RATIO ANALYSIS

BY-
ANANTA VISHAIN
PGDM-IB
ROLL NO.- 21IB307

FINANCIAL RATIO ANALYSIS 1

 1. The financial ratios of a firm are as follows.

Current ratio = 1.25

Acid-test ratio = 1.10
Current liabilities = 2000
Inventory turnover ratio = 10
What is the sales of the firm?

Ans1.) CA= CL*CR

= 2000*1.25 = 2500
CA-INVENTORIES= CL*ACR
2500-INVT= 2000*1.10
INVT= 300
SALES= INVENTORIES*ITR
= 300*10
= 3000.

2. The financial ratios of a firm are as follows.

Current ratio = 1.33
Acid-test ratio = 0.80
Current liabilities = 40,000
Inventory turnover ratio = 6
What is the sales of the firm?

FINANCIAL
ANS2.) CA=RATIO
CL*CR ANALYSIS 2
= 40,000*1.33
= 53,200
CA-INVT= CL*ATR
53,200-INVT= 40,000*0.80
SALES= INVT*ITR
= 21,200*6
= 1,27,200

3. The financial ratios of a firm are as follows.

Current ratio = 1.6

Acid-test ratio = 1.2
Current liabilities = 2,000,000
Inventory turnover ratio = 5

What is the sales of the firm?

ANS3. CA= CL*CR

= 2,00,000*1.6
= 3,20,000
INVENTORIES= 8,00,000
SALES= 8,00,000*5 = 40,00,000
 4. Complete the balance sheet and sales data (fill in the blanks) using the following
financial data:
Debt/equity ratio = 0.80
Acid-test ratio = 1.1
Total assets turnover ratio= 2
Days' sales outstanding in
Accounts receivable = 30 days
Gross profit margin = 30 percent
Inventory turnover ratio = 6

Balance sheet

Equity capital 80,000 Plant and equipment ....

Retained earnings 50,000 Inventories ....
Short-term bank borrowings . . . . Accounts receivable ....
Cash ....
.... ....
Sales ....
Cost of goods sold ……..

ANS4. A) DEBT/EQUITY = 0.80

EQUITY = 80,000+50,000 = 1,30,000
DEBT = 0.8*1,30,000 = 1,04,000

B) TOTAL ASSETS = 1,30,000+1,04,000 = 2,34,000

FINANCIAL RATIO ANALYSIS 3
C) TOTAL ASSETS TURN RATIO = 2
SALES = 2*2,34,000 = 4,68,000
GROSS PROFIT MARGIN = 30%

D) COST OF GOODS SOLD = 0.7*4,68,000 = 3,27,600

DAY’S SALES A/C RECIEVABLE = 30DAYS

E) ACCOUNT RECIEVABLES = 4,68,000*30/360 = 39,000

F) ITR = COST OF GOOD SOLD / INVNT

INVT = 54,600

G) ATR = CASH + ACC RECIEVABLES/ CL

1.1 = CASH + 39,000/1,04,000
CASH = 75,400
PLANT & EQUIPMENT = TOTAL ASSETS – INVT – ACC
RECIEVABLES – CASH
PLANT & EQUIPMENT = 65,000.

5. Complete the balance sheet and sales data (fill in the blanks) using the following
financial data:
Debt/equity ratio = 0.40
Acid-test ratio = 0.9
Total assets turnover ratio = 2.5
 Days' sales outstanding in
Accounts receivable = 25 days
Gross profit margin = 25 percent
Inventory turnover ratio =8
Balance sheet
Equity capital 160,000,000 Plant and equipment--------
Retained earnings 30,000,000 Inventories ………
Short-term bank borrowings . . . …… Accounts receivable ….. . . .
Cash ....
.... ....
Sales ....….
Cost of goods sold …….

ANS5. A) DEBT/EQUITY = 0.40

EQUITY = 1,60,000,000 + 30,000,000 = 1,90,000,000
DEBT = 0.4*1,90,000,000+ 76,000,000
TOTAL ASSETS = 1,90,000,000 + 76,000,000
= 2,66,000,000

B) TASR = 2.5
SALES = 25*2,66,000,000 = 6,65,000,000

C) GROSS PROFIT MARGIN = 25%

COST OF GOODS SOLD = 0.75 * 6,65,000,000
FINANCIAL RATIO ANALYSIS = 4,98,750,000 4

D) ACC. RECIEVABLE = SALES*25/360

= 6,65,000,000*25/360
= 46,180,556

F) ITR = COG/INVENTORIES
8 = 4,98,750,000/INVT
INVT = 62,343,750

G) ATR = CASH + ACC. RECIEVABLE/ CL

0.9 = CASH + 46,180,556/ 76,000,000
CASH = 22,219,444
PLANT & EQUIPMENT = TOTAL ASSET – INVT – ACC. RECV –
CASH
= 1,35,256,250

6. Complete the balance sheet and sales data (fill in the blanks) using the following
financial data:

Debt/equity ratio = 1.5

Acid-test ratio = 0.3
Total assets turnover ratio = 1.9
Days' sales outstanding in
 Accounts receivable = 25 days
Gross profit margin = 28 percent
Inventory turnover ratio = 7

Balance sheet

Equity capital 600,000 Plant and equipment ....

Retained earnings 100,000 Inventories ....
Short-term bank borrowings . . . Accounts receivable ....
Cash ....
.... ....
Sales . . . …..
Cost of goods sold ………

ANS6. A) DEBT/EQUITY = 1.5

EQUITY = 6,00,000 + 1,00,000 = 7,00,000
DEBT = 1.5 * 7,00,000 = 10,50,000
TOTAL ASSET = 7,00,000 + 10,50,000
= 17,50,000

B) ASSET TOTAL RATIO = 1.9

SALES = 1.9 * 17,50,000 = 33,25,000
GPM = 28%

C) COST OF GOODS SOLD = 0.72 * 33,25,000 = 23,94,000

FINANCIAL RATIO ANALYSIS 5
D) ACC, RECIEVABLES = SALES*25/360
= 33,25,000 * 25 / 360
= 2,30,903

E) ATR = CASH + ACC. RECIEVABLE / CL

0.3 = CASH + 2,30,903 / 10,50,000
CASH = 84,097

G) PLANT & EQUIPMENTS = TA – INVT – ACC. RECV. – CASH

= 10,93,000
 7. The following information is given for Beta Corporation.
Sales 5000
Current ratio 1.4
Inventory turnover 5
ratio
Acid test ratio 1.0
What is the level of current liabilities?

ANS7. CR = CA/CL
1.4(CL) = CA
ATR = CA – INVT / CL
1 = CA – INVT / CL
CL = CA – INVT
INVT = 5000 / 5 = 1000
CL = CA+ 1000
1.4(CA +1000) = CA
1400 = 0.4CA
3500 = CA
2500 = CL

8. Safari Inc. has profit before tax of Rs.90 million. If the company's times interest
covered ratio is 4, what is the total interest charge?

ANS8. PBT = 90 MILLION

FINANCIALTIMES
RATIO ANALYSIS
COVERED = PBIT / INT = 4 6
PBIT = 4 * INT
PBT = PBIT – INT
PBIT = 90 MILLION + INT
RS90 + INT = 4(INT)
RS30(MILLION) = INT

9. A has profit before tax of Rs.40 million. If its times interest covered ratio is 6, what is
the total interest charge?

ANS9. PBT = 40RS (MILLION)

TIMES COVERED = PBIT / INT = 6
PBIT = INT * 6
INT = PBT/5 = 40/5 = 8RS (MILLION)
10. The following information is given for Alpha Corporation
Sales 3500
Current ratio 1.5
Acid test ratio 1.2
Current liabilities 1000
What is the inventory turnover ratio?

ANS10. CA = CL * 1.5
= 1000*1.5 = 1500
QA = CL * 1.2 = 1000 * 1.2 = 1200
INVENTRY = 300
 ITR = 3500/300 = 11.7

11. ABC Inc. has profit before tax of Rs.63 million. If the company's times interest
covered ratio is 8, what is the total interest charge?

ANS11. PBT = RS63(MILLION)

TIMES COVERED = PBIT / INT = 8
PBIT = 8 * INT
PBIT – INT = 63 MILLION
INT = 63/7 = 9MILLION

12. The following data applies to a firm:

Interest charges Rs.200,000
Sales Rs.6,000,000
Tax rate 40 percent
Net profit margin 5 percent
What is the firm's times interest covered ratio?

ANS12. SALES = 6,000,000

NET PROFIT MARGIN = 5%
NET PROFIT = 6,000,000 * 5% = 300,000
TAX RATE = 40%
PBT = 300,000 / 0.6= 5,00,000
INT CHARGE = 2,00,000
FINANCIALPBIT
RATIO ANALYSIS
= 700,000 7
TIMES COVERED = 7,00,000/ 2,00,000 = 3.5

13. The following data applies to a firm:

Interest charges Rs.50,000

Sales Rs.300,000
Tax rate 25 percent
Net profit margin 3 percent

What is the firm's times interest covered ratio?

ANS13. SALES = 3,00,000

NET PROFIT MARGIN = 3%
NET PROFIT = 3,00,000 * 0.03
= 9000
TAX RATE = 25%
PBT = 9000 / 0.75 = 12000
INT CHRGE = 50,000
PBIT = 62,000
ITC = 62,000 / 50,000 = 1.24

14. The following data applies to a firm:

Interest charges Rs.10,000,000

 Sales Rs.80,000,000
Tax rate 50 percent
Net profit margin 10 percent

What is the firm's times interest covered ratio?

ANS14. SALES = 80,000,000

NPM = 10%
NP = 80,000,000 * 0.1 = 8,000,000
TAX RATE = 50%
PBT = 8,000,000 / 0.5 = 16,000,000
INT CHRGE = 10,000,000
PBIT = 26,000,000
ITC = 26,000,000 / 10,000,000

15. A firm's current assets and current liabilities are 25,000 and 18,000 respectively. How
much additional funds can it borrow from banks for short term, without reducing the
current ratio below 1.35?

ANS15. CA = 25,000 CL = 18,000

CR = CA + BB / CL + BB BB = BANK BORROW
1.35 = 25,000 + BB / 18000+BB
24,300 + 1.35BB = 25000 + BB
0.35BB = 700
BB = 2000
FINANCIAL RATIO ANALYSIS 8
16. LNG’s current assets and current liabilities are 200,000 and 140,000 respectively.
How much additional funds can it borrow from banks for short term, without reducing
the current ratio below 1.33?

ANS16. CA = 2,00,000 CL = 1,40,000

CR = CA + BB / CL + BB
1.4 = 2,00,000 + BB / 1,40,000 + BB
1,86,200 + 1.4BB = 2,00,000 + BB
0.4BB = 13,800
BB = 41,818

17. Navneet’s current assets and current liabilities are 10,000,000 and 7,000,000
respectively. How much additional funds can it borrow from banks for short term,
without reducing the current ratio below 1.4?

ANS17. CA = 10,000,000 CL = 7,000,000

CR = CA = BB / CL + BB
1.4 = 10,000,000 + BB / 7,000,000 +BB
4,800,000 + 1.4BB = 10,000,000 + BB
0.4BB = 2,00,000
BB = 5,00,000

18.Compute the financial ratios for Acme Ltd. Evaluate Acme's performance with
reference to the standards.
 Acme Limited Balance Sheet, March 31, 20X7

Liabilities and Equity

Equity capital Rs.60,000,000

Reserves and surplus 45,000,000
Long-term debt 72,000,000
Short-term bank borrowing 40,000,000
Trade creditors 30,000,000
Provisions 15,000,000
Total 62,000,000
Assets

Fixed assets (net) Rs.110,000,000

Current assets
Cash and bank 30,000,000
Receivables 45,000,000
Inventories 61,000,000
Pre-paid expenses 10,000,000
Others 6,000,000
Total 262,000,000

Acme Limited Profit and Loss Account for the Year Ended March 31, 20X7

FINANCIAL
Net salesRATIO ANALYSIS Rs.320,000,000 9
Cost of goods sold 204,000,000
Gross profit 116,000,000
Operating expenses 50,000,000
Operating profit 66,000,000
Non-operating surplus 4,000,000
Profit before interest and tax 70,000,000
Interest 12,000,000
Profit before tax 58,000,000
Tax 20,000,000
Profit after tax 38,000,000
Dividends 4,000,000
Retained earnings 34,000,000

Acme Standard

Current ratio 1.3

Acid-test ratio 0.70
Debt-equity ratio 2.0
Times interest covered ratio 4.5
Inventory turnover ratio 5.0
Average collection period 45 days
Total assets turnover ratio 1.5
Net profit margin ratio 8%
Earning power 20 %
 Return on equity 18 %

ANS18. A) CR = CA/CL
= 1,52,000,000 / 85,000,000 = 1.8

B) ATR = CA – INVT / CL
= 91,000,000 / 85,000,000 = 1.1

C) DEBT/EQUITY RATIO = 72,000,000 + 40,000,000 / 60,000,000

+45,000,000
= 1.1

D) TIMES INT COV. RATIO = PBIT / INT

= 70,000,000 /12,000,000
= 5.83

E) INVT TURN RATIO = CGS / INVT

= 204,000,000 / 61,0000,000
= 3.34

F) AVG COLLECT PERIOD = 365/NET SALES/ACC. RECV

= 365 *45,000,000 / 3,20,000,000
= 51.3 DAYS

FINANCIALG)
RATIO ANALYSIS
TOTAL ASSET = EQUITY + TOTAL DEBT 10
= 2,17,000,000
TATR = NET SALES / TOTAL ASSET = 320,000,000 / 217,000,000
= 1.5

H) NET PROFIT MARGIN = PBT / NET SALES

= 38,000,000 / 320,000,000
= 11.9%

I) EARNING POWER = PBIT / TOTAL ASSET

= 70,000,000 / 217,000,000
= 32.3%

J) ROE = EQUITY EARNING / NET WORTH

= 38,000,000 / 105,000,000
= 36.2%

19. The comparative balance sheets and comparative Profit and Loss accounts for Somani
Limited, a machine tool manufacturer, are given below:

Comparative Balance Sheets, Somani Limited (Rs. in million)

20X7
20X 20X 20X6
4 5
 20X3
Share capital 41 50 50 50 55
Reserves and surplus 16 36 72 118 150
Long-term debt 28 25 30 29 22
Short-term bank borrowing 35 30 36 38 38
Current liabilities 24 28 30 30 25
Total 144 169 218 265 290
Assets
Net fixed assets 72 80 75 102 103
Current assets
Cash and bank 8 9 15 12 11
Receivables 24 30 59 62 85
Inventories 35 42 55 75 79
Other Assets 5 8 14 14 12
Total 144 169 218 265 290

FINANCIAL RATIO ANALYSIS 11

 Comparative Profit & Loss Account of Somani Ltd
(Rs. in million)
20X 20X
20X3 4 5 20X6 20X7
Net sales 285 320 360 350 355
Cost of goods sold 164 150 170 175 174
Gross profit 121 170 190 175 181
Operating expenses 64 66 68 68 64
Operating profit 57 104 122 107 117
Non-operating surplus deficit 3 4 4 3 3
Profit before interest and tax 60 108 126 110 120
Interest 8 6 10 12 12
Profit before tax 52 102 116 98 108
Tax 15 26 30 26 29
Profit after tax 37 76 86 72 79

Compute the following ratios for years 20X3-20X7:

• Current ratio
• Debt-equity ratio
• Total assets turnover ratio
• Net profit margin
• Earning power
• Return on equity

FINANCIAL
ANS19.RATIO ANALYSIS 12

03 04 05 06 07
Current ratio 1.2 1.5 2.2 2.4 3.0
Debt equity 1.1 0.6 0.5 0.4 0.3
Total asset 2.4 2.3 1.9 1.5 1.3
ratio
Net profit 13 23.8 23.9 20.6 22.3
margin
Earning 50 76.6 67 46.8 45.3
power
Return on 64.4 88.4 70.5 42.9 38.5
equity

WORKING NOTES

A) CURRENT RATIO = CA/CL

03 = 72/59 = 1.2
04 = 89/58 = 1.5
05 = 143/66= 2.2
06 = 163/68= 2.4
07 = 187/63= 3
 B) DEBT-EQUITY = DEBT/EQUITY
03 = 28+35/41+16 = 1.1
04 = 25+30/50+36 = 0.6
05 = 30+36/50+72 = 0.5
06 = 29+38/50+118 = 0.4
07 = 22+38/150+55 = 0.3

C) TOTAL ASSET TURNOVER RATIO = NET SALES /

TOTAL ASSET
03 = 285/120 = 2.4
04 = 320/141 = 2.3
05 = 360/188 = 1.9
06 = 350/235 = 1.5
07 = 355/265 = 1.3

D) NET PROFIT MARGIN= PAT/NET SALES

03 = 37*100/285 = 13
04 = 76*100/320 = 23.8
05 = 86*100/360 = 23.9
06 = 72*100/350 = 20.6
07 = 79*100/355 = 22.3
FINANCIAL RATIO ANALYSIS 13
E) EARNING POWER = PBIT/TOTAL ASSET
03 = 60*100/120 = 50
04 = 108*100/141 = 76.6
05 = 126*100/188 = 67
06 = 110*100/235 = 46.8
07 = 120*100/265 = 45.3

F) ROE = EQUITY / NET WORTH

03 = 37/57 * 100 = 64.9
04 = 76/86 * 100 = 88.4
05 = 86/122 * 100 = 70.5
06 = 72/168 * 100 = 42.9
07 = 79/205 * 100 = 38.5