FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is a method of determining the past, current and projected
performance of a company. Several techniques are commonly used as a part of financial
statement analysis to calculate statistical relationships between data present in the financial
statements. It is the process of reviewing and evaluating the financial statement and gaining an
understanding of the financial health of the company so as to enable an effective decision
making and become more useful to investors, shareholders, managers and other interested
parties.
Analysis and Interpretation:
The Company has to analyze and interpret the financial statements and the Analysis is
made to evaluate the profitability, liquidity and solvency of the business firm. The analyzed data
will be interpreted basing on the proficiency and skills of the interpreter. Conclusions are drawn
about the financial health of the organization. The Analysis is of no use without interpretation.
Though the two terms are synonymously used but there is a slight distinction between these two
terms.
DEFINITIONS:
“Financial statement analysis is largely a study of relationship among the various financial
factors in a business as disclosed by a single set of statements and a study of trend of these
factors as shown in a series of statements”

“By establishing strategic relationship between the components of balance sheet and profit and
loss accounts and other operative data, it unveils the meaning and significance of the various
items embodied in the financial statements.”

Thus Financial statement analysis can be defined as the process of identifying financial strengths
and weaknesses of the firm by properly establishing relationship between the items of the
balance sheet and the profit and loss account in a systematic and simple manner.

It is the process of understanding the risk and profitability of a firm through analysis of reported
financial information, by using different accounting tools and techniques.

OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS:

The following are the main objectives of financial statement analysis:
1. It measures the present and the past performance of the business concern.
2. It examines the earning capacity and the efficiency of the firm.
3. It determines the profitability and growth prospects of the firm.
4. It analyses the short term and long term solvency position of the firm.
5. It enables to make a inter firm and intra firm comparison to asses the operational efficiency of
similar type of firms.
6. To appraise the future potential of the business concern.
TYPES OF FINANCIAL STATEMENT ANALYSIS:

Financial statement
analysis

Material used: Object: Modus operandi:

- External -Long term -Horizontal

-Internal -Short term -Vertical

ANALYSIS ON THE BASIS OF MATERIAL USED:

Internal Analysis: An analysis based on the factual data recorded in the books of accounts done
by the management is known as internal analysis. It provides reliable and dependable
information of the enterprise to the users.
External Analysis: An analysis which is done by the external parties, like creditors, investors,
bankers, government and research scholars, based on the published reports and statements of the
enterprise.
ANALYSIS ON THE BASIS OF OBJECT:
Long term analysis: This analysis is made in order to study the long term financial stability,
solvency and liquidity as well as profitability and earning capacity of a business concern.
Short term analysis: This is made to determine the short term solvency, stability and liquidity
as well as the earning capacity of the business concern.
ANALYSIS ON THE BASIS OF MODUS OPERANDI:
Horizontal analysis: Comparison of two or more year's financial data is known as horizontal
analysis, or trend analysis or dynamic analysis or comparative analysis. Horizontal analysis is
facilitated by showing changes between years in both rupee and percentage form.
Vertical Analysis: It is the procedure of preparing and presenting common size statements.
Common size statement is one that shows the items appearing on it in percentage form as well as
in rupee form. Each item is stated as a percentage of some total of which that item is a part. Key
financial changes and trends can be highlighted by the use of common size statements. It is also
known as static analysis or structural analysis or common size analysis.
TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS:
The following are the tools and techniques of financial statement analysis
1. Comparative analysis or comparative statements
2. Common size statements or common size analysis
3. Trend analysis
4. Ratio analysis
5. Funds flow analysis
6. Cash flow analysis
7. Cost volume profit analysis
8. Variance analysis
1. Comparative analysis or comparative statements: The comparative financial statements are
statements of the financial position at different period of time. The elements of financial position
are shown in a comparative form so as to give an idea of financial position at two or more
periods. It is also known as horizontal analysis.
It is not only the comparison of the figures of two periods but also the relationship between
balance sheet and income statements. It enables an in-depth study of financial position and
operative results of the firm. While preparing the comparative statements two important
statements are prepared. They are
1. Comparative income statement or profit and loss account
2. Comparative balance sheet
Comparative income statement: It shows the absolute figures for two or more years and
absolute changes from one period to another period in terms of figures and percentages. It shows
the operational performance of the firm in different periods and draw conclusions for the same
Proforma of comparative income statement
Particulars Base Current Increase/ Increase/
Year Year
Decrease (in Decrease (in
Rs.) %)
Sales(cash & Credit) XXX XXX XXX
Less: sales returns XXX XXX XXX
Net sales XXX XXX XXX
Less: Cost of goods sold XXX XXX XXX
Gross profit XXX XXX XXX
Less: Operating Expenses
Administration Expenses XXX XXX XXX
Finance Expenses XXX XXX XXX
Selling & Distribution expenses XXX XXX XXX
Add: Operating Income :
Commission received XXX XXX XXX
Rent received XXX XXX XXX
Discount received XXX XXX XXX
Operating profit XXX XXX XXX
Add :Non Operating Income
Profit on sale of assets and shares XXX XXX XXX
Dividend received XXX XXX XXX
Total profit XXX XXX XXX
Less: Non Operating Expenses:
Loss on sale of assets and shares XXX XXX XXX
Stock destroyed by fire XXX XXX XXX
Profit before interest and tax XXX XXX XXX
Less: interest XXX XXX XXX
Profit before taxes XXX XXX XXX
Less income tax XXX XXX XXX
Profit after taxes or net profit XXX XXX XXX

Note: Cost of goods sold = Opening stock + Purchases – Purchase returns + Wages + Direct
expenses + Manufacturing expenses – Closing stock.

Comparative balance sheet: For comparing the assets, liabilities and the net worth of the firm,
balance sheets of two or more different dates or uniform firms with same dates are used and
inferences can be drawn from the analysis.
 Proforma of comparative Balance Sheet:
Particulars Base Year Current Increase/ Increase/
Year Decrease Decrease
(in Rs.) (in % )
Shareholder’s Funds:
Equity Share Capital XXX XXX XXX
Preference Share Capital XXX XXX XXX
Capital & General Reserve XXX XXX XXX
Profit & Loss A/C or Retained Earnings XXX XXX XXX
Share Premium XXX XXX XXX
Sinking Fund XXX XXX XXX

Less: Fictitious Assets:

Preliminary Expenses XXX XXX XXX
Discount on Issue of Shares and Debentures XXX XXX XXX
Miscellaneous Expenditure XXX XXX XXX
Profit & Loss A/C (Dr) XXX XXX XXX

Total (1) XXX XXX XXX

Long term liabilities:
Debentures XXX XXX XXX
Bank Loans or Long Term Loans XXX XXX XXX
Mortgage Loan XXX XXX XXX

Total (2) XXX XXX XXX

Current liabilities:
Sundry Creditors XXX XXX XXX
Bills Payable XXX XXX XXX
Bank Overdraft XXX XXX XXX
Outstanding Expenses XXX XXX XXX
Provision for Tax XXX XXX XXX
Income Received in Advance XXX XXX XXX
Proposed Dividend XXX XXX XXX
Dividend Payable XXX XXX XXX
Tax Payable XXX XXX XXX
Short Term Loans XXX XXX XXX

Total (3) XXX XXX XXX

TOTAL LIABILITIES (1+2+3) XXX XXX XXX

Fixed Assets:
Land & Building XXX XXX XXX
Plant & Machinery XXX XXX XXX
Furniture & Fixtures XXX XXX XXX
Premises XXX XXX XXX
Freehold Property XXX XXX XXX
Others XXX XXX XXX
Total (1) XXX XXX XXX
Investments:
Investments XXX XXX XXX
Government Securities XXX XXX XXX
Total (2) XXX XXX XXX
Current Assets:
Sundry Debtors XXX XXX XXX
Bills Receivable XXX XXX XXX
Cash in Hand XXX XXX XXX
Cash at Bank XXX XXX XXX
Closing Stock or Inventory XXX XXX XXX
Pre paid Expenses XXX XXX XXX
Accrued Income XXX XXX XXX
Short Term Investments (Marketable XXX XXX XXX
Securities) XXX XXX XXX
Loans & Advances XXX XXX XXX
Others XXX XXX XXX
Total (3)
TOTAL ASSETS (1+2+3) XXX XXX XXX

2. Common Size Statement: It is a financial statement for studying the key changes and trends
in the financial position and operating results of a company. Through this technique the
individual items of profit and loss account and balance sheet are expressed as percentage in
relation to some common base like sales (in income statement), total assets and total liabilities
(in balance sheet).It is also known as vertical analysis or 100% statement.

In the case of profit and loss account usually net sales are taken as base i.e., 100% and all
other items of profit and loss account are expressed as a percentage of sales. Similarly in the
balance sheet statement the total assets and the total liabilities of the firm is treated as equivalent
to 100% and each of the asset and liability is expressed as a percentage of this total.

Proforma of Common Size Statement:

Particulars Base Year % Current Year %

Note: Items of income statement and balance sheet are same as that of proforma comparative
statement stated above is to be considered.

3. Trend Analysis: This analysis is an important tool of horizontal analysis. This method is
immensely helpful in making a comparative study of the financial statements of several years.
Under this method trend percentages are calculated for each item taking the figures of base year
as 100%. The starting year is usually taken as the base year if there is no specification of the base
year out of the given years and on that base the percentage for each of the item/ variable of each
of the years is calculated. These trend ratios may be compared with industry in order to know the
strong or weak points of a firm. Trend percentages may be used for both balance sheet and profit
and loss account.

Proforma of Trend Statement / Analysis:

Year Sales Cost Profit

Amount Percentage Amount Percentage Amount percentage

Advantages of Trend Analysis:

1. Through this technique a firm can analyze and interpret his income and financial position
over a series of years.
2. By trend analysis we can forecast the potential tasks of the firm.
3. We can know about the progress, performance and efficiency of the firm over a period of time.
Disadvantages of Trend Analysis:
1. Accuracy of the trend percentages depends upon the accuracy of the base year data.
2. There is no precise method or procedure in selecting the base year.
3. Only monetary values as per the records of the organization are considered, non monetary
aspects are ignored.

1. Prepare comparative statement of Keshav Limited from the following data:

Particulars 2020 2021 Particulars 2020 2021

Cost of goods sold 3,00,000 3,50,000 Sales 5,00,000 6,00,000
Administration expenses 40,000 50,000 Discount (cr) 10,000 15,000
Selling expenses 30,000 40,000 Rent received 20,000 30,000
Distribution expenses 20,000 30,000 Profit on sale of land 10,000 15,000
Loss by fire 20,000 10,000
Interest paid 40,000 50,000
Income tax 35,000 40,000

2. Prepare comparative statement of Eswar Limited from the following data:

Particulars 2019 2020

Sales 8,00,000 9,50,000
Cost of goods sold 5,50,000 6,00,000
Return inward 20,000 10,000
Administration expenses 40,000 50,000
Interest paid on debentures 30,000 20,000
Profit on sale of assets 15,000 10,000
Selling expenses 20,000 30,000
Finance expenses 50,000 40,000
Loss by fire 12,000 ------
Commission received 8,000 10,000
Tax @ 40% 40%

3. Prepare Common Size statement of Murali Limited from the following data:

Particulars 2019 2020 Particulars 2019 2020

Cost of goods sold 3,00,000 3,50,000 Sales 5,00,000 6,00,000
Administration expenses 40,000 50,000 Discount (cr) 10,000 15,000
Selling expenses 30,000 40,000 Rent received 20,000 30,000
Distribution expenses 20,000 30,000 Profit on sale of land 10,000 15,000
Loss by fire 20,000 10,000
Interest paid 40,000 50,000
Income tax 35,000 40,000

4. Prepare Common size Statement of Zafar Limited from the following data:
 Particulars 2019 2020
Sales 8,00,000 9,50,000
Cost of goods sold 5,50,000 6,00,000
Return inward 20,000 10,000
Administration expenses 40,000 50,000
Interest paid on debentures 30,000 20,000
Profit on sale of assets 15,000 10,000
Selling expenses 20,000 30,000
Finance expenses 50,000 40,000
Loss by fire 12,000 ------
Commission received 8,000 10,000
Tax @ 40% 40%

5. Prepare comparative and common size statement of Venkat Limited from the following data:

Particulars 2020 2021

Sales 8,60,000 10,20,000
Cost of goods sold 6,50,000 7,00,000
Return inward 10,000 20,000
Office expenses 70,000 80,000
Interest paid on debentures 50,000 60,000
Profit on sale of share 25,000 30,000
Selling expenses 25,000 30,000
Distribution expenses 40,000 50,000
Discount received 10,000 20,000
Tax @ 30% 30%

6. From the following information prepare a comparative statement of Devi Limited.

Liabilities 2020 (Rs) 2021 (Rs) Assets 2020 (Rs) 2021 (Rs)
Capital 3,00,000 3,20,000 Building 1,50,000 1,60,000
Reserve 70,000 85,000 Machinery 1,20,000 1,40,000
Profit & loss A/c 80,000 65,000 Furniture 40,000 30,000
Bank Loan 1,00,000 90,000 Investment 80,000 90,000
Creditors 90,000 1,20,000 Bank 30,000 25,000
Provision for tax 50,000 45,000 Bills Receivable 50,000 35,000
Bills Payable 40,000 35,000 Debtors 1,20,000 1,40,000
Bank overdraft 20,000 40,000 Stock 1,60,000 1,80,000
Total 7,50,000 8,00,000 Total 7,50,000 8,00,000

7. Prepare a comparative statement of Anil Industries limited from the following data.

Liabilities 2020 (Rs) 2021 (Rs) Assets 2020 (Rs) 2021 (Rs)
Capital 1,20,000 1,50,000 Building 1,00,000 1,20,000
Reserve 50,000 60,000 Machinery 70,000 80,000
Profit & loss A/c 80,000 70,000 Furniture 40,000 35,000
8% Debentures 90,000 1,00,000 Investment 40,000 45,000
Creditors 60,000 65,000 Cash 20,000 30,000
Bills Payable 20,000 25,000 Bills Receivable 30,000 10,000
Outstanding expenses 30,000 30,000 Debtors 70,000 80,000
Inventory 80,000 1,00,000
Total 4,50,000 5,00,000 Total 4,50,000 5,00,000

8.From the following information prepare a common size statement of Naveen Limited.

Liabilities 2020 (Rs) 2021 (Rs) Assets 2020 (Rs) 2021 (Rs)
Capital 3,00,000 3,20,000 Building 1,50,000 1,60,000
Reserve 70,000 85,000 Machinery 1,20,000 1,40,000
Profit & loss A/c 80,000 65,000 Furniture 40,000 30,000
Bank Loan 1,00,000 90,000 Investment 80,000 90,000
Creditors 90,000 1,20,000 Bank 30,000 25,000
Provision for tax 50,000 45,000 Bills Receivable 50,000 35,000
Bills Payable 40,000 35,000 Debtors 1,20,000 1,40,000
Bank overdraft 20,000 40,000 Stock 1,60,000 1,80,000
Total 7,50,000 8,00,000 Total 7,50,000 8,00,000

9 .Prepare a trend statement of Goutami limited from the following data.

Year Sales Total cost Profit

2017 2,00,000 1,25,000 75,000
 2018 2,20,000 1,60,000 60,000
2019 2,30,000 1,80,000 50,000
2020 2,80,000 2,00,000 80,000
2021 3,00,000 2,30,000 70,000

10. Prepare a trend analysis statement of Poornima Ltd taking the year 2019 as base.

Year Sales Total cost Profit (before tax)

2017 5,00,000 4,00,000 1,00,000
2018 6,00,000 4,50,000 1,50,000
2019 6,50,000 5,20,000 1,30,000
2020 7,00,000 6,00,000 1,00,000
2021 7,80,000 6,50,000 1,30,000

11. Prepare a trend analysis statement of Ravi Ltd taking the year 2018 as base.

Year Turnover Total cost Profit (before tax)

2017 4,50,000 4,00,000 50,000
2018 5,00,000 4,20,000 80,000
2019 5,60,000 5,00,000 60,000
2020 6,00,000 5,30,000 70,000
2021 6,50,000 6,00,000 50,000

RATIO ANALYSIS
A ratio is a relationship between two or more variables usually expressed
arithmetically as a mathematical quotient like a: b or a/b or as percentage, number of times etc.
Ratio provides basis for inter-firm as well as intra-firm comparison.

Analysis is the process of reviewing and evaluating the financial statement and gaining
an understanding of the financial health of the company so as to enable an effective decision
making and become more useful to investors, shareholders, managers and other interested
parties.
 Ratio analysis is a tool used by individuals to conduct a quantitative analysis of
information in a company's financial statements. It is an important technique in financial
statement analysis. Ratios are calculated from current year numbers and are then compared to
previous years, other companies, the industry, or even the economy to judge the performance of
the company. Through this technique the financial position and performance of the firm can be
judged in terms of profitability, turnover, liquidity and solvency. Through this technique we can
analyze the short run and long run position of the firm with the help of the existing data in the
financial statements and to make future projections. It helps to analyze the past performance of a
firm and provide information to various interested parties like creditors, investors, management,
shareholders, government etc regarding profitability and solvency of the firm. Ratio analysis can
also illuminate company strengths and expose weaknesses through examination of resulting data.

DEFINITIONS:
Accounting Ratio: It is also known as financial ratio. A way of expressing the relationship
between one accounting result and another arithmetically, intended to provide a useful
comparison. Accounting ratios assist in measuring the efficiency and profitability of a company
based on its financial reports. Accounting ratios form the basis of fundamental analysis.

“The term accounting ratio is used to describe significant relationships which exist between
figures shown in a balance sheet, in a profit and loss account, in a budgetary control system or in
any other part of the accounting organization.”

“The relationship of one item to another expressed in simple mathematical form is known as
ratio.”
“Simply one number expressed in terms of another is known as ratio.”
“Ratio analysis of financial statements is a study of relationship among various financial factors
in a business as disclosed by a single set of statement and a study of trend of these factors as
shown in a series of statements.”
Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication
of a firm's financial performance in several key areas.
Investors or lenders, usually use a ratio analysis to interpret the relationship between financial
variables. It's usually used to draw opinions about a company's financial state, operations, and
investment opportunity.

NATURE AND OBJECTIVES OF RATIO ANALYSIS:

The following are the main objectives of ratio analysis
 Analysis the data which was recorded in the financial statement i.e. profit & loss A/C and
balance sheet.
 To make good decisions in a correct time.
 Helpful to provide a meaningful interpretation.
 Select the required variable out of financial statements.
 To know the performance and efficiency of the firm.
 A clear interpretation the calculated ratios.
 Calculated required ratios out of available data.
 Compare present ratios with previous year ratios or with one ratio to other ratio.

PRECAUTIONS FOR THE USE OF RATIOS:

The following precautions are to be considered in the use of ratios
1. Accuracy of financial statements
2. Purposes of analysis
3. Selection of ratios
4. Use of standards
5. Efficiency of the analiser
6. Ratios provide only a base

USES / MERITS / ADVANTAGES OF RATIO ANALYSIS:

Ratio analysis is an important technique of financial statement analysis. It determines the
profitability, efficiency and financial position of the firm.The following are the main uses of ratio
analysis
1. Helps in decision making
2. Helps in financial forecasting & planning
3. Helps in communication
4. Helps in coordination
5. Helps to control cost
6. Useful for comparison
7. Utility to interested parties
8. Judging the operating efficiency
9. Useful in identifying weaknesses

LIMITATIONS / DEMERITS / DISADVANTAGES OF RATIO ANALYSIS:

Despite Of the above advantages ratio analysis suffers with the following limitations.
1. Single ratio
2. Ignores qualitative factors
3. Historical methods
4. Price level changes
5. Window dressing
6. Changes in methods & procedures
7. Un comparable study /Lack of uniformity
8. Only an instrument
CLLASIFICATION OF RATIOS:
The ratios are classified into two categories i.e.
1. Traditional classification ratios
2. Functional / Purpose-wise classification ratios
1. Traditional classification ratios:
It is done on the basis of financial statements (income and balance sheet
statement).The ratios could be classified as under

Traditional Ratio

Profit & loss A/C: Balance sheet: Composite:

Ratios Ratios Ratios

2. Functional / Purpose-wise classification ratios :

Each ratio serves a specific purpose, on the basis of purpose the accounting
ratios can be classified into the following categories.
1. Liquidity / Short-Term Solvency Ratios
2. Activity / Velocity / Turn over ratios
3. Financial / Leverage / Long-Term Solvency Ratios
4. Profitability Ratios

1. Liquidity / Short-Term Solvency Ratios:

This ratio helps in measuring the cash sufficiency that is available with the enterprise, which will
help them to pay off its short-term liabilities. A good and high liquidity ratio facilitates the
company that it is in a good position to pay its creditors, the money on time. 2 or more as the
ratio is considered acceptable. The commonly used liquidity ratios are the –
 Liquidity Ratio

Current Quick/Acid/Liquid Absolute liquidity

Ratio Ratio Ratio

Current Ratio: The current ratio is a liquidity ratio that measures a company’s ability to pay
short-term obligations or those due within one year.
Current Ratio = Current Assets / Current Liability
Liquid Ratio: The quick ratio is an indicator of a company’s short-term liquidity position and
measures a company’s ability to meet its short-term obligations with its most liquid assets.
Liquid Ratio = Liquid Assets / Current Liability
Absolute Liquid Ratio: The absolute liquid ratio is a measurement of a company's liquidity,
specifically the ratio of a company's total cash and cash equivalents to its current liabilities.
Absolute Liquid Ratio = Absolute Liquid Assets / Current Liability

Solvency Ratios: These ratios are also referred to as leverage ratios in that they estimate a firm’s
ability to manage its financial commitments and conduct business in the long term.
Debt-Equity (D/E) ratio: It 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.
Debt - Equity Ratio = Long Term Debt/ Total Equity
Total Debt- to- Equity Ratio: This solvency ratio formula aims to determine the amount of total
debt (which includes both short-term debt and long-term debt) a business has undertaken. The
Ratio helps in identifying how much business is funded by debt compared to Equity
Contribution.

Total Debt to Equity Ratio = Total Debt/ Total Equity

Total Debt to Total Assets Ratio: This Ratio aims to determine the proportion of total assets of
the company (which includes both Current Assets and Non-Current Assets), which are financed
by Debt and helps in assessing the total leverage of the business.
Total Debt to Total Assets Ratio = Total Debt / Total Assets
Proprietary Ratio: This ratio establishes the relationship between Shareholders’ funds and total
assets of the business. It indicates the extent to which shareholder’s funds have been invested in
the assets of the business.
Proprietary Ratio = Shareholders’ fund / Total Assets
Financial Leverage: The Financial Leverage ratio captures the impact of all obligation, both
interest-bearing and non-interest bearing. This Ratio aims to determine how much of the business
assets belong to the Shareholders of the company rather than the Debt holders /Creditors.
Financial Leverage = Total Assets / Shareholders’ fund

Capital Gearing Ratio: The capital gearing ratio is the ratio of all capital with a fixed return
(i.e., preference share capital plus long-term liabilities) to all capital with a variable return (i.e.,
ordinary share capital).
Capital gearing ratio = Preference share capital + Debt / Equity

Efficiency Ratios: A turnover ratio represents the amount of assets or liabilities that a company
replaces in relation to its sales. The concept is useful for determining the efficiency with which a
business utilizes its assets. In most cases, a high asset turnover ratio is considered good, since it
implies that receivables are collected quickly, fixed assets are heavily utilized.
Inventory Turnover Ratio: The inventory turnover ratio measures the amount of inventory that
must be maintained to support a given amount of sales. It can be impacted by the type of
production process flow system used, the presence of obsolete inventory, management's policy
for filling orders, inventory record accuracy.
Inventory Turnover Ratio = Cost of goods sold / Average Inventory

Accounts Receivable Turnover Ratio: The accounts receivable turnover ratio measures the
time it takes to collect an average amount of accounts receivable. It can be impacted by the
corporate credit policy, payment terms, the accuracy of billings, the activity level of the
collections.
Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable
Average Collection Period = No. of days or month in a year / Trade Receivable Turnover
Ratio

Accounts Payable Turnover Ratio: The accounts payable turnover ratio measures the time
period over which a company is allowed to hold trade payables before being obligated to pay
suppliers.
Accounts Payable Turnover Ratio = Total credit purchases / Average Accounts Payable
Average Payment Period = No. of days or month in a year / Trade Payables Turnover
Ratio

Fixed Asset Turnover Ratio: The fixed asset turnover ratio measures the fixed asset investment
needed to maintain a given amount of sales. It can be impacted by the use of throughput analysis,
manufacturing outsourcing, capacity management, and other factors.
Fixed asset turnover ratio = Cost of goods sold (or) Sales / Fixed assets
Working Capital Turnover Ratio: Working capital turnover is a ratio that measures how
efficiently a company is using its working capital to support sales and growth. Also known as net
sales to working capital, working capital turnover measures the relationship between the funds
used to finance a company's operations and the revenues a company generates to continue
operations and turn a profit.
Working Capital Turnover Ratio = Cost of goods sold (or) Sales / Working capital

Profitability Ratios: Profitability ratios are a type of accounting ratio that helps in determining
the financial performance of business at the end of an accounting period. Profitability ratios
show how well a company is able to make profits from its operations.

Gross Profit Ratio: Gross Profit Ratio is a profitability ratio that measures the relationship
between the gross profit and net sales revenue. When it is expressed as a percentage, it is also
known as the Gross Profit Margin.
Gross Profit Ratio = Gross Profit / Net sales X 100

Operating Ratio / Operating Cost Ratio: Operating ratio is calculated to determine the cost of
operation in relation to the revenue earned from the operations.
Operating Ratio = Operating cost / Net sales X 100

Operating Profit Ratio: Operating profit ratio is a type of profitability ratio that is used for
determining the operating profit and net revenue generated from the operations. It is expressed as
a percentage.
Operating Profit Ratio = Operating Profit / Net sales X 100

Expenses Ratio: It is computed to show the relationship between an individual expense or group
of expenses and sales. It is computed by dividing a particular expense or group of expenses by
net sales.
Expenses Ratio = Particular expenses / Net sales X 100

Net Profit Ratio: Net profit ratio is an important profitability ratio that shows the relationship
between net sales and net profit after tax. When expressed as percentage, it is known as net profit
margin.
Net Profit Ratio = Net Profit / Net sales X 100

Return on Capital Employed (ROCE) or Return on Investment (ROI): Return on capital

employed (ROCE) or Return on Investment is a profitability ratio that measures how well a
company is able to generate profits from its capital. It is an important ratio that is mostly used by
investors while screening for companies to invest.
ROCE or ROI = EBIT / Capital Employed X 100
Return on Net Worth: This is also known as Return on Shareholders’ funds and is used for
determining whether the investment done by the shareholders are able to generate profitable
returns or not.
Return on Net Worth = Net profit / Shareholders’ Funds X 100
Earnings Per Share (EPS): Earnings per share or EPS is a profitability ratio that measures the
extent to which a company earns profit. It is calculated by dividing the net profit earned by
outstanding shares.
Earnings per share = Net Profit / Total no. of Equity shares

Book Value Per Share: Book value per share is referred to as the equity that is available to the
common shareholders divided by the number of outstanding shares.
Book Value per Share = (Shareholders’ fund – Preference capital) / Total no. of equity
Shares

Dividend Payout Ratio: Dividend payout ratio calculates the amount paid to shareholders as
dividends in relation to the amount of net income generated by the business.
Dividend Payout Ratio (DPR) = Dividends per share / Earnings per share

Price Earnings Ratio: This is also known as P/E Ratio. It establishes a relationship between the
stock (share) price of a company and the earnings per share. It is very helpful for investors as
they will be more interested in knowing the profitability of the shares of the company and how
much profitable it will be in future.
Price Earnings Ratio = Market value per share / Earnings per share

1.From the following information calculate liquidity and solvency ratios of Devi Limited.
Liabilities 2020 (Rs) 2021 (Rs) Assets 2020 (Rs) 2021 (Rs)
Capital 3,00,000 3,20,000 Building 1,50,000 1,60,000
Reserve 70,000 85,000 Machinery 1,20,000 1,40,000
Profit & loss A/c 80,000 65,000 Furniture 40,000 30,000
Bank Loan 1,00,000 90,000 Investment 80,000 90,000
Creditors 90,000 1,20,000 Bank 30,000 25,000
Provision for tax 50,000 45,000 Bills Receivable 50,000 35,000
Bills Payable 40,000 35,000 Debtors 1,20,000 1,40,000
Bank overdraft 20,000 40,000 Stock 1,60,000 1,80,000
Total 7,50,000 8,00,000 Total 7,50,000 8,00,000
2. From the following information calculate liquidity and solvency ratios of Anil Industries
limited.
Liabilities 2020 (Rs) 2021 (Rs) Assets 2020 (Rs) 2021 (Rs)
Capital 1,20,000 1,50,000 Building 1,00,000 1,20,000
Reserve 50,000 60,000 Machinery 70,000 80,000
Profit & loss A/c 80,000 70,000 Furniture 40,000 35,000
8% Debentures 90,000 1,00,000 Investment 40,000 45,000
Creditors 60,000 65,000 Cash 20,000 30,000
Bills Payable 20,000 25,000 Bills Receivable 30,000 10,000
Outstanding expenses 30,000 30,000 Debtors 70,000 80,000
Inventory 80,000 1,00,000
Total 4,50,000 5,00,000 Total 4,50,000 5,00,000

3.From the following information calculate turn over ratios of Naveen Limited.
Liabilities 2020 (Rs) 2021 (Rs) Assets 2020 (Rs) 2021 (Rs)
Capital 3,00,000 3,20,000 Building 1,50,000 1,60,000
Reserve 70,000 85,000 Machinery 1,20,000 1,40,000
Profit & loss A/c 80,000 65,000 Furniture 40,000 30,000
Bank Loan 1,00,000 90,000 Investment 80,000 90,000
Creditors 90,000 1,20,000 Bank 30,000 25,000
Provision for tax 50,000 45,000 Bills Receivable 50,000 35,000
Bills Payable 40,000 35,000 Debtors 1,20,000 1,40,000
Bank overdraft 20,000 40,000 Stock 1,60,000 1,80,000
Total 7,50,000 8,00,000 Total 7,50,000 8,00,000
Sales for the year 2020 Rs. 5,00,000 and 2021 Rs. 6,00,000
Gross profit for the year 2020 Rs. 1,00,000 and 2021 Rs. 1,20,000

4. Calculate profitability ratios of Venkat Limited from the following data:

Particulars 2021(Rs.)
Sales 8,60,000
Cost of goods sold 6,50,000
Return inward 10,000
Office expenses 70,000
Interest paid on debentures 50,000
Profit on sale of share 25,000
Selling expenses 25,000
 Distribution expenses 40,000
Discount received 10,000
Tax @ 30%
Liabilities 2021 (Rs.) Assets 2021 (Rs.)
Capital @ Rs.20 per share 3,20,000 Building 1,60,000
Reserve 85,000 Machinery 1,40,000
Profit & loss A/c 65,000 Furniture 30,000
Bank Loan 90,000 Investment 90,000
Creditors 1,20,000 Bank 25,000
Provision for tax 45,000 Bills Receivable 35,000
Bills Payable 35,000 Debtors 1,40,000
Bank overdraft 40,000 Stock 1,80,000
Total 8,00,000 Total 8,00,000
Market price per share Rs. 25, Dividend per share Rs. 5

5. From the following information prepare balance sheet:

Current ratio 2.5
Working capital 60,000
Liquidity ratio 1.5
Reserves and surplus 40,000
Proprietary ratio (fixed assets/ proprietary fund) 0.75
Bank overdraft 10,000
There is no long-term loan or fictitious asset. (B/S = Rs. 2,80,000)

6. From the following information prepare balance sheet:

Current ratio 2.5
Liquidity ratio 1.5
Net working capital 3,00,000
Fixed assets turnover ratio (on cost of sales) 2 times
Average debt collection period 2 months
Stock turnover ratio (cost of sales/closing stock) 6 times
Gross profit ratio 20%
Fixed assets/shareholders net worth 0.80
Reserve and surplus/capital 0.50 ( B/S = Rs. 11,00,000)

7. From the following information for the year ended 31 st Dec 2021, you are required to
calculate: 1) Gross Profit Ratio; 2) Operating Ratio; 3) Operating Profit Ratio and 4) Net Profit
Ratio.
Total Sales- Rs. 5,00,000
Sales Return- Rs. 50,000
Gross Profit – 40% of Net Sales.
Operating Expenses – Rs.60,000
Non-operating Income – Rs. 21,000
Tax Rate is 50%

8. From the given data complete the balance sheet

Sales Rs. 25,00,000 Total assets / Net worth 3.5 Sales / Fixed assets 6
Sales / Current assets 8 Sales / Inventory 15 Sales / Debtors 18 Current ratio 2.5
Liabilities Rs. Assets RS.
Net worth Fixed assets
Long term liability Inventory
Current liability Debtors
Cash
7,29,167 7,29,167

9. Calculate working capital

CR - 2.5, Q.R - 1.75, Stock Rs. 1,50,000 (W.C Rs. 3,00,000)

10. Prepare a balance sheet from the following data:

Stock turnover ratio – 6
Gross profit – 20%
Capital turnover ratio – 2
Fixed assets turnover ratio – 4
Debt collection period – 2 months
Creditor’s payment period – 73 days
Gross profit Rs. 60,000
Excess of closing stock over opening stock was Rs. 5,000 ( B/S Rs. 1,69,000)