Unit-II: Financial Statement Analysis

Course: MBA-FC-31 (Corporate Financial Decisions)

Course Instructor: Dr Suhel Ahmad
[email protected], +91-9452-9456-82
Financial Statements

• Summary of the accounting which represents the financial position of a

company over the year/accounting year.
• Many different type of statements, meant for different purpose and mainly
includes:
• Balance Sheet
• Income Statement or Profit and loss account
• Cash flow statement
Financial Statements Analysis

• Critical evaluation of the financial information contained in the financial

statements.
• Establishing a relationship among various financial facts and figures as
given in a set of financial.
• Helpful in taking business decisions and it guides to nearly all stakeholders
including managers, investors, government and regulatory bodies to check
financial soundness of the company.
Objectives of Financial Statements Analysis

• To assess the current profitability and operational efficiency of the firm as a

whole as well as its different departments so as to judge the financial health
of the firm.
• To ascertain the relative importance of different components of the financial
position of the firm.
• To identify the reasons for change in the profitability/financial position of
the firm.
• To judge the ability of the firm to repay its debt and assessing the short-term
as well as the long-term liquidity position of the firm.
Tools of Financial Statements Analysis

1. Comparative Statements
2. Common Size Statements
3. Ratio Analysis
4. Trend Analysis
5. Cash Flow Analysis
Comparative Statements

1. These are the statements showing the profitability and financial position
of a firm for different periods of time in a comparative form to give an
idea about the position of two or more periods.
2. It usually applies to the two important financial statements, namely,
Balance Sheet and Income Statement prepared in a comparative form.
3. The financial data will be comparative only when same accounting
principles are used in preparing these statements.
4. Comparative figures indicate the trend and direction of financial position
and operating results.
5. This analysis is also known as ‘Horizontal Analysis’.
Comparative Statements

1. Put the accounting figures of two or more years in different columns, side
by side.
2. Take a difference of current year with previous year or base year
3. Convert the absolute difference into percentage term by dividing the
absolute difference by previous/base year and multiply by 100.

Particulars Year 1 Year 2 Absolute % Increase of

Difference Decrease
(3-2)
1 2 3 4 5
Rs. Rs. Rs. %
Comparative Statements
Illustration 1: From the following accounting statement, prepare a comparative statement

Particulars 2018 (Rs.) 2019 (Rs.)

Gross Sales 30,600 36,720
Less: Sale Return 600 700
Net Sales 30,000 36,020
Less: Cost of Goods 18,200 20,250
Gross Profit 11,800 15,770
Less: Operating Exp. 9,000 10,000
Profit: From Operations 2,800 5,770
Add: Non-Operation Income 300 400
3,100 6,170
Less: Non-Operating Exp. 400 600
Net Profit Before Tax 2,700 5,570
Less: Tax @50% 1,350 2,785
Net Profit After Tax 1,350 2,785
Comparative Statements
Particulars 2018 (Rs.) 2019 (Rs.) Absolute Diff. %
Gross Sales 30,600 36,720 +6,120 +20.00
Less: Sale Return 600 700 100 16.67
Net Sales 30,000 36,020 6.020 20.07
Less: Cost of Goods 18,200 20,250 2,050 11.26
Gross Profit 11,800 15,770 3,970 33.64
Less: Operating Exp. 9,000 10,000 1,000 11.11
Profit: From Operations 2,800 5,770 2970 106.07
Add: Non-Operation Income 300 400 100 33.33
Net Income 3,100 6,170 3070 99.03
Less: Non-Operating Exp. 400 600 200 50.00
Net Profit Before Tax 2,700 5,570 2,870 106.30
Less: Tax @50% 1,350 2,785 1,435 106.30
Net Profit After Tax 1,350 2,785 1,435 106.30
Comparative Statements: Self-Test
Self Test 1: The following are the Balance Sheets of XYZ Ltd. for the year ended March 31, 2015 and 2016.
Prepare a Comparative Balance Sheet and comment on the financial position of the business firm.

In 000
Liabilities 2015 2016 Assets 2015 2016
Equity Share Capital 600 800 Land and Building 370 270
Reserve & Surplus 330 222 Plant and Machinery 400 600
Debentures 200 300 Furniture and Fixtures 20 25
Long term Loans 150 200 Other Fixed Assets 25 30
Bills Payables 50 45 Cash in hand and at Bank 20 80
Sundry Creditors 100 120 Bills Receivables 150 90
Other Current Liabilities 5 10 Sundry Debtors 200 250
Stock 250 350
Prepaid Expenses --- 2
1,435 1,697 1,435 1,697
Common Size Statements
• Also known as component percentage statement
• It is a financial tool for studying the key changes and trends in the financial position and
operational result of a company.
• Each item in the statement is stated as a percentage of the aggregate, of which that item is a
part.
• For example, a common size balance sheet shows the percentage of each asset to the total
assets, and that of each liability to the total liabilities.
• Similarly, in the common size income statement, the items of expenditure are shown as a
percentage of the net sales. If such a statement is prepared for successive periods, it shows
the changes over the time.
• Such statements also allow an analyst to compare the operating and financing characteristics
of two companies of different sizes in the same industry.
• Thus, common-size statements are useful, both, in intra-firm comparisons over different
years and also in making inter-firm comparisons for the same year or for several years.
• This analysis is also known as ‘Vertical analysis’.
Common Size Statements: Procedure
Following Steps may be adopted for calculating and preparing the common size statements
1. List out absolute figures in ₹ at two points of time, say year-1 & year-2 (Column 2 & 4).
2. Choose a common base (as 100). For example, Sales revenue total may be taken as base
(100) in case of income statement, and
3. Total assets or total liabilities (100) in the case of balance sheet.
4. For all items of Col. 2 and 4 work out the percentage of that total. Column 3 and 5
represents these percentages.

Particulars Year-1 % Year-2 %

1 2 3 4 5
Common Size Statements
Illustration 2: Convert the following balance sheet into common size balance sheet and discuss
the result.
Balance Sheet as on March 31, 2010 and 2011
(₹ in lakhs)
Liabilities 2010 2011 Assets 2010 2011
Equity Shared Capital 1,000 1,200 Debtors 450 390
Capital Reserve 90 185 Cash 200 15
General Reserve 500 450 Stocks 320 250
Sinking Fund 90 100 Investment 300 250
Debentures 450 650 Building Less Depreciation 800 1,400
Sundry Creditors 200 150 Land 198 345
Others 15 20 Furniture and Fittings 77 105
2,345 2,755 2,345 2,755
Common Size Statements
Common Size Balance Sheet as on March 31, 2010 and 2011
(₹ in lakhs)
Particulars 2010 2011
₹ % ₹ %
Equity Shared Capital 1,000 42.64 1,200 43.56
Capital Reserve 90 3.84 185 6.72
General Reserve 500 21.32 450 16.33
Sinking Fund 90 3.84 100 3.63
Shareholder’s Fund 1680 71.64 1935 70.24
Debentures 450 19.19 650 23.59
Long Term Debt 450 19.19 650 23.59
Sundry Creditors 200 8.53 150 5.44
Others 15 0.64 20 0.73

Current Liabilities 215 9.17 170 6.17

Total Liabilities 2,345 100 2,755 100
Common Size Statements
Common Size Balance Sheet as on March 31, 2010 and 2011
(Rs. in lakhs)
Particulars 2010 2011
₹ % ₹ %
Building 800 34.12 1,400 50.82
Land 198 8.44 345 12.52
Furniture & Fittings 77 3.28 105 3.81
Total Fixed Assets 1075 45.84 1,850 67.15
Debtors 450 19.19 390 14.16
Cash 200 8.53 15 0.05
Stocks 320 13.64 250 9.07
Total Current Assets 970 41.36 655 23.28
Investments 300 12.08 250 9.07
Total Assets 2,345 100 2,755 100
Common Size Statements: Self Test
Self Test 2: Prepare a Common Size Income Statement from the below given Income
Statement of XYZ Ltd. ended on 31st March 2014 and 2015.
Income Statement

Particulars 2014 2015

Net Sales 5,00,000 4,95,000
Cost of Goods Sold 3,78,000 3,60,000
Operating Expenses 62,500 60,000
Depreciation 22,000 22,000
Income from Investments 70,000 89,000
Income Tax @10% @10%
Ratio Analysis

• The relationship (mathematical) of a number with a reference another number is called ratio
• Generally represented as fraction, proportion or percentages
• When the number is calculated by referring to two accounting numbers derived from the
financial statements, it is termed as accounting ratio.
• A ratio must be calculated using numbers which are meaningfully correlated.
• Ratio Analysis provides users with crucial financial information and points out the areas
which require investigation.
• It involves regrouping of data by application of arithmetical relationships, though its
interpretation is a complex matter.
Ratio Analysis
Objectives of Accounting Ratios
1. To know the areas of the business which need more attention;
2. To know about the potential areas which can be improved with the effort in the desired
direction;
3. To provide a deeper analysis of the profitability, liquidity, solvency and efficiency levels in
the business;
4. To provide information for making cross sectional analysis by comparing the performance
with the best industry standards;
5. To provide information derived from financial statements useful for making projections
and estimates for the future.
Ratio Analysis

Advantages of Ratio Analysis

1. Helps understand efficacy of decisions
2. Simplify complex figures and establish relationships
3. Helpful in comparative analysis (Trend and interfirm)
4. Identification of problem areas
5. Enables SWOT analysis
6. Various comparisons
Ratio Analysis

Ratio Analysis
1. Traditional Classification
a) Income Statement Ratios
b) Balance Sheet Ratios
c) Composite Ratios
2. Functional Classification
a) Liquidity Ratios
b) Solvency Ratios
c) Activity Ratios
d) Profitability Ratios
Liquidity Ratios
• The ability of the business to pay the amount due to stakeholders as and when it is due is
known as liquidity,
• The ratios calculated to measure it are known as ‘Liquidity Ratios’.
• They are essentially short-term in nature.
• Liquidity ratios are calculated to have indications about the short term solvency of the
business, i.e. the firm’s ability to meet its current obligations.
• These are analyzed by looking at the amounts of current assets and current liabilities in
the balance sheet.
• These include bank overdraft, creditors, outstanding expenses, bills payable, income
received in advance etc.
• The two ratios included in this category are:
1. Current Ratio
2. Quick Ratio
Current Ratio (CR)
• Current Ratio (CR) is calculated as proportion of current assets to current liabilities.
• CR is expressed as:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

= Current Assets : Current Liabilities

• Current Assets include cash in hand, bank balance, debtors, bills receivable, stock,
prepaid expenses, accrued income, and short-term investments (marketable securities).

• Current Liabilities include creditors, bills payable, outstanding expenses, provision for
taxation net of advance tax, bank overdraft, short-term loans, income received in
advance, etc.
• A current ratio of 2:1 is desirable and considered good.
Current Ratio (CR)
Illustration 3: Given below is an intercept of Financial Statement of Vipul Ltd. Find
Current Ratio from the information provided and discuss the result.
Particulars Rs. Particulars Rs.
Debtors 40,000 Cash 30,000
Bills Payable 40,000 Stock 50,000
Advance Tax 4,000 Bills Receivable 10,000
Bank Overdraft 4,000 Creditors 60,000
Current Ratio (CR)

Current Assets = Debtors + Advance Tax + Cash + Stock + Bills Receivable

= 40,000 + 4,000 + 30,000 + 50,000 + 10,000
= 1,34,000
Current Liabilities = Bills Payable + Bank Overdraft + Creditors
= 40,000 + 4,000 + 60,000
= 1,04,000

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
1,34,000
=
1,04,000

= 1.29:1
Quick Ratio
• Quick Ratio is calculated as proportion of quick (liquid) assets to current liabilities.
• It is expressed as:
𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

= Quick Assets : Current Liabilities

• Quick Assets are defined as those assets which are quickly convertible into cash.
• While calculating quick assets we exclude the closing stock and prepaid expenses from the
current assets.
• Because non-liquid current asset are excluded, it is considered better than current ratio as a
measure of liquidity position of the business.
• It is calculated to serve as a supplementary check on liquidity position of the business and is
therefore, also known as ‘Acid-Test Ratio’.
• A quick ratio of 1:1 is desirable and considered good.
Quick Ratio
Illustration 4: Given below is an intercept of Financial Statement of Vipul Ltd. Find Quick
Ratio from the information provided and discuss the result.
Particulars Rs. Particulars Rs.
Debtors 40,000 Cash 30,000
Bills Payable 40,000 Stock 50,000
Advance Tax 4,000 Bills Receivable 10,000
Bank Overdraft 4,000 Creditors 60,000
Quick Ratio

Quick Assets = Debtors + Cash + Bills Receivable

= 40,000 + 30,000 + 10,000
= 80,000
Current Liabilities = Bills Payable + Bank Overdraft + Creditors
= 40,000 + 4,000 + 60,000
= 1,04,000

𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
80,000
=
1,04,000

= .77:1
Other Liquidity Ratios
• Cash Ratio is calculated with reference to current liabilities. Cash and marketable securities (cash equivalent)
are divided by current liabilities to obtain cash ratio.

𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠

𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

• Interval Measures assesses a firm’s ability to meet its regular cash expenses. It relates liquid assets to average
daily operating cash flows.
• The average daily operating expenses are cost of goods sold plus selling, administrative and general expenses
less depreciation and other non-cash expenditures divided by number of days in a year.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠

𝐼𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑀𝑒𝑎𝑠𝑢𝑟𝑒𝑠 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Solvency Ratios
• The ability of the business to pay its debts in long run.
• The ratios calculated to measure long term debt paying ability of a firm are known as
‘Solvency Ratios’.
• They are essentially long-term in nature.
• These are analyzed by looking at the amounts of long term assets and liabilities in the
balance sheet.
• The ratios included in this category are:
1. Debt Equity Ratio
2. Debt Ratio/Debt to Capital Employed Ratio
3. Proprietary Ratio
4. Total Assets To Debt Ratio
5. Interest Coverage Ratio
Solvency Ratios
Asset = Equity + Liability

• What should be the optimum mix of share capital and borrowings

• Debt is risky and legally binding
• Debt is useful in magnifying shareholder’s return through financial leverage or financial
gearing
• Highly indebted firm find it difficult to raise fund
• Leverage ratios provide indications for these situations
Debt-Equity Ratio
• Debt-Equity Ratio is calculated as relationship between long-term debt and equity.
• It is expressed as:

𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡𝑠

𝐷𝑒𝑏𝑡𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐹𝑢𝑛𝑑

• If debt component of the total long-term funds employed is small, outsiders feel more
secure.
• Capital structure with less debt and more equity is considered favorable as it reduces the
chances of bankruptcy.
• Normally, it is considered to be safe if debt equity ratio is 2:1.
Debt-Equity Ratio
Illustration 5: Calculate Debt Equity Ratio, from the following information :

Total external liabilities: Rs.5,00,000 Balance Sheet Total: Rs.10,10,000

Current liabilities: Rs.1,00,000 Fictitious Assets: Rs.10,000
Debt-Equity Ratio
Self Test 5: From the following particulars of balance sheet of XYZ Co. Ltd. compute debt
equity ratio.
Particulars Amount
Equity & Liabilities
Share capital 12,00,000
Reserve & Surplus 2,00,000
Money received against share warrant 1,00,000
Long-term borrowings 4,00,000
Other long-term liabilities 40,000
Long-term provisions 60,000
Short-term borrowings 2,00,000
Trade payables 1,00,000
Other current liabilities 50,000
Short-term provisions 1,50,000
25,00,000
Debt Ratio/Debt to Capital Employed Ratio
• Debt Ratio is calculated as relationship between long-term debt and net asset or total capital
employed. The net capital includes all internal and external funds.
• It is expressed as:

𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡𝑠

𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝑜𝑟 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡

• It shows proportion of debt (long-term) in the total capital employed.

• Low ratio shows higher confidence for security to the creditors.
• Normally, it is considered to be safe if debt equity ratio is 2:1.
Proprietary Ratio
• Proprietary Ratio is calculated as relationship between proprietor’s (shareholders) fund to
the net asset.
• It is expressed as:

𝑆ℎ𝑎𝑟𝑒 ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐹𝑢𝑛𝑑

𝑃𝑟𝑜𝑝𝑟𝑖𝑒𝑡𝑎𝑟𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 (𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡)

• It shows proportion of shared capital in the total capital employed.

• High ratio shows higher confidence for the creditors.
Total Asset to Debt Ratio
• Total Asset to Debt Ratio measures the extent of the coverage of long-term debt by assets.
• It is calculated as

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑡𝑜 𝑑𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡
Interest Coverage Ratio
• Interest Coverage Ratio is a ratio which deals with the servicing of interest on loan.
• It is a measure of security of interest payable on long-term debt. It expresses the relationship
between profits available for payment of interest and the amount of interest payable.
• It is calculated as

𝐸𝐵𝐼𝑇
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡

• It gives the number of times interest on long-term debt is covered by the profits available for
interest.
• A higher ratio ensures safety of interest payment debt and it also indicates availability of
surplus for shareholders.
Interest Coverage Ratio
Self Test: From the following detail, calculate interest coverage ratio:

Net Profit after tax Rs. 60,000;

15% Long-term debt 10,00,000;
and Tax Rate 40%.
Activity Ratios
• These ratios indicate the speed at which, activities of the business are being
performed.
• The activity ratios express the number of times assets employed, or, for that
matter, any constituent of assets, is turned into sales during an accounting
period.
• Higher turnover ratio means better utilization of assets and signifies improved
efficiency and profitability, and as such are known as efficiency ratios.
• The important activity ratios calculated under this category are:
1. Inventory Turnover
2. Trade receivable Turnover
3. Trade payable Turnover
4. Investment (Net assets) Turnover
5. Fixed assets Turnover
6. Working capital Turnover
Inventory Turnover Ratios
• It determines the number of times inventory is converted into revenue from
operations during the accounting period under consideration.
• It expresses the relationship between the cost of revenue from operations and
average inventory, expressed as:

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

• Where, average inventory is arithmetic average of opening and closing

inventory.
Inventory Turnover Ratios
Illustration
From the following information, calculate inventory turnover ratio :
Rs.
Inventory in the beginning = 18,000
Inventory at the end = 22,000
Net purchases = 46,000
Wages = 14,000
Revenue from operations = 80,000
Carriage inwards = 4,000
Inventory Turnover Ratios
Self Test
• From the following information, calculate inventory turnover ratio:
Rs.
Revenue from operations = 4,00,000
Average Inventory = 55,000
Gross Profit Ratio = 10%

• A trader carries an average inventory of Rs. 40,000. His inventory turnover

ratio is 8 times. If he sells goods at a profit of 20% on Revenue from
operations, find out the gross profit.
Inventory Turnover Ratios
Self Test
• A trader carries an average inventory of Rs. 40,000. His inventory turnover
ratio is 8 times. If he sells goods at a profit of 20% on Revenue from
operations, find out the gross profit.

Cost/av. Int = 8
Cost/40,000 = 8
Cost = 40,000*8 = 3,20,000

Revenue*80/100 = 3,20,000
Revenue = 4,00,000
Gross Profit = Revenue- Cost
= 4,00,000-3,20,000
= 80,000
Trade Receivables Turnover Ratio
• It expresses the relationship between credit revenue from operations and trade
receivable.
• It is calculated as:
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐹𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛
𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

• Where Average Trade Receivable = (Opening Debtors and Bills Receivable +

Closing Debtors and Bills Receivable)/2
Trade Receivables Turnover Ratio
Illustration
Calculate the Trade receivables turnover ratio from the following information:
Rs.
Total Revenue from operations = 4,00,000
Cash Revenue from operations = 20% of Total Revenue from
operations
Trade receivables as at 1.4.2016 = 40,000
Trade receivables as at 31.3.2017 = 1,20,000
Average Collection Period
• Trade Receivable ratio is also helpful in working out the average collection
period.
• The ratio is calculated by dividing the days or months in a year by trade
receivables turnover ratio.

𝑁𝑜. 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑟 𝑚𝑜𝑛𝑡ℎ𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜

Self Test: For the illustration in the previous section, workout the average
collection period for the trade receivables.
Trade Payable Turnover Ratio
• Trade payables turnover ratio indicates the pattern of payment of trade
payable.
• Trade payable arise on account of credit purchases
• It expresses relationship between credit purchases and trade payable.
• It is calculated as:
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒
𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠

• Where Average Trade Payable = (Opening Creditor and Bills Payable +

Closing Creditors and Bills payable)/2
Trade Payable Turnover Ratio
Illustration
Calculate the Trade payables turnover ratio from the following figures:
Rs.
Credit purchases during 2016-17 = 12,00,000
Creditors on 1.4.2016 = 3,00,000
Bills Payables on 1.4.2016 = 1,00,000
Creditors on 31.3.2017 = 1,30,000
Bills Payables on 31.3.2017 = 70,000
Average Payment Period
• Trade payable ratio is also helpful in working out the average payment period.
• The ratio is calculated by dividing the days or months in a year by trade
payables turnover ratio.

𝑁𝑜. 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑟 𝑚𝑜𝑛𝑡ℎ𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜

Self Test: For the illustration in the previous section, workout the average
payment period for the trade payables.
Assets Turnover Ratios
• Assets are employed to generate sales, which ultimately results into profits
• Firms should manage their assets efficiently to maximize sales
• The relationship between sales and assets are known as Assets Turnover
• Several Assets Turnover ratios are calculated in practice

1. Net Assets/Capital Employed Turnover Ratio

2. Total Asset Turnover Ratio
3. Fixed Asset Turnover Ratio
4. Current Asset Turnover Ratio
5. Working Capital Turnover Ratio
Net Assets/Capital Employed Turnover Ratio
• It shows relationship between revenue from operations and net assets (capital employed)
in the business.
• Higher turnover means better activity and profitability.
• It is calculated as follows:

𝑆𝑎𝑙𝑒𝑠 𝑜𝑟 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡 𝑜𝑟 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑟 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑

• Where, Net Asset or Capital employed is total of Net fixed Assets (NFA) and Net Current
Assets (CA).
Total Assets Turnover Ratio
• Instead of or in addition to Net Asset Turnover Ratio, Total asset turnover ratio is also
indicative of operational efficiency
• It shows relationship between revenue from operations (Sales) and Total assets.
• It shows firms ability to generate sales from all financial resources committed.
• Higher turnover means better activity and profitability.
• It is calculated as follows:

𝑆𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

• Where, Total Asset includes Net fixed Assets (NFA) and Current Assets (CA).
Other Assets Turnover Ratio
• Few extensions of assets turnovers ratios are, Fixed, Current and Net Current Assets
Turnover Ratios.
• These ratios are calculated as:

𝑆𝑎𝑙𝑒𝑠
𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

𝑆𝑎𝑙𝑒𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠

𝑆𝑎𝑙𝑒𝑠
𝑁𝑒𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =
𝑁𝑒𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Self Test
From the Following Information, Calculate following Ratios given that the Revenue from
operations were Rs. 30,00,000;
1. Net Assets Turnover Ration; 4. Total assets Turnover Ratio
2. Fixed Assets Turnover Ratio; 5. Current Assets Turnover Ratio
3. Working Capital Turnover Ratio