www.kmneduonline.com (Specially prepared for RBI GR B Phase-II 2016 Finance Paper) RATIO ANALYSIS 1 7:13 AM FINANCIAL STATEMENTS Financial Statements generally consists of the following two types : Profit & Loss Account – which summarises the expenses incurred and revenues received during the period covered by it ; and Balance Sheet – which lists out the Assets and Properties owned by the Unit and the Liabilities it owes to outsiders and also to its owners. 2 and so on? 3 . Whether the sales. The assets that are available to secure their advances. meeting the liabilities in time. The stake of the owners of the concern as compared to the amount lent. production. Bankers & Financial Institutions : General financial position to determine if the concern is worth lending to. How the amount lent to the concern has been utilised. profitability are increasing or decreasing? The liquidity position of the concern i.7:13 AM WHO ARE INTERESTED IN FINANCIAL STATEMENTS ? Creditors .e. 7:13 AM MAJOR COMPONENTS OF BALANCE SHEET Balance Sheet is a statement of Assets & Liabilities as on a given date. ASSETS as what the Business Owns and LIABILITIES as what the Business Owes. It reflects the Financial Position of a concern as on a date. ASSETS as USES and LIABILITIES as SOURCES OF FUNDS 2. The Balance Sheet can be looked at from two angles: 1. LIABILITIES ASSETS NET WORTH FIXED ASSETS TERM LIABILITIES CURRENT ASSETS CURRENT LIABILITIES OTHER NON CURRENT ASSETS 4 . Net Worth : It is the total investment of the owners in the Business.7:13 AM MAJOR COMPONENTS OF BALANCE SHEET 1. In Proprietorship and Partnership Firms they are added to Capital and not shown separately. For a Limited Company it comprises of a sum of Share Capital + Reserves Share Capital is the direct investment of the owners in the business. This includes Equity Share Capital and Preference Share Capital. Reserves : Profits of the business which have been reinvested in the business. 5 . TERM LIABILITIES : All those borrowings made by the concern which are repayable after One Year of the Balance Sheet date are called Term Liabilities.7:13 AM MAJOR COMPONENTS OF BALANCE SHEET 2. These include TERM LOANS DEBENTURE TERM DEPOSITS REDEEMABLE PREFERENCE SHARE CAPITAL (Maturing with 12 years of Balance Sheet Date) 6 . CURRENT LIABILITIES : All those borrowings made by the concern which are expected to be repaid within 12 months of the date of the Balance Sheet.7:13 AM MAJOR COMPONENTS OF BALANCE SHEET 3. These include CREDITORS PROVISIONS FOR EXPENSES BANK BORROWING FOR WORKING CAPITAL DEPOSITS MATURING WITHIN 12 MONTHS INSTALLMENTS OF TERM LOANS DEBENTURES/REDEEMABLE PREFERENCE WITHIN ONE YEAR SHARES MATURING Total of Term Liabilities + Current Liabilities is called Outside Liabilities and is the Total Borrowings of the Firm 7 . They are tangible in nature and have a long life. 8 . FIXED ASSETS: These are the assets which help in the production of goods & services of the concern.7:13 AM MAJOR COMPONENTS OF BALANCE SHEET 4. The examples of Fixed Assets are : Land Building Plant & Machineries Furniture & Fixtures etc. 7:13 AM MAJOR COMPONENTS OF BALANCE SHEET 5.. Spares Advance Payment for Suppliers Prepaid Insurance Debtors & Bills Receivables 9 .M.Securities Stocks of R.G Stores. CURRENT ASSETS: These are the assets which are expected to be consumed or converted into cash through the normal business operations and usually within one year.G and F. Such as: Cash & Bank Balances FDs with Banks Short Term Govt . Semi F. NON CURRENT ASSETS: These are the assets which do not fall in the above two categories of assets. Trade Mark] Preliminary & Pre-operative Expenses 10 . Patent. They are: Corporate Investments Loans not recoverable within 1 year Non Consumable Spares Deferred Receivables Advance for Capital Expenditure Intangible Assets [ Goodwill.7:13 AM MAJOR COMPONENTS OF BALANCE SHEET 6. 7:13 AM RATIO ANALYSIS It’s a tool which enables the banker or lender to arrive at the following factors : Liquidity position Profitability Solvency Financial Stability Quality of the Management Safety & Security of the loans & advances to be or already been provided 11 . COM FORMAT OF BALANCE SHEET FOR RATIO ANALYSIS LIABILITIES ASSETS NET WORTH/EQUITY/OWNED FUNDS FIXED ASSETS : LAND & BUILDING. Other Long Term Liabilities NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. PLANT & Share Capital/Partner’s Capital/Paid up Capital/ MACHINERIES Owners Funds Original Value Less Depreciation Reserves ( General. Bills Receivables. Short duration loans or deposits Expenses payable & provisions against various items CURRENT ASSETS : Cash & Bank Balance. assets which are not current or fixed in nature CURRENT LIABILTIES Bank Working Capital Limits such as CC/OD/Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable. Advance Payment of Taxes. Marketable/quoted Govt. Goodwill. 12 . Loans and Advances recoverable within 12 months INTANGIBLE ASSETS Patent.WWW. Prepaid expenses. Fixed Deposits.SIP.KMNEDUONLINE. Book Debts/Sundry Debtors. Stocks & Inventory (RM. Debit balance in P&L A/c. Unsecured Loans.FG) Stores & Spares. Capital. or other securities. Revaluation & [Net Value or Book Value or Written down value] Other Reserves) Credit Balance in P&L A/c LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions) Debentures/Bonds. CLASSIFICATION OF RATIOS Balance Sheet Ratio P&L Ratio or Income/Revenue Statement Ratio Balance Sheet and Profit & Loss Ratio Financial Ratio Operating Ratio Composite Ratio Current Ratio Quick Asset Ratio Proprietary Ratio Debt Equity Ratio Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio Fixed Asset Turnover Ratio. Earning per Share Ratio. Return on Total Resources Ratio. Debtors’ Turnover Ratio. 13 . Return on Own Funds Ratio. SOME IMPORTANT NOTES Liabilities have Credit balances and Assets have Debit balances Current Liabilities are those which have either become due for payment or shall fall due for payment within 12 months from the date of Balance Sheet Current Assets are those which undergo change in their shape/form within 12 months. These are also called Working Capital or Gross Working Capital Net Worth & Long Term Liabilities are also called Long Term Sources of Funds Current Liabilities are known as Short Term Sources of Funds Long Term Liabilities & Short Term Liabilities are also called Outside Liabilities 14 Current Assets are Short Term Use of Funds . 15 . only for Calculation of Current Ratio & Quick Ratio. If there is profit it shall become part of Net Worth under the head Reserves and if there is loss it will become part of Intangible Assets Investments in Govt. Securities to be treated current only if these are marketable and due.7:13 AM SOME IMPORTANT NOTES Assets other than Current Assets are Long Term Use of Funds Installments of Term Loan Payable in 12 months are to be taken as Current Liability. Investments in other securities are to be treated Current if they are quoted. Bonus Shares as issued by capitalization of General Reserves and as such do not affect the Net Worth. Investments in allied/associate/sister units or firms to be treated as Non-current. But with Rights Issue. change takes place in Net Worth and Current Ratio. Current Liabilities : Creditors.33 : 1 Current Assets : Cash & those assets which can be converted into cash within 1 year. Debtors. Bills Payable.7:13 AM Current Ratio : It is the relationship between the current assets and current liabilities of a concern. Current Ratio = Current Assets/Current Liabilities The ideal Current Ratio preferred by Banks is 1. Short Term Bank Loans. Marketable securities. 1. Inventories. For example. 16 . Prepaid Expenses. Accrued Expenses. Income Tax Liabilities and long Term Liabilities maturing in the current year. A ratio greater than 1 means that the firm has more current assets than current claims against them. a cushion of protection for creditors. Higher the ratio greater the margin of safety. It represents the “Margin of Safety’ i. As a conventional rule a Current Ratio of 2 is considered most satisfactory.Current Ratio measures the firm’s short term solvency. This rule is based on the logic that in a worse situation. the firm will be able to meet its current obligations.e. even if the value of current assets become half. 17 . alternatively it is the difference of Current Assets and Current Liabilities. NWC = Current Assets – Current Liabilities 18 . It measures the firm’s potential reservoir of funds.7:13 AM 2. Net Working Capital : This is worked out as surplus of Long Term Sources over Long Term Uses. 000 Current Ratio = > Quick Ratio => Current Liabilities 1.000/1.50.000/1.00. Securities or quickly marketable/quoted shares and Bank Fixed Deposits. Receivables upto 6 months.5 : 1 19 .000 = 3:1 = 1.000 Debtors 1. Quickly realizable securities such as Govt.000 1.50.00. Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities Example : Cash 50. Inventories are less liquid hence the same is deducted from the Current Assets to arrive at Quick Assets. Cash & Bank balances are the most liquid assets.00. Examples of quick Assets are : Cash/Bank Balances.000 Inventories 1.7:13 AM 3.00. Quick Current Assets : Quick assets are those which can be immediately converted into cash without a loss of value.00. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities.000 Total Current Assets 3.000 3.00. if the Firm is having the following : Capital = Rs. Long Term Outside Liabilities / Tangible Net Worth Liabilities of Long Term Nature Total of Capital and Reserves & Surplus Less Intangible Assets For instance. It represents the lender’s contribution for each Rupee of owner’s contribution. DEBT EQUITY RATIO : It is the relationship between borrower’s fund (Debt) and Owner’s Capital (Equity). 800 Lacs Debt Equity Ratio will be => 800/500 = 1. 200 Lacs Free Reserves & Surplus = Rs.7:13 AM 4.6 : 1 20 . 300 Lacs Long Term Loans/Liabilities = Rs. EARNING PER SHARE : EPS indicates the quantum of net profit of the year that would be ranking for dividend for each share of the company being held by the equity share holders. Net profit after Taxes and Preference Dividend/ No.7:13 AM Composite Ratio 17. of Equity Shares 19. PRICE EARNING RATIO : PE Ratio indicates the number of times the Earning Per Share is covered by its market price. RETRUN ON EQUITY CAPITAL (ROE) : Net Profit after Taxes / Tangible Net Worth 18. Market Price Per Equity Share/Earning Per Share 21 . (The Ideal DSCR Ratio is considered to be 2 ) PAT + Depr.7:13 AM 20. + Annual Interest on Long Term Loans & Liabilities --------------------------------------------------------------------------------Annual interest on Long Term Loans & Liabilities + Annual Installments payable on Long Term Loans & Liabilities ( Where PAT is Profit after Tax and Depr. is Depreciation) 22 . DEBT SERVICE COVERAGE RATIO : This ratio is one of the most important one which indicates the ability of an enterprise to meet its liabilities by way of payment of installments of Term Loans and Interest thereon from out of the cash accruals and forms the basis for fixation of the repayment schedule in respect of the Term Loans raised for a project. QUICK RATIO = (C.A – INVENTORY)/C.L 1. RETRUN ON INVESTMENT RATIO = EBIT/NET ASSETS OR CAPITAL EMPLOYED 5. DEBTORS TURNOVER RATIO = (CREDIT SALES OR SALES)/AVERAGE DEBTORS 3. GROSS MARGIN = GROSS PROFIT/SALES 2. INTEREST COVERAGE RATIO = (EBIT+Depr.A / C.E OR NET ASSETS / NET WORTH 4. CAPITAL EQUITY RATIO = C.L 2. DEBT EQUITY RATIO = NET WORTH/TOTAL DEBT 3. WORKING CAPITAL TURNOVER = SALES/NET WORKING CAPITAL LEVERAGE RATIOS : 1.www. PAT TO EBIT RATIO = PAT/EBIT 4. ASSETS TURNOVER = SALES/NET ASSETS OR CAPITAL EMPLOYED 6. NET MARGIN = PAT/SALES. INVENTORY TURNOVER RATIO = (COST OF GOODS SOLD OR SALES)/INVENTORY 2.com (RBI GR B Phase –II Practice Papers available) LIQUIDITY RATIOS : PROFITABILITY RATIOS : 1. EBIT/SALES 3. TOTAL DEBT RATIO = TOTAL DEBT/CAPITAL EMPLOYED 2. COLLECTION PERIOD = 360/DEBTORS TURNOVER 5.kmneduonline. INVENTORY PERIOD = 360/INVENTORY TURNOVER 4.)/INTEREST 23 . CURRENT RATIO = C. RETRUN ON EQUITY = PAT/NET WROTH ACTIVITY RATIOS : 1.
Report "Financial Ratios Useful for Solving Numericals"