RATIOS

1 Gross Profit Margin Ratio:

= Total revenue – COGS x 100

Total revenue

The Gross Profit margin is calculated by deducting cost of goods sold from total revenue earned
divided by total revenue earned and then multiplying it by 100.

Gross Profit Ratio (Year 2021) = (23,716,503-19,912,094)/ 23,716,503*100

= 16.04%
Gross Profit Ratio (Year 2020) = (25,394,852-21,344,224)/ 25,394,852*100
= 15.95%
The Gross Profit margin indicates a marginal growth of only 0.09%. Even though there is a narrow
Gross Profit margin improvement, it didn’t come from the increased sales, it was mainly because of
lower cost of goods sold during the year ended 2021. In the year ended June 2020, cost of goods
sold was 84.05% of the total sales and in the year ended June 2021 cost of goods sold was 83.96% of
the total revenue earned.
Even though the Gross Profit margin was improved very narrowly, the Gross Profit was down 6.07%
Year on Year for the year ended June 2021.

2 Net Profit Margin Ratio:

= Net profit x 100

Total Revenue

The net profit margin, or simply net margin, measures how much net income or profit is generated
as a percentage of revenue. It is the ratio of net profits to revenues for a company or business
segment. The net profit margin illustrates how much of each dollar in revenue collected by a
company translates into profit.

Net Profit Margin (Year 2020) = 5, 54,397/25394852*100

= 2.18%
Net Profit Margin (Year 2021) = 87,592/23716503*100
=0.36%
The Net profit margin has been declined drastically Year on Year. This was mainly due to the extra
dividends paid during the year ended June 2021. On the year ended June 2020, the Dividends paid
were 113,075 and during the year ended June 2021 it has been increased by more than 9%. During
the year ended June 2021 the dividend pay-out ratio was 92.10%, which is not at all normal. This was
the main reason why the net profit ratio was lower than expected.

3 Operating Margin Ratio:

= EBIT
Total Revenue

The operating margin measures how much profit a company makes on a dollar of sales after paying
for variable costs of production, such as wages and raw materials, but before paying interest or tax.
Higher ratios are generally better; illustrating the company is efficient in its operations and is good at
turning sales into profits. 
Operating Margin Ratio (Year 2020) = 1012435/ 25394852
= 0.39
Operating Margin Ratio (Year 2021) = 1163840/23716503
= 0.49
Here Operating margin has been increased 10% Year on Year. This improvement of operating margin
shows better management controls, more efficient use of resources, improved pricing, and more
effective marketing. So, in effect, this shows that this company is earning 50% of their income from
their core operations and the other 50% by other means. This 10% operating margin improvement
Year on Year is shown in the year when the total sales revenue was declined 6%. That gives the
company a very positive impact among the investors and lenders especially.

4 Return on Assets:

= Net Profit
Total Asset

ROA is calculated simply by dividing a firm's net profit by total assets. It is then expressed as a
percentage. Return on assets (ROA) is an indicator of how profitable a company is relative to its total
assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's
management is at using its assets to generate earnings. ROA is best used when comparing similar
companies or by comparing a company to its own previous performance. ROA does not take into
account a company’s debt, while return on equity (ROE) does—if a company carries no debt, its
shareholders' equity and its total assets will be the same and ROA would equal ROE.

Return on Assets (Year 2020) = 554397/7087845 = 7.82%

Return on Assets (Year 2021) = 87592/6450092 = 1.35%

Usually, a lower ROA indicates less asset efficiency. Here there has been drastic decline of ROA,
almost 6% less than last year. Even though total assets have been reduced by 9% this drastic drop of
value is because of the high dividends paid in the year. During the year ended June 2021 the
dividend pay-out ratio was 92.10%, which is not at all normal. This was the main reason why the ROA
was lower than expected.

5 Returns on Capital Employed:

= EBIT
Capital Employed

Return on capital employed (ROCE) is a financial ratio that measures a company’s profitability in
terms of all of its capital. ROCE can be especially useful when comparing the performance of
companies in capital-intensive sectors. This is because unlike other fundamentals such as  return on
equity (ROE), which only analyses profitability related to a company’s shareholders’ equity, ROCE
considers debt and equity. This can help neutralize financial performance analysis for companies
with significant debt, the calculation of ROCE tells you the amount of profit a company is generating
per $1 of capital employed. Obviously, the more profit per $1 a company can generate the better.
Thus, a higher ROCE indicates stronger profitability.
Return on Capital Employed (Year 2020) = 1012435/934072
= 1.08
Return on Capital Employed (Year 2021) = 1163840/ 1021664
= 1.14
Here ROCE for year ended June 2020 is 1.08 and 1.14 for year ended June 2021, this means that this
organisation is consistently getting better at generating profits more efficiently. In the last year they
were able to convert only $1.08 from every dollar earned, this year they are able to make $1.14
cents of profit from every dollar they earn. There has been an increase of 5.3 % of ROCE year on
year.

6 Accounts Receivable Turnover Ratio:

= Net Sales
Average accounts Receivable

A high receivables turnover ratio may indicate that a company’s collection of accounts receivable is
efficient and that the company has a high proportion of quality customers that pay their debts
quickly. A low receivables turnover ratio could be the result of inefficient collection, inadequate
credit policies, or customers who are not financially viable or creditworthy. The accounts receivable
turnover ratio is an accounting measure used to quantify a company's effectiveness in collecting its
receivables or money owed by clients. The receivables turnover ratio measures the efficiency with
which a company collects on its receivables or the credit it extends to customers. The ratio also
measures how many times a company's receivables are converted to cash in a period.

Accounts Receivable Turnover Ratio (Year 2021) = 23716503/3581473.5

= 6.62

7 Interest Coverage Ratio:

= EBIT
Interest Expense

The interest coverage ratio is a debt and profitability ratio used to determine how easily a company
can pay interest on its outstanding debt. The interest coverage ratio is calculated by dividing a
company's earnings before interest and taxes (EBIT) by its interest expense during a given period.
The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes
(EBIT) by its interest expense during a given period. Generally, a higher coverage ratio is better,
although the ideal ratio may vary by industry.

Interest Coverage Ratio (Year 2020) = 1012435/1, 20,571

= 8.40
Interest Coverage Ratio (Year 2021) = 1163840 /76,385
= 15.24
The interest coverage ratio as almost doubled Year on Year. This means that company is more than
sufficient to cover the interest payments with its current earnings.  Interest coverage ratio is a
company’s ability to meet its interest obligations is an aspect of its solvency and is thus an important
factor.

8 Debt Service Coverage Ratio:

= EAT + Depreciation + Interest

Interest Expense

Debt-service coverage ratio (DSCR) is a measurement of a firm's available cash flow to pay current
debt obligations. The DSCR shows investors whether a company has enough income to pay its debts.
The minimum DSCR that a lender demands depends on macroeconomic conditions Lenders will
routinely assess a borrower's DSCR before making a loan. A DSCR of less than 1 means negative cash
flow, which means that the borrower will be unable to cover or pay current debt obligations without
drawing on outside sources—in essence, borrowing more. If the economy is growing, lenders may be
more forgiving of lower ratios.

Debt Coverage Ratio (Year 2020) = (922824+ 62739 +120571) / 120571

= 9.17
Debt Coverage Ratio (Year 2021) = 1109915+0+76385/76385
= 15.53

DSCR showing a growth of more than 6 and standing at a high of 15.53, gives us a clear view that
their cash flow was strong and stable. This gives the company the ability to pay their debts using
internal funds and without sourcing from outside.

9 Debt to Equity Ratio:

= Total Debt
Total Equity

The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by
dividing a company’s total liabilities by its shareholder equity. The D/E ratio is an important metric
used in corporate finance. It is a measure of the degree to which a company is financing its
operations through debt versus wholly owned funds. More specifically, it reflects the ability of
shareholder equity to cover all outstanding debts in the event of a business downturn. 

Debt Equity Ratio (Year 2020) = 61, 53,773/ 9, 34,072

= 6.59
Debt Equity Ratio (Year 2021) = 54, 28,428/ 10, 21,664
= 5.31
Usually, a higher Debt Equity ratio means, there is high risk for the shareholders. Here the debt
equity ratio has been declined 19.42% Year on Year that is a very healthy sign for investors and
creditors. There has been only a 6.07% decline in trading income Year on Year, still they managed to
bring down Debt to Equity by 19.42%, which is highly appreciable and proves the strong
management that runs the organisation.
10 Total Debts to Total Asset Ratio:

= Debt
Total Asset

Total-debt-to-total-assets are a leverage ratio that defines the total amount of debt relative
to assets owned by a company. Using this metric, analysts can compare one company's leverage
with that of other companies in the same industry. This information can reflect how financially
stable a company is. The higher the ratio, the higher the degree of leverage and, consequently, the
higher the risk of investing in that company.

Debts to Total Assets Ratio (Year 2020) = 46, 69,436/ 70, 87,845
= 0.66
Debts to Total Assets Ratio (Year 2021) = 46, 15,551/ 64, 50,092
= 0.72
From this Debt to Asset ratio, we can understand that in the year ended June 2020, 66% of the total
assets of the company were financed by creditors and in the succeeding year it is standing at 72%.
This ratio shows that total Debts to Assets ratio is 6% higher Year on Year for the year ended June
2021 but when we analyse the Balance Sheet, we can see that, there has been no material debt
taken by the company, still there is an increase in the Total Debt to Asset Ratio of 6%. This is because
there has been a decline of 8.9% total assets owned by the organization. This is what resulted in the
increment of Total Debt to Asset Ratio.

11. Quick Ratio:

= Current Asset – Inventory

Current Liability

The quick ratio is a pointer of a company’s immediate liquidity ability and measures a company’s
capacity to meet its short-term obligations with its most liquid assets.

:2020 = (5113848-575000) / 6153773 = 0.74

:2021 = (4615627-625000) / 5428428 = 0.73

A high quick ratio is an indication that a company is utilizing its short-term assets effectively to meet
its financial needs. As visible from the calculation there has only been a slight decline in the quick
ratio of the company. The quick ratio of 0.73 is not a satisfactory level considering the fact that it has
declined over the year.

12. Current Ratio:

= Current Asset
Current Liability
The current ratio gives an insight on the company’s ability to pay short-term obligations or those due
within one year.
:2020: = 5113848 / 6153773 = 0.83
:2021: = 4615627 / 528428 = 0.85

The current ratio helps investors understand more about a company’s ability to cover its short-term
debt with its current assets. Here, the current ratio has been improving Year on Year. There has been
an improvement of almost 2% compared to previous year. Even though the current ratio is not
anywhere near to 2, which the ideal current ratio is, but given the performance we can expect that
in a couple of years.

13. Inventory Turnover Ratio:

= COGS
Average Inventory

Inventory turnover is a financial ratio depicting how many times a company has traded and replaced
inventory during a given period. A company can then divide the days in the period by the inventory
turnover formula to calculate the days it takes to sell the inventory on hand. Calculating inventory
turnover can help businesses make better decisions on pricing, manufacturing, marketing, and
purchasing new inventory.

;2020; 21344224 / 525000 = 40.65

; 2021: 19912094 / 600000 = 33.19

The company shows a decline in inventory turnover ration which is infect God for the company.
Earlier in the fiscal year 2020, they use to require 40 days in order to cash their inventory. But in the
year 2021, there has been a decline of 7.5 % which means now they are able to cash their
inventories in a time frame of 33 days. This trend will help the company to regulate and control their
inventories efficiently and thereby enhancing their profit and cashflow effectively

14. Fixed Asset Turnover Ratio:

= Net Sales
Average Fixed Asset

Fixed Asset Trove Rati is used to analyse operating performance. Tis gives a comparison of net sales
and fixed assets and gives an overview on the company’s ability to produce mor sales from its
investment on fixed assets.

2021: 23716503 / 1904232 = 12.45

This calculation clearly depicts that the company withholds a turnover ratio of 12.45. Even though,
no particular standards are given for the respective industries, 12.45 can be considered as a good
inventory turnover ratio respective of the industry the company is working on. This establishes the
company’s efficiency in managing their fixed assets properly in order to generate more revenue
through net sales.

15. Tota Asset Turnover Ratio:

= Net Sales
Average Total Asset

This ratio is a tool used to analyse the value of company’s revenue it is generating with respect to its
total assets. This ratio can be used as an indicator of a company’s efficiency in utilising its assets to
generate more revenue

: 2021: 23716503 / 6768968.5 = 3.50

The asset turnover ratio of the company stays at a value of 3.50. Even though, no set standards for
Asset turnover ratio, we can easily say that 3.50 is a good ratio irrespective of the companies
operating sector. The ability of his company to generate almost 4 times revenue per dollar of its
assets implies that the company is performing well in its respective sector.

2.The overall business performance of the organisation was more than satisfying. While looking back
on the business environment in the consolidated fiscal year under review, there is a narrow Gross
Profit margin improvement which occurred mainly because of lesser cost of goods sold during the
year. Gross Profit margin showed a slight growth. The only value which shows a decline is the Net
profit margin which has been weakened drastically to a value almost equal to 1/4 th of the previous
Year. This decline can be easily traced back to the extra dividends paid this year. This year the
dividend pay-out ratio was 92.10%, compared to last year’s 9%, which is not at all normal. This was
the main reason why the net profit ratio was lower than expected.
Better management controls, more efficient use of resources and more effective marketing has led
to Operating margin Ratio to be increased by 10% Year on Year. So, this shows that this company is
gaining 50% of their income from their core operations and the other 50% by other means. This 10%
operating margin improvement Year on Year gives the company a very positive impact among the
investors and lenders especially. The lower ROA compared to the previous year is not a satisfiable
position to be in. But the fact that the company possess a dividend pay-out ratio of 92.1 percent that
backs up this drastic decline. The visible increase on ROCE illustrates that this company is getting
better at making profits more efficiently. In the last year they converted 1.08 dollar from every dollar
they spend, this year they are able to make 1.14 dollars of profit from every dollar they have spent.
When analysing the liquidity ratios, both of them have not hi the standard rate. The quick ratio
shows a slight decline and current ratio shows a slight improvement. As this have not reached the
industry standards, we can assume that paying to current obligations without compromising their
future investments will be possible in the near future. The fact that company excelled in all the three
turnover ratios (Inventory turnover ratio, Fixed Asset Turnover Ratio, Tota Asset turnover ratio) gives
us a clear view on the efficiency of the company to effectively manage and regulate their inventories
and assets in order to generate more revenue.
The interest coverage ratio almost doubled this year, which indicates that company is more than
sufficient to cover the interest payments with its current earnings. Debt Service Coverage Has hit a
high of 15.53 which indicates its lesser needs for borrowing from outside. If the economy is growing,
lenders may be more forgiving of lower ratios. Here the debt equity ratio has been declined this
year, that is a very healthy sign for investors and creditors. There has been only a 6.07% decline in
trading income this year, still they managed to bring down Debt to Equity by 19.42%, which is highly
appreciable and proves the strong management that runs the company.

3. In my evaluation, yes, the company is eligible to avail a credit of $5 million. The analysis can be
supported on the basis of the following interpretation:

a. Interest coverage Ratio – ICR is on of the major factor that needs to be considered as a
higher ICR shows the capacity of the firm to earn and the ability to repay debts. While the
market average ICR stood at a value of 5-6, this company hit 15.53 in 2021, which shows a
growth of almost double than the previous year.
b. Debt Service Coverage Ratio – Th growth of DSCR from 9.17 (in 2020) to 15.53 (in 2021)
shows the ability of the firm to repay the credit without any lapse. This is a positive factor
considering the company as the average DSCR suggested by market analysts stands at a
value of 5-6. This ensures the reliability of the firm and its capacity to repay the credit.
c. Debt To E quit Ratio - The DER of 2021 is 5.31 and showed a decline of more than on point
from the previous year. This portrait the fact that the company was able to run its business
mainly through its equity funds and was able to control their debts
d. Current ratio and quick ratio are slightly less than satisfiable. But as it is a long-term credit,
the company can easily manage to pay off the credit without any lapse.

From the above factors, we can reach to a conclusion that, the company is ore than reliable and $5
million can be provided to them as credit, without the fear repayment lapse.