Ratio Analysis Worksheet

Financial Statement
2010-2011

Financial Statement Analysis

Prepared By:- MFM 2011-14
Harshad Khambale Mahendra Gajarmal Nayan Kshatriya Vishal Rathod Vijay Sethe 11 56 14 33 43

Financial Analysis
Assessment of the firms past, present and future financial conditions Done to find firms financial strengths and weaknesses Primary Tools:
Financial Statements Comparison of financial ratios to past, industry, sector and all firms
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Financial Statements
Balance Sheet Income Statement Cashflow Statement Statement of Retained Earnings

Sources of Data
Annual reports
Via mail, SEBI or company websites

Published collections of data

Newspapers, magazines etc.

Investment sites on the web

Examples
[Link] [Link] [Link] [Link]
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Why needed ?
Lenders need it for carrying out the following Technical Appraisal Commercial Appraisal Financial Appraisal Economic Appraisal Management Appraisal
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Ratio Analysis
Its a tool which enables the banker or lender to arrive at the following factors : Liquidity position Profitability Solvency Financial Stability Quality of the Management Safety & Security of the loans & advances to be or already been provided
Prof. Anjali Kulkarni 6

Five Major Categories of Ratios and Their Implications

Liquidity: Can we make required payments? Asset management: right amount of assets vs. sales? Also known as Turnover/ Activity Ratios. Debt management: Right mix of debt and equity? Also known as Leverage/ Capital Structure Ratios. Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? Market value: Do investors like what they see as reflected in P/E and M/B ratios? Also known as Valuation Ratios.
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Classification of Ratios
Balance Sheet P&L Ratio or Ratio Income/Revenue Statement Ratio
Financial Ratio Operating Ratio

Balance Sheet and Profit & Loss Ratio

Composite Ratio

Current Ratio Quick Asset Ratio Proprietary Ratio Debt Equity Ratio

Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio

Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors Turnover Ratio,
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Prof. Anjali Kulkarni

Review: Income Statement

Gross Profit = Sales - Costs of Goods Sold EBITDA = Gross Profit - Cash Operating Expenses EBIT = EBDIT - Depreciation - Amortization EBT = EBIT - Interest NI or EAT = EBT- Taxes
Net Income is a primary determinant of the firms cash flows and, thus, the value of the firms shares

Ratios : Liquidity
1. Current Ratio : It is the relationship between the current assets and current liabilities of a concern. Current Ratio = Current Assets/Current Liabilities

If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1 The ideal Current Ratio preferred by Banks is 1.33 : 1 2. Net Working Capital : This is worked out as surplus of Long Term Sources over Long Term Uses, alternatively it is the difference of Current Assets and Current Liabilities. NWC = Current Assets Current Liabilities
Prof. Anjali Kulkarni 10

Ratios : Liquidity
3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities. Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits.

Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example : Cash 50,000 Debtors 1,00,000 Inventories 1,50,000 Total Current Assets 3,00,000 Current Ratio = > Quick Ratio =>

Current Liabilities

1,00,000

3,00,000/1,00,000 1,50,000/1,00,000
Prof. Anjali Kulkarni

= 3:1 = 1.5 : 1
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Ratios: Leverage
4. DEBT EQUITY RATIO : It is the relationship between borrowers
fund (Debt) and Owners Capital (Equity). DER =

Debt ----------Equity

Debentures + Long Term loans = ------------------------------------------------------------------------------------Equity Shares+ Preference Shares + Reserves and Surplus For instance, if the Firm is having the following : Capital Free Reserves & Surplus Long Term Loans/Liabilities Debt Equity Ratio will be = Rs. 200 Lacs = Rs. 300 Lacs = Rs. 800 Lacs => 800/500 i.e. 1.6 : 1

Prof. Anjali Kulkarni

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Ratios : Leverage
5. PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owners Fund. Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100 The ratio will be 100% when there is no Borrowing for purchasing of Assets. 6. GEARING RATIO Debt + Preference Shares = ---------------------------------------

Equity 7. INTEREST COVERAGE RATIO: Extent of earnings available to pay off interest burden. Is given by Earnings Before Interest and Taxes (EBIT ) ICR = ------------------------------------------------------Interest
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Ratios: Profitability
8. GROSS PROFIT RATIO : By comparing Gross Profit percentage to Net Sales we can arrive at the Gross Profit Ratio which indicates the manufacturing efficiency as well as the pricing policy of the concern. Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

Alternatively , since Gross Profit is equal to Sales minus Cost of Goods Sold, it can also be interpreted as below :
Gross Profit Ratio = [ (Sales Cost of goods sold)/ Net Sales] x 100 A higher Gross Profit Ratio indicates efficiency in production of the unit.

Prof. Anjali Kulkarni

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Ratios : Profitability
9. OPERATING PROFIT RATIO :
It is expressed as => (Operating Profit / Net Sales ) x 100

Higher OP ratio indicates higher operational efficiency Operating Profit = NP + Non-operating Expenses Non-operating Income

10. NET PROFIT RATIO :

It is expressed as => ( Net Profit / Net Sales ) x 100

It measures overall profitability.

Prof. Anjali Kulkarni

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Ratios : Turnover
11. STOCK/INVENTORY TURNOVER RATIO : COGS ----------------------------Average Inventory
(Opening Stock + Closing Stock)

STR =

Average Inventory or Stocks =

------------------------------------------------2

COGS = Sales GP

or

OS+ Purchases CS

This ratio indicates the number of times the inventory is rotated during the relevant accounting period

Prof. Anjali Kulkarni

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Ratios : Turnover
12. DEBTORS TURNOVER RATIO : This ratio reflects the
relationship between credit sales and debtors. Credit Sales DTR = ----------------------------Average Debtors 365 Average Collection Period = ---------------DTR

13. CREDIT TURNOVER RATIO : This ratio indicates the

intention of the firm to pay quickly to its creditors Credit Purchases CTR = -------------------------------Average Creditors 365 Average Payment Period = ------------CTR
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Ratios : Turnover
14. CURRENT ASSET TURNOVER RATIO : CATR = Net Sales / Current Assets 15. FIXED ASSET TURNOVER RATIO : FATR = Net Sales /Fixed Assets 16. TOTAL ASSETS TURNOVER RATIO : TATR = Net Sales / Total Assets

Prof. Anjali Kulkarni

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Ratios : Profitability
16. RETRUN ON ASSETS : Assets Net Profit after Taxes/Total

17. RETRUN ON CAPITAL EMPLOYED :

( Net Profit before Interest & Tax / Average Capital Employed) x 100
Average Capital Employed is the average of the equity share capital and long term funds provided by the owners and the creditors of the firm at the beginning and end of the accounting period.

Prof. Anjali Kulkarni

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