arrive at the Gross Profit Ratio which indicates themanufacturing efficiency as well as the pricing policy of the concern.
Gross Profit Ratio = (Gross Profit / Net Sales ) x 100
Alternatively , since Gross Profit is equal to Sales minus Cost ofGoods Sold, it can also be interpreted as below :
Gross Profit Ratio = [ (Sales Cost of goods sold)/ Net Sales]x 100
A higher Gross Profit Ratio indicates efficiency in production of the unit.
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7. OPERATING PROFIT RATIO :
It is expressed as => (Operating Profit / Net Sales ) x 100
Higher the ratio indicates operational efficiency
8. NET PROFIT RATIO :
It is expressed as => ( Net Profit / Net Sales ) x 100
It measures overall profitability.
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9. STOCK/INVENTORYTURNOVER RATIO :
(Average Inventory/Sales) x 365 for days(Average Inventory/Sales) x 52 for weeks(Average Inventory/Sales) x 12 for months
Average Inventory or Stocks = (Opening Stock + Closing Stock)
-----------------------------------------
2
. This ratio indicates the number of times the inventory isrotated during the relevant accounting period
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10. DEBTORS TURNOVER RATIO : This is also called Debtors
Velocity or Average Collection Period or Period of Credit given .
(Average Debtors/Sales ) x 365 for days(52 for weeks & 12 for months)
11. ASSET TRUNOVER RATIO : Net Sales/Tangible Assets
12. FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets
13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets
14. CREDITORS TURNOVER RATIO : This is also called Creditors
Velocity Ratio, which determines the creditor payment period.
(Average Creditors/Purchases)x365 for days
(52 for weeks & 12 for months)
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15. RETRUN ON ASSETS : Net Profit after Taxes/Total Assets
16. RETRUN ON CAPITAL EMPLOYED :
( Net Profit before Interest & Tax / Average Capital Employed) x 100
Average Capital Employed is the average of the equity share
capital and long term funds provided by the owners and the
creditors of the firm at the beginning and end of the accounting
period.
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Composite Ratio
17. RETRUN ON EQUITY CAPITAL (ROE) :Net Profit after Taxes / Tangible Net Worth
18. EARNING PER SHARE : EPS indicates the quantum of net profit
of the year that would be ranking for dividend for each share of
the company being held by the equity share holders.
Net profit after Taxes and Preference Dividend/ No. of Equity
Shares
19. PRICE EARNING RATIO : PE Ratio indicates the number of times
the Earning Per Share is covered by its market price.
Market Price Per Equity Share/Earning Per Share
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20. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most
important one which indicates the ability of an enterprise to
meet its liabilities by way of payment of installments of Term
Loans and Interest thereon from out of the cash accruals and
forms the basis for fixation of the repayment schedule in
respect of the Term Loans raised for a project. (The Ideal DSCR
Ratio is considered to be 2 )
PAT + Depr. + Annual Interest on Long Term Loans & Liabilities
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Annual interest on Long Term Loans & Liabilities + Annual
Installments payable on Long Term Loans & Liabilities
(Where PAT is Profit after Tax and Depr. is Depreciation)
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