Ratio Analysis


Practical Problems

Q. The following is the Balance Sheet and Profit & Loss Account of H.S.G. Limited. (Dec. 02)

Balance Sheet
as on 31-3-2001

  Liabilities Rs.   Assets Rs.
  Share Capital
(12,000 Equity Share of Rs. 10 each)
1,20,000   Machinery 1,55,000
  Reserves and Surplus 35,000   Inventories 65,000
  13% Debentures 80,000   Debtors 40,000
  Sundry Creditors 50,000   Cash at Bank 35,000
  Provision for Taxation 15,000   Prepaid Expenses 5,000
    3,00,000     3,00,000

Profit & Loss Account
for the year ended 31-3-2001

  Particulars Rs.
  Sales 2,00,000
  Less: Cost of Sales 1,30,000
  Profit before Interest and Tax 70,000
  Less: Interest 10,400
  Profit before Tax 59,400
  Less: Tax 30,000
  Profit after Tax 29,400

Compute:

  1. Return on Investment
  2. Return on Net Worth
  3. Earning per Share
  4. Investment Turnover Ratio
  5. Current Ratio

a)
Return on Investment   Net Profit before Interest and Tax    
=
x 100
  Capital Employed    

  Rs. 70,000        
=
x 100 = 29.78%
  Rs. 2,35,000        

Where Capital Employed = Share Capital + Reserves and Surplus + 13% Debentures

= Rs. 1,20,000 + Rs. 35,000 + Rs. 80,000 = Rs. 2,35,000.

b)

Return on Net Worth   Net Profit + Int.    
=
x 100
  Net Assets    

  29,600 + 10,400        
=
x 100 = 13.33%
  3,00,000        

c)

Earning per share   Net Profit after interest, tax and dividend
=
  No. of Equity Shares

  Rs. 29,600    
=
= 2.46
  12,000    

d)

Investment Turnover Ratio   Net Sales
=
  Investment (Capital Employed)

  Rs. 2,00,000    
=
= 0.85 times.
  Rs. 2,35,000    

e)

Current Ratio   Current Assets
=
  Current Liabilities

  Rs. 1,45,000    
=
= 2.23: 1
  Rs. 65,000    

Where Current Assets = Inventories + Debtors + Cash at Bank + Prepaid Expenses

= Rs. 65,000 + Rs. 40,000 + Rs. 35,000 + Rs. 5,000 = Rs. 1,45,000

Current Liabilities = Sundry Creditors + Provision for Taxation

= Rs. 50,000 + Rs. 15,000 = Rs. 65,000.

Q. The following facts, relate to Excel Ltd. (Dec. 01)

Current ratio = 2.7
Quick ratio = 1.8
Current liabilities = Rs. 6,00,000
Inventory Turnover = 4 times

What would be the sales of the company.

Current Ratio   Current Assets
=
  Current Liabilities

  CA
2.7 =
  6,00,000

CA = 16,20,000

Liquid Ratio   Liquid Assets
(Quick assets)
=
  Current Liabilities

  QA
1.8 =
  6,00,000

= 10,80,000

Stock = CA - QA
= 16,20,000 - 10,80,000 = 5,40,000

Stock Turnover Ratio   Cost of Goods Sold or Sales
=
  Average Stock

  Sales
4 =
  5,40,000

Sales = 21,60,000

NOTE: As only closing stock is given therefore this would be treated as average stock.

Q. (a) The margin of profit of Apex Industries is 10%, its total assets turnover ratio is 2 times, and its equity/total assets ratio is 40%. What would be the company's rate of return on equity? (June 01)

(b) If the net profit margin of the above firm is 25 percent, and the ROI is 10 percent, what would be the total assets turnover ratio ? (June 01)

(a)

Margin of profit = 10%
Total assets turnover = 2 times
Equity/total assets = 40%

ROE = (Total assets/equity) X total assets turnover ratio X net profit margin%

ROE = (100/40) X 2 X 10 = 50%

(b)

Total assets turnover   ROI
=
  Net profit margin

= 10/25
= 0.4 times

Q. What is the rate of return on equity for a company whose profit margin is 12%, its total assets turnover ratio is 2 times, and its equity/total assets ratio is 40%. (June 00)

Margin of profit = 12%
Total assets turnover = 2 times
Equity/total assets = 40%

ROE = (Total assets/equity) X total assets turnover ratio X net profit margin%

ROE = (100/40) X 2 X 12 = 60%

 
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