Sahrish Business Finance

8/6/2019 Sahrish Business Finance

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RATIO ANALYSISThe Balance Sheet and the Statement of Income are essential, but they are only the starting point

for successful financial management. Ratio Analysis Is applied to Financial Statements to

analyze the success, failure, and progress of business.

Ratio Analysis enables the business owner/manager to spot trends in a business and to compare

its performance and condition with the average performance of similar businesses in the same

industry. To do this ratios are compared with the average of businesses similar to ones business

and compare ones own ratios for several successive years, watching especially for any

unfavorable trends that may be starting. Ratio analysis may provide the all-important early

warning indications that allow you to solve your business problems before your business is

destroyed by them.

1. CURRENT RATIO

Current Assets

Marketable investment +raw material and stores +Other stock + Accrued Income +Advances +

deposits with GOVT +Advance payment of tax + Other Receivables + Finished goods and semi

finished goods + Receivables + Sundry Debtors + Cash in hand + cash at Bank

Current Liabilities

Current LIABILITIES & PRIVISIONS + PROVISIONS WHICH ARE GIVEN AT THE

LIABILITY SIDE OF THE BALANCE SHEET

Formula of current ratio

Current Ratio = Current Assets / Current Liabilities

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Years Current assets Currentliabilities

Current ratio

1996 1903.8 1922 0.99

1997 2384.7 2510.61 0.95

1998 2979.22 2971.3 1

1999 3504.3 3568.4 0.98

2000 3694.2 4159.5 0.89

2001 4005.73 4659.22 0.89

COMMENT

If the current ratio of a business is 1or more, it means it has more current assets than the current

liabilities, the above table is showing that ratio of the company to meet it liabilities by the

current assets is less than one so the liabilities are more and it is just satisfactory because its

nearby one and firm can increase this in the upcoming year.

2. Quick Ratio

This is the ratio of quick assets to all current liabilities..The Quick Ratio is sometimes called the

"acid-test" ratio and is one of the best measures of liquidity.

The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding

inventories, it concentrates on the really liquid assets, with value that is fairly certain. It helps

answer the question: "If all sales revenues should disappear, could my business meet its current

obligations with the readily convertible `quick' funds on hand?"

Current assets-inventoriesQuick Ratio = _________________________________________

Total Current Liabilities

Quick Ratio is calculated as shown below:

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Comment:

The quick ratio is similar to the current ratio except that it excludes inventory, which is

generally the least liquid current asset. An acid-test of 1:1 is considered satisfactory unless the

majority of your "quick assets" are in accounts receivable, Quick ratio of the company is 0.59

times which is not so good but accept able so its relatively better that the most of the current

assets are liquid assets of the company.

3. Debtors Turnover Ratio

This ratio indicates how well accounts receivable are being collected. If receivables are not

collected reasonably in accordance with their terms, management should rethink its collection

policy. If receivables are excessively slow in being converted to cash, liquidity could be

severely impaired

The Accounts Receivable Turnover Ratio is calculated as follows

Formula: credit sales / average debtors

Calculation of debtors' turnover ratio

Years 1996 1997 1998 1999 2000 2001

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Years Quick assetsCurrent

liabilities Quick ratio

1996 1183 1922 0.6161997 1340.1 2510.61 0.534

1998 1833.54 2971.3 0.617

1999 1294.5 3568.4 0.615

2000 2512.4 4159.5 0.604

2001 2765.68 4659.22 0.594


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Net credit sales 7137.8 8363.310261.5

710978.

311458.

311861.7

7

Averagedebtors 143.5 144.45 169.197

213.342 249.13 344.64

Debtorsturnover ratio 49.74 57.88 60.37 51.46 45.99 34.42

Calculation of net credit sales and Average debtors:

The net credit sales are given in the income statement.

Average Debtors are calculated by adding of two years and dividing to the number of years.

COMMENT:

This shows the effectiveness of the companys credit control system. Much like rate of stock

turn over, this ratio shows how much times in a year are debtors given credit and they fully

repay it. Credit sales are higher and the graph mentioned above is showing a down ward trend

so the real value can be determined by knowing the average collection period because in the last

year the credit sales are increased and also the debtors are increased which are highest in the

year 2001

4. Average Collection Period

This is another way of stating the debtors turnover ratio. It is calculated in number of weeks(or

months) taken by each debtor, on average, to pay his debt to the company .If the rate of debtors

turnover ratio is high, average credit allowed period would be low. If the rate of debtors

turnover ratio is low, it indicates a high average credit allowed period. I

Calculation of average collection period:

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Years 1996 1997 1998 1999 2000 2001

Days in a year 365 365 365 365 365 365

Debtors turnover 49.74 57.88 60.65 51.46 45.99 34.41ACP 7.33 6.3 6 7 7.9 10.6

Here, the average collection period is gradually increasing, indicating that an extended line of

credit has been allowed. There was a sharp decline in the debtors' turnover ratio in 1999, and thedecline continued till 2001. The fall in debtors' turnover ratio can be attributed to any of the

following reasons:

There might be an increase in the volume of sales relative to the increase in debars.

5. Inventory or Stock Turnover Ratio

Net SalesInventory Turnover Ratio = ___________________________

Average Inventory at Cost

Calculation of Stock Turnover:

Years 1996 1997 1998 1999 2000 2001

Sales 7137.8 8363.310261.5

710978.3

111458.

311861.7

7

Closinginventory 903.4 1044.6 1145.68 1309.8 1181.8 1240.05

Stockturnover 7.9 8 8.9 8.4 9.7 9.5

Calculation of closing stock and sales:

Sales are taken from the income statement and closing stock is taken out from the asset side of

the balance sheet

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Comment:

There are ups and down in stock turnover ratio from 1997 to 2001. In 1998, 2000 and 2001 the

higher stock turnover ratio shows low investment in inventory or stock but in 1997 and in 1999

it shows higher investment in inventory

6. Interest Coverage Ratio

The interest coverage ratio is calculated by dividing a company's earnings before interest and

taxes (EBIT) of one period by the company's interest expenses of the same period:

Calculation of interest coverage ratio:

Years 1996 1997 1998 1999 2000 2001

EBIT 652.3 870.9 1128.4 1414.4 1695.9

2050.4

7

Interest 57 33.8 29.28 22.3 31.1 7.74

Interest coverage 11.44 25.76 38.53 63.42 129.42 264.92

Calculation of PBIT and interest:

These are given in the income statement and PBIT is calculated by subtracting deprecation from

PBDT and interest is mentioned in the income statement.

Comment:

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This ratio shows the number of times the interest charges on long-term liabilities have been

collected before the deduction of interest and tax. A high interest coverage ratio is in 2001 that

the company can easily meet its interest burden even if profit before interest and taxes.

7. Gross Margin:

Gross Profit

Gross Margin Ratio = _______________*100

Net Sales

The Gross Margin Ratio is calculated as follows:

Calculation of net sales and GP:

It is calculated by deducting in direct taxes (exercise duty) from sales and GP is mentioned in

the income statement.

COMMENT:

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Years 1996 1997 1998 1999 2000 2001

Gross profit 707.5 928.8 1229.4 1543.1 1826.8 2195.13

Net Sales 6560.7 7736.8

9426.1

3

10116.

5

10588.

2

10941.1

1

Gross margin 10.78 12 13.04 15.25 17.25 20.06


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The gross margin has been increasing steadily since 1997.

The gross profit is the profit made on sale of goods. It is the profit on turnover. In the year

2000-2001 the gross profit ratio is 20%. It has increased and its constantly increasing from

1996 which is a good sign for the company

8. Net Profit Margin Ratio

This ratio is the percentage of sales left after subtracting the Cost of Goods sold and all

expenses, except income taxes. It provides a good opportunity to compare companys "return on

sales" with the performance of other companies in industry. It is calculated before income tax

because tax rates and tax liabilities vary from company to company for a wide variety of

reasons, making comparisons after taxes much more difficult.

The Net Profit Margin Ratio is calculated as follows:Net Profit after Tax

Net Profit Margin Ratio = _____________________*100Net Sales

Years 1996 1997 1998 1999 2000 2001

Net profit 402.8 567.1 806.2 1074.11327..8 1640.31

Sales 6560.7 7736.8

9426.1

3

10116.

5

10588.

2

10941.1

1

Net Margin 6.14 7.33 8.55 10.62 12.54 14.99

Calculation of net sales and net profit:

Nat sales = sales - direct taxesNet profit is mentioned in the income statement

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Comment:

The net profit margin has increased significantly. The high net profit margin implies higher

returns to shareholders in the form of dividends and stock price appreciation which s good sing

for the share holders that they can get high return.

9. Debt-Equity Ratio

As follows debt-equity ratio is calculated

Total Liabilities

Debt/Worth Ratio = _______________

Net Worth

Calculation of debt-equity ratio:

Years 1996 1997 1998 1999 2000 2001

Debts 260 186.4 264.31 177.2 111.5 83.73

Net worth 938.1 1261.2

1713.0

3 2102.5 2488

3043.6

9

Debt-equity Ratio 0.277 0.148 0.154 0.084 0.045 0.028

Calculation:

Net worth is taken from the liability side and debts are also from the liability side.

COMMENT:

This Debt/Worth or Leverage Ratio indicates the extent to which the business is reliant on debt

financing (creditor money versus owner's equity) from 1998 the debt-equity ratio shows a

downward trend. It means company is mostly relying on its share holder funds rather than

borrowed funds. If the company is mostly relying on its equity it means there is a huge return

from equity.

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10. Return on Assets (ROA)

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to

how efficient management is at using its assets to generate earnings. Calculated by dividing a

company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this

is referred to as "return on investment".

Net Profit after-tax

Return on Assets = ________________________

Average Total Assets

Calculation of ROA:

Years 1996 1997 1998 1999 2000 2001

PAT 402.8 567.1 806.2 1074.1

1327..

8

1640.3

1

Average total assets 2878.1

3208.8

5

3965.8

5 4763.8 5465.9 6280.78

ROA 13.99 17.67 20.32 22.55 24.29 26.12

Calculation of profit after tax and average assets.

Pat is taken out from the income statement and average assets are obtained by taking sum of 2

years/number of years..

Comment:

The above Graph shows an upward trend in the return on total assets. Which means efficiency in

use of total Assets the higher the ratio it means business is more efficient in utilization of it

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resources as same in the case of this company and to know the actual value its important to

know what effects if interest is also added to it.

Formula: PAT + Interest/Average total assets * 100

Years 1996 1997 1998 1999 2000 2001

PAT + interest 459.8 600.9 835.4 1096.4

1340.4

3

1648.0

5

Average total assets 2878.1

3208.8

5

3965.8

5 4763.8 5465.9

6280.7

8

ROA 15.97 18.73 21.06 23.01 24.52 26.24

Calculation of profit after tax and average assets.

Pat is taken out from the income statement and interest is added

Average assets are obtained by taking sum of 2 years/number of years.

Comments:

The graph is moving up words and constantly moving up wars from 1996.this is good that the

company is utilizing its all recourses but to know the share of the creditors is also important

because by that we know the real value of the company own.

11. Return on Capital Employed (ROCE)

A ratio that indicates the efficiency and profitability of a company's capital investments.

Formula: PBIT / Average total capital employed * 100

Return on Capital Employed (ROCE) is calculated as follows

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Calculation of PBIT and Average total capital employed

PBIT is calculated by PBDIT deprecation and its in income statement.

By adding borrowing to the owner equity

COMMENT

1996 the ratio was 54% after that company start increasing productivity on its capital employed

there for in 2000 the ratio reached its maximum level which shows the higher earning capacity

of company on its capital employed.

12. Return on total shareholders' equity:

This ratio establishes the relationship between net profits available to equity shareholders and

the amount of capital invested by them. It is used to compare the performance of company's

equity capital with those of other companies, and thus help the investor in choosing a company

with higher return on equity capital.

Calculation of return on total shareholders' equity:

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Years 1996 1997 1998 1999 2000 2001

PBIT 652.3 870.9 1128.36 1414.4 1695.9 2050.47

Average total

capital employed 1198.1 1447.6

1977.3

4 2279.7

2599.3

5

3127.4

2

ROCE 54.44 60.16 57.07 62.04 65.24 65.56


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Years 1996 1997 1998 1999 2000 2001

Net profit after taxes 402.8 567.1 806.2 1074.1 1327.8

1640.3

1

Average total

shareholders equity 145.8 172.45 209.33 219.5 219.75 220.06

Return on total

shareholders equity 2.76 3.29 3.85 4.89 6.04 7.45

Calculation:

Average total share holders equity is calculated by adding equity of two years and dividing

with the number of years.

COMMENT:

One of the most important profitability metrics is return on equity (or ROE for short). Return on

equity reveals how much profit a company earned in comparison to the total amount of

shareholder equity the return on total shareholders' equity has been increasing since 1997 to

2001. This increase is due to the increase in net profits available to equity shareholders.

13. Non-operating Income Ratio

This ratio indicates the extent to which a firm is dependent on its non-operating income to pay

dividends

Non-operating income / Profit before tax

Years 1996 1997 1998 1999 2000 2001

Non-operating

income 106.7 165.2 183.9 269.3 305.9 283.14

Profit before tax 595.3 837.1 1099.2 1392.1 1682.8

2042.7

3

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Non-operating

income ratio 0.179 0.197 0.167 0.193 0.182 0.138

Calculation of non operating profit and PBT

Both are in the in the income statement.

COMMENT

Increasing ratios mean that the business is moving away from its core business but its not

increasing and is a good sign for company that the graph is showing.

14. Interest Incidence Ratio

This ratio shows how much of the operating profit is used to meet interest obligations

Calculation of interest incidence:

Years 1996 1997 1998 1999 2000 2001

Interest 57 33.8 29.2 22.3 13.1 7.74

Operating profit 707.5 928.8 1229.4 1543.1 1826.8

2195.1

3

Interest incidence

ratio 0.081 0.036 0.024 0.014 0.007 0.003Calculation

Both are taken out from the income statement

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Comment

Incidence rates describe the frequency of specific events. This type of statistic typically is used

in evaluating the prevalence of injuries and illnesses in the work place. This shows the down

ward trend that the interest is decreasing day by day means very less creditors day by day so its

reducing the tax benefit.

15. Direct Marketing Expenses Ratio (DMER)

Calculation of direct marketing expenses ratio

1996 1997 1998 1999 2000 2001

Direct

marketing

expenses 283 490.6 676.8 746.5 709.2 835.75

Net sales 6560.7

7736.7

5

9426.1

3

10116.

5

10588.1

8

10941.1

1

Direct

marketing

expenses ratio 0.043 0.063 0.071 0.073 0.066 0.076

Calculation:

Nat sales are calculated by subtracting in direct taxes from gross sales.

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COMMENT

The direct marketing expenses include salaries and allowances for marketing and sales people,

forwarding expenses, sales commission, traveling and expenditure on advertisements. The

mixed trend in the ratio may have gone for a major capacity expansion in 1997-2001.

16. Dividend per Share:

Formula dividend to equity shares holders/no of outstanding shares

Years Dividend Number of

shares

outstanding

Dividend per share

1996 249 1.46 170.55

1997 338.5 1.99 170.14

1998 463.4 2.19 211.62

1999 638.1 2.19 291.37

2000 770.2 2.2 350.1

2001 1100.62 2.20 500.28

Calculation:

It is assumed that ordinary shares are 100 and dived equity by supposed number of shares.

17. Earnings per Share:

This ratio indicates the earning per equity share. It establishes the relationship between net profit

available for equity shareholders and the number of equity shares.

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In any

companies if

you are pay

proper

dividend to

the

shareholders

they are

more invest in the business and they are trust on the company in 1996 is 61% and it is

Decreasing remaining four years but in last year 2001 it is increased which is at its highest level

18. Sales Assets Turnover Ratio

Calculation of sales assets turnover ratio:

Years 1996 1997 1998 1999 2000 2001

Gross sales 7137.8 8363.3

10261.

5

10978.

3

11458.

3

11861.7

7

Trade debtors +

finished goods

inventory 613.5 666.6 741.57 907.5 854.2 1012.78

Sales assets

turnover ratio 11.63 12.54 13.83 12.09 13.41 11.71

Calculation:

Trade debtors + finished goods inventory these are present in the asset side of the financial

statements. And gross sales from the income statement

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Years Dividend per

share

Earnings per

share

Dividend Pay-out

Ratio

1996 170.55 275.89 61.82

1997 170.14 284.97 59.74

1998 211.62 368.13 57.49

1999 291.37 490.46 59.41

2000 350.1 603.54 58

2001 500.28 745.6 67.10


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COMMENT

The mixed trend in the ratio may have gone for a major capacity expansion in 1997-2001.and a

sharp decline in 2001

19. DUPONT ANALYSIS

This form of analysis was introduced by the management of the famous Du

Pont Company. It works on the basis of splitting the computation of return on equity in three

distinct stages, with a view to get better understanding of the factors that contribute towards

improving a companys financial performance.

Formula: Return on sales * total asset turn over * Return on equity

Calculation of formula items:

Return on sales = net profit / net sales

Total asset turn over = net sales / total assets

Return on equity = Total assets / equity

Year Return on Sales Total Assets

Turnover

Gearing ROE

1996 0.061 2.28 3.068 42.93%

1997 0.073 2.186 2.807 44.97%

1998 0.086 2.146 2.564 47.06%

1999 0.106 1.97 2.443 51.09%

2000 0.125 1.827 2.33 53.37%

2001 0.15 1.617 2.223 53.89%

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COMMON SIZE BALANCE SHEET:

21. Horizontal Analysis:

It is another method to know about the financial performance of the

company. In this method we take one year as a base year and then compare all the remaining

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F i x e d A s s e t s

A s s e t s

R e v a l u e d F i x e d

I n v e s t m e n t


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year on the basis of that base year. In this we can see that what is the change (increase or

decrease) is happened in current year as compare to the basis. It must be noted that only one

year is selected as a base year. For example in case of balance sheet if we are doing the

horizontal analysis of the current assets and 5 years are given in our data. So, we can do this

with the help of the base year. For example, if we choose 1st year as a base year than we shall

see that we is happening in current assets in 2nd year, 3rd year, 4th year and 5th year. They

might be a decreasing or increasing as compare to the base year. The base year is considered as

100.

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CONCLUSION

From our analysis we might conclude that the liquidity position of the firm is good, operating

performance is also well as compared to the past year. The overall trend of the company is

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F i x e d A s s e t s

R e v a l u e d F i x e d A s


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moving up wards there are some loop holes but the company is moving with good polices and

generating profit as well as increasing share vale and its easily shown by the help of graphs and

the common size analysis that the firm is increasing condition from 1996 onwards2001.

From the point of view of equity investor the firm is very much attractive because of the

following s points:

1. Dividend per share of the company is high, which is very much attractive for the investor.

2. Dividend payout ratio of the company is also very high

In ICI company limited sales turn over increase which shows the performance of the company

better company also payment of dividend on time that means shareholder are satisfy with the

performance of the company and ICI company also early payment of interest that means

creditors also satisfy with the performance of the company and they will give more loan to the

company net profit and gross profit also better in the company but investment decrease in the

company may be due to economic factors current and quick ratios is also increase collection

period from debtors is better overall company performance is better now company in profit

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