13May_FinancialRatioAnalysis

7/30/2019 13May_FinancialRatioAnalysis

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Ratio AnalysisModule C

CAIIB

Madhav PrabhuM. Tech, MIM, PMP, CISA, CAIIB, CeISB, MCTS, DCL

[email protected]


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Objective

Understand the importance of critically looking at the FinancialStatements from the bankers point of view.

Make an intelligent use of the information, as contained in theFinancial Statements, to carry out a meaningful Financial Appraisal.

Make proper analysis of the relevant Ratios and interpret the

implications thereof in the context of the required FinancialAppraisal.

Understand the implications of some important Ratios and Conceptshaving a bearing on the Financial Appraisal.

Understand the Importance and Limitations of Ratio Analysis.

Understand the role of Funds Flow as an adjunct to Financial

Appraisal. Understand the distinct and separate uses of Funds Flow and Cash

Flow Statements.


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Financial Statements

The Profit and Loss Account and the BalanceSheet are interrelated and not independent.

The Balance Sheet shows the position of Assetsand Liabilities of a business enterprise as on a

given date, whereas the Profit and Loss Accountshows the profit made or the loss incurred by theenterprise for a particular year,

The Balance Sheet for two or more successive

years will show the changes that have takenplace in the Assets and Liabilities and the netchange (increase or decrease) in the Net Worthduring those years.


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The Profit and Loss Account is as valuablea source of information as the BalanceSheet and, at no stage, it should be given

a secondary place in ascertaining thefinancial solvency and strength of anenterprise, since the trend of profits is thebest indicator of the prosperity of an

enterprise and the value of the assetsdepends largely on the maintenance of thebusiness as a going concern.


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Although the position of net profit or loss can be

ascertained from a study of the Balance Sheet, it

is only from a study of the Profit and Loss

Account that we can ascertain as to how theprofit or loss has been made, the factors or

reasons behind such profit or loss and the

significant features of its constituent items.

The Profit and Loss Account is based on theaccrual concept in accounting


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What to be taken and what not..

Items to be taken into account income relating to the accounting period which has

been earned, but not actually received.

expenditure which has been incurred and relates tothe accounting period, but not actually paid.

Items not to be taken into account (to be carriedover) Income which has been received, but not earned (i.e.,

which does not relate to the accounting period).

expenditure which has been incurred, but does notpertain to the accounting period.


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Users of financial statements

The management of the enterprise

Investors or shareholders

Creditors Employees

Government agencies, tax authorities etc

Lenders, i.e. banks and financialinstitutions


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Need for Financial Analysis

Technical Appraisal

Commercial Appraisal

Financial Appraisal Economic Appraisal

Management Appraisal


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What is Financial Ratio Analysis?

Ratio is an arithmetic relationship betweentwo figures

Can be expressed as Percentage, Fractionand Proportion

These alternative methods of expressingrelationship between items, which shou ld berelated to each o ther, are, for the purpose offinancial analysis, referred to as Ratio

Analysis

The usage? Interpretation !


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is drawing conclusions

to serve as basis for

decisions and actions

Interpretation


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Need for Comparison of Ratios

Reveal the relationship in a more

meaningful way which enables an analyst

to interpret them judiciously and

intelligently.

Draw inferences or conclusions

Such inferences can be drawn by

comparisons.


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Types of comparison

Trend Ratios intra firm

Inter-firm comparison

Ratios of the enterprise with the averageor standard ratios of the industry

Comparison with related facts is the basisof ratio analysis.


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How to go about it?

Balance Sheet

Trading/Manufacturing and Profit and Loss Account

Various Schedules relating to assets and liabilities, particularly thedebtors, creditors, loans and advances, stocks, provisions, termloans and deposits including unsecured or subordinated loans

Report of the Auditors in the prescribed form Report of the Directors, if it is a company

Details of Contingent Liabilities

Details of Interest on Term Liabilities payable within 12 months fromthe date of Balance Sheet

Details of old or slow-moving or obsolete stocks, unrecoverable

debts and advances given on a long-term basis.


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CLASSIFICATION/TYPES OF

RATIOS Balance Sheet Ratios, i.e., ratios calculated on the basis of the

items/figures of Balance Sheet only. For example, Current Ratio,Debt-Equity Ratio etc. These ratios are also referred to as FinancialRatios.

Profit and Loss Account Ratios or Income Statement Ratios orRevenue Statement Ratios, i.e., ratios calculated on the basis of the

items/figures of Profit and Loss Account only. For example, GrossProfit Ratio, Stock Turnover Ratio etc. These ratios are also calledOperating Ratios.

Balance Sheet and Profit and Loss Account Ratios, i.e., ratioscalculated on the basis of the items/figures ofboth the BalanceSheet and the Profit and Loss Account. For example, Fixed Assets

Turnover Ratio, Debtors Turnover Ratio etc. These ratios are alsoreferred to as Inter-Statement Ratios or Composite Ratios.


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Ratios

Four groups, on the basis of their functions

Liquidity Ratios measure the short-term

stability of an enterprise.

Leverage/Capital Structure Ratios indicate

the relationship between Debt and Equity.

Profitability Ratios measure earning

success. Activity Ratios measure the efficiency of

asset management.


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Ratio Ltd :P/L Account for the year ending 31st March, 20x1

20x1 20x0

Net Sales 701 623

Cost of Goods sold 552 475

Stocks 421 370

wages & salaries 68 55other Mfg Exp 63 50

Gross Profit 149 148Operating Expenses 60 49

Depreciation 30 26

Gn Adm 12 11

Selling 18 12

Operating Profit 89 99Non Operating surplus/deficit -- 6

Profit before interest and tax 89 105

Interest 21 22

Profit before tax 68 83

Tax 34 41

Profit after tax 34 42Dividend 28 27

Retained Earnings 6 15

Per Share Data (Rs)

EPS 2.27 2.80

Dividend Per share 1.80 1.80

Mkt Price Per Share 21.0 20.0Book Value per share 17.47 17.07

R ti Ltd B l Sh t 31 t M h 20 1 (R i Mill)


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Ratio Ltd: Balance Sheet as on 31st March,20x1 (Rs in Mill)

20x1 20x0

Current Liabilities

Provisions

Current Assets

Loans & Advances

I Sources of Funds1 Share Holders funds 262 256

a) Share Capital 150

b) Reserves & Surplus 112

2 Loan Funds 212 156

a) Secured Loans 143Due after 1 year 108

Due within 1 year 35

b) Unsecured Loans 69

Due after 1 year 29

Due within 1 year 40

474 412

R ti Ltd B l Sh t 31st M h 20 1 (R i Mill)


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Ratio Ltd: Balance Sheet as on 31st March,20x1 (Rs in Mill)

20x1 20x0

Current Liabilities

Provisions

Current Assets

Loans & Advances

Usage of Funds

1 Fixed Assets 330 322

2 Investments 15 15

long term 12 12

short term 3 3

3 CA, Loans and Advances 234 156

Inventories 105 72debtors 114 68

Cash & Bank Balance 10 6

Loans & Advances 5 10

Less CL and Provisions 105 81

Net Current Assets 129 75

4 Misc Expenditure and Losses -- --

474 412


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Liquidity Ratios

Current

Ratio=

Current Assets

Current Liabilities

Acid

Test

Ratio

=Current Assets-inventory

Current Liabilities

237/180

=1.32

(237-105)/180

=0.73


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Interpretation

Current Ratio The higher the current ratio, the larger would be the

amount of rupees available per rupee of currentliability. In other words, the ability of the enterprise to

meet its current obligations is more, which indicatesthat the safety of funds of short-term creditors isgreater

But be aware

Very high Current Ratio may be the result of slack management

practices

Current Ratio should, therefore, be seen in relation tothe components of the current assets and theirliquidity


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Acid Test Ratio or Quick Ratio

Refinement of the Current Ratio

Takes into account the quick (or more liquid)current assets and current liabilities to determine

the quick or instant liquidity position of anenterprise

Ratio concentrates on cash, marketablesecurities and receivables (net of bad and

doubtful debts) in relation to current obligations,it is a more rigorous and penetrating measure ofthe liquidity position of an enterprise than theCurrent Ratio


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Calculation

Amount (Rs)

Cash 50,000

Debtors 1,00,000

Inventories 1,50,000

Total Current Assets 3,00,000

Current Liabilities 1,00,000

Current Ratio 3:1

Acid Test Ratio 1.5:1


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Acid Test Ratio

However caution.

Variation from season to season in an

enterprise and

from enterprise to enterprise in an industry

Important to interpret in light of nature of

business

Good Current Ratio and Low Acid Test

Ratio indicates?


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Turnover Ratio

To determine how quickly certain current

assets are converted into cash

Inventory Turnover Ratio,

Debtors Turnover Ratio and

Creditors Turnover Ratio.


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Inventory Turnover Ratio

Dividing the cost of goods sold by the

average inventory

Cost of Goods sold = Sales minus gross

profit or Op Stock+Purchase-Cl Stock

Avg Inventory= Op+Closing/2

Indicated number of times inventory is

rotated in a year

If ITR = 6, what is interpretation?


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An enterprise has sold goods worth Rs

4,00,000 with a gross profit margin of 25

per cent. The stocks at the beginning and

at the end of the year wereRs 75,000 and Rs 25,000 respectively.

What would be the Inventory Turnover

Ratio?


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Interpretation

Inventory management peformance

Fair judgement on liquidity

Stockout.caution


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Debtors Turnover Ratio

Relationship between credit sales and

debtors of an enterprise

Speed of realisation

Net Credit Sales/Avg outsanding debtors

Net Credit Sales= Gross Credit Sales-

Returns

Caution..


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Net Credit Sales figures may not be

available

Bad and doubtful debts not to be excluded


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Total Sales for the year 200304 1,00,000

Cash Sales for the year 200304 20,000

Debtors as on 01.04.2003 10,000

Debtors as on 31.03.2004 15,000

Bills Receivables as on 01.04.2003 7,500

Bills Receivables as on 31.03.2004 12,500

Average of Opening Balance + Closing Balance

(Rs 17,500.00 + Rs 27,500.00)

Debtors Turnover Ratio 80000/22500 =3.56


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Interpretation

Efficiency of realisation

Short collection period preferable

Could lose sales..


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Debt Collection Period Ratio

Indicates avg period of realisation

365/Debtors turnover


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Creditors Turnover Ratio

Number of times the creditors are paid vis--vis

credit purchases

Speed with which payments are made to

creditors for purchases made on credit basis Dividing net credit purchases by the average of

outstanding creditors

Net Credit Purchases are equal to Gross CreditPurchases less Returns to Suppliers


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Credit purchases during 0304 1,00,000

Creditors as on 01.04.2003 20,000

Creditors as on 31.03.2004 10,000 Bills Payable as on 01.04.2003 4,000

Bills Payable as on 31.03.2004 6,000

Creditors Turnover Ratio = 100000/20000


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Interpretation

Creditors paid promptly

Credit worthiness

Low ratio indicates liberal credit terms


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LEVERAGE/CAPITAL

STRUCTURE RATIOS

Short term creditors view

Long term creditors view


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LEVERAGE/CAPITAL

STRUCTURE RATIOS

Two aspects of the long-term solvency of

an enterprise:

Regular payment of interest on the loan, as

and when due, during the period of the loan,and

Repayment of principal amount of the loan in

predetermined instalments on the due datesor in one lump sum on maturity.


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LEVERAGE/CAPITAL

STRUCTURE RATIOS

Two different, but mutually dependent and

inter-related, types of Leverage Ratios

Ratios of the first type are based on the

relationship between borrowed funds andowners capital and are computed from the

Balance Sheet.

The other types of ratios, also referred to asthe Coverage Ratios, are calculated from the

Profit and Loss Account


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Leverage Ratios

Debt equity

Debt to Capital


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Debt Equity

Two approaches

Long term debts/Equity

Total Debt/Equity

D/E ratio also called Debt to Net Worth

Ratio


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Debt Equity

Interpretation

denotes the proportion of capital of an

enterprise to its total debts,

Indicates the relationship between the ownedfunds and the borrowed funds of the

enterprise.


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Debt Equity

Implication Pressure on earnings of the enterprise, leading to

default on meeting debt obligations;

Possibility of the creditors losing heavily,

Interference from creditors in management of theenterprise including close monitoring of the day-to-day operations of the enterprise;

The enterprise might find it difficult to borrowadditional funds, it would be possible only on

restrictive terms and conditions and at relativelyhigher costs.

There is no ideal however.

Capital intensive industries D/E could be higher


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Debt to Capital Ratio

1st approach Capital = Permanent Capital ofthe enterprise = Shareholders Equity + Longterm debts Measures Long term debt proportion

2nd approach Long term debts and currentLaibilities/Permanent capital+current liabilities Measures total assets financed by external funds

3

rd

approach Owners or proprietoryfunds/Tangible assets Measures what portion of the Total Tangible Assets is

financed by the Owners or the Proprietors Funds


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Coverage Ratios

PL Account

Claims of creditors

arise on account of

interest on loans, payment of dividend on preference shares, and

amortization of principal or repayment of instalments of term

loans or redemption of preference share capital on maturity.

Measure the relationship between what isnormally available from the operations of an

enterprise and the claims of its creditors


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Interest Coverage Ratio

Dividend Coverage ratio


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Interest Coverage ratio

Important from lenders point of view

Shows how many times the interest

charges are covered by the EBIT, out of

which those will be paid

EBIT/Fixed interest charges on loans

Why EBIT?


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Interest Coverage ratio

Important from lenders point of view

EBIT/Fixed interest charges on loans

Why EBIT?

Interest is tax-deductible and tax is calculated afterpayment of interest on loans

Caution

Too high a ratio may imply unused debt capacity.

Low Ratio is a danger signal in the sense that the

enterprise is using excessive long-term debts and


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Measures the ability of an enterprise to

pay dividend on preference shares

PAT/Pref Div Amt

Why PAT here?


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Measures the ability of an enterprise to

pay dividend on preference shares

PAT/Pref Div Amt

Why PAT here?

Unlike debts on which interest is a charge on

the profits of the enterprise, the Preference

Dividend is treated as an appropriation ofprofit


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Profitability Ratios

Gross Profit Margin

Net Profit Margin


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Gross Profit Margin

Gross Profit/Net Sales

Interpretation

Efficiency in the matter of production as well as

pricing Very High GPM

Check for unsatisfactory basis of valuation of stocks

resulting in over-valuation of closing stock and/or

under-valuation of opening stock

Low GPM

Check for high cost of production, low selling price


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Net Profit Margin

Net Profit/Net Sales

Measures the overall efficiency of production,administration, selling, financing, pricing and taxmanagement of an enterprise

Indicative of the managements ability to operate thebusiness with success, by way of recovery fromrevenues, not only of the cost of raw materials,

the expenses towards operating the business including

depreciation and the cost of borrowed funds, but

also leaving a reasonable margin of profit for the organisation.

P fit bilit R ti R l t d t


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Profitability Ratios Related to

Investments

Return on Assets,

Return on Capital Employed

Return on Shareholders Equity


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Return on Assets

Measured in terms of the relationship

between net profits and assets

Assets = Total Assets (FA-Deprecn)+NWC

Intangibles


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Return on Capital Employed

Profits/Total Capital Employed

Insight into how efficiently the long-termfunds of the owners and the creditors are

being used Higher the Ratio, the more efficient is the

use of capital employed

Can be improved by improving the profitabilityor by increasing the turnover of capital or bycombination of both


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Return on Shareholders Equity

Rate of Return on

Total Shareholders Equity, and

Ordinary Shareholders Equity,

Earning Per Share,

Dividend Per Share,

Dividend Pay-out Ratio, and

Price Earning Ratio.

Return on Total Shareholders


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Return on Total Shareholders

Equity

Preference share capital

Equity share capital

PAT/Avg Total Shareholder equity

Return on Ordinary Shareholders


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Return on Ordinary Shareholders

Equity

Equity share capital

PAT(after Pref Div)/Avg Ordinary

Shareholder equity


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Earning Per Share

NPAT-Pref Div/No. of Equity Shares

Measure of profitability from the

shareholders point of view

Again caution

should not be relied upon blindly: Why?


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Earning Per Share

NPAT-Pref Div/No. of Equity Shares

Measure of profitability from the

shareholders point of view

Again caution

should not be relied upon blindly

EPS cannot represent financial operations of

business Comparison across companies different

accounting procedures could be applied


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Dividend Per Share

Better indicator than EPS

NP (distributable)/No. of equity shares


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Dividend Payout Ratio

Dividend Paid/PAT

DPS/EPS


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Activity Ratio

Measures efficiency with which an enterprise is

managing and utilising its assets

Also called as Efficiency Ratios orAsset

Utilisation Ratios efficiency with which the assets are utilized

Higher the rate of conversion or turnover, the more

efficient is the utilization or management of the assets

Also referred as Turnover Ratios


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Assets Turnover Ratio

To find out whether the investments in therelative fixed assets have been judiciousand whether such investments have

contributed towards achievement of thedesired sales target

Total Assets Turnover

Cost of Goods Sold/Total assets

Interpretation

Efficient and effective utilisation


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Capital Gearing Ratio

Relation of Equity Capital to Loans

Technique of raising finances for a

company by resorting to fixed interest or

dividend-carrying securities


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Low Gearing (Rs) High Gearing(Rs)

Equity Share Capital 15,00,000 6,00,000

8 % Preference Share Capital 4,00,000 4,00,000

7 % Redeemable PreferenceShare Capital 1,00,000 8,00,000

7 per cent Debentures 3,00,000 4,00,000

General Reserves 1,00,000 1,00,000

PL Appropriation Account 1,00,000

24,00,000 24,00,000

Gearing Ratio 16:8 8:16

2:1 1:2


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Interpretation

A high gearing may result in some benefits to

the equity shareholders, where the rate of

interest/dividend on fixed interest/dividend-carrying securities is lower than the rate of

return on total capital invested in the business

Debt Service Coverage Ratio


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(DSCR)

Ability of an enterprise to meet its liabilities

by way of payment of instalments of term

loans and interest thereon from out of

cash accruals Forms the basis for fixation of the

repayment schedule

Cash accruals/Repayment

Cash acruals+Int/Repayment+Int



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(DSCR)

Interpretation

Along with cash flow indicates

when the repayment of the loan should begin,

how much should it be, and what should be the repayment period.


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Return on Net Worth (RoNW)

Measures the returns on the Net Worth,

i.e., Equity and Reserves of a company

and gives an idea of the way in which

shareholders funds are being utilized Net Profit /Net Worth

RONW good measure for comparison

If bonus shares are issued

EPS decreases, RONW?


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Return on Net Worth (RoNW)

Measures the returns on the Net Worth,i.e., Equity and Reserves of a companyand gives an idea of the way in which

shareholders funds are being utilized Net Profit /Net Worth

RONW good measure for comparison

If bonus shares are issued EPS decreases, RONW? Constant!


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Some Scenarios

Overtrading

Cash shortage

High Inv Turnover Ratio

Low Current Ratio

UnderTrading

Low Inv Turnover Ratio

High Current Ratio


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Under capitalisation

Owner capital less than borrowed capital

May be result of over trading

Effects Payment of excessive interest on borrowed capital,

Use of out-of-date appliances and equipments because of

inability to purchase new plant, equipments etc., and

High cost of production because of the use of old machines

and excessive interest on loans and high cost of purchasedue to extra credit period demanded on purchases.


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Over capitalisation

If its earnings are not sufficient to justify a fair

return on the amount of share capital and

debentures that have been issued Owner capital more than borrowed funds


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Importance of Ratio Analysis

Basis for comparing otherwise incomparableabsolute figures

Enables drawing of inferences on theperformance

Liquidity Position Long term Solvency

Operating Efficiency

Overall Profitability

Inter-firm Comparison Trend Analysis


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Limitations

Ratios are only tools

Ratio Analysis communicates only a

relative picture

Inflation distorts financial Ratio Analysis

Inter-firm comparison consider age, size

etc

Gives symptoms further investigation

needed for diagnosis


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Funds Flow

Funds Flow statement Balance Sheet

Profit Loss account

Drawn from movement of funds Analysis of resources available for finance

activities and uses

Also called Balance Sheet variationstatement or Sources and Uses of Fundsstatement


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F d fl St t t


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Funds flow Statement

For better understanding The operating surplus generated by the company, before tax and

dividend.

Whether any additional fixed assets have been acquired and, ifso, the amount spent therefor.

Whether any fixed assets have been sold and, if so, the saleproceeds thereof.

Whether any miscellaneous income, extraneous to the normaloperations of the company, has been received and, if so, theamount thereof.

Dividend paid by the company and, if so, whether it was paid outof the earnings of the year or out of profits of earlier year(s).

The extent of funds generated by way of depreciation charge.

Di ti ti


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Distinction

Transactions not involving cash are excluded for the purpose ofCash Flow Statement

Transactions not involving cash are excluded for the purpose ofCash Flow Statement. For example, transactions involving changeof Finished Goods to Receivables are ignored in Cash FlowStatement, whereas these form part of Funds Flow Statement.

The accrual concept is ignored in Cash Flow Statement, but isconsidered in Funds Flow Statement, since the relative items formpart of cash flow at the time of receiving or effecting the payments.

The Funds Flow Statement is an extension of the Balance Sheetand is a part of appraisal process, whereas the Cash FlowStatement is used by the management as a tool for monitoring the

cash balance to ensure timely receipt and payment of cash and alsomaintain cash balance in hand to the extent required.

C h Fl St t t


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Cash Flow Statement

Ability of the enterprise to meet obligationsto trade creditors

To make timely payment of interest on and

instalments of bank loans, as and whendue,

To pay interest to debenture holders asalso dividends to its shareholders

Enables the management to makenecessary planning


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A firm has a higher asset turnover ratio than theindustry average, which implies

A) the firm has a higher P/E ratio than otherfirms in the industry.

B) the firm is more likely to avoid insolvency inthe short run than other firms in the industry.

C) the firm is more profitable than other firms inthe industry.

D) the firm is utilizing assets more efficientlythan other firms in the industry.


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A firm has a higher asset turnover ratio than theindustry average, which implies

A) the firm has a higher P/E ratio than otherfirms in the industry.

B) the firm is more likely to avoid insolvency inthe short run than other firms in the industry.

C) the firm is more profitable than other firms inthe industry.

D) the firm is utilizing assets more efficientlythan other firms in the industry.**


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If the interest rate on debt is higher thanROA, then a firm will __________ byincreasing the use of debt in the capital

structure.A) increase the ROE

B) not change the ROE

C) decrease the ROED) change the ROE in an indeterminablemanner


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If the interest rate on debt is higher thanROA, then a firm will __________ byincreasing the use of debt in the capital

structure.A) increase the ROE

B) not change the ROE

C) decrease the ROE **D) change the ROE in an indeterminablemanner


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If a firm has a positive tax rate, a positiveROA, and the interest rate on debt is thesame as ROA, then ROA will be

________.A) greater than the ROE

B) equal to the ROE

C) less than the ROED) greater than zero but it is impossible todetermine how ROA will compare to ROE


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If a firm has a positive tax rate, a positiveROA, and the interest rate on debt is thesame as ROA, then ROA will be

________.A) greater than the ROE**

B) equal to the ROE

C) less than the ROED) greater than zero but it is impossible todetermine how ROA will compare to ROE


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When long term uses in a funds flowstatement are more than long term uses, it

results in:

Increase in WC gap Increase in NWC

Increase in CL

Decrease in WC


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When long term uses in a funds flowstatement are more than long term uses, it

results in:

Increase in WC gap Increase in NWC**

Increase in CL

Decrease in WC


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A firm incurs a loss. In funds statement itwould be shown as

a. Source of funds

b. Use of funds

c. Waste of funds

d. Routing of funds


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A firm incurs a loss. In funds statement itwould be shown as

a. Source of funds

b. Use of funds**

c. Waste of funds

d. Routing of funds


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Balance sheet total of a firm has total of32 lakhs. LTS are 20 Lakhs. If CR is

1.5:1, what is the amount of long term

use of firm?a. 18

b. 16

c. 14

d. 12


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Balance sheet total of a firm has total of32 lakhs. LTS are 20 Lakhs. If CR is

1.5:1, what is the amount of long term

use of firm?a. 18

b. 16

c. 14**

d. 12


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Payment of creditors has been made byfirm out of available cash. This will

a. Not bring any change to WC

b. Change the WC

c. Change WC and overall NW

d. Not change WC and OP


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Payment of creditors has been made byfirm out of available cash. This will

a. Not bring any change to WC**

b. Change the WC

c. Change WC and overall NW

d. Not change WC and OP


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Activity rations measure

a. Efficiency of asset management

b. Earning success

c. Relationship between Debt and equity

d. Short term stability of a firm


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Activity rations measure

a. Efficiency of asset management**

b. Earning success

c. Relationship between Debt and equity

d. Short term stability of a firm


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An SSI unit isues fully paid bonus sharesof Rs. 30 Lakhs. D/E was 2:1, LToutside

Liab Rs 200 Lakhs before this. What is

new D/E?a. 1.5:1

b. 1.8:1

c. 2.0:1

d. 2.5:1


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An SSI unit isues fully paid bonus sharesof Rs. 30 Lakhs. D/E was 2:1, LToutside

Liab Rs 200 Lakhs before this. What is

new D/E?a. 1.5:1

b. 1.8:1

c. 2.0:1**

d. 2.5:1


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DSCR helps Banks to:

a. Assess WC need

b. Assess TL need

c. Fix amount of instalment and period

d. Assess credit worthiness of firm


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DSCR helps Banks to:

a. Assess WC need

b. Assess TL need

c. Fix amount of instalment and period**

d. Assess credit worthiness of firm


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Total Liabilities Rs. 80 L, CR 1.5:1, FA:50 L and D/E 3:1. Amount of Long Term

Liab:

a. 20b. 45

c. 15

d. 10


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Total Liabilities Rs. 80 L, CR 1.5:1, FA:50 L and D/E 3:1. Amount of Long Term

Liab:

a. 20b. 45**

c. 15

d. 10


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Total Liabilities Rs. 70 L of which Termliab is Rs 25 L. CA Rs. 40 L and CR 2:1

NW is:

a. 25**b. 20

c. 45

d. 30


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Total Liabilities Rs. 70 L of which Termliab is Rs 25 L. CA Rs. 40 L and CR 2:1

NW is:

a. 25b. 20

c. 45

d. 30


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Fixit Company

Income Statement (2006)

Sales 4,000,000

Cost of goods sold 3,040,000

Gross profit 960,000

Selling and administrative expenses 430,000

Operating profit 530,000

Interest expense 160,000

Income before tax 370,000

Tax expense 148,000

Net income

222,000

Balance Sheet


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Balance Sheet

2005 2004

Cash 60,000 50,000

Accounts receivable 550,000 500,000

Inventory 690,000 620,000

Total current assets 1,300,000 1,170,000

Fixed assets 1,300,000 1,230,000

Total assets 2,600,000 2,400,000

Accounts payable 270,000 250,000

Bank loan 580,000 500,000

Total current liabilities 850,000 750,000

Bonds payable 900,000 1,000,000

Total liabilities 1,750,000 1,750,000

Capital (25,000 shares) 250,000 250,000

Retained earnings 600,000 400,000

Total liabilities & equity 2,600,000 2,400,000


111/122

The firm's current ratio for 2006 is___________.

A) 1.98

B) 2.47

C) 0.65

D) 1.53


112/122

The firm's current ratio for 2006 is___________.

A) 1.98

B) 2.47

C) 0.65

D) 1.53 **

E) Rationale: 1,300,000/850,000 = 1.53.


113/122

The firm's average collection period for2006 is _______days.

A) 47.90

B) 48.53

C) 46.06

D) 47.65


114/122

The firm's average collection period for2006 is _______days.

A) 47.90 **

B) 48.53

C) 46.06

D) 47.65

Rationale: (525,000 / 4,000,000) (365) =

47.90.


115/122

The firm's inventory turnover ratio for 2006is ________.

A) 4.64

B) 4.16

C) 4.41

D) 4.87


116/122

The firm's inventory turnover ratio for 2006is ________.

A) 4.64 **

B) 4.16

C) 4.41

D) 4.87

Rationale: 3,040,000/[(620,000 + 690,000) /

2] = 4.64


117/122

The firm's return on equity ratio for 2005 is________.

A) 0.1235

B) 0.0296

C) 0.2960

D) 2.2960


118/122

The firm's return on equity ratio for 2005is ________.

A) 0.1235

B) 0.0296

C) 0.2960 **

D) 2.2960

Rationale: 222,000/[(850,000 + 650,000) / 2]

= 0.2960


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Documents

13May_FinancialRatioAnalysis