It is the only financial statement that relates to

specific point of time and not a period of time

Shows how the funds are deployed in various assets

owned by the entity and how are they financed.

Shows the tools available in the organisation

to remain profitable in the long run

Can be presented either in Report Format O

R Account Format
 Assets on t
Items are Equity =
Facts about he right an
Listed in Assets min
Balance Sh d Liabilitie
order of us
eet s on the lef
t liquidity Liabilities

ASSETS: Outstanding value of Stock/inventory, equip-

ments, building and money owed to the organization.
LIABILITIES : Balances of Accounts for money owed by
the organization to suppliers, lenders, own employees
and service providers (Unpaid Expenditure).
EQUITY : Net Assets (combination of Shareholders’ fund
i.e. Paid up Capital and undistributed Profit i.e. Reserves).
 ASSETS

INTANGIBLE/
CURRENT FIXED Non-CURRENT FICTITIOUS

a. Cash & Cash Eq a. Machinery a. Neither Current Non-physical e.g.

uivqalents nor Fixed
b. Office a. Goodwill
b. Short Term Equipments b. Security Deposit
Investments b. Brand Value
c. Vehicles c. Investment in
c. Accounts other/ subsidiary c. Patents/Copyrights
d. Plant
Receivables d. Debit balance of
& Prepaid Exp. e. Land & units P&L A/c or Accu-
Building mulated Losses
d. Provision for
Bad Debts e. Preliminary Exps
e. Inventory/Stock
 LIABILITIES

CURRENT LONG TERM EQUITY

a. Creditors or Account
a. Debts due after 12 mo a. Capital investment
s Payable
nths from B/S date by the promotor/ s
b. Accrued but unpaid
hareholders
expenses b. Bonds & Debenture
c. Loans tenable for 12 b. Retained Profits
c. Long Term Lease
months
c. Subordinated long
d. Portion of Long Ter d. Pension Obligations
term unsecured
m Debt Payable withi
loans from
n 12 months
promoters/friends
e. Any other dues inclu
& relatives.
ding statutory payab
le within 12 m
Sources of Funds: Liabilities
Uses of Funds : Assets
Short Term Sources : Current Liabilities, dues that
are payable within 1 year (next Balance Sheet date).
Long Term Sources : Long Term Debt or Liabilities
that are repayable beyond 12 months period.
Equity : Promoters’ OR Shareholders’ Funds.
Short Term Uses : Investment in Current Assets that
can be converted to cash or used to pay Current
Liabilities within 12 months.
Long term Uses : Investment in assets other than
current Assets ..
Fixed Assets/Block: The real physical assets deployed

in business to conduct or facilitate operation that will

exist for longer number of years.
Sundry Creditors/Trade Creditors/Receivables : Short
Term obligations owed to the firm by its clients/buyers
for goods or services arising out of credit sales.
 Inventory/Stock : Materials purchased for selling; may
consist of Raw Material, Work-in-Process and
Finished
Goods.
Depreciation : Value of Fixed Assets usually decline
over time. Hence to present realistic value of assets,
proportionate value, depending upon estimated life of
LIABILITIES :
Unsecured loans
Advances / progress payments from customers
Deposits from dealers/Agencies
Provision for taxation
Disputed excise liabilities (contingent liabilities)
Dividend or Gratuity payable
Provision for Bad Debts
Provisions not made for Statutory Dues
Revaluation Reserve
Share Premium
Preference Shares (Redeemable a within 1 year)
Deferred Tax Liability
ASSETS :
Capital WIP
Advances to suppliers for capital goods
Dead Stock
Investment in Associates
Other consumable spares
Deferred Receivables – maturity >1 yr
P&L A/c. Debit Balance
Deferred Tax Assets
Prepaid Expenses
Fixed deposits with banks
Work-in-Progress
1. How much it owns? : The ASSETS
2. How much it owes? : The LIABILITIES
3. What is owners’ stake? : The EQUITY
Objectives of Balance Sheet study :
Creditors & Short Term Lenders : Liquidity i.e. Firm’s
ability to meet its short term obligations.
Term Lenders/Investors : Solvency i.e. Ability of an
organization to sustain its activity in the long run.
a.various numbers on the BS in a rational manner
(Ratios);

b. performance of an unit with the previous years under

different parameters to see its growth; and

c. performance of the unit with similar other units to

reveal how efficiently the organization is being
managed.
LIABILITIES BALANCE SHEET ASSETS
CAPITAL – AUTHORISED FIXED ASSETS – GROSS BLOCK
- ISSUED LESS : DEPRECIATION
- SUBSCRIBED NET BLOCK ->
- PAID UP CAPITAL WORK IN PROGRESS
SHARE PREMIUM ADVANCES TO SUPPLIERS TO CAPITAL GOODS
RESERVES - GENERAL RESERVES
INVESTMENT – IN SUBSIDIARY Cos
- CAPITAL RESERVES
- OTHERS
- REVALUATION RESER E
NON CONSUMABLE INVENTORIES
SEED CAPITAL
OTHER NON CURRENT ASSETS
PROFIT AND LOSS ACCOUNT
DEFERRED RECEIVABLES – MATURITY MORE THAN 1 YR
DEFERRED TAX LIABILITY INTANGIBLE ASSETS - GOODWILL
DEBENTURES
TERM LOAN FROM BANKS / FIs
- PATENTS
LONG TERM FIXED DEPOSITS (PAYABLE AF - COPY RIGHTS
TER 1 YR) - TRADE MARKS
UNSECURED LOANS - PRELIMINARY EXPE.

- PRE OPER. EXP.

P & L ACCOUNT DEBIT BALANCE
DEFERRED TAX ASSETS
LIABILITIES BALANCE SHEET
ASSETS

FIXED ASSETS
NET WORTH
INVESTMENTS &
NON CURRENT ASSETS

LONG TERM DEBT INTANGIBLE ASSETS

INVENTORY - RAW MATERIALS
- WORK IN PROGRESS
- FINISHED GOODS
- STORES & SPARES
SUNDRY DEBTORS
DEFERRED RECEIVABLES
LOANS AND ADVANCES
PREPAID EXPENSES
SHORT TERM INVESTMENTS
CASH AND BANK BALANCE
LIABILITIES BALANCE SHEET ASSETS
FIXED ASSETS
NET WORTH
INVESTMENTS &
NON CURRENT ASSETS
LONG TERM DEBT INTANGIBLE ASSETS
SHORT TERM BORROWINGS INVENTORY - RAW MATERIALS
- WORK IN PROGRESS
FROM BANKS – OCC, ODBD, BILLS ETC. - FINISHED GOODS
BILLS PAYABLE - STORES & SPARES
SUNDRY CREDITORS SUNDRY DEBTORS
ADVANCES RECEIVED FROM CUSTOMERS
DEFERRED RECEIVABLES
LOANS AND ADVANCES
EXPENSES PAYABLE PREPAID EXPENSES
STATUTORY LIABILITIES PAYABLE SHORT TERM INVESTMENTS
CASH AND BANK BALANCE
INSTALMENT ON TERM LOAN
OTHER CURRENT LIABILITIES
LIABILITIES BALANCE SHEET ASSETS

FIXED ASSETS

NET WORTH INVESTMENTS &

NON CURRENT ASSETS

LONG TERM DEBT INTANGIBLE ASSETS

CURRENT LIABILITIES CURRENT ASSETS

 BALANCE SHEET
LIABILITIES ASSETS
CAPITAL – AUTHORISED FIXED ASSETS – GROSS BLOCK
- ISSUED LESS : DEPRECIATION
- SUBSCRIBED NET BLOCK ->
- PAID UP CAPITAL WORK IN PROGRESS
SHARE PREMIUM ADVANCES TO SUPPLIERS TO CAPITAL GOODS
RESERVES - GENERAL RESERVES
INVESTMENT – IN SUBSIDIARY Cos
- CAPITAL RESERVES
- OTHERS
- REVALUATION RESER E
NON CONSUMABLE INVENTORIES
SEED CAPITAL
OTHER NON CURRENT ASSETS
PROFIT AND LOSS ACCOUNT
DEFERRED RECEIVABLES – MATURITY MORE THAN 1 YR
DEFERRED TAX LIABILITIES INTANGIBLE ASSETS - GOODWILL
DEBENTURES - PATENTS
TERM LOAN FROM BANKS / Fis - COPY RIGHTS
LONG TERM FIXED DEPOSITS (PAYABLE AFTER 1 YR) - TRADE MARKS
UNSECURED LOANS - PRELIMINARY EXPENSES
P & L ACCOUNT DEBIT BALANCE
DEFERRED TAX ASSETS
SHORT TERM BORROWINGS INVENTORY - RAW MATERIALS
FROM BANKS – OCC/ODBD/BILLS - WORK IN PROGRESS
BILLS PAYABLE - FINISHED GOODS
SUNDRY CREDITORS - STORES & SPARES
ADVANCES RECEIVED FROM CUSTOMERS SUNDRY DEBTORS
EXPENSES PAYABLE DEFERRED RECEIVABLES
STATUTORY LIABILITIES PAYABLE LOANS AND ADVANCES
INSTALMENT ON TERM LOAN PREPAID EXPENSES
OTHER CURRENT LIABILITIES CASH AND BANK BALANCE
 LIABILITIES BALANCE SHEET ASSETS

CAPITAL – AUTHORISED FIXED ASSETS – GROSS BLOCK

- ISSUED LESS : DEPRECIATION
- SUBSCRIBED NET BLOCK
- PAID UP CAPITAL WORK IN PROGRESS
SHARE PREMIUM ADVANCES TO SUPPLIERS FOR CAPITAL GOODS
RESERVES - GENERAL RESERVES
- CAPITAL RESERVES INVESTMENT – IN SUBSIDIARY Cos
- REVALUATION RESERVE - OTHERS
NON CONSUMABLE INVENTORIES
PROFIT AND LOSS ACCOUNT OTHER NON CURRENT ASSETS
GOVT. SUBSIDY / SEED CAPITAL DEFERRED RECEIVABLES – MATURITY MORE THAN 1 YR
DEFERRED TAX LIABILITY INTANGIBLE ASSETS - GOODWILL
PREFERENCE SHARES (RED. AFTER 1 YEAR) - PATENTS
DEBENTURES - COPY RIGHTS
TERM LOAN FROM BANKS / FIs - TRADE MARKS
LONG TERM FIXED DEPOSITS (PAYABLE AFTER 1 YR) - PRELIMINARY EXPENSES
UNSECURED LOANS P & L ACCOUNT DEBIT BALANCE
DEFERRED TAX ASETS
SHORT TERM BORROWINGS INVENTORY - RAW MATERIALS
From Banks – OCC / ODBD / BILLS / OTHERS - WORK IN PROGRESS
From Others - FINISHED GOODS
BILLS PAYABLE - STORES & SPARES
SUNDRY CREDITORS SUNDRY DEBTORS
ADVANCES RECEIVED FROM CUSTOMERS DEFERRED RECEIVABLES
EXPENSES PAYABLE LOANS AND ADVANCES
STATUTORY LIABILITIES PAYABLE CASH AND BANK BALANCE
INSTALMENT ON TERM LOAN PREPAID EXPENSES
OTHER CURRENT LIABILITIES
OPERATING STATEMENT (PROFIT AND LOSS ACCOUNT FOR THE YEAR )
GROSS SALES - DOMESTIC SALES …….
- EXPORT SALES ….… ……
TOTAL GROSS SALES
LESS EXCISE DUTY ……
NET SALES (A) ……
(% AGE RISE OR FALL IN NET SALES AS COMPARED
TO PREVIOUS YEAR)
COST OF SALES
RM CONSUMED - IMPORTED
- DOMESTIC
STORES AND SPARES - IMPORTED
- DOMESTIC
POWER AND FUEL
DIRECT LABOUR
OTHER MFG. EXPENSES
DEPRECIATION
SUB-TOTAL XXXXX
ADD : OPENING STOCK IN PROCESS
LESS: CLOSING STOCK IN PROCESS
COST OF PRODUCTION XXXXX

ADD: OP. STOCK OF FINISHED GOODS

LESS: CL. STOCK OF FINISHED GOODS
COST OF SALES (B) XXXX
 OPERATING STATEMENT (PROFIT AND LOSS ACCOUNT FOR THE YEAR )
GROSS SALES - DOMESTIC SALES ……. GROSS PROFIT (A) – (B)
- EXPORT SALES ……. .…... (NET SALES – COST OF SALES)
TOTAL GROSS SALES
LESS EXCISE DUTY …….. ……
NET SALES (A)
(% AGE RISE OR FALL IN NET SALES AS
COMPARED TO PREVIOUS YEAR)
COST OF SALES
RM CONSUMED - IMPORTED
- DOMESTIC
STORES AND SPARES - IMPORTED
- DOMESTIC
POWER AND FUEL
DIRECT LABOUR
OTHER MFG. EXPENSES
DEPRECIATION
SUB-TOTAL XXXX

ADD : OPENING STOCK IN PROCESS

LESS: CLOSING STOCK IN PROCESS
COST OF PRODUCTION XXXX

ADD: OP. STOCK OF FINISHED GOODS

LESS: CL. STOCK OF FINISHED GOODS
COST OF SALES (B) XXXX
 OPERATING STATEMENT (PROFIT AND LOSS ACCOUNT FOR THE YEAR )
GROSS SALES - DOMESTIC SALES ……… GROSS PROFIT (A) – (B)
- EXPORT SALES ..….…
….…… (NET SALES – COST OF SALES)
TOTAL GROSS SALES
LESS EXCISE DUTY ………
NET SALES (A) ………. LESS: S G & A EXPENSES
% AGE RISE OR FALL IN NET SALES AS
COMPARED TO PREVIOUS YEAR OPERATING PROFIT BEFORE INTEREST
COST OF SALES
RM CONSUMES - IMPORTED
- DOMESTIC
STORES AND SPARES - IMPORTED
- DOMESTIC
POWER AND FUEL
DIRECT LABOUR
OTHER MFG. EXPENSES
DEPRECIATION
SUB-TOTAL XXXX

ADD : OPENING STOCK IN PROCESS

LESS: CLOSING STOCK IN PROCESS
COST OF PRODUCTION XXXX

ADD: OP. STOCK OF FINISHED GOODS

LESS: CL. STOCK OF FINISHED GOODS
COST OF SALES (B) XXXX
 OPERATING STATEMENT (PROFIT AND LOSS ACCOUNT FOR THE YEAR )
GROSS SALES - DOMESTIC SALES ……… GROSS PROFIT (A) – (B) -----
- EXPORT SALES …….… (NET SALES – COST OF SALES)
TOTAL GROSS SALES …..…
LESS EXCISE DUTY …….…
NET SALES (A) ...…
LESS: S G & A EXPENSES -----
% AGE RISE OR FALL IN NET SALES AS
COMPARED TO PREVIOUS YEAR OPERATING PROFIT BEFORE INTEREST -----
COST OF SALES
RM CONSUMES - IMPORTED LESS: INTEREST -----
- DOMESTIC OPERATING PROFIT AFTER INTEREST ===
STORES AND SPARES - IMPORTED
- DOMESTIC
POWER AND FUEL
DIRECT LABOUR
OTHER MFG. EXPENSES
DEPRECIATION
SUB-TOTAL XXXX

ADD : OPENING STOCK IN PROCESS

LESS: CLOSING STOCK IN PROCESS
COST OF PRODUCTION XXXX

ADD: OP. STOCK OF FINISHED GOODS

LESS: CL. STOCK OF FINISHED GOODS
COST OF SALES (B) XXXX
 OPERATING STATEMENT (PROFIT AND LOSS ACCOUNT FOR THE YEAR)
GROSS SALES - DOMESTIC SALES ……. GROSS PROFIT (A) – (B) ----
- EXPORT SALES ……. (NET SALES – COST OF SALES)
TOTAL GROSS SALES ………
LESS EXCISE DUTY LESS: S G & A EXPENSES ----
NET SALES (A) ……… OPERATING PROFIT BEFORE INTEREST ----
% AGE RISE OR FALL IN NET SALES AS
COMPARED TO PREVIOUS YEAR
LESS: INTEREST ----
OPERATING PROFIT AFTER INTEREST ==
COST OF SALES
RM CONSUMES - IMPORTED ADD: OTHER NON OPERATING INCOME ----
- DOMESTIC
STORES AND SPARES - IMPORTED
- DOMESTIC
LESS: OTHER NON OPERATING ----
POWER AND FUEL EXPENSES
DIRECT LABOUR
OTHER MFG. EXPENSES PROFIT/LOSS BEFORE TAXES ==
DEPRECIATION
SUB-TOTAL XXXX
ADD : OPENING STOCK IN PROCESS
LESS: CLOSING STOCK IN PROCESS
COST OF PRODUCTION XXXX

ADD: OP. STOCK OF FINISHED GOODS

LESS: CL. STOCK OF FINISHED GOODS
COST OF SALES (B) XXXX
 OPERATING STATEMENT (PROFIT AND LOSS ACCOUNT FOR THE YEAR )
GROSS SALES - DOMESTIC SALES ……… GROSS PROFIT (A) – (B) -----
- EXPORT SALES ……… (NET SALES – COST OF SALES)
TOTAL GROSS SALES ……
LESS EXCISE DUTY ………
LESS: S G & A EXPENSES -----
NET SALES (A) ……
% AGE RISE OR FALL IN NET SALES AS OPERATING PROFIT BEFORE INTEREST
COMPARED TO PREVIOUS YEAR -----
LESS: INTEREST ------
COST OF SALES OPERATING PROFIT AFTER INTEREST =====
RM CONSUMES - IMPORTED
- DOMESTIC ADD: OTHER NON OPERATING INCOME -----
STORES AND SPARES - IMPORTED
- DOMESTIC LESS: OTHER NON OPERATING EXPENSES -----
POWER AND FUEL
DIRECT LABOUR
OTHER MFG. EXPENSES PROFIT /LOSS BEFORE TAXES (PBT) ===
DEPRECIATION
SUB-TOTAL XXXX LESS: PROVISIONS FOR TAXES ---
ADD : OPENING STOCK IN PROCESS
LESS: CLOSING STOCK IN PROCESS
NET PROFIT / LOSS ==
COST OF PRODUCTION XXXX

ADD: OP. STOCK OF FINISHED GOODS

LESS: CL. STOCK OF FINISHED GOODS
COST OF SALES (B) XXXX
 OPERATING STATEMENT (PROFIT AND LOSS ACCOUNT FOR THE YEAR )
GROSS SALES - DOMESTIC SALES ……… GROSS PROFIT (A) – (B)
- EXPORT SALES ……… (NET SALES – COST OF SALES)
TOTAL GROSS SALES ……
LESS EXCISE DUTY ………
LESS: S G & A EXPENSES
NET SALES (A) ……
% AGE RISE OR FALL IN NET SALES AS OPERATING PROFIT BEFORE INTEREST
COMPARED TO PREVIOUS YEAR
LESS: INTEREST
COST OF SALES OPERATING PROFIT AFTER INTEREST
RM CONSUMES - IMPORTED
- DOMESTIC ADD: OTHER NON OPERATING INCOME
STORES AND SPARES - IMPORTED LESS: OTHER NON OPERATING EXPENSES
- DOMESTIC
POWER AND FUEL PROFIT BEFORE TAXES (PBT) / LOSS
DIRECT LABOUR
OTHER MFG. EXPENSES PROVISIONS FOR TAXES
DEPRECIATION
SUB-TOTAL XXXX NET PROFIT / LOSS ==
ADD : OPENING STOCK IN PROCESS
LESS: CLOSING STOCK IN PROCESS LESS: DIVIDEND ----
XXXX
COST OF PRODUCTION RETAINED PROFITS ==
ADD: OP. STOCK OF FINISHED GOODS
LESS: CL. STOCK OF FINISHED GOODS
XXXX
COST OF SALES (B)
 OPERATING STATEMENT (PROFIT AND LOSS ACCOUNT FOR THE YEAR )
GROSS SALES - DOMESTIC SALES ……… GROSS PROFIT (A) – (B)
- EXPORT SALES ……… (NET SALES – COST OF SALES)
TOTAL GROSS SALES ……
LESS EXCISE DUTY ……… LESS: S G & A EXPENSES
NET SALES (A) .…. OPERATING PROFIT BEFORE INTEREST
% AGE RISE OR FALL IN NET SALES AS LESS: INTEREST
COMPARED TO PREVIOUS YEAR OPERATING PROFIT AFTER INTEREST
ADD: OTHER NON OPERATING INCOME
COST OF SALES
LESS: OTHER NON OPERATING EXPENSES
RM CONSUMES - IMPORTED
- DOMESTIC PROFIT BEFORE TAXES / LOSS
STORES AND SPARES - IMPORTED
- DOMESTIC PROVISIONS FOR TAXES
POWER AND FUEL
DIRECT LABOUR NET PROFIT / LOSS
OTHER MFG. EXPENSES LESS: DIVIDEND
DEPRECIATION
SUB-TOTAL XXXX RETAINED PROFITS ===
ADD : OPENING STOCK IN PROCESS
LESS: CLOSING STOCK IN PROCESS LESS: TRD. TO RESERVES ------
COST OF PRODUCTION XXXX

ADD: OPENING STOCK OF FINISHED GOODS PROFIT TRD TO P & L A/C. ===
LESS: CLOSING STOCK OF FINISHED GOODS .
COST OF SALES (B)
XXXX
OPERATING STATEMENT (PROFIT AND LOSS ACCOUNT FOR THE YEAR )
GROSS SALES - DOMESTIC SALES ……… GROSS PROFIT (A) – (B)
- EXPORT SALES …… (NET SALES – COST OF SALES)
…………
TOTAL GROSS SALES
……
LESS EXCISE DUTY LESS: S G & A EXPENSES
NET SALES (A)
OPERATING PROFIT BEFORE INTEREST
% AGE RISE OR FALL IN NET SALES AS LESS: INTEREST
COMPARED TO PREVIOUS YEAR OPERATING PROFIT AFTER INTEREST
COST OF SALES
ADD: OTHER NON OPERATING INCOME
LESS: OTHER NON OPERATING EXPENSES
RM CONSUMES - IMPORTED
- DOMESTIC
PROFIT BEFORE TAXES / LOSS
STORES AND SPARES - IMPORTED
- DOMESTIC
PROVISIONS FOR TAXES
POWER AND FUEL
DIRECT LABOUR
NET PROFIT / LOSS
OTHER MFG. EXPENSES
DEPRECIATION
LESS: DIVIDEND
SUB-TOTAL
ADD : OPENING STOCK IN PROCESS
RETAINED PROFITS
LESS: CLOSING STOCK IN PROCESS
COST OF PRODUCTION
LESS: TRD. TO RESERVES
ADD: OPENING STOCK OF FINISHED GOODS
LESS: CLOSING STOCK OF FINISHED GOODS
PROFIT TRD TO P & L ACCOUNT
COST OF SALES (B)
 CONTINGENT LIABILITIES

1. Pending law suit.

2. Claims against organisation not acknowledged as debt.

3. Guarantee given by the organisation on behalf of others.

4. Taxes and Duties under dispute with the Government.

 RATIO ANALYSIS:
Purpose and use:
Ratios present a profile of firm, its economic
characteristics, competitive approach, and its
unique operative, financial, and investment
characteristics.
It is an expression of linear direct relationship
between two indicators.
Expressed as an integer or as percentage.
For arriving at a meaningful conclusion, compare
the figures of a firm (or of different firms) over a
period of time and enable to take proper decision.
 BROAD CLASSIFICATION OF RATIOS

PROFITABLITY
RATIOS

BS
 BROAD CLASSIFICATION OF RATIOS

PROFITABLITY
RATIOS

CURRENT
RATIO

QUICK RATIO

NET WORKING CA
PITAL

BS
 LIQUIDITY RATIOS
Current Ratio: (1.33:1)
The current ratio offers an approximate measure of
a company's ability to pay its current maturing
obligations on time. Generally, the higher the
current ratio, the greater the cushion a company
has to work within meeting its current obligations.
Measures only total rupee’s worth of CA and CL and
not the quality.
Assets are subject decline in value whereas Liabilities
are NOT. Due to this anomaly, we need to monitor
quality of assets on a constant basis.
CR = Current Assets/Current Liabilities = Positive
RATIO ANALYSIS Contd. …
 Quick Ratio:
 It measures capacity of the firm to pay off current liabilities of
urgent nature from its quickly realizable current assets.
 Quick Ratio=Quick Assets/CL
(Quick Assets include Cash/Bank, Receivables upto 6 months, Quickly
realizable Securities and Bank FDs)
 Net Working Capital: (Positive)
 It discloses contribution of the promoter in current assets of the
firm. Should never be less than the margin stipulated in the
sanction. It is also worked as surplus of long term sources over
long term uses.
NWC = Current Assets – Current Liabilities
 BROAD CLASSIFICATION OF RATIOS

PROFITABLITY
RATIOS

CURRENT DEBT EQUITY RA

RATIO TIO
GEARING RATIO
QUICK RATIO
DSCR
NET WORKING
CAPITAL FIXED ASSETS
COVERAGE RAT
IO
BS
 LEVERAGE RATIOS
Leverage or Solvency Ratio:
Leverage is a measure of degree of risk shouldered
by the firm versus its financers. Used to adjudge
long term solvency.
The assets are financed by TNW of the firm and
financers. Higher the proportion of borrowed funds
greater is the degree of risk to the financers.
It measures the balance between its total debt
(borrowed fund) and the equity (owned fund) used
to capitalize the business.
Highly leveraged business is less equipped to deal
with the business cycle fluctuations and are,
therefore, more prone to failure.
 LEVERAGE RATIOS Contd. …
 DER (Long Term Debt/TNW) (2:1)
Measures long term solvency position
Represents stake of promoters vis-à -vis lenders
Lenders to take into account the risk perception while financing.
 Lower the ratio, higher the degree of protection enjoyed by the lenders.

 Gearing Ratio (TOL:TNW) (3:1)

 Measures long term solvency position.

 Measures stake of financiers in the business vis-à -vis of the

owners. As the liabilities grow in comparison to equity, so does
the risk to financers.
 To be studied for a period of 3 - 5 years
 Declining ratio indicates reduction of the concern’s dependence
on outside borrowings, a positive sign.
 LEVERAGE RATIOS Contd. …
 Debt Service Coverage Ratio [1.5/1)
 Used for judging the repayment capacity and fixing repayment
schedule for the term loans sanctioned by banks and Fis.
 Generally a higher ratio of 2 and above indicates adequacy of cash
accruals of the entity in meeting repayment of long-term debt of the
firm, provided profitability and non-cash expenses remain the same
or increase.
 DSCR= (PAT+Depreciation+Int on TL)/(Int on TL+ Installment of TL)

 FIXED ASSETS COVERAGE RATIO (Positive with required margin)

 Denotes to what extent do fixed assets provide protection for
long term creditors.
Net Fixed Assets (After providing Depreciation)
 FACR = --------------------------------------------------------------------

LONG TERM DEBT SECURED BY FIXED ASSETS

 BROAD CLASSIFICATION OF RATIOS

PROFITABLITY
RATIOS

CURRENT DEBT EQUITY RA

RATIO TIO

GEARING RATIO
QUICK RATIO
DSCR
NET WORKING
CAPITAL FIXED ASSETS
COVERAGE RAT
IO
BS
 EFFICIENCY OR ACTIVITY RATIO
Efficiency Ratio: (Turnover Ratio / Asset
Management Ratio):

This measures how efficiently the assets are

employed by a firm. These ratios are based on the
relationship between the level of activity
represented by sales, etc, and the levels of various
assets.
However it can be more realistically adjudged when
these factors are compared with those of other
units of similar sizes and similar nature i.e.
competitors.
INVENTORY TURNOVER RATIO
COST OF GOODS SOLD
INVENTORY TURNOVER RATIO = ------------------------------
AVERAGE INVENTORY
- Holding Levels :
- Total Inventory = (Inventory / COGS) * 12 or 365
- RM Holding level = (RM / RM Consumed) * 12 or 365
- WIP Holding level = (WIP / COP) * 12 or 365
- FG Holding level = (FG / COS) * 12 or 365
- Shows how rapidly the inventory is turning into receivables
through sales.
- High inventory turnover indicates good inventory
management.
- Low inventory turnover indicates excess holding of
inventory, slow and non moving of inventory. BACK
DEBTORS TURNOVER RATIO
NET SALES
Debtors Turnover Ratio = ----------------
DEBTORS

 Higher the value of debtor turnover, the more efficient

is the management of sales on credit basis.

 DEBTORS HOLDING LEVEL = (Average Debtors / Net

Sales) x 12 or 365

BACK
CREDITORS TURNOVER

TOTAL PURCHASES
CREDITORS TURNOVER RATIO = -----------------------
CREDITORS

CREDITORS HOLDING LEVEL = (Average Creditors / Purchases) x 12

or 365

BACK
 BROAD CLASSIFICATION OF RATIOS

PROFITABLITY
RATIOS

CURRENT DEBT EQUITY RA GROSS PRO

FIT RETURN O
RATIO TIO N EQUITY
OPERATING
GEARING RATIO PROFIT
QUICK RATIO TOTAL DE
NET PROFI BT/
DSCR T MARGIN PBDIT
NET WORKING
CAPITAL FIXED ASSETS RETURN ON OTHERS
COVERAGE RAT CAPITAL E
IO MPLOYED
BS
 PROFITABILITY RATIO
 PROFITABILITY RATIOS indicates profit earning ability o
f the unit out of main business compared to various activi
ties and similar units in the industry.

GROSS PROFIT
GROSS PROFIT RATIO = -------------------
NET SALES

- Indicating efficiency and competence of the

manufacturing unit.

BACK
OPERATING PROFIT RATIO

 Indicates profit earning capacity of the firm out of its m

ain activity.
OPERATING PROFIT
O P Ratio = --------------------------
NET SALES

- Indicates efficiency of the main activity of the

concern.

BACK
NET PROFIT RATIO
NET PROFIT AFTER TAX
= -------------------------------
NET SALES

NPBT & NPAT

- Determining the efficiency of the concern as a

whole.

BACK
PBDITA
This ratio indicates how much income is generated by t
he firm on per unit of sales without incidence of Depre
ciation, Interest and Tax burden, so as to take appropri
ate decision.
Net Profit + Depreciation+ Interest+ Tax
PBDITA = -------------------------------------------------------------------------
NET SALES
RETURN ON EQUITY
 This ratio is generally used by investors in the equity a
s well as lenders to know how profitable is the venture
in terms of funds deployed by the promoters/ sharehol
ders and retained in the business.
PROFIT AFTER TAX
ROE = ----------------------- X 100
TNW

BACK
RETRUN ON INVESTMENT (ROCE)
This is the basic profitability ratio that suggests as to how muc
h the unit is earning on its capital employed.

OPERATING PROFIT (BEFORE INTEREST)

ROCE = -------------------------------------------------
CAPITAL EMPLOYED

CAPITAL EMPLOYED = SHARE CAPITAL + RESERVES AND

SURPLUS + LONG TERM BORROWINGS

- NON BUSINESS ASSETS

– FICTITIOUS ASSETS

BACK
 RATIO ANALYSIS:
OTHER IMPORTANT RATIOS:
RATIOS
1) Bank Borrowing to Net Sales = BB/Net Sales*100
2) Return on Equity = Profit after Tax/Equity (TNW)*100
3) PBDIT/Net Sales
4) PBDIT/Interest Expenses
5) FACR = Fixed Assets/Total Debts (Term Liability)
6) Inventory Turnover Ratio= Cost of goods Sold
Average Inventory
7) Receivable T/0 Ratio = Sales/Ave. a/cs. Receivables
8) Total Assets T/O Ratio = Sales/Average Total assets

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