Financial Ratio Analysis Numerical
A financial ratio is nothing but a parameter to measure the company’s financial status. Also, financial ratios compare the state of the company with different pieces of financial information.
Question No. 1 The following financial information are provided of a company:
| Total Credit Sales of the Year | Rs. 20,00,000 |
| Inventory at the end of the year | Rs. 4,00,000 |
| Gross Profit Margin | 30% |
| Account Receivable at the end | Rs. 1,00,000 |
Opening Balance of Inventory was less by Rs. 2,00,000 than the ending balance of inventory,
Find:
- Stock Turnover Ratio
- Average Collection Period
Solution:
Stock Turnover Ratio = (Cost of Goods Sold)/(Average Inventory)
Cost of Goods Sold Ratio = Sales (100%) – Gross Profit Margin =100%-30% = 70%
Where, Cost of Goods Sold = 70%* 20,00,000 = Rs.14,00,000
Average Inventory = (Opening Stock Closing Stock)/2 = ((4,00,000-2,00,000)+4,00,000)/2 = Rs. 3,00,000
Stock Turnover Ratio = 14,00,000/3,00,000 = 4.67
Average Collection Period = (Debtors*Days in Year)/Credit Sales
= (1,00,000*365)/20,00,000 = 18.25
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Question No. 2 The Balance Sheet of a company for the year ended 31st March, 2018 is given as below:
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
| Authorised Capital (10,000 shares of Rs. 100 each) | 10,00,000 | Land and Building | 2,00,000 |
| Issued Capital(5,000 shares of Rs. 100 each) | 5,00,000 | Plant and Machinery | 4,00,000 |
| Debenture @ 12% | 1,00,000 | Inventory and Finished Goods | 1,00,000 |
| Accounts Payable | 2,00,000 | Accounts Receivable | 2,50,000 |
| Bills Payable | 1,00,000 | Cash at Bank | 50,000 |
| Profit of last year | 40,000 | ||
| Profit of current year | 60,000 | ||
| Total | 10,00,000 | Total | 10,00,000 |
The Company issued 5,000 shares to purchase the following assets and liabilities of a company at an agreed value of Rs. 120 per share.
| Plant and Machinery | Rs. 4,00,000 |
| Account Receivable | Rs. 1,00,000 |
| Inventory | Rs. 1,00,000 |
| Cash at Bank | Rs. 50,000 |
| Accounts Payable | Rs. 1,00,000 |
Calculate
- Interest Coverage Ratio of the company
- Current and Quick Ratio after the merger
- Debt-Equity Ratio of the company after and before the merger
Solution:
- Interest Coverage Ratio = Earning before interest and taxes/ Interest Charge)
= (60,000+12,000)/12,000 = 72,000/12,000 = 6 times
| Working Note: Earning before interest and taxes = Interest + Profit of current year EBIT = 12,000 + 60,000 = Rs. 72,000 Interest = 1,00,000 × 12 % = Rs. 12,000 |
- Current and Quick Ratio after the Merger
Current Ratio = Current Assets/Current Liabilities = 6,50,000/4,00,000 = 1.625:1
| Working Note: Current Asset = Inventory + Accounts Receivable + Cash at Bank (Before and After Merger) = 100000+250000+50000+100000+50000+100000 = Rs. 6,50,000 Current Liabilities = Accounts Payable + Bills Payable = 200000+100000+100000 = Rs. 4,00,000 |
Quick Ratio = (Current Asset- Liabilities)/( Current Liabilities) = (6,50,000-1,00,000-1,00,000)/ 4,00,000 = 1.125:1
- Debt-Equity Ratio of the company after and before the merger
Debt-Equity Ratio= Long term Debt/ Shareholder’s Equity (Excluding Current Liabilities)……..A
Debt-Equity Ratio = Total Debt/ Shareholder’s Equity (Including Current Liabilities)………….B
Before Merger
Debt-Equity Ratio = 1,00,000/(500000+40000+60000) =0.167= 16.7%..A
= (1,00,000+2,00,000+1,00,000)/(5,00,000+40,000+60,000) = 0.667 = 66.7% B
After Merge
Debt-Equity Ratio = 1,00,000/(5,00,000+40,000+60,000+6,00,000) = 0.667 =66.7%……..A
= (1,00,000+2,00,000+1,00,000+1,00,000)/1,00,000 = 0.417 = 41.7%………B
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Question No. 3 The following is the financial information of a firm:
| Total Assets ( Including Preliminary Expenses) | Rs. 2,40,000 |
| Opening Inventory | Rs. 80,000 |
| Closing Inventory | Rs. 40,000 |
| Days in a year | 360 days |
| Gross Profit ( 20% of Sales) | Rs. 120,000 |
| Average Collection Period | 36 days |
Required:
- Amount of Sales
- Amount of Debtors
- Total Asset Turnover Ratio
- Inventory Turnover Ratio
Solution:
- Amount of Sales
Gross Profit Margin = (Gross Profit/Sales)*100
or, 20 = (1,20,000/Sales)*100
or, Amount of Sales = 1,20,00000/20
Amount of Sales = Rs. 6,00,000
- Amount of Debtors
Average Collection Period = (Debtors* Days in Year)/Sales
or, 36 = (Debtors*360)/ 6,00,000
or, Debtors = (36*6,00,000)/360
or, Debtors = Rs. 60,000
- Total Asset Turnover
Total Asset Turnover = Sales/ Total Asset = 6,00,000/2,40,000 = 2.5 times
- Inventory Turnover Ratio
Inventory Turnover Ratio = Cost of Goods Sold/ Average Inventory
or, Cost of Goods Sold = Sales – Gross Profit = Rs. 6,00,000- 1,20,000 =Rs. 4,80,000
Average Inventory = (Opening Inventory + Closing Inventory)/2 = Rs. (80,000+40,000)/2 = Rs.60,000
Inventory Turnover Ratio =Rs. 4,80,000/60,000 = 8 times
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Question No. 4 A company presents the following financial indicators:
| Opening Stock | Rs. 20,000 |
| Closing Stock | Rs. 10,000 |
| Purchases | Rs. 60,000 |
| Sales | Rs. 1,05,000 |
| Sales Return | Rs. 5,000 |
| Carriage Inward | Rs. 5,000 |
| Office and Administration Expenses | Rs.5,000 |
| Selling Expenses | Rs. 3,000 |
Required:
- Stock Turnover Ratio
- Net Profit Margin
- Return of Assets, of value of Rs. 1,70,000
Solution:
Dr. Trading and P/L Ac Cr.
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
| To Opening Stock To Purchase To Carriage Inward To Gross Profit | 20,000 60,000 5,000 25,000 | By Sale 1,05,000 Less: Sales Return 5,000 By Closing Stock | 1,00,000 10,000 |
| 1,10,000 | 1,10,000 | ||
| To Office & Ad. Expenses To Selling Expenses To Net Profit | 5,000 3,000 17,000 | By Gross Profit | 25,000 |
| 25,000 | 25,000 |
Stock Turnover Ratio = Cost of Goods Sold/ Average Inventory
Where, Cost of Goods Sold = Sales -Gross Profit = Rs. (1,00,000-25,000) = Rs. 75,000
Average Stock = (Opening Stock+ Closing Stock)/2 = (20,000+10,000)/2 = Rs. 15,000
Stock Turnover Ratio = 75,000/15,000 = 5 Times
Net Profit Margin = ( Net Profit After Tax/ Sales )*100
=(17,000/1,00,000)*100 =17%
Return on Asset = (Net Profit/Total Assets)*100%
= (17,000/1,70,000)*100 = 10%
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Question No. 5 A company provides the following information from its book:
| Common Stock, Rs. 100 legal Value | Rs. 2,00,000 |
| Preference Stock of 10% at Rs. 50 par | Rs. 1,00,000 |
| Net profit after tax | Rs. 45,000 |
| Interest Expenses | Rs. 12,000 |
| Total assets for the current year | Rs. 4,50,000 |
| Market Price of common stock at end of current year | Rs 4,50,000 |
| Equity dividends were paid at the rate of Rs. 10 per share | |
| Shareholders’ equity for current year | Rs. 3,60,000 |
Required:
- Return on Assets
- Return on Common Shareholders’ Equity
- Earning per share
- Price earning ratio
Solution:
Return on Assets = Net Profit after tax/ Total Assets
= 45,000/4,50,000 = 0.10 = 10%
Return on Common Shareholders’ Equity=(Net Profit after tax-Preference Dividend)/Common Shareholders’ Equity
= (45,000-10,000)/(3,60,000-1,00,000)
= 35,000/2,60,000
= 0.1346
= 13.46%
| Working Note: Preference Dividend = 10% * 1,00,000 =Rs. 10,000 Common Shareholders’ Equity=Shareholders’ Equity-Preference Share Capital =Rs.( 3,60,000-1,00,000)=Rs. 2,60,000 |
Earning per share = (Net Profit after tax- Preference Dividend)/ Number of Equity Shares
= (45,000-10,000)/2,000 = Rs. 17.5
Price Earning Ratio = Market Value Per Share/ Earning Per Share
= 12.75/17.5 = 0.7286 = 72.86%
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Question No 6 A company has registered the following details in its books of accounts
| Net Sales | Rs. 9,00,000 |
| Inventory Turnover Ratio | 10 times |
| Account Receivable at the end of the period | Rs. 2,00,000 |
| Net Income After Tax | Rs. 50,000 |
| Total Assets Value | Rs. 7,50,000 |
| Debenture Interest Paid | Rs. 25,000 |
| Income Tax Paid | Rs. 30,000 |
| Days in a year | 360 days |
| Share Capital | |
| Preference Capital Share 8% | Rs. 75,000 |
| Equity share capital of Rs. 100 each | Rs. 1,20,000 |
Required:
- Value of Inventory
- Average Collection Period
- Return on Assets
Solution:
Inventory Turnover Ratio = Sales/ Closing Stock
or, Closing Stock = Sales/ Inventory Turnover Ratio
or, Value of Inventory = 9,00,000/10 = Rs. 90,000
Average Collection Period = (Closing Debtors* Days in year)/(Credit Sales)
or ACP = ( 2,00,000*360)/9,00,000
= 80 Days
Return on Asset = ( Net Profit after tax + Interest )/ Total Assets
or, ROA =(50,000+ 25,000)/ 7,50,000
or, = 75,000/7,50,000 =0.10 = 10.00%
OR
Return on Asset = Net Profit After Tax / Total Assets
= 50,000/ 7,50,000
= 0.0667 = 6.67%
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Question No. 7 Following figures were extracted from the book of a company:
| Amount of Current Liabilities | Rs. 25,000 |
| Amount of Net Profit | Rs. 2,55,000 |
| Quick Ratio | 0.50 Times |
| Total Assets | Rs. 20,00,000 |
| Net Profit Margin | 15% |
| Non-Liquid Current Assets | Rs. 25,000 |
Required:
- Amount of Quick Assets
- Total Assets Turnover Ratio
- Amount of Total Sales
- Current Ratio
Solution:
Amount of Quick Assets
Quick Ratio = Quick Assets/Current Liabilities
or, 0.50 = Quick Assets/ 25,000
or, Quick Assets = 25000*.50 = Rs. 12,500
Amount of Total Sales
Net Profit Margin = Net Profit / Sales
or, 0.15 = 2,55,000/ Sales
or, Sales = 2,55,000/0.15 =Rs.17,00,000
Total Assets Turnover Ratio = Sales / Total Assets
Or, Total Assets Turnover Ratio = 17,00,000/20,00,000 =0.85 Times
Current Ratio = Current Assets/ Current Liabilities
= (Non-Liquid Current Assets + Quick Assets)/Current Liabilities
= ( 25,000+12,500)/25,0000 =37,500/25,000 = 1.5:1
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Question No. 8 The Balance Sheet of Madan Mohan Limited as on 31-04-2022 was as follow :
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
| Equity Share Capital | 40,000 | Plant and Machinery | 24,000 |
| Capital Reserve | 8,000 | Land and Buildings | 40,000 |
| 8% Loan on Mortgage | 32,000 | Furniture & Fixtures | 16,000 |
| Creditors | 16,000 | Stock | 12,000 |
| Bank Overdraft | 4,000 | Debtors | 12,000 |
| Taxation | Investments (Short-term) | 4,000 | |
| Current | 4,000 | Cash in Hand | 12,000 |
| Future | 4,000 | ||
| Profit and Loss A/C | 12,000 | ||
| Total | 1,20,000 | Total | 1,20,000 |
From the information above mentioned, compute:
- Current Ratio
- Quick Ratio
- Debt-Equity Ratio
- Proprietary Ratio
Solution:
Current Ratio = Current Assets/Current Liabilities
Current Assets = Stock + Debtors +Investment (short-term) + Cash in hands
or, = 12,000 + 12,000 + 4,000 + 12,0000
or, = Rs. 40,000
Current Liabilities = Creditors + Bank Overdraft + Provision for Taxation (Current and Future)
or, = 16,000 + 4,000 + 4,000 + 4,000
or, = Rs. 28,000
Current Ratio = 40,000/28000 = 1.43 : 1
Quick Ratio = Quick Assets/ Quick Liabilities
Quick Assets =Current Assets – Stock
or, = 40,000 -12,000 =Rs. 28,000
Quick Liabilities = Current Liabilities – ( Bank overdraft + Provision for Taxes (future))
or, = 28,000 – (4,000+4,000) = Rs. 20,000
Quick Ratio = 28,000/20,000 = 1.40 : 1
Debt-Equity Ratio = Long-term Debt (Liabilities)/Shareholders Fund
Long term Liabilities = Debentures + Long term Loans
or, LTB = Rs. 32,000
Shareholders Fund = Equity Share Capital + Reserves & Surplus + Preference Share
or, = 40,000 + 8,000 + 12,000 = Rs. 60,000
Debt Equity Ratio = 32,000 + 60,000 = 0.53 : 1
Proprietary Ratio = Shareholder’s Fund/ Total Assets
Shareholders Fund = Equity Share Capital + Reserves & Surplus + Preference Share
or, = 40,000 + 8,000 + 12,000 = Rs. 60,000
Total Assets = Total Assets – Fictitious Assets
or, = 1,20,000
Proprietary Ratio = 60,000/1,20,000 = 0.5 : 1
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