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Ratio AnalysisModule C
CAIIB
Madhav PrabhuM. Tech, MIM, PMP, CISA, CAIIB, CeISB, MCTS, DCL
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Objective
Understand the importance of critically looking at the FinancialStatements from the bankers point of view.
Make an intelligent use of the information, as contained in theFinancial Statements, to carry out a meaningful Financial Appraisal.
Make proper analysis of the relevant Ratios and interpret the
implications thereof in the context of the required FinancialAppraisal.
Understand the implications of some important Ratios and Conceptshaving a bearing on the Financial Appraisal.
Understand the Importance and Limitations of Ratio Analysis.
Understand the role of Funds Flow as an adjunct to Financial
Appraisal. Understand the distinct and separate uses of Funds Flow and Cash
Flow Statements.
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Financial Statements
The Profit and Loss Account and the BalanceSheet are interrelated and not independent.
The Balance Sheet shows the position of Assetsand Liabilities of a business enterprise as on a
given date, whereas the Profit and Loss Accountshows the profit made or the loss incurred by theenterprise for a particular year,
The Balance Sheet for two or more successive
years will show the changes that have takenplace in the Assets and Liabilities and the netchange (increase or decrease) in the Net Worthduring those years.
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The Profit and Loss Account is as valuablea source of information as the BalanceSheet and, at no stage, it should be given
a secondary place in ascertaining thefinancial solvency and strength of anenterprise, since the trend of profits is thebest indicator of the prosperity of an
enterprise and the value of the assetsdepends largely on the maintenance of thebusiness as a going concern.
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Although the position of net profit or loss can be
ascertained from a study of the Balance Sheet, it
is only from a study of the Profit and Loss
Account that we can ascertain as to how theprofit or loss has been made, the factors or
reasons behind such profit or loss and the
significant features of its constituent items.
The Profit and Loss Account is based on theaccrual concept in accounting
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What to be taken and what not..
Items to be taken into account income relating to the accounting period which has
been earned, but not actually received.
expenditure which has been incurred and relates tothe accounting period, but not actually paid.
Items not to be taken into account (to be carriedover) Income which has been received, but not earned (i.e.,
which does not relate to the accounting period).
expenditure which has been incurred, but does notpertain to the accounting period.
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Users of financial statements
The management of the enterprise
Investors or shareholders
Creditors Employees
Government agencies, tax authorities etc
Lenders, i.e. banks and financialinstitutions
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Need for Financial Analysis
Technical Appraisal
Commercial Appraisal
Financial Appraisal Economic Appraisal
Management Appraisal
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What is Financial Ratio Analysis?
Ratio is an arithmetic relationship betweentwo figures
Can be expressed as Percentage, Fractionand Proportion
These alternative methods of expressingrelationship between items, which shou ld berelated to each o ther, are, for the purpose offinancial analysis, referred to as Ratio
Analysis
The usage? Interpretation !
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is drawing conclusions
to serve as basis for
decisions and actions
Interpretation
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Need for Comparison of Ratios
Reveal the relationship in a more
meaningful way which enables an analyst
to interpret them judiciously and
intelligently.
Draw inferences or conclusions
Such inferences can be drawn by
comparisons.
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Types of comparison
Trend Ratios intra firm
Inter-firm comparison
Ratios of the enterprise with the averageor standard ratios of the industry
Comparison with related facts is the basisof ratio analysis.
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How to go about it?
Balance Sheet
Trading/Manufacturing and Profit and Loss Account
Various Schedules relating to assets and liabilities, particularly thedebtors, creditors, loans and advances, stocks, provisions, termloans and deposits including unsecured or subordinated loans
Report of the Auditors in the prescribed form Report of the Directors, if it is a company
Details of Contingent Liabilities
Details of Interest on Term Liabilities payable within 12 months fromthe date of Balance Sheet
Details of old or slow-moving or obsolete stocks, unrecoverable
debts and advances given on a long-term basis.
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CLASSIFICATION/TYPES OF
RATIOS Balance Sheet Ratios, i.e., ratios calculated on the basis of the
items/figures of Balance Sheet only. For example, Current Ratio,Debt-Equity Ratio etc. These ratios are also referred to as FinancialRatios.
Profit and Loss Account Ratios or Income Statement Ratios orRevenue Statement Ratios, i.e., ratios calculated on the basis of the
items/figures of Profit and Loss Account only. For example, GrossProfit Ratio, Stock Turnover Ratio etc. These ratios are also calledOperating Ratios.
Balance Sheet and Profit and Loss Account Ratios, i.e., ratioscalculated on the basis of the items/figures ofboth the BalanceSheet and the Profit and Loss Account. For example, Fixed Assets
Turnover Ratio, Debtors Turnover Ratio etc. These ratios are alsoreferred to as Inter-Statement Ratios or Composite Ratios.
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Ratios
Four groups, on the basis of their functions
Liquidity Ratios measure the short-term
stability of an enterprise.
Leverage/Capital Structure Ratios indicate
the relationship between Debt and Equity.
Profitability Ratios measure earning
success. Activity Ratios measure the efficiency of
asset management.
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Ratio Ltd :P/L Account for the year ending 31st March, 20x1
20x1 20x0
Net Sales 701 623
Cost of Goods sold 552 475
Stocks 421 370
wages & salaries 68 55other Mfg Exp 63 50
Gross Profit 149 148Operating Expenses 60 49
Depreciation 30 26
Gn Adm 12 11
Selling 18 12
Operating Profit 89 99Non Operating surplus/deficit -- 6
Profit before interest and tax 89 105
Interest 21 22
Profit before tax 68 83
Tax 34 41
Profit after tax 34 42Dividend 28 27
Retained Earnings 6 15
Per Share Data (Rs)
EPS 2.27 2.80
Dividend Per share 1.80 1.80
Mkt Price Per Share 21.0 20.0Book Value per share 17.47 17.07
R ti Ltd B l Sh t 31 t M h 20 1 (R i Mill)
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Ratio Ltd: Balance Sheet as on 31st March,20x1 (Rs in Mill)
20x1 20x0
Current Liabilities
Provisions
Current Assets
Loans & Advances
I Sources of Funds1 Share Holders funds 262 256
a) Share Capital 150
b) Reserves & Surplus 112
2 Loan Funds 212 156
a) Secured Loans 143Due after 1 year 108
Due within 1 year 35
b) Unsecured Loans 69
Due after 1 year 29
Due within 1 year 40
474 412
R ti Ltd B l Sh t 31st M h 20 1 (R i Mill)
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Ratio Ltd: Balance Sheet as on 31st March,20x1 (Rs in Mill)
20x1 20x0
Current Liabilities
Provisions
Current Assets
Loans & Advances
Usage of Funds
1 Fixed Assets 330 322
2 Investments 15 15
long term 12 12
short term 3 3
3 CA, Loans and Advances 234 156
Inventories 105 72debtors 114 68
Cash & Bank Balance 10 6
Loans & Advances 5 10
Less CL and Provisions 105 81
Net Current Assets 129 75
4 Misc Expenditure and Losses -- --
474 412
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Liquidity Ratios
Current
Ratio=
Current Assets
Current Liabilities
Acid
Test
Ratio
=Current Assets-inventory
Current Liabilities
237/180
=1.32
(237-105)/180
=0.73
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Interpretation
Current Ratio The higher the current ratio, the larger would be the
amount of rupees available per rupee of currentliability. In other words, the ability of the enterprise to
meet its current obligations is more, which indicatesthat the safety of funds of short-term creditors isgreater
But be aware
Very high Current Ratio may be the result of slack management
practices
Current Ratio should, therefore, be seen in relation tothe components of the current assets and theirliquidity
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Acid Test Ratio or Quick Ratio
Refinement of the Current Ratio
Takes into account the quick (or more liquid)current assets and current liabilities to determine
the quick or instant liquidity position of anenterprise
Ratio concentrates on cash, marketablesecurities and receivables (net of bad and
doubtful debts) in relation to current obligations,it is a more rigorous and penetrating measure ofthe liquidity position of an enterprise than theCurrent Ratio
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Calculation
Amount (Rs)
Cash 50,000
Debtors 1,00,000
Inventories 1,50,000
Total Current Assets 3,00,000
Current Liabilities 1,00,000
Current Ratio 3:1
Acid Test Ratio 1.5:1
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Acid Test Ratio
However caution.
Variation from season to season in an
enterprise and
from enterprise to enterprise in an industry
Important to interpret in light of nature of
business
Good Current Ratio and Low Acid Test
Ratio indicates?
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Turnover Ratio
To determine how quickly certain current
assets are converted into cash
Inventory Turnover Ratio,
Debtors Turnover Ratio and
Creditors Turnover Ratio.
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Inventory Turnover Ratio
Dividing the cost of goods sold by the
average inventory
Cost of Goods sold = Sales minus gross
profit or Op Stock+Purchase-Cl Stock
Avg Inventory= Op+Closing/2
Indicated number of times inventory is
rotated in a year
If ITR = 6, what is interpretation?
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Inventory Turnover Ratio
An enterprise has sold goods worth Rs
4,00,000 with a gross profit margin of 25
per cent. The stocks at the beginning and
at the end of the year wereRs 75,000 and Rs 25,000 respectively.
What would be the Inventory Turnover
Ratio?
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Inventory Turnover Ratio
Interpretation
Inventory management peformance
Fair judgement on liquidity
Stockout.caution
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Debtors Turnover Ratio
Relationship between credit sales and
debtors of an enterprise
Speed of realisation
Net Credit Sales/Avg outsanding debtors
Net Credit Sales= Gross Credit Sales-
Returns
Caution..
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Debtors Turnover Ratio
Net Credit Sales figures may not be
available
Bad and doubtful debts not to be excluded
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Debtors Turnover Ratio
Total Sales for the year 200304 1,00,000
Cash Sales for the year 200304 20,000
Debtors as on 01.04.2003 10,000
Debtors as on 31.03.2004 15,000
Bills Receivables as on 01.04.2003 7,500
Bills Receivables as on 31.03.2004 12,500
Average of Opening Balance + Closing Balance
(Rs 17,500.00 + Rs 27,500.00)
Debtors Turnover Ratio 80000/22500 =3.56
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Debtors Turnover Ratio
Interpretation
Efficiency of realisation
Short collection period preferable
Could lose sales..
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Debt Collection Period Ratio
Indicates avg period of realisation
365/Debtors turnover
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Creditors Turnover Ratio
Number of times the creditors are paid vis--vis
credit purchases
Speed with which payments are made to
creditors for purchases made on credit basis Dividing net credit purchases by the average of
outstanding creditors
Net Credit Purchases are equal to Gross CreditPurchases less Returns to Suppliers
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Creditors Turnover Ratio
Credit purchases during 0304 1,00,000
Creditors as on 01.04.2003 20,000
Creditors as on 31.03.2004 10,000 Bills Payable as on 01.04.2003 4,000
Bills Payable as on 31.03.2004 6,000
Creditors Turnover Ratio = 100000/20000
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Creditors Turnover Ratio
Interpretation
Creditors paid promptly
Credit worthiness
Low ratio indicates liberal credit terms
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LEVERAGE/CAPITAL
STRUCTURE RATIOS
Short term creditors view
Long term creditors view
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LEVERAGE/CAPITAL
STRUCTURE RATIOS
Two aspects of the long-term solvency of
an enterprise:
Regular payment of interest on the loan, as
and when due, during the period of the loan,and
Repayment of principal amount of the loan in
predetermined instalments on the due datesor in one lump sum on maturity.
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LEVERAGE/CAPITAL
STRUCTURE RATIOS
Two different, but mutually dependent and
inter-related, types of Leverage Ratios
Ratios of the first type are based on the
relationship between borrowed funds andowners capital and are computed from the
Balance Sheet.
The other types of ratios, also referred to asthe Coverage Ratios, are calculated from the
Profit and Loss Account
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Leverage Ratios
Debt equity
Debt to Capital
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Debt Equity
Two approaches
Long term debts/Equity
Total Debt/Equity
D/E ratio also called Debt to Net Worth
Ratio
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Debt Equity
Interpretation
denotes the proportion of capital of an
enterprise to its total debts,
Indicates the relationship between the ownedfunds and the borrowed funds of the
enterprise.
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Debt Equity
Implication Pressure on earnings of the enterprise, leading to
default on meeting debt obligations;
Possibility of the creditors losing heavily,
Interference from creditors in management of theenterprise including close monitoring of the day-to-day operations of the enterprise;
The enterprise might find it difficult to borrowadditional funds, it would be possible only on
restrictive terms and conditions and at relativelyhigher costs.
There is no ideal however.
Capital intensive industries D/E could be higher
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Debt to Capital Ratio
1st approach Capital = Permanent Capital ofthe enterprise = Shareholders Equity + Longterm debts Measures Long term debt proportion
2nd approach Long term debts and currentLaibilities/Permanent capital+current liabilities Measures total assets financed by external funds
3
rd
approach Owners or proprietoryfunds/Tangible assets Measures what portion of the Total Tangible Assets is
financed by the Owners or the Proprietors Funds
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Coverage Ratios
PL Account
Claims of creditors
arise on account of
interest on loans, payment of dividend on preference shares, and
amortization of principal or repayment of instalments of term
loans or redemption of preference share capital on maturity.
Measure the relationship between what isnormally available from the operations of an
enterprise and the claims of its creditors
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Interest Coverage Ratio
Dividend Coverage ratio
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Interest Coverage ratio
Important from lenders point of view
Shows how many times the interest
charges are covered by the EBIT, out of
which those will be paid
EBIT/Fixed interest charges on loans
Why EBIT?
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Interest Coverage ratio
Important from lenders point of view
EBIT/Fixed interest charges on loans
Why EBIT?
Interest is tax-deductible and tax is calculated afterpayment of interest on loans
Caution
Too high a ratio may imply unused debt capacity.
Low Ratio is a danger signal in the sense that the
enterprise is using excessive long-term debts and
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Dividend Coverage ratio
Measures the ability of an enterprise to
pay dividend on preference shares
PAT/Pref Div Amt
Why PAT here?
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Dividend Coverage ratio
Measures the ability of an enterprise to
pay dividend on preference shares
PAT/Pref Div Amt
Why PAT here?
Unlike debts on which interest is a charge on
the profits of the enterprise, the Preference
Dividend is treated as an appropriation ofprofit
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Profitability Ratios
Gross Profit Margin
Net Profit Margin
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Gross Profit Margin
Gross Profit/Net Sales
Interpretation
Efficiency in the matter of production as well as
pricing Very High GPM
Check for unsatisfactory basis of valuation of stocks
resulting in over-valuation of closing stock and/or
under-valuation of opening stock
Low GPM
Check for high cost of production, low selling price
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Net Profit Margin
Net Profit/Net Sales
Measures the overall efficiency of production,administration, selling, financing, pricing and taxmanagement of an enterprise
Indicative of the managements ability to operate thebusiness with success, by way of recovery fromrevenues, not only of the cost of raw materials,
the expenses towards operating the business including
depreciation and the cost of borrowed funds, but
also leaving a reasonable margin of profit for the organisation.
P fit bilit R ti R l t d t
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Profitability Ratios Related to
Investments
Return on Assets,
Return on Capital Employed
Return on Shareholders Equity
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Return on Assets
Measured in terms of the relationship
between net profits and assets
Assets = Total Assets (FA-Deprecn)+NWC
Intangibles
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Return on Capital Employed
Profits/Total Capital Employed
Insight into how efficiently the long-termfunds of the owners and the creditors are
being used Higher the Ratio, the more efficient is the
use of capital employed
Can be improved by improving the profitabilityor by increasing the turnover of capital or bycombination of both
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Return on Shareholders Equity
Rate of Return on
Total Shareholders Equity, and
Ordinary Shareholders Equity,
Earning Per Share,
Dividend Per Share,
Dividend Pay-out Ratio, and
Price Earning Ratio.
Return on Total Shareholders
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Return on Total Shareholders
Equity
Preference share capital
Equity share capital
PAT/Avg Total Shareholder equity
Return on Ordinary Shareholders
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Return on Ordinary Shareholders
Equity
Equity share capital
PAT(after Pref Div)/Avg Ordinary
Shareholder equity
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Earning Per Share
NPAT-Pref Div/No. of Equity Shares
Measure of profitability from the
shareholders point of view
Again caution
should not be relied upon blindly: Why?
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Earning Per Share
NPAT-Pref Div/No. of Equity Shares
Measure of profitability from the
shareholders point of view
Again caution
should not be relied upon blindly
EPS cannot represent financial operations of
business Comparison across companies different
accounting procedures could be applied
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Dividend Per Share
Better indicator than EPS
NP (distributable)/No. of equity shares
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Dividend Payout Ratio
Dividend Paid/PAT
DPS/EPS
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Activity Ratio
Measures efficiency with which an enterprise is
managing and utilising its assets
Also called as Efficiency Ratios orAsset
Utilisation Ratios efficiency with which the assets are utilized
Higher the rate of conversion or turnover, the more
efficient is the utilization or management of the assets
Also referred as Turnover Ratios
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Assets Turnover Ratio
To find out whether the investments in therelative fixed assets have been judiciousand whether such investments have
contributed towards achievement of thedesired sales target
Total Assets Turnover
Cost of Goods Sold/Total assets
Interpretation
Efficient and effective utilisation
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Capital Gearing Ratio
Relation of Equity Capital to Loans
Technique of raising finances for a
company by resorting to fixed interest or
dividend-carrying securities
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Capital Gearing Ratio
Low Gearing (Rs) High Gearing(Rs)
Equity Share Capital 15,00,000 6,00,000
8 % Preference Share Capital 4,00,000 4,00,000
7 % Redeemable PreferenceShare Capital 1,00,000 8,00,000
7 per cent Debentures 3,00,000 4,00,000
General Reserves 1,00,000 1,00,000
PL Appropriation Account 1,00,000
24,00,000 24,00,000
Gearing Ratio 16:8 8:16
2:1 1:2
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Capital Gearing Ratio
Interpretation
A high gearing may result in some benefits to
the equity shareholders, where the rate of
interest/dividend on fixed interest/dividend-carrying securities is lower than the rate of
return on total capital invested in the business
Debt Service Coverage Ratio
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Debt Service Coverage Ratio
(DSCR)
Ability of an enterprise to meet its liabilities
by way of payment of instalments of term
loans and interest thereon from out of
cash accruals Forms the basis for fixation of the
repayment schedule
Cash accruals/Repayment
Cash acruals+Int/Repayment+Int
Debt Service Coverage Ratio
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Debt Service Coverage Ratio
(DSCR)
Interpretation
Along with cash flow indicates
when the repayment of the loan should begin,
how much should it be, and what should be the repayment period.
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Return on Net Worth (RoNW)
Measures the returns on the Net Worth,
i.e., Equity and Reserves of a company
and gives an idea of the way in which
shareholders funds are being utilized Net Profit /Net Worth
RONW good measure for comparison
If bonus shares are issued
EPS decreases, RONW?
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Return on Net Worth (RoNW)
Measures the returns on the Net Worth,i.e., Equity and Reserves of a companyand gives an idea of the way in which
shareholders funds are being utilized Net Profit /Net Worth
RONW good measure for comparison
If bonus shares are issued EPS decreases, RONW? Constant!
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Some Scenarios
Overtrading
Cash shortage
High Inv Turnover Ratio
Low Current Ratio
UnderTrading
Low Inv Turnover Ratio
High Current Ratio
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Under capitalisation
Owner capital less than borrowed capital
May be result of over trading
Effects Payment of excessive interest on borrowed capital,
Use of out-of-date appliances and equipments because of
inability to purchase new plant, equipments etc., and
High cost of production because of the use of old machines
and excessive interest on loans and high cost of purchasedue to extra credit period demanded on purchases.
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Over capitalisation
If its earnings are not sufficient to justify a fair
return on the amount of share capital and
debentures that have been issued Owner capital more than borrowed funds
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Importance of Ratio Analysis
Basis for comparing otherwise incomparableabsolute figures
Enables drawing of inferences on theperformance
Liquidity Position Long term Solvency
Operating Efficiency
Overall Profitability
Inter-firm Comparison Trend Analysis
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Limitations
Ratios are only tools
Ratio Analysis communicates only a
relative picture
Inflation distorts financial Ratio Analysis
Inter-firm comparison consider age, size
etc
Gives symptoms further investigation
needed for diagnosis
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Funds Flow
Funds Flow statement Balance Sheet
Profit Loss account
Drawn from movement of funds Analysis of resources available for finance
activities and uses
Also called Balance Sheet variationstatement or Sources and Uses of Fundsstatement
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F d fl St t t
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Funds flow Statement
For better understanding The operating surplus generated by the company, before tax and
dividend.
Whether any additional fixed assets have been acquired and, ifso, the amount spent therefor.
Whether any fixed assets have been sold and, if so, the saleproceeds thereof.
Whether any miscellaneous income, extraneous to the normaloperations of the company, has been received and, if so, theamount thereof.
Dividend paid by the company and, if so, whether it was paid outof the earnings of the year or out of profits of earlier year(s).
The extent of funds generated by way of depreciation charge.
Di ti ti
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Distinction
Transactions not involving cash are excluded for the purpose ofCash Flow Statement
Transactions not involving cash are excluded for the purpose ofCash Flow Statement. For example, transactions involving changeof Finished Goods to Receivables are ignored in Cash FlowStatement, whereas these form part of Funds Flow Statement.
The accrual concept is ignored in Cash Flow Statement, but isconsidered in Funds Flow Statement, since the relative items formpart of cash flow at the time of receiving or effecting the payments.
The Funds Flow Statement is an extension of the Balance Sheetand is a part of appraisal process, whereas the Cash FlowStatement is used by the management as a tool for monitoring the
cash balance to ensure timely receipt and payment of cash and alsomaintain cash balance in hand to the extent required.
C h Fl St t t
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Cash Flow Statement
Ability of the enterprise to meet obligationsto trade creditors
To make timely payment of interest on and
instalments of bank loans, as and whendue,
To pay interest to debenture holders asalso dividends to its shareholders
Enables the management to makenecessary planning
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A firm has a higher asset turnover ratio than theindustry average, which implies
A) the firm has a higher P/E ratio than otherfirms in the industry.
B) the firm is more likely to avoid insolvency inthe short run than other firms in the industry.
C) the firm is more profitable than other firms inthe industry.
D) the firm is utilizing assets more efficientlythan other firms in the industry.
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A firm has a higher asset turnover ratio than theindustry average, which implies
A) the firm has a higher P/E ratio than otherfirms in the industry.
B) the firm is more likely to avoid insolvency inthe short run than other firms in the industry.
C) the firm is more profitable than other firms inthe industry.
D) the firm is utilizing assets more efficientlythan other firms in the industry.**
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If the interest rate on debt is higher thanROA, then a firm will __________ byincreasing the use of debt in the capital
structure.A) increase the ROE
B) not change the ROE
C) decrease the ROED) change the ROE in an indeterminablemanner
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If the interest rate on debt is higher thanROA, then a firm will __________ byincreasing the use of debt in the capital
structure.A) increase the ROE
B) not change the ROE
C) decrease the ROE **D) change the ROE in an indeterminablemanner
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If a firm has a positive tax rate, a positiveROA, and the interest rate on debt is thesame as ROA, then ROA will be
________.A) greater than the ROE
B) equal to the ROE
C) less than the ROED) greater than zero but it is impossible todetermine how ROA will compare to ROE
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If a firm has a positive tax rate, a positiveROA, and the interest rate on debt is thesame as ROA, then ROA will be
________.A) greater than the ROE**
B) equal to the ROE
C) less than the ROED) greater than zero but it is impossible todetermine how ROA will compare to ROE
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When long term uses in a funds flowstatement are more than long term uses, it
results in:
Increase in WC gap Increase in NWC
Increase in CL
Decrease in WC
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When long term uses in a funds flowstatement are more than long term uses, it
results in:
Increase in WC gap Increase in NWC**
Increase in CL
Decrease in WC
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A firm incurs a loss. In funds statement itwould be shown as
a. Source of funds
b. Use of funds
c. Waste of funds
d. Routing of funds
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A firm incurs a loss. In funds statement itwould be shown as
a. Source of funds
b. Use of funds**
c. Waste of funds
d. Routing of funds
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Balance sheet total of a firm has total of32 lakhs. LTS are 20 Lakhs. If CR is
1.5:1, what is the amount of long term
use of firm?a. 18
b. 16
c. 14
d. 12
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Balance sheet total of a firm has total of32 lakhs. LTS are 20 Lakhs. If CR is
1.5:1, what is the amount of long term
use of firm?a. 18
b. 16
c. 14**
d. 12
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Payment of creditors has been made byfirm out of available cash. This will
a. Not bring any change to WC
b. Change the WC
c. Change WC and overall NW
d. Not change WC and OP
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Payment of creditors has been made byfirm out of available cash. This will
a. Not bring any change to WC**
b. Change the WC
c. Change WC and overall NW
d. Not change WC and OP
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Activity rations measure
a. Efficiency of asset management
b. Earning success
c. Relationship between Debt and equity
d. Short term stability of a firm
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Activity rations measure
a. Efficiency of asset management**
b. Earning success
c. Relationship between Debt and equity
d. Short term stability of a firm
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An SSI unit isues fully paid bonus sharesof Rs. 30 Lakhs. D/E was 2:1, LToutside
Liab Rs 200 Lakhs before this. What is
new D/E?a. 1.5:1
b. 1.8:1
c. 2.0:1
d. 2.5:1
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An SSI unit isues fully paid bonus sharesof Rs. 30 Lakhs. D/E was 2:1, LToutside
Liab Rs 200 Lakhs before this. What is
new D/E?a. 1.5:1
b. 1.8:1
c. 2.0:1**
d. 2.5:1
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DSCR helps Banks to:
a. Assess WC need
b. Assess TL need
c. Fix amount of instalment and period
d. Assess credit worthiness of firm
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DSCR helps Banks to:
a. Assess WC need
b. Assess TL need
c. Fix amount of instalment and period**
d. Assess credit worthiness of firm
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Total Liabilities Rs. 80 L, CR 1.5:1, FA:50 L and D/E 3:1. Amount of Long Term
Liab:
a. 20b. 45
c. 15
d. 10
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Total Liabilities Rs. 80 L, CR 1.5:1, FA:50 L and D/E 3:1. Amount of Long Term
Liab:
a. 20b. 45**
c. 15
d. 10
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Total Liabilities Rs. 70 L of which Termliab is Rs 25 L. CA Rs. 40 L and CR 2:1
NW is:
a. 25**b. 20
c. 45
d. 30
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Total Liabilities Rs. 70 L of which Termliab is Rs 25 L. CA Rs. 40 L and CR 2:1
NW is:
a. 25b. 20
c. 45
d. 30
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Fixit Company
Income Statement (2006)
Sales 4,000,000
Cost of goods sold 3,040,000
Gross profit 960,000
Selling and administrative expenses 430,000
Operating profit 530,000
Interest expense 160,000
Income before tax 370,000
Tax expense 148,000
Net income
222,000
Balance Sheet
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Balance Sheet
2005 2004
Cash 60,000 50,000
Accounts receivable 550,000 500,000
Inventory 690,000 620,000
Total current assets 1,300,000 1,170,000
Fixed assets 1,300,000 1,230,000
Total assets 2,600,000 2,400,000
Accounts payable 270,000 250,000
Bank loan 580,000 500,000
Total current liabilities 850,000 750,000
Bonds payable 900,000 1,000,000
Total liabilities 1,750,000 1,750,000
Capital (25,000 shares) 250,000 250,000
Retained earnings 600,000 400,000
Total liabilities & equity 2,600,000 2,400,000
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The firm's current ratio for 2006 is___________.
A) 1.98
B) 2.47
C) 0.65
D) 1.53
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The firm's current ratio for 2006 is___________.
A) 1.98
B) 2.47
C) 0.65
D) 1.53 **
E) Rationale: 1,300,000/850,000 = 1.53.
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The firm's average collection period for2006 is _______days.
A) 47.90
B) 48.53
C) 46.06
D) 47.65
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The firm's average collection period for2006 is _______days.
A) 47.90 **
B) 48.53
C) 46.06
D) 47.65
Rationale: (525,000 / 4,000,000) (365) =
47.90.
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The firm's inventory turnover ratio for 2006is ________.
A) 4.64
B) 4.16
C) 4.41
D) 4.87
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The firm's inventory turnover ratio for 2006is ________.
A) 4.64 **
B) 4.16
C) 4.41
D) 4.87
Rationale: 3,040,000/[(620,000 + 690,000) /
2] = 4.64
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The firm's return on equity ratio for 2005 is________.
A) 0.1235
B) 0.0296
C) 0.2960
D) 2.2960
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The firm's return on equity ratio for 2005is ________.
A) 0.1235
B) 0.0296
C) 0.2960 **
D) 2.2960
Rationale: 222,000/[(850,000 + 650,000) / 2]
= 0.2960
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