Chapter 2- Ratio Analysis

Chapter 2
Financial Analysis & Planning - Ratio Analysis
TYPES OF RATIO
I. PROFITABILITY RATIOS BASED ON SALES:
These ratios measure how efficiently a company has generated profit on sales and investment.
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
i. Gross Profit Ratio= 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 (In %)

Gross Profit = Gross Profit as per Trading Account.

Sales = Sales net of returns.
Significance = Indicator of Basic Profitability.

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡
ii. Operating Profit Ratio= 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
(In %)

Operating Profit = Sales Less Cost of Sales

[OR]
Net Profit as per P & L Account
(+) Non-Operating Expenses (e.g. Loss on sale of assets, preliminary Expenses written off, etc.)
(-) Non-Operating Income (e.g. Rent, Interest & Dividends received)
Sales = Sales net of returns.
Significance = Indicator of Operating Performance of business.

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
iii. Net Profit Ratio= 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
(In %)

Net Profit = Net profit as per P & L A/c (either before tax or after tax, depending upon data).
Sales = Sales net of returns.
Significance= Indicator of Overall Profitability.

iv. Contribution Sales Ratio [or] Profit Volume Ratio= Contribution/ Sales

Contribution = Sales Less Variable Costs.

Sales = Sales net of returns.
Significance = Indicator of Profitability in Marginal Costing.

II. COVERAGE RATIOS:

The soundness of firm, from the view point of long term creditors & Preference shares, lays its ability to
service their client.
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑓𝑜𝑟 𝐷𝑒𝑏𝑡 𝑆𝑒𝑟𝑣𝑖𝑐𝑒
i. Debt Service Coverage Ratio= (𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝐼𝑛𝑠𝑡𝑎𝑙𝑚𝑒𝑛𝑡) (In Times)

Earnings for Debt Service = Net Profit after Taxation

(+) Interest on Debt Funds
(+) Non-Cash Operating Expenses(e.g. depreciation & amortizations)
(+) Non-Operating Items/Adjustments (e.g. Loss on sale of Fixed Assets,etc.)
Interest + Instalment = Interest + Principal, i.e.
Interest on Debt
(+) Instalment of Loan Principal
Significance =Indicates extent of current earnings available for meeting commitments of interest and
instalment. Ideal Ratio must be between 2 to 3 times.

𝐸𝐵𝐼𝑇
ii. Interest Coverage Ratio= 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
(In Times)

EBIT = Earnings before Interest and Tax.

Interest = Interest on Debt
Significance= Indicates ability to meet interest obligations of the current year. Should be greater than 1.

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 Chapter 2- Ratio Analysis

𝐸𝐴𝑇
iii. Preference Dividend Coverage Ratio= 𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 (In Times)

EAT = Earnings after Tax.

Preference Dividend = Dividend on Preference Capital.
Significance= Indicates ability to pay dividend on Preference Capital. Should be greater than 1.

III. TURNOVER/ACTIVITY/PERFORMANCE RATIOS

These ratio show how efficiently a company is using its assets to generate sales, e.g. Fixed Assets Turnover
ratio, Debtor Turnover ratio etc.
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑑
i. Raw Material Turnover Ratio= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 (In Times)

Cost of Raw Material Consumed = Opening Stock of Raw Materials

(+) Purchases of Raw Materials
(-) Closing Stock of Raw Materials
(𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑅𝑀 𝑆𝑡𝑜𝑐𝑘 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑅𝑀 𝑆𝑡𝑜𝑐𝑘)
Average Stock of Raw Material= 2
Significance= Indicates how fast/regularly Raw Materials are used in production.

𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑐𝑜𝑠𝑡
ii. WIP Turnover Ratio= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑊𝐼𝑃 (In Times)

Factory Cost = Materials Consumed + Wages + POH

(𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑊𝐼𝑃 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑊𝐼𝑃)
Average Stock of WIP = 2
Significance= Indicates the WIP movement/production cycle.

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

iii. Finished Goods or Stock Turnover Ratio= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝐹𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝐺𝑜𝑜𝑑𝑠
(In Times)

Cost of Goods Sold = (a) For Manufacturers: OpeningStock of FG (+)Cost of Production (-) Closing Stock of
FG.
(b) For Traders: Opening Stock of FG + Cost of Goods Purchased (-) Closing Stock of FG.
(𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐹𝐺 𝑆𝑡𝑜𝑐𝑘 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐹𝐺 𝑆𝑡𝑜𝑐𝑘)
Average Stock of Finished Goods = 2
Significance =Indicates how fast inventory is used/sold. High Turnover shows fast moving FG. Low Turnover
may mean dead or excessive stock.

𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
iv. Debtors Turnover Ratio= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 (In Times)

Credit Sales = Credit Sales net of returns

Average Accounts Receivable = Average Accounts Receivable (i.e. Debtors + B/R)
(𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐷𝑟𝑠 & 𝐵/𝑅 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐷𝑟𝑠 & 𝐵/𝑅 )
2
Significance = Indicates the speed of collection of Credit Sales/Debtors.

𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
v. Creditors Turnover Ratio= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
(In Times)

Credit Purchases = Credit Purchases net of returns

Average Accounts Payable = Average Accounts Payable (i.e. Creditors + B/P)
(𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐶𝑟𝑠 & 𝐵/𝑃 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐶𝑟𝑠 & 𝐵/𝑃)
2

𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 (𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠)

vi. Working Capital Turnover Ratio= 𝑁𝑒𝑡 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
(In Times)

[Also called Operating Turnover (or) Cash Turnover Ratio]

Turnover = Sales net of returns
Net Working Capital = Current Assets Less: Current Liabilities
(Average of Opening and Closing balances may be taken)

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Significance= Ability to generate sales per rupee of Working Capital.

𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
vii. Fixed Assets Turnover Ratio= 𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 (In Times)

Turnover = Sales net of returns

Net Fixed Assets = Net Fixed Assets (Average of Opening and Closing balances may be taken)
Significance= Ability to generate sales per rupee of Fixed Assets.

𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
viii.Capital Turnover Ratio = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
(In Times)

Turnover = Sales net of returns

Capital Employed = (Average of Opening and Closing balances may be taken)
Significance = Ability to generate sales per rupee of long-term Investment.

ALSO STUDY CONCEPT OF DEBTOR, CREDITORS & STOCK VELOCITY

IV. CAPITAL STRUCTURE RATIOS

These ratios measure the extent to which a company which has been financed by long term debt obligations
like Debt equity ratio. It measures the ability of an enterprise to survive over a long period of time.
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
i. Debt to Total Assets Ratio = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Debt = Borrowed Funds (or) Loan Funds

= Debentures + Long-Term Loans from Banks, Financial Institutions, etc.

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
ii. Debt Ratio = 𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡𝑠

Total debt includes both long term and short term debt.

𝐸𝑞𝑢𝑖𝑡𝑦
iii. Equity to Total Funds Ratio = 𝑇𝑜𝑡𝑎𝑙 𝐹𝑢𝑛𝑑𝑠

Equity = Net Worth (or) Shareholders’ Funds (or) Proprietors’ Funds (or) Owners’ Funds (or) Own Funds
= Equity Share Capital + Preference Share Capital + Reserves & Surplus Less: Miscellaneous Expenditure (as
per Balance Sheet) and Accumulated Losses.
Total Funds = Long Term Funds (or) Capital Employed (or) Investment
= Debt + Equity......Liability Route
= Fixed Assets + Net Working Capital ..........Assets Route
Significance = Indicates Long Term Solvency, mode of financing and extent of own funds used in operations.
Ideal Ratio is 33%.

𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
iv. Equity Ratio = 𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡

v. Debt – Equity Ratio = 𝐸𝑞𝑢𝑖𝑡𝑦
OR 𝐸𝑞𝑢𝑖𝑡𝑦

Long term Debt = Borrowed Funds (or) Loan Funds = Debentures + Long-Term Loans from Banks, Financial
Institutions, etc.
Equity = Net Worth (or) Shareholders’ Funds (or) Proprietors’ Funds (or) Owners’ Funds (or) Own Funds
= Equity Share Capital + Preference Share Capital + Reserves & Surplus Less: Miscellaneous Expenditure (as
per Balance Sheet) and Accumulated Losses.
Significance= Indicates the relationship between Debt & Equity. Ideal Ratio is 2:1.

𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝐷𝑒𝑏𝑒𝑛𝑡𝑢𝑟𝑒𝑠 + 𝑜𝑡ℎ𝑒𝑟 𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑑 𝑓𝑢𝑛𝑑𝑠

vi. Capital Gearing Ratio = 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐹𝑢𝑛𝑑𝑠

Preference Capital + Debentures + Other borrowed funds = Preference Share Capital and Debt i.e. Debentures
+ Long-Term Loans from Banks, Financial Institutions, etc.
Equity Shareholders Funds = Equity Share Capital Less Preference Share Capital i.e.

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= Equity Share Capital + Reserves & Surplus Less: Miscellaneous Expenditure (as per Balance Sheet) and
Accumulated Losses.
Significance = Show proportion of Fixed Charge (Dividend or Interest) Bearing Capital to Equity Funds, and the
extent of advantage or leverage enjoyed by Equity Shareholders.

𝑃𝑟𝑜𝑝𝑟𝑖𝑒𝑡𝑎𝑟𝑦 𝐹𝑢𝑛𝑑𝑠
vii. Proprietary Ratio = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Proprietary Funds = Net Worth (or) Shareholders’ Funds (or) Proprietors’ Funds (or) Owners’ Funds (or) Own
Funds
= Equity Share Capital + Preference Share Capital + Reserves & Surplus Less: Miscellaneous Expenditure (as
per Balance Sheet) and Accumulated Losses.
Total Assets = Net Tangible Fixed Assets (+) Total Current Assets
Significance = Shows extent of Owner’s Funds, i.e. Shareholders’ Funds utilised in financing the assets of the
business.

𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
viii. Fixed Asset to Long Term Fund Ratio = 𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐹𝑢𝑛𝑑𝑠

Fixed Assets = Net Fixed Assets, i.e. Gross Block (-) Depreciation
Long Term Funds = Debt + Equity......Liability Route
= Fixed Assets + Net Working Capital ..........Assets Route
Significance= Shows proportion of Fixed Assets (Long-Term Assets) financed by long-term funds. Indicates
the financing approach followed by the Firm, i.e. Conservative, Matching or Aggressive. Ideal Ratio is less than
one.

V. LIQUIDITY RATIO
These ratios show company’s ability to meet its short term financial obligation like current ratio and quick
ratio.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
i. Current Ratio= 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Current Assets = Inventories/Stocks

(+) Debtors & B/R
(+) Cash & Bank
(+) Receivables
(+) Accruals
(+) Shot Term Loans
(+) Marketable Investments/Short Term Securities
Current Liabilities = Sundry Creditors
(+) Outstanding Expenses
(+) Short Term Loans & Advances (Cr.)
(+) Bank Overdraft/Cash Credit
(+) Provision for Taxation
(+) Proposed Dividend
(+) Unclaimed Dividend
Significance = Ability to repay short-term liabilities promptly. Ideal Ratio is 2:1. Very high Ratio indicates
existence of idle Current Assets.

ii. Quick Ratio= Quick Assets / Current Liabilities

(Also called Liquid Ratio [or] Acid Test Ratio)

Quick Assets = Current Assets
(-) Inventories
(-) Prepaid Expense
Significance = Ability to meet immediate liabilities. Ideal Ratio is 1:1

𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠

iii. Absolute Cash Ratio [or] Cash Ratio [or] Absolute Liquidity Ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Cash + Marketable Securities = Cash in Hand

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 Chapter 2- Ratio Analysis

(+) Cash at Bank (Dr)

(+) Marketable Investments/Short Term Securities(current investments)
Significance = Availability of cash to meet short-term commitments. No ideal ratio as such. If Ratio > 1, it
indicates very liquid resources, which are low in profitability.

𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠
iv. Basic Defence Interval Measure= 𝐶𝑎𝑠ℎ 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦
(In days)

Quick Assets = Current Assets

(-) Inventories
(-) Prepaid Expenses
𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑠ℎ 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Cash Expenses per Day = 365
Cash Operating Expenses = COGS + Selling admin other expenses ( excluding depreciation and non cash exp)
Cash Expenses = Total Expenses (-) Depreciation& write-offs.
Significance= Ability to meet regular Cash Expenses.

VI. OVERALL RETURN RATIOS - OWNER VIEW POINT

i. Return on Investment (ROI) [or] Return on Capital Employed (ROCE) =

𝐸𝐵𝐼𝑇
Pre-tax ROCE: = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝐸𝐵𝐼𝑇(1−𝑡) 𝐸𝑎𝑡 +𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Post-tax ROCE: = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
· Either pre-tax or post-tax ROCE may be computed.
· Pre-tax ROCE is generally preferred for analysis purposes.
· Capital Employed = Investment
= Equity + Debt
Significance = Overall profitability of the business of the business on the Total Funds Employed.

ii. Return on Net Worth (RONW) =

Pre-tax RONW: =
Post – tax RONW: =
· Either pre-tax or post-tax ROE may be computed.
· Post-tax ROE is generally preferred for analysis purposes.
· Equity (or) Net Worth (or) Shareholders’ Funds (or) Proprietors’ Funds (or) Owners’ Funds (or)Own
Funds
Significance = Indicates profitability of Equity Funds/Owner’s Funds invested in the business.

iii. Return on Assets (ROA) =

𝐸𝐵𝑇
Pre-tax ROA: = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐸𝐴𝑇 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝐵𝑇(1−𝑇)
Post-tax ROA: = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 or 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
· Either pre-tax or post-tax ROA may be computed.
· Pre-tax ROA is generally preferred for analysis purposes.
· Average, i.e. ½ of Opening & Closing Balances of any of the following items –
(a) Total Assets, (or)
(b) Tangible Assets, (or)
(c) Fixed Assets.
Significance = Indicates Net Income per rupee of Average Total Assets or Tangible or Fixed Assets.

𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
iv. Earnings per Share (EPS)= 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒𝑠

Residual Earnings, i.e. EAT (-) Preference Dividend

𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
Number of Equity Shares outstanding = 𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Significance = Income per share, whether or not distributed as dividends.

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𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑

v. Dividend per share(DPS)= 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒𝑠

Profits distributed to Equity Shareholders.

Significance= Profits distributed per Equity Share.

𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

vi. Price Earnings Ratio (PE Ratio)= 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Average Market price (or closing Market price) as per Stock Exchange quotations. (Market price per share =
MPS)
Significance = Indicates relationship between MPS and EPS, and Shareholders’ perception of the Company.

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
vii. Dividend Yield (%)= 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Average MPS (or Closing MPS) as per stock Exchange quotations.

Significance = True return on Investment, based on Market Value on Market Value of Shares.

𝐸𝑆𝐻𝐹
viii. Book Value per Share= 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒𝑠

𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
Number of Equity Shares outstanding = 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
Significance= Basis of Valuation of Shares based on Book Values.

𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

ix. Market Value to Book Value= 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Average MPS (or Closing MPS) as per stock Exchange quotations.

Significance= Higher ratio indicates better position for Shareholders in terms of return & capital gains.

𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑎𝑛𝑑 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑜𝑚𝑝𝑎𝑛𝑦

X. Q Ratio = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
or 𝐴𝑠𝑠𝑒𝑡 𝑅𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝐶𝑜𝑠𝑡

PRACTICAL PROBLEMS
Question 1 - Rtp May 2022
FM Ltd. is in a competitive market where every company offers credit. To maintain the competition, FM Ltd.
sold all its goods on credit and simultaneously received the goods on credit. The company provides the
following information relating to current financial year:
Debtors Velocity 3 months
Creditors Velocity 2 months
Stock Turnover Ratio (on Cost of Goods Sold) 1.5
Fixed Assets turnover Ratio (on Cost of Goods Sold) 4
Gross Profit Ratio 25%
Bills Receivables ₹ 75,000
Bills Payables ₹ 30,000
Gross Profit ₹ 12,00,000
FM Ltd. has the tendency of maintaining extra stock of ₹ 30,000 at the end of the period than that at the
beginning.
DETERMINE:
(i) Sales and cost of goods sold
(ii) Sundry Debtors
(iii) Closing Stock
(iv) Sundry Creditors
(v) Fixed Assets

Question 2 - Dec 2021

Following are the data in respect of ABC Industries for the year ended 31st March, 2021:
Debt to Total assets ratio : 0.40
Long-term debts to equity ratio : 30%

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 Chapter 2- Ratio Analysis

Gross profit margin on sales : 20%

Accounts receivable period : 36 days
Quick ratio : 0.9
Inventory holding period : 55 days
Cost of goods sold : ₹ 64,00,000
Liabilities ₹ Assets ₹
Equity Share Capital 20,00,000 Fixed assets
Reserves & Surplus Inventories
Long-term debts Accounts receivables
Accounts payable Cash
Total 50,00,000 Total
Required:
Complete the Balance Sheet of ABC Industries as on 31st March, 2021. All calculations should be in nearest
Rupee. Assume 360 days in a year.

Question 3 - Nov 09
From the information given below calculated the amount of Fixed assets and Proprietor’s Funds
Ratio of fixed assets to Proprietors Funds 0.75
Net working capital ₹ 6,00,000

Question 4 - May 06
JKL Limited has the following Balance Sheets as on March 31, 2006 and March 31, 2005:
Balance Sheet(₹ in Lakhs)
Particulars March 31,2006 March 31, 2005
Sources of Funds
Shareholders’ funds 2,377 1,472
Loan Funds 3,570 3,083
5,947 4,555
Application of Funds
Fixed Assets 3,466 2,900
Cash and Bank 489 470
Debtors 1,495 1,168
Stock 2,867 2,407
Other Current Assets 1,567 1,404
Less: Current Liabilities (3,937) (3,794)
5,947 4,555

The Income Statement of the JKL Ltd. for the year ended is as follows: (₹ in lakhs)
Particulars March 31, 2006 March 31, 2005
Sales 22,165 13,882
Less: Cost of Goods sold 20,860 12,544
Gross Profit 1,305 1,338
Less: Selling, General and Administrative expenses 1,135 752
Earnings before Interest and Tax (EBIT) 170 586
Interest Expense 113 105
Profit before tax 57 481
Tax 23 192
Profit after tax (PAT) 34 289
Required:
(i) Calculate for the year 2005-06:
a. Inventory Turnover Ratio
b. Financial Leverage
c. Return on Investment (ROI)
d. Return on Equity (ROE)
e. Average Collection Period.
(ii) Give a brief comment on the financial position of JKL Limited.

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Question 5 - Nov 09
MN Limited gives you the following information related for the year ending 31st March, 2009:
1. Current Ratio 2.5 : 1
2. Debt – Equity Ratio 1: 1.5
3. Return on Total Assets 15%
4. Total Assets Turnover Ratio 2
5. Gross Profit Ratio 20%
6. Stock Turnover Ratio 7
7. Current Market Price per Equity Share ₹ 16
8. Net Working Capital ₹ 4,50,000
9. Fixed Assets ₹ 10,00,000
10. 60,000 Equity Shares of ₹ 10 each
11. 20,000, 9% Preference shares of ₹ 10 each
12. Opening Stock ₹ 3,80,000
You are required to calculate:
a. Quick Ratio
b. Fixed assets Turnover Ratio
c. Proprietary Ratio
d. Earnings per share
e. Price Earnings Ratio.

Question 6 -
FLOW Ltd. has the following Profit &Loss Account for the year ended 31st March, 2010 and the Balance Sheet
as on that date:
Profit and Loss Account (For the year ended 31st March, 2010) (₹ In lakhs)
Particulars Amount Particulars Amount
Opening Stock 1.75 Sales: Credit 12.00
Add: Manufacturing Cost 10.75 Cash 3.00
Less: Closing Stock (1.50)
Cost of Goods Sold 11.00
Gross Profit 4.00
15.00 15.00
Administrative expenses 0.35 Gross Profits 4.00
Selling expenses 0.25 Royalty Income 0.09
Depreciation 0.50
Interest 0.47
Income-Tax 1.26
Net Profit 1.26
4.09 4.09
st
Balance Sheet as on 31 March, 2010
Liabilities ₹ Assets ₹
Equity Shares of ₹ 10 3.50 Plant and Machinery 10.00
10% Preference Shares 2.00 Less: Depreciation 2.50
Reserves and Surplus 2.00 Net Plant and Machinery 7.50
Long-term loan (12%) 1.00 Goodwill 1.40
Debentures (14%) 2.50 Stock 1.50
Creditors 0.60 Debtors 1.00
Bills Payable 0.20 Prepaid expenses 0.25
Accrued expenses 0.20 Marketable securities 0.75
Provision for Tax 0.65 Cash 0.25
12.65 12.65

The market price per share of FLOW Ltd. on 31st March, 2010 is ₹ 45.
Particulars (₹ in lakhs)
Reserves at the beginning 1.465
Net Profit during the year 1.260
2.725

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 Chapter 2- Ratio Analysis

Preference Dividends 0.200

Equity Dividends 0.525
Reserves at the close of the year 2.000
Compute the following Ratios.
(1)Current Ratio; (2) Quick Ratio; (3) Debt Equity Ratio; (4) Interest coverage; (5) Fixed charge coverage; (6)
Stock Turnover; (7) Debtors Turnover; (8) Average collection period; (9) Gross Profit Margin; (10) Net Profit
Margin; (11) Operating Ratio; (12) Return on Capital Employed; (13) Earnings per share; (14) Return on
shareholder’s funds; (15) P/E Ratio; and (16) Earning Yield.

Question 7 -
Excellence Ltd. has the following data for projections for the next five years. It has an existing Term Loan of ₹
360 lakhs repayable over next five years and has got sanctions for new term loan for ₹ 500 lakhs which is also
repayable in five years. As a Finance Manager you are required to calculate:
(i) Interest Service coverage ratio and
(ii) Debt Service Coverage Ratio
Particulars Amount(₹ in Lakhs)
Profit after tax 480
Depreciation 155
Taxation 125
Interest on Term Loans 162
Repayment of Term Loans 178

Question 8 - Study Material

In a meeting held at Solan towards the end of 2009, the Directors of M/s HPCL Ltd. has taken a decision to
diversify. At present HPCL Ltd. sells all finished goods from its own warehouse. The company issued
debentures on 01.01.2010 and purchased fixed assets on the same day. The purchase prices have remained
stable during the concerned period. Following information is provided to you:
INCOME STATEMENTS
Particulars 2009 (₹) 2010 (₹)
Cash Sales 30,000 32,000
Credit Sales 2,70,000 3,00,000 3,42,000 3,74,000
Less: Cost of goods sold 2,36,000 2,98,000
Gross profit 64,000 76,000
Less: Expenses
Warehousing 13,000 14,000
Transport 6,000 10,000
Administrative 19,000 19,000
Selling 11,000 14,000
Interest on Debentures 49,000 57,000
Net Profit 15,000 19,000

BALANCE SHEET
Particulars 2009 (₹) 2010 (₹)
Fixed Assets (Net Block) - 30,000 - 40,000
Debtors 50,000 82,000
Cash at Bank 10,000 7,000
Stock 60,000 94,000
Total Current Assets (CA) 1,20,000 1,83,000
Creditors 50,000 76,000
Total Current Liabilities (CL) 50,000 76,000
Working Capital (CA – CL) 70,000 1,07,000
Total Assets 1,00,000 1,47,000
Represented by:
Share Capital 75,000 75,000
Reserve and Surplus 25,000 42,000
Debentures - 30,000
1,00,000 1,47,000

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You are required to calculate the following ratios for the years 2009 and 2010.
(i) Gross Profit Ratio
(ii) Operating Expenses to Sales Ratio
(iii) Operating Profit Ratio
(iv) Capital Turnover Ratio
(v) Stock Turnover Ratio
(vi) Net Profit to Net Worth Ratio, and
(vii) Debtors Collection Period.
Ratio relating to capital employed should be based on the capital at the end of the year. Give the reasons for
change in the ratios for 2 years. Assume opening stock of ₹ 40,000 for the year 2009. Ignore Taxation.

Question 9 - Study Material

The total sales (all credit) of a firm are ₹ 6,40,000. It has a gross profit margin of 15 per cent and a current ratio
of 2.5. The firm’s current liabilities are ₹ 96,000; inventories ₹ 48,000; cash ₹ 16,000.
a) Determine the average inventory to be carried by the firm, if an inventory of 5 times is expected? (Assume a
360 day year).
b) Determine the average collection period if the opening balance of debtors is intended to be of ₹ 80,000?
(Assume a 360 day year).

Question 10 - Study Material

VRA Limited has provided the following information for the year ending 31st March 2015
Debt Equity Ratio 2:1
14% long term debt ₹ 5,00,000
Gross Profit Ratio 30%
Return on equity 50%
Income Tax Rate 35%
Capital Turnover Ratio 1.2 times
Opening Stock ₹ 4,50,000
Closing stock 8% of sales
You are required to prepare Trading and Profit and Loss Account for the year ending 31st March, 2015.

Question 11 - Mtp Oct 2021

The following figures and ratios are related to a company:
(i)Sales of the year (all credit) ₹ 30,00,000
(ii)Gross Profit ratio 25 percent
(iii)Fixed assets turnover (based on cost of goods sold) 1.5
(iv)Stock turnover (based on cost of goods sold) 6
(v)Liquid ratio 1:1
(vi)Current ratio 1.5:1
(vii)Receivable (Debtors) collection period 2 months
(viii)Reserves and surplus to Share capital 0.6:1
(ix)Capital gearing ratio 0.5
(x)Fixed assets to net worth 1.20:1
You are required to prepare:
(a)Balance Sheet of the company on the basis of above details.
(b)The statement showing working capital requirement, if the company wants to make a provision for
contingencies @ 10 percent of net working capital including such provision.

Question 12 - Study Material

Additional information: Equity shares 80,000 @ 10 each ₹ 8,00,000 & 9% Preference shares of ₹ 3,00,000, Profit
(after tax at 35 per cent), ₹ 2,70,000; Depreciation, ₹ 60,000; Equity dividend paid, 20 per cent; Market price of
equity shares, ₹ 40.
You are required to compute the following, showing the necessary workings:
(a) Dividend Yield on the Equity Shares
(b) Cover for the Preference and Equity Dividends
(c) Earnings per Share
(d) Price-earnings Ratio.

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Question 13 - Nov 2019

Following information relates to a firm:
Current ratio 1.5 : 1
Inventory Turnover Ratio (Based on COGS) 8
Sales ₹ 40,00,000
Working capital ₹ 2,85,000
Gross Profit Ratio 20%
You are required to find out:
(i)The value of opening stock presuming that the closing stock is ₹ 40,000 more than the opening stock.
(ii)The value of Bank overdraft, presuming that the Bank overdraft and other current liabilities are in a ratio of 2
:1

Question 14 - Nov 02
From the following information, prepare a summarised Balance sheet as at 31st March 2002:
Working Capital ₹ 2,40,000
Bank overdraft ₹ 40,000
Fixed Assets to Proprietary Ratio 0.75
Reserves and Surplus ₹ 1,60,000
Current ratio 2.5
Liquid Ratio 1.5

Question 15 - Study Material

Ganpati Limited has furnished the following ratios and information relating to the year ended 31st March, 2010.
Sales ₹ 60,00,000
Return on Net Worth 25%
Rate of Income Tax 50%
Share Capital to Reserves 7:3
Current Ratio 2
Net Profit to Sales 6.25%
Inventory Turnover (based on Cost of goods sold) 12
Cost of goods sold ₹ 18,00,000
Interest on Debentures ₹ 60,000
Sundry Debtors ₹ 2,00,000
Sundry Creditors ₹ 2,00,000
You are required to:
(a) Calculate the operating expenses for the year ended 31st March, 2010.
(b) Prepare a balance sheet as on 31st March in the following format:
Balance Sheet as on 31st March, 2010
Liabilities ₹ Assets ₹
Share Capital - Fixed Assets -
Reserve and Surplus - Current Assets
15% Debentures - Stock -
Sundry Creditors - Debtors -
Cash -

Question 16 -
Using the following Data, complete the balance sheet given below:
Gross Profit ₹ 54,000
Shareholders’ Funds ₹ 6,00,000
Gross Profit Margin 20%
Credit sales to total sales 80%
Total assets turnover 0.3 times
Inventory turnover 4 times
Average collection period (a 360 days year) 20 days
Current ratio 1.8
Long term debt of Equity 40%

Balance Sheet

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Liabilities ₹ Assets ₹
Creditors ………. Cash ……….
Long term Debt ………. Debtors ……….
Shareholders’ funds ………. Inventory ……….
Fixed Assets ……….

Question 17 -
Below is given the balance Sheet of A Ltd. as on 31st March,2001 –
Liabilities ₹ Assets ₹
Share Capital: Fixed Assets:
14% Preference Shares 1,00,000 At Cost 5,00,000
Equity Shares 2,00,000 Less: Depreciation 1,60,000 3,40,000
General Reserves 40,000 Stock in trade 60,000
12% Debentures 60,000 Sundry Debtors 80,000
Current Liabilities 1,00,000 Cash 20,000
Total 5,00,000 Total 5,00,000
The following information is available. Prepare the forecast Balance Sheet as on 31st March 2002.
1. Fixed assets costing ₹ 1,00,000 to be installed on 1st April 2001 & would become operative on that date,
payment is required to be made on 31st March2002.
2. The Fixed Assets-Turnover Ratio would be 1.5 (on the basis of cost of Fixed Assets).
3. The Stock-Turnover Ratio would be 14.4 (on the basis of the opening & closing stock).
4. The break-up of cost and Profit would be as follows: Materials – 40%, Labour – 25%, Manufacturing
Expenses – 10%, Office and Selling Expenses – 10% , Depreciation – 5%, Profit – 10% and Sales – 100% .The
Profit is subject to interest & taxation at 50%.
5. Debtors would be 1/9th of Sales which Creditors would be 1/5th of Materials Cost.
6. A Dividend at 10% would be paid on Equity Shares in March 2002.
7. ₹ 50,000, 12% Debentures have been issued on 1st April 2001.

Question 18 -
From the following particulars prepare the Balance Sheet of Krishna Ltd.
Current Ratio 2
Working Capital ₹ 2,00,000
Capital Block to Current Assets 3:2
Fixed Assets to Turnover 1:3
Sales Cash/Credit 1:2
Creditors Velocity 2 months
Stock Velocity 2 months
Debtors Velocity 3 months
Capital Block:
Net profit – 10% of turnover
Reserve – 2 1/2% of turnover
Debenture/Share Capital – 1:2
Gross Profit Ratio – 25% (of sales)

Question 19 - Study Material

Following is the abridged Balance Sheet of Alpha Ltd.:-
Liabilities ₹ Assets ₹
Share Capital 1,00,000 Land and Buildings 80,000
Profit and Loss Account 17,000 Plant and Machineries 50,000
Current Liabilities 40,000 Less: Depreciation 15,000 35,000
1,15,000
Stock 21,000
Debtors 20,000
Bank 1,000 42,000
Total 1,57,000 Total 1,57,000

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 Chapter 2- Ratio Analysis

With the help of the additional information furnished below, you are required to prepare Trading and Profit &
Loss Account and a Balance Sheet as at 31st March, 2010:
(i) The company went in for reorganization of capital structure, with share capital remaining the same as
follows:
Share capital 50%
Other Shareholders’ funds 15%
5% Debentures 10%
Trade Creditors 25%
Debentures were issued on 1st April, interest being paid annually on 31st March.
(ii) Land and Buildings remained unchanged. Additional plant and machinery has been bought and a further ₹
5,000 depreciation written off.(The total fixed assets then constituted 60% of total fixed and current assets.)
(iii) Working capital ratio was 8:5.
(iv) Quick assets ratio was 1:1.
(v) The debtors (four-fifth of the quick assets) to sales ratio revealed a credit period of 2 months. There were
no cash sales.
(vi) Return on net worth was 10%.
(vii) Gross profit was at the rate of 15% of selling price.
(viii) Stock turnover was eight times for the year. Ignore Taxation.

Question 20 - Study Material

XYZ Company’s details are as under:
Revenue: ₹ 29,261; Net Income: ₹ 4,212; Assets: ₹ 27,987: Shareholders’ Equity: ₹ 13,572. Calculate return on
equity.

Question 21 -
Particulars Amount (₹)
Return 80,000
Sales 3,00,000
Capital Employed 2,25,000
Compute (a) Capital Turnover Ratio, (b) Net Operating Profit ratio and (c) Applying Du Pont analysis state the
relationship between the two.

Question 22 -
Compute the Return on Capital Employed from the following data relating to company A and B applying Du
Pont analysis:-
Particulars Ram Ltd Shyam Ltd
Gross Profit Margin 30% ₹ 1,80,000 (15%)
Capital Employed Nil ₹ 2,00,000
Turnover on Capital Employed 4 Times Nil
Net Sales for the year ₹ 10,00,000 Nil
Operating Profit on Sales 5% 6%

Question 23 - Study Material

The following accounting information and financial ratios of PQR Ltd. relate to the year ended 31st March, 2020
I Accounting Information :
Gross profit 15% of Sales
Net profit 8% of Sales
Raw materials consumed 20% of works cost
Direct wages 10% of work cost
Stock of Raw materials 3 months usage
Stock of finished goods 6% of works cost
Debt collection period 60 days
All sales are on credit
II Financial Ratios :
Fixed assets to Sales 1:3
Fixed assets to Current assets 13 : 11
Current Ratio 2:1

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 Chapter 2- Ratio Analysis

Long – term loans to Current liabilities 2:1

Capital to Reserves and Surplus 1:4
If value of Fixed Assets as on 31st March , 2019 amounted to ₹ 26 lakhs , Prepare a summarised Profit and
Loss Account of the company for the year ended 31st March , 2020 and also the Balance Sheet as on 31st
March, 2020.

Question 24 - Study Material

ABC Company sells plumbing fixtures on terms of 2/10 , net 30. Its financial statements over the last 3 years
are as follows :
Particulars 2018 2019 2020
₹ ₹ ₹
Cash 30,000 20,000 5,000
Accounts Receivable 2,00,000 2,60,000 2,90,000
Inventory 4,00,000 4,80,000 6,00,000
Net fixed assets 8,00,000 8,00,000 8,00,000
14,30,000 15,60,000 16,95,000
₹ ₹ ₹
Accounts payable 2,30,000 3,00,000 3,80,000
Accruals 2,00,000 2,10,000 2,25,000
Bank loan , short - 1,00,000 1,00,000 1,40,000
term
Long - term debts 3,00,000 3,00,000 3,00,000
Common stock 1,00,000 1,00,000 1,00,000
Retained earnings 5,00,000 5,50,000 5,50,000
14,30,000 15,60,000 16,95,000
₹ ₹ ₹
Sales 40,00,000 43,00,000 38,00,000
Cost of goods sold 32,00,000 36,00,000 33,00,000
Net profit 3,00,000 2,00,000 1,00,000
Analyse the company’s financial condition and performance over the last 3 years. Are there any problems ?

Question 25 - May 2022

Following information and ratios are given for W Limited for the year ended 31st March, 2022:
Equity Share Capital of ₹ 10 each ₹ 10 lakhs
Reserves & Surplus to Shareholders’ Fund 0.50
Sales / Shareholders’ Fund 1.50
Current Ratio 2.50
Debtors Turnover Ratio 6.00
Stock Velocity 2 Months
Gross Profit Ratio 20%
Net Working Capital Turnover Ratio 2.50
You are required to Calculate:
1. Shareholders' Fund
2. Stock
3. Debtors
4. Current liabilities
5. Cash Balance.

Question 26 - Rtp Nov 2022

The following information of ASD Ltd. relate to the year ended 31st March, 2022:
Net profit 8% of sales
Raw materials consumed 20% of Cost of Goods Sold
Direct wages 10% of Cost of Goods Sold
Stock of raw materials 3 months’ usage
Stock of finished goods 6% of Cost of Goods Sold
Gross Profit 15% of Sales
Debt collection period 2 Months (All sales are on credit)

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Current ratio 2:1

Fixed assets to Current assets 13 : 11
Fixed assets to sales 1:3
Long-term loans to Current liabilities 2 : 1
Capital to Reserves and Surplus 1:4
You are required to PREPARE-
Profit & Loss Statement of ASD Limited for the year ended 31st March, 2022 in the following format.
Particulars (₹) Particulars (₹)
To Direct Materials consumed ? By Sales ?
To Direct Wages ?
To Works (Overhead) ?
To Gross Profit c/d ?
? ?
To Selling and Distribution Expenses ? By Gross Profit b/d ?
To Net Profit ?
? ?
Balance Sheet as on 31st March, 2022 in the following format.
Liabilities (₹) Assets (₹)
Share Capital ? Fixed Assets 1,30,00,000
Reserves and Surplus ? Current Assets:
Long term loans ? Stock of Raw Material ?
Current liabilities ? Stock of Finished Goods ?
Debtors ?
Cash ?
? ?

Question 27 - Rtp May 2023

From the following information, find out missing figures and REWRITE the balance sheet of Mukesh Enterprise.
Current Ratio = 2:1
Acid Test ratio = 3:2
Reserves and surplus = 20% of equity share capital
Long term debt = 45% of net worth
Stock turnover velocity = 1.5 months
Receivables turnover velocity = 2 months
You may assume closing Receivables as average Receivables.
Gross profit ratio = 20%
Sales is ₹ 21,00,000 (25% sales are on cash basis and balance on credit basis)
Closing stock is ₹ 40,000 more than opening stock.
Accumulated depreciation is 1/6 of original cost of fixed assets.
Balance sheet of the company is as follows:
Liabilities (₹) Assets (₹)
Equity Share Capital ? Fixed Assets (Cost) ?
Reserves & Surplus ? Less: Accumulated. Depreciation ?
Long Term Loans 6,75,000 Fixed Assets (WDV) ?
Bank Overdraft 60,000 Stock ?
Creditors ? Debtors ?
Cash ?
Total ? Total ?

Question 28 - Mock Oct 2022

From the following information and ratios, PREPARE the Balance sheet as at 31st March 2022 and lncome
statement for the year ended on that date for M/s Ganguly & Co -
Average Stock ₹10 lakh
Current Ratio 3:1
Acid Test Ratio 1:1
PBIT to PBT 2.2:1
Average Collection period (Assume 360 days in a year) 30 days

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 Chapter 2- Ratio Analysis

Stock Turnover Ratio (Use sales as turnover) 5 times

Fixed assets turnover ratio 0.8 times
Working Capital ₹10 lakh
Net profit Ratio 10%
Gross profit Ratio 40%
Operating expenses (excluding interest) ₹ 9 lakh
Long term loan interest 12%
Tax Nil

Question 29 - Rtp Nov 2023

From the following table of financial ratios of Prabhu Chemicals Limited, comment on various ratios given at
the end:
Ratios 2021 2022 Average of Chemical Industry
Liquidity Ratios
Current ratio 2.1 2.3 2.4
Quick ratio 1.4 1.8 1.4
Receivable turnover ratio 8 9 8
Inventory turnover 8 9 5
Receivables collection period 46 days 41 days 46 days
Operating profitability
Operating income –ROI 24% 21% 18%
Operating profit margin 18% 18% 12%
Financing decisions
Debt ratio 45% 44% 60%
Return
Return on equity 26% 28% 18%
COMMENT on the following aspect of Prabhu Chemicals Limited
1. Liquidity
2. Operating profits
3. Financing
4. Return to the shareholders.

Question 30 - Study Material

From the following information, you are required to PREPARE a summarised Balance Sheet for Rudra Ltd. for
the year ended 31st March, 2023:
Debt Equity Ratio 1:1
Current Ratio 3:1
Acid Test Ratio 8:3
Fixed Asset Turnover (on the basis of sales) 4
Stock Turnover (on the basis of sales) 6
Cash in hand ₹ 5,00,000
Stock to Debtor 1:1
Sales to Net Worth 4
Capital to Reserve 1:2
Gross Profit 20% of Cost
COGS to Creditor 10:1
Interest for entire year is yet to be paid on Long Term loan @ 10%.

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