Ratio Analysis – Problems – MAA – Sem 1

Problem No.1
Given below is the summarized balance sheet, profit and loss of Lakshmi Sugar Mills ltd., as on 31-12-
1997.You are required to calculate;
a) Current ratio e) Proprietary ratio i) Debtors Turnover ratio
b) Quick ratio f) Stock Turnover ratio j) Creditors Turnover ratio
c) Fixed assets ratio g) Fixed assets turnover ratio
d) Debt equity ratio h) Return on capital employed

Balance sheet
Liabilities Rs. Assets Rs.
Issued capital: Land and Buildings 30,00,000
40,000 shares of Rs.100 each 40,00,000 Plant & machinery 16,00,000
Reserve 18,00,000 Stock 29,60,000
Creditors 26,00,000 Debtors 14,20,000
Profit and loss account 6,00,000 Cash at bank 6,20,000
6% debentures 6,00,000
96,00,000 96,00,000
Profit and Loss Account
Particulars `Rs. Particulars Rs.
To Opening Stock 19,90,000 By Sales 1,70,00,000
To Purchases 1,09,05,000 By Closing Stock 29,80,000
To Direct Expenses 2,85,000 By Gross Profit
To Gross Profit 68,00,000
1,99,80,000 1,99,80,000
To Administrative Expenses 30,00,000 By Gross Profit 68,00,000
To Selling and Distribution 6,00,000 By Non Operating Income 80,000
To Financial expenses 3,00,000
To Other Non-Operating Expenses 80,000
To Net Profit 30,00,000
69,80,000 69,80,000

a. Current Ratio= CA/CL

Current assets = 29,60,000+ 14,20,000+ 6,20,000= 50,00,000
Stock- 2960,000
Debtors-1420,000
Cash- 6,20,000
Current liabilities = creditors=26,00,000
Current ratio= 50,00,000/26,00,000 = 1.93:1
 b. Quick ratio= Quick assets/quick liabilities
Quick assets = 50,00,000- 29,60,000 = 20,40,000
Quick liabilities = creditors= 26,00,000
Quick ratio = 2040000/2600000 = 0.78 :1

c) Fixed assets ratio=fixed assets/long term funds

Fixed assets = L& B +P &M
Fixed assets= 30,00,000+16,00,000= 46,00,000
Long term funds =shares+ reserves+ P & L a/c+deebentures =40,00,000+ 18,00,000+ 6,00,000+6,00,000=
70,00,000
Shares= 40,00,000
Reserves= 18,00,000
P& L a/c= 6,00,000
Debentures 6,00,000
Fixed assets ratio = 46,00,000/70,00,000= 0.66:1

d) Debt-equity ratio = long term debt/shareholders fund

Long term debt=debentures= 6,00,000
Shareholders fund= 64,00,000
Debt equity ratio= 6,00,000/64,00,000 = 0.094:1

e) Proprietary ratio= shareholders fund/ total tangible assets

Shareholders fund= 64,00,000
Total tangible assets=96,00,000
Proprietary ratio= 64,00,000/96,00,000 =0.66:1

f) Stock turnover ratio= COGS/Avg .stock

Avg.stock = opening stock+ closing stock/2
= 19,90,000+29,80,000/2
= 49,70,000/2
= Rs. 24,85,000
COGS = Sales –GP
 = 1,70,00,000-68,00,000
=1,02,00,000
STR = 1,02,00,000/24,85,000 = 4.10 times

g) Fixed assets turnover ratio = sales/net fixed assets

= 1,70,00,000/46,00,000
= 3.7 times

h) Return on capital employed = operating profit/avg capital employed

Operating profit = GP –operating expenses= operating income
= 68,00,000-39,00,000
= Rs.29,00,000
Capital employed = FA + CA –CL
46,00,000+50,00,000-26,00,000
=70,00,000
Return on capital employed= 29,00,000/70,00,000 x 100= 41.43%

i)Debtors turnover ratio =net credit sales/average receivables

= 1,70,00,000/14,20,000 = 11.97 times

j)Creditors turnover ratio = net credit purchases/average accounts payable

= 1,09,05,000/26,00,000= 4.19 times

Problem.No.2
The following figures relate to Nirma traders for the year ended 31st march 2000.
Trading and profit and loss account
Particulars `Rs. Particulars Rs.
To opening stock 75,000 By sales 5,20,000
To purchases 3,25,000 Less:
gross profit 2,00,000 Returns 20,000 5,00,000
By closing stock 1,00,000
6,00,000 6,00,000
To operating expenses: By gross profit 2,00,000
administrative 40,000 By non-operating income:
selling and Dividend 9,000
and distribution 25,000 65,000 Profit on
To non-operating expenses: sale of shares 11,000 20,000
To loss on sale of assets 5,000
To net profit 1,50,000
2,20,000 2,20,000

Balance sheet as on 31st March 2000

Liabilities Rs. Assets Rs.
Issued capital: Land and building 1,50,000
2000 equity shares Plant and machinery 80,000
of Rs.100 each 2,00,000 Stock 1,00,000
Reserves 90,000 Debtors 1,40,000
Current liabilities 1,50,000 Cash and bank 30,000
Profit and loss a/c 60,000
5,00,000 5,00,000
Calculate (1) Gross profit ratio (2)Operating ratio (3) Operating profit ratio (4)Net profit ratio (5)
Expenses ratio (6) Stock turnover ratio (7)Return on total resources (8) Turnover of fixed assets (9)
Turnover to total assets.

1.Gross profit ratio:

Gross profit / sales X 100
=2,00,000/ 5,00,000 X100 = 38.40%

2.Operating Ratio:
CGS + operating expenses/ sales x 100
CGS = Sales – Gross Profit
= 5,00,000 -2,00,000
= 3,00,000
= 3,00,000 +40,000 +20,000/ 5,20,000 x 100
= 3,65,000 / 5,20,000 x100
=73.0%

3.Operating profit ratio:

Operating profit / sales x100
Operating profit = gross profit – operating expenses + operating income
= 2,00,000 – 65,000
= 1,35,000
= 1,35,000 / 5,20,000 x100
= 27%

4.Net profit ratio:

Net profit ratio/ sales x100
= 1,50,000/5,00,000 x100
= 30%

5.Expenses Ratio:
A) Administrative expenses ratio:
= Admin expenses / net sales x 100
= 40,000/ 5,20,000 x100
= 8%
B) Selling & Distribution expenses ratio:
= S& D expenses/ net sales x100
= 25,000/ 5,20,000 x100
=5%

6.Stock turnover ratio:

=COGS / Average Stock
Avg stock = opening stock + closing stock /2
= 75,000 +1,00,000/ 2
=1,75,000 /2
=87,500
COGS = 3,20,000
= 3,20,000 /87,500 = 3.43 times

7.Return on total resources:

= Net Profit / total assets x100
= 1,50,000 / 5,00,000 x100 = 30%
8.Turnover on fixed assets:
= Sales/ net fixed assets
= 5,00,000 / 2,30,000
= 2.17 times

9.Turnover to total assets:

Sales / total assets
= 5,00,000 / 5,00,000
= 1 time