[unit =v] Financial Analysis through Rati Q1 What is the need of financial (ratio) analysis? | Explain ‘significance of ratio analysis. Give | Smaniaen of ratio analysis. : Financial (Ratio) Analysis Need of ratio analysis | ‘* Much of the financial information is mentioned in the Financial Statements of a company, but sometimes an absolute figures conveys no meaning. A figure may become more meaningful if it is compared with some other informative figure. Also the figure mentioned in financial statements may not give the qualitative information. For analyzing and interpretation of financial statements Ratio Analysis is used. * Ratio analysis gives the significance and meaning of financial statements data. From ratio analysis a forecast may be made of the prospects of future earnings, ability to pay interest and probability of sound divided policy can be determined, hence the strength and weaknesses of the organization. Ratio Analysis is the process of determining and evaluating financial ratios. *The term ratio means the numerical or an arithmetical relationship between two figures. Importance of Ratio Analysis. + As the absolute figures do not convey any meaning unless they are compared with each other. Various ratios can be obtained from financial ratio by grouping and regrouping of figure in order to draw fruitful meanings. © The importance of ratio analysis are_mentioned other financial institutions for firm before sanctioning loan to them, ii) Financial ratios are also useful for in finding the profitability of the firm. The financial ratios of organization compared with the ratio of previous the same organization to find the ex. of firm. This comparison is called i comparison. The ratio of one organizations are with other organization of similar i This is called as inter-firm compari v) Ratio analysis helps in setting future forecasting of the firm. Ratios reflects the actual asset and li the weaknesses of the firm can be and remedial steps can be taken to this situation, i) Ratios indicates the efficiency of the Ratios reflects the ability of the firm the financial obligations, Classification of Ratios * The ratios may be classified under various Since they are often compared with i which helps mangers understand their performance relative to that of competitors often used to track performance over time. * Following types of financial ratios are important to managerial control. i) Liquidity ratios. {i) Activity ratios / Asset management ratios, iii) Debt management ratios / Leverage ratios. iv) Profitability ratios. ‘ Q2 What are the limitations of ra iii) iv) vi Scanned with CamScannercs and Financial Analysis 5-2 nitations of ratio analysis ‘on historical accounting : A classic sntage of financial reporting is that events d on historic basis. This should be when making any investment ars inefficiencies Comparing a ‘g performance over the years tells you when there are inherent limitations in things are done. Care must be taken to deficiencies in processes _ before g any analysis tool. not consider the effects of inflation : which is commonly defined as upward on the prices of commodities are not when analysing a company using ement accounting tool like variance ratios analysis, sensitivity analysis, ced scorecard, etc. This disadvantage of “analysis can however be dealt with by your analysis on other forms accounting inflationary accounting, fair value current cost accounting, etc. The hhere is that those other methods of are not free from criticism. ‘to find proxy company : Because ratios to compare a company with its peer, g must be compared with likes. The drawback » is that is very difficult to find two that are similar in all ramifications. is to find a close proxy which is also @ task. tell much on its own : As useful as is, it does not give the whole Financial Analysis through Ratios knowledge of interpreting the numbers in such a way that sound economic decision can be made. & Does not factor in changes : Ratio analyses do not consider changes that affect the business that the analyst is trying to analyse. This change can ‘come in the form of political, economical, social, technological, environmental, and legal (PESTEL). For the whole process of financial and accounting ratio analysis to make sense, provisions have to be made to account for these macro variables. 9 Does not consider non financial factors : A major criticism of ratio analysis is that it is purely based on numbers. Yes, the numbers are important but what value will be derived from numbers when it is not related to core strategic value of a company. Good accounting ratio analysis should leverage on fundamental analysis. 40. Encourages suboptimal decision making : The fact that majority of ratio analysis is based on financial data makes it prone to manipulations ‘and managers making suboptimal decisions. Part of the function of management is to ensure that ‘motivation and incentive schemes are designed in such a way that there will be little or no room for divisional managers to indulge in any form of fraudulent act. 5.2 : Liquidity Ratios Q.3 Explain the following Ratios. (i) Current Ratio (ii) Quick Ratio SGP NTU + May-17, Ans. : i) Current Ratio ‘Current ratio is the ratio of current assets ‘current liabilities. Current ratio is also called. ital ratio. Current ratio measures working capil company's ability to meet the claims of creditors by using only current assets. Scanned with CamScannerBusiness Economics and Financial Analysis 5-3 + The firm is said to be comfortable in its liquidity position when current ratio is 2 > 1. But the ind norm for current ratio is 2 : 6. Interpretation = % The current ratio gives idea about current asset available for each current Lor ae Higher ratio indicates better coverage of current assets for short term claims. Extremely igh current indicates improper handling of stocks. Current ratio is also used for inter-firm comparison. i) Quick Ratio Y * Quick ratio measures the firm's ability to convert its current assets quickly into cash to meet current liabilities. It is also called as acid-test ratio. * Quick ratio is the ratio of quick assets and liquid liabilities. The quick assets are also called as li assets. : Se ck ratig = __ Quick as | Quick ratio = Citrent liabilities | Where, Quick assets = Current assets - (Stock + Prepaid expenses) * Quick ratio indicates the ability of a firm to meet its short term obligations with short-term assets. standard for this ratio is 1 : 1. Interpretation * Quick ratio provides a hard and rigorous measure of short-term liquidity. Quick ratio along current-ratio gives clear idea about firm's ability to meet its short-term commitments. * Activity ratio is classified as 1. Inventory Turnover Ratio. 2. Debtors Turnover Ratio. Inventory Turnover Ratio ‘+ Inventory turnover ratio indicates the number of times the average inventory (stock) is sold du any given accounting period. * This ratio is used to test the effectiveness of inventory management. * The ratio of cost of goods sold to the average inventory is called as inventory tumover ratio. Cost of goods = Sales - Gross profit "Average inventory = OPsting Inventory + Closing inventory Scanned with CamScanner5-4 Financial Analysis through Ratios ‘Low inventory indicates either excess or obsolete inventory. High inventory tumover indicates "ventory handling i.e, less amount of money is tied up in inventory that is waiting to be sold Inventory holding period is given by - 365 days Inventory holding period = Tr ventory turnover ratio Inventory turnover ratio indicates the speed with which the inventory (stock) is sold. The ratio should ™ neither be too high nor be too low. If it is too high it leads to inventory shortage cost and if it is too Jow it leads to increase in inventory ordering and carrying costs. Hence the ratio should be of reasonable level. It's typical value as per industry norm is 7 times (7 : 1). Debtor's Turnover Ratio Debtor's turnover ratio is also called as receivables turnover ratio. The debtor's turnover ratio measures how quickly receivables or debtor's are converted into cash ie. liquidity of receivables. Debtor's tumover ratio is given by - Debtor's turnover ratio = Credit sales__ | Kverage debtors | ? Credit sales refers to goods sold on credit, Credit sales = Gross credit sales ~ Returns. ‘Average debtors is the average of opening and closing balances of debtor's for the given accounting period. ices ° eee eee A Tor Oe at the end of year ‘* Realization of debts is important and monitored closely as it affects the working capital. If the turnover ratio is high, it means that the trade credit management is done properly or debtors are "prompt in payment. «When debtor's turnover ratio is low, it means that the trade credit management is poor. It indicates Jong collection period (delayed payment) or the debtor's are not prompt. Hence a moderate ratio is high debtor's tamover ratio explains thatthe firm is efcent in collecting its debts. Wheres lower © indicates its in efficiency. Too high ratio with affect volume of sales as only prompt paying are considered. Ideally, the debtor's turnover ratio should be 8 to 10. Si, — Scanned with CamScannerBusiness Economics and Financial Analysis 5-5 Rinanctal Analysis Ans. : Capital Structure Ratios * Capital structure ratios are also referred as Leverage ratios. The capital structure ratios are ratios that assess the extent to which an organization uses debt to finance investments and the to which it is able to meet long term obligations. * Capital structure ratios are classified as - 1. Debt-equity ratio 2. Interest coverage ratio Debt-Equity Ratio + Debt-equity ratio is the ratio of outsider’s fund (debt) and insider's fund (equity). It reflects Proportion of borrowed capital and owners capital in financing the assets of a firm. The debt ratio is calculated as - Debt | Debt-equity ratio = Fy ‘+ Debt (outsider's) funds include debentures, bonds long-term loans etc. Equity (own capital) in: share capital, reserves, retained earnings. Interpretations *A high D/E ratio indicates that the creditor is stake is more as compared to owners. This dangerous situation from creditors point of view because if business fails, creditors will loose money. +A flow D/E ratio means less risk to the creditors. It shows that the owners of business have inv more and borrowed funds is less. This is an advantageous situation from creditors point of view it reduces risk of creditors. Ideal value of D/E ratio is 1: 1. Interest Coverage Ratio ‘Interest coverage ratio indicates the firms capacity to pay the interest on debt it borrows. The in ‘coverage ratio is calculated as, imams Se, Big Interest coverage ratio = Net profit before interest and taxes * Interest coverage ratio helps in determining the extent to which the net profit before interest and can drop but meet the claims of long-term creditors. Interpretation x + High ratio indicates that the firm has paying the interest. ability to take care of it's creditors promptly ie. no problem 2.6 What are profitability ratios ? Explain - ‘ () Grose profit ratio) Net profit ratio. (ll) P/E ratio Ans. : Profitability Ratios , (iv) EPS + Profitability ratios are financial ratios that measure managements : ich pois though thee of ogaicatonaleomns wearers Abity to‘controt expenses Scanned with CamScannermeasures Profitability of the firm, as following, i. ming ratio (P/E ratio). Per Share (EPS). Ratio is the ratio of gross profit to net accounting period. It is usually of percentage. Gross profit ratio is high, it shows that firms is ‘well and the production cost is 5-6 Financial Analysis through Ratios ‘Net profit after taxes ] Ta Neteales 1} [Net profit ratio = | Interpretations © It net profit ratio is high, it means that the owners will get enough returns on their investment and firm can sustain in adverse economic conditions. ‘If net profit ratio is low, it indicates that owners will not get enough retums. (i PriceEarning Ratio (PIE Ratio) «* Price/Earning ratio is given by - Market value per share P/E ratio = — « P/E ratio gives the earning with market price. Interpretation © P/E ratio reflects the current price in the market for each rupee of EPS. (lv) Eamings Per Share (EPS) «Earnings Per Share (EPS) gives, _ better understanding of profitability of a firm. EPS gives a measure of profit on equity shareholder gets on each share held by them. ‘* EPS is given by - mae Net profit after taxes ‘Number of shares outstandings Interpretation © Generally, higher EPS is better for an organization and vice-versa. ‘© EPS does not reflect anything about profit retention for business and how much is paid to the owners Scanned with CamScannerBasins eons end Finan Anlyl 37 Financial Anais * Fixed Asset Turnover (FAT) is an efficiency ratio that indicates how well or efficiently the uses fixed assets to generate sales. This ratio divides net sales by net fixed assets, over an period. +The net fixed assets include the amount of property, plant, and equipment, less the acum depreciation. Generally, a higher fixed asset ratio implies more effective utilization of inv fixed assets to generate revenue. This ratio is often analyzed alongside leverage and profit ratios. Investors and creditors use this formula to understand how well the company 1s utilizing equipment to generate sales. This concept is important to investors because they want to be 2b measure an approximate return on their investment. This is particularly true in the manufacturing industry where companies have large and equipment purchases. Creditors, on the other hand, want to make sure that the company can p enough revenues from a new piece of equipment to pay back the Joan they used to purchase it * Management typically doesn't use this calculation that much because they have insider info: about sales figures, equipment purchases, and other details that aren't readily available to ext users. They measure the return on their purchases using more detailed and specific information. Fixed Asset Tumover = Kee nee iii) Stock Or Inventory Turnover Ratio : Refer Q4. Q.8 Two companies ABC limited and XYZ ILimited have approached ICICI bank for a loan sanction of % 50,000 for working capital purpose. | ABC LIMITED ©) | XYZ LIMITED @)_ | Net sales | 9,10,000 Gross profit 3,82,200 | Interest paid 20,000 % Income tax 75,000 Profit after tax 82,000 Inventories 90,000 Debtors 70,000 Cash 6,000 Current liabilities | 1,82,000 Long term liability 1,60,000 Shareholders equity | 180,000 Note that bank wants to sanction loan only to one applicant whom do you recommend and why. Pee ae 7 Scanned with CamScannereomomics and Financial Analysis ABC Limited ose Financial Analysis through Ratios 1. Current ratio = 1,66,000 ~ 90,000 _ 76,000 2 Quick ratio = tA cd 182,000 82,000 XYZ Limited 1. Current ratio = 95200 + 56,000 + 18,000 139-200 «42:4 716,000 716,000 ck ratio « 132.200 ~ 65,200 _ 74,000 2 PO nr IEE, nll ie. is coun Tem ~ 7.16000 7°68 *4 9 From the following extract of a balance sheet of Airline company calculate the debt equity ratio and ‘coverage ratio. Given that the debt equity ratio Is in the range of 10: 1, how do you interpret thie ? 50,000, 10 % preference shares of % 100 each 2,00,000 equity shares of © 10 each 10 %, $0,000 tures of € 100 each Net profit during the year was © 10,00,000. the given problem, the relevant ratios for debt equity ratio are debentures and equity shares only other jon is unnecessary. Debtequity ratio= gor = Equity” 2000000 ~ cone rupee of equity, there is debt of © 1.5. The standard ratio is D/E ratio 1.5 : 1 means that for every the air lines company, the ratio of 1.5 : 1 is very good. . The given D/E ratio is 10: 1 for Limited is given below : Selected financial information about Siri Traders tors + Inventories + Cash Current assets_ _ Debtors + Inver Current ratio = Gorrent ities = Current + Liabilities Quick assets Current assets — Closing stock iin "Carentan 365 x Average debtors 356_ days oe oeait wales TE, Scanned with CamScannerBusiness Economics and Financial Analysis 5-9 Cost of good sold ‘Average inventory 4. Inventory turnover ratio = For year 2001 72,000 + 1,14,000 + 15,000 + 40,000 , 241,000 _ 5 ‘ Current rete SSCS 2 Quick ratio = sod = 365. 72,000 3. Debt collection period = “ET Toy = 438 days 5,70,000 _ 5 4. Inventory turnover ratio = 773 555 For year 2002 ., . 30,000 + 55,000 + 8000 + 27,000 _ 1,20,000 _ L Current ratio = 20000 + SA = r7000 ~ 2 Quick ratio 3. Debt collection period 4. Inventory turnover ratio Conclusion| Current ratio| Quick ratio | Debt collection period | Inventory turnover ratio 2001 15 0.79 43.8 5 2002 1.09 059, 25.46 59 ‘Since current ratio in 2001 is 1.5: 1, the liquidity position is satisfactory as in 2002, i.e. 1.09. The qui ratio is 0.79 in 2001. Compared to 0.59 in 2002 ie. short-term liquidity position is satisfactory collection period is lesser in 2002, hence the firm is more efficient in 2002. Inventory turnover in ra! 2002 is better. Q.11 The following are the extracts from the financial statements of Blue and Red Ltd. as on $31“ 2001 and 2002 respectively. 31" March 2001 (%) | 31° March 2002 () Stock 10,000 Debtors. 20,000 Bills receivables | 10,000 7 Cash in hand 18,000 Bills payable 15,000 Bank overdraft | — 9% debentures | 5,00,000 Sales for the year | 3,50,000 Gross profit x Scanned with CamScanner5-0 Financial Anatysis through Ratios both the years the inmate vette. ©) Stock tamover salie Aso tempol ts esas 6 Tatio = _Cutrent assets _ Stocks + Debtors + Bill recetvable + Cash in hand Current abilities Bills payable + over Liquidity ratio = __“iquid assets Current assets - Stocks Current Tiabilities “~~ Current Habilities = Cost of goods sold _ Net sales - Gross profits Average stock “Average stock = 10:000 + 20,000 + 10,000 + 18,000 _ 58,000 _ 5 4 "75,000 ~ = 295 3,00,000 - 50,000 aw ~ Gono + 25m00)72" 434 0, liquidity ratio and stock tumover ratio is better in 2001. balance sheet of Alpha Ltd, as on 31% March 2000, 2001 and 2002 is given below. Scanned with CamScanner1 Analysis thro Business Economics and Financial Analysis 5-1 _ Financial Analysis through From the above compute the following as on 81% March 2000 and 2002 : 8) Debt to equity ratio 6) Current ratio and comment on the results. Bonds + Others ‘Aas sa Se gctlty aitie Bay * Capital + F and L account Current Current Tiabilities 2 Current ratio = As on 31° March 2000 68 + 281 | 39 _ 497 R DIE ratio = Tor + 166” 360 a: Current ratio = 3 2.75 ‘As on March 2002 124 + 379 _ 503 _ p97 DIE ratio oe or 2 8 2 Current ratio ~ 23236 Interpretation DfE ratio is 0.97 for both years, current ratio is more in 2000 compared to 2002. Q.13 Following is the Balance sheet of XYZ company as on 3i* Dec 2000. Liabilities z Assets “Equity share capital | 20,000 | Good will Capital reserve 10,000 _| Fixed assets 84 16,000 | Stocks ~ | 8000 | Debtors 6,000 Investments aattamtaen x am fa ’ 60,000 a Sales amounted to © 1,20,000. Calculate ratios for 1a) Testing liquidity and b) Solvency of the company. ‘Ans. : a) Liquidity Ratios Current assets _ Stocks + Debtors + Cash + Investments 1. Current ratio = Cirrent liabilities Creditors + Bank overdraft Liquid assets Current Assets ~ Stocks 2 Liquid ratio = Current liability ~ Creditors + Bank overdraft b) Solvency Ratios 1 Dabvoity mo Fray * tal reserve + Loan Scanned with CamScanner5-12 Financial Analysis throughs Ration it ratio = 6000 + 6000 + 6000 + 2000 _ 20,000 8000+ 6000 ™ Tag * 142 d ratio = 20000 — 6000 | | : . 10,000 + 16,000 _ 26,000 SD/E ratio - 7000), 26,000 DE 20,000 25000" 9 } is the profit and loss account and balance sheet of Jai Hind Ltd. Calculate the following profit ratio) Current ratio c) Liquidity ratio. Scanned with CamScannerBusiness Economics and Financial Analysis 5-13 Financial Analysis throush x 100 = 62.5 Gross profit ratio « “OA Current assets Closing stocks + Debtors + Bank balance Ph Cumrent ratio: * erent Tablivas tors + Bills payal «= (1,00,000 + 1,50,000) + 1,00,000 + 50,000 _ 4,00,000 . 5 67 . 4 7,00,000 + 50,000 "750000 5 Liquid assets _ Current assets ~ Stock ©) “Liquid ratio = corrent Habilties ” — Current liabilities = 400,000 - (1,50,000 + 1,00,000) _ 1,50,000 _ 1 150,000 150,000 18 The following data are the figures extracted from the books of XYZ Ltd. as at 91-03-2004. Calculate : {) Gross profit ratio ii) Net profit ratio ili) Inventory turnover ratio. 3 {= Gross profit Ans.: i) Gross profit ratio = >> PD Gross profit is defined as the difference between net sales and cost of goods sold. Gross profit = Net sales ~ (Operating expenses + Non-operating expenses) Gross profit = 24,00,000 ~ (18,00,000 + 240,000) Gross profit = 3,60,000 Now’ Gross profit ratio. = ZOE = 015 ii) scan Net profit = Gross profit ~ Taxes Since taxes are not given assuming it be 3,00,000. Then Net profit = 3,60,000 ~ 3,00,000 = 60,000 Net profit ratio = S000, = 0005 : iii) Inventory turnover ratio ; Scanned with CamScannercapital it can raise. The initial and projected net cash flows for each ‘are shown below. The cost of capital of is 12 %. You are required to compute PY. Rank them in the order of acceptance. budget fully utilized ? Project | Project | Project | Project A B c D 50.000 | $0,000 | 75,000 50,000 | 70,000 | 60,000 50,000 | 75,000 _| 80,000 50,000 | 75,000 _| 100,000 TINT = Dec-i7, Marks 10] : Calculation of net present value : ‘Financial Analysis through Ratios ©The NPV uses the discounted cash flows ic, expresses cash flows in terms of current rupees. The NPVs of different projects therefore can be compared, It implies that each project can be evaluated independent of others on its own merit. Limitations «It involves difficult calculations. The application of this method necessitates forecasting cash flows and the discount rate. Thus accuracy of NPV depends on accurate estimation of these two factors which may be quite difficult in practice. ‘The ranking of projects depends on the discount rate. Let us consider two projects involving an initial outlay of © 25 lakhs each with following inflow. | in taki) + | Pret a [soo | 25 | Project B | 125 505 T At discount rate of 5 % and 10 % the NPV of projects Pr ee Peet and their rankings at 5 % and 10 % are as follows : Wa | NPV @ 5% | Rank | NPV © 10% | Rank | 66973 | 66975 | Project A | 3394 I 30.78 I | 59775 | 59,775 Project B | 32.25 a 27.66 u 712 35,600 | 49, | 42,720 | 42,720 = “The project ranking is same when the discount rate is 0.636 | 31,800 | 47,700 | 50.880 | 25440 changed from 5 % to 10 %. However, the impact of 0567 | 28350 | 42525 | 56700 | 11.340 the discounting becomes more severe for the later * ‘= cash flows. Naturally, higher the discount rate, ato of 180,250 | 215,635) 277,050 | 206,250 highter would be the impact. In the case of project B ‘200,000 | 190,000) 250,000 | 210,000 the larger cash flows come later in the project life. to L. “= ae [zm | 0750 ‘Thus decreasing the present value to a larger extend. ‘The decision under NPV method is based on obsolute measure. It ignores the difference in initial outflows, size of different proposals etc. While evaluating mutually exclusive projects. Q.17 The following results are expected by XYZ Ltd. by quarters next year, in thousands of rupees. Scanned with CamScanner| Purchase of plant ‘The debtors at the end of the quarter are one-third of sales of the quarter. The opening balance of deb is © 3000000. Cash on hand at the beginning of the year is ¢ 650000 and desired minimuin balance © 500000. Borrowings are made at the beginning of the quarters in which the need will occur in multip ‘of © 10000 and are repaid at the end of quarters. You are required to prepare a cash budget by quarters the year. O&[INTU : Dec.-17, Marks 1 Ans. : 3,500 (ii) From current quarter (2/3 of sales) 5,000 | 7,000 | 12,000 | 7,000 | 31,000 8000 | 9,500 | 15,500 7,000 1,000 100 Scanned with CamScannerpmics and Financial Analysis 5-16 Financial Analysis through Ratios the following balance sheet and other information calculate the following : ity ratio b) Quick ratio —_c) Trade receivables turnover ratio capital e) Gearing ratio —_f) Net worth ) Capital employed Balance Sheet at March 31, 2017 1. Equity and liabilities 1. Shareholder's funds a) Share capital b) Reserves and surplus 2. Non-current liabilities | Long-term borrowings 12,00,000 3. Current liabilities Trade payables Total 36,00,000 a a area information : Revenue from operations © 18,00,000 GP rate is 20 %. (INT : Dec.-17, Marks 10] . Debt 8) Debi-Equity Ratio = Por Debt = Long term borrowing + Long term liabilities + Long term provisions i Debt = 12,00,000 + 5,00,000 + 0 = 17,00,000 Equity = Share capitalt Reserves and surplus = 10,00,000 + 9,00,00 =19,00,000 17901000 _ 9.49. Ratio = Zaps 7 08951 Oni nat = Quick assets = Current assets (Inventories + Advance tax) Current Assets = Inventories + Trade receivables + Advance tax + cash & cash receivables Scanned with CamScannera ge cei ne Ol ‘Business Economics and Financial Analysis Current assets Current liabilities Current liabilities Quick ratio ©) Trade receivables turnover ratio Credit revenue from operations Credit revenue from operations Credit revenue from operations Average trade receivables Trade receivables turnover ratio 5-17 ‘= 4,00,000 + 9,00,000 + 5,00,000 = 18,00,000 = Trade payables + Short term borrowing = 5,00,000 + 18,00,000 = 23,00,000 = __ Quick assets ‘Current liabilities ~ Net Credit Revenue from Operations ‘Average Trade Receiv Financial Analysis through ny 18,00,000 ~ (4,00,000) «+4 99,000/23,00,000 = o « "33,0000 = Total revenue from operations ~ Cash revenues from operations = 20 % of & 18,00,000 = 3,60,000 = 18,00,000 - 3,60,000 = 14,40,000 = 9,00,000 = 14,40,000/9,00,000 = 1.6: 1 4) Working capital = Current assets - Current liabilities Working capital = (4,00,000 + 9,00,000 + 5,00,000) — 5,00,000 = € 13,00,000 ) Gearing Ratio = - Long-term debt+ Short-term debt+ Bank overdrafts Net gearing ratio <= 7 a chard ler acini aT 12,00,000+ 5,00,000___ ~ 70700,000+ 9,00,000+ 5,00,000 ~ 970833 9 Net Worth = Total assets - Total liabilities = (18,00,000 + 4,00,000 + 9,00,000 + 500,000) ~ ae rene = 7 19,00,000 2) Capital employed = Share holder's fund + Long term borrowings Q.19 The following data are given : = (10,00,00 + 9,0,000) + 12,0000 = © 31,00,000 ¢ Scanned with CamScanner5-18 Financial Analysis through Ratios eee s i) Acid test Ratio; and _}) Gross profit ratio BaP [INTU + Dec.-16, Marks 4] Current assets _ 70,000 Current ratio = _Cutrent assets _ Current liabilities ~ 35,000 ~ 21 Quick assets __ (Current assets ~ (Stock + Prepaid expenses) Acid Test (Quick) Ratio = —SUC*S0s_.S" oe ee Current liabilities ‘Current liabilities 70,000 ~ (30,000) . 5 44. 35,000 114:1 nz ratio = OPCTAtNg cost _ Cost of goods sold + Operating expenses evens ae Net sales —— ae Nee __ 60,000-+ 40,000 _ 9 gag. 720,000 0.833:1 ___ Gross profit _ Sales - Cost of goods sold Gross profit ratio - “Net sales "Net Sales Questions with Answers [2 & 3 Marks] 20 Define profitability index. : Profitability Index ear ey ict ie «financial tol which fl us whether an tnvesnent should be apie! calculated by the following formula. rejected. It uses the time value concept of money and is ty inex asin cv prone ane fe pete es Ah S57 the initial investment. Profitability Index (P1) = i basis of its value, the higher the "The profitability index helps in giving ranks to the projects on the None prea ge Theos Cometh ein 7 PS bs so cometinincarvent enoote Give coliable assist SGP IDNTU + May-16, Marks 3) 1,20,000— 60,000 _ 9.5, 77,20,000 05:1 [ [INTU : May-16, Marks 2] Present value of cash inflows Present value of outflows — sheet that is ether cash, a cash equivalent, or which Scanned with CamScannerBusiness Economics and Financial Analysis 5: * Examples of current assets are Cash, including foreign currency Investments, except for investments that cannot be easily liquidated Prepaid expenses Accounts receivable 5. Inventory 22 Define any of the two activity ratios and illustrate with assumed data. ‘ESP [INTU : May-16, Marks 3] Ans. : Acitivity Ratios : ‘* Activity ratios measures how efficiently the business is running. We often call this as “Assets Management Ratio” i.e. how efficiently the assets of the company is being used by the management to generate maximum possible revenue. Usually, this ratio indicates how much sales have taken place in comparison to various categories of assets. 1. Stock/ Inventory turnover ratio ‘It is the relationship between the cost of goods sold during the year and the average inventory. It can be calculated as : Cost of goods sold Inventory tumover ratio = a seen cost ve ae When cost of goods sold and average inventory is Sales Inventory tumover ratio = Cyasing inventory 2. Debtors turnover ratio ‘* Debtors turnover ratio compares the sales of the uncollected amount from customers with whom goods were sold. This is to ascertain the efficiency for debt collection. Also known as receivable turnover ratio, it can be calculated as : Net sales Debtors tumover ratio = 3 debtors Net credit sales Debtors turnover ratio = 7 ators When average debtors and credit sales are not available, Total sales Debtors tumover ratio= Cisse debtors re tal Financial Analysis through ka 0.23 Give a brief description to solvency ratios SGP IONTU : May-12, Maris ‘Ans. : Solvency Ratios * Solvency ratios, also called leverage ratios, meas a company's ability to sustain ope indefinitely by comparing debt levels with assets, and earnings. ein other words, solvency ratios identify 0 concern issues and a firm's ability to pay its bills the long term. Many people confuse solvency rat with liquidity ratios. * Although they both measure the ability 0 company to pay off its obligations, solvency focus more on the long-term sustainability company instead of the current liability pay * Solvency ratios show a company’s ability to payments and pay off its long-term obligations creditors, bondholders, and banks. ‘* Better solvency ratios indicate a more creditworti and financially sound company in the long-term ‘Types of Solvency Ratios 1) Debt to Equity Ratio 2) Debt Ratio 3) Proprietary Ratio 4) Interest Coverage Ratio Q.24 Give a brief description to funds from EE LINTY : May-18, Marks 3) This measure is commonly used to judge operational performance of REITs, especially regard to investing in them. Scanned with CamScanner