Atharva School of Business

FINANCIAL ACCOUNTING

RATIO ANALYSIS

Ashok Leyland is the largest supplier of logistics vehicles to the Indian Army.

Profit and Loss A/c

Particulars SALES Less: Cost of Good sold

AMT is in CRORES Amt Amt Amt 11407

Opening stock
Add: Purchases Less: Closing stock GROSS PROFIT Less: Operating Expenses A) Administrative Expenses Power N Fuel Cost Employee Cost

2208
8406 10614 (-)4416 6198 5209

65 974

Other Mfg expenses

B) Selling N Distribution Net Profit Before Tax

86

1125
857 1982 3227

Less: Tax
NET PROFIT AFTER TAX

220
3007

Balance Sheet
Particulars SOURCES OF FUNDS Share Capital Amt

AMT is in CRORES Amt Amt

Equity Share Capital

Preference sh.capital Reserves N Surplus NET WORTH

133
0 133 2523 2656 1272 1385 2657

Borrowed Funds
Secured Unsecured

CAPITAL EMPLOYED

5313

Cont
Particulars APPLICATION OF FUNDS Fixed Assets Investments Current Asset Stock Debtors Bills Receivable Loans N Adv Cash/bank Less: Current Liabilities Creditors Bank Overdraft Provisions WORKING CAPITAL 2015 1490 220 3725 4313 5313 4416 1730 700 622 570 8038 630 370 Amt Amt Amt

Gross Profit Ratio

GPR = Gross Profit/Sales * 100 GPR = 5209/11407 * 100

= 45.66 %

Interpretation
It shows the gross profit on sales A high ratio may not result in high gross profit figure unless a large volume of sales is achieved. The higher the better A gross profit margin of 45.66% means that for every 1rupee of sales, the firm makes 45.66 rupee in gross profit

Expense Ratio
Exp ratio = Exp/Sales * 100

Exp Ratio = 1982/11407 * 100

=17.37 %

Expenses = Admin Exp + Selling Exp = 1125 +587 = 1982

Interpretation
It shows the Expenses on sales The lower the Expense ratio, the larger is the profitability and higher the Expense ratio, lower is the profitability. The Expense Ratio of 17.37 % is considered to be under control which can be minimized with more efforts to maximize the profit.

Net Profit Ratio

NPR = Net Profit/Sales * 100 = 3227 / 11407 * 100

= 28.29 %

Interpretation

It shows the net profit as a percentage of sales It gives some ideas of the companys pricing policy and cost control Net profit takes into account the fixed costs involved in production the overheads The Net Profit of 28.29% means company is earning 28.29 paisa on the investment of 1 rupee each

Operating Ratio
Op.Ratio = COGS + Op.Exp/Sales * 100 = 6198 + 1982 / 11407 * 100

=71.71 %

Interpretation

It shows the operational efficiency of the business An operating ratio ranging between 75% and 80% is generally considered as standard for manufacturing concerns The Operating Ratio of 71.71% means that company is just below the standard manufacturing.

Stock Turnover Ratio

STR = COGS / Average Stock = 6198 / 3312 = 1.9 times

Average Stock = Opening stock + Closing stock / 2

= 2208 + 4416 / 2
= 3312

Interpretation
Also known as Inventory Turnover Ratio the level of inventory should neither be too high nor too low. high inventory means higher carrying costs and higher risk of stocks low inventory may mean the loss of business opportunities

Current Ratio

CR = Current assets/Current Liabilities = 8038 / 3725

= 2.15 : 1

Interpretation

Looks at the ratio between Current Assets and Current Liabilities Ideal level 2 : 1 A ratio of 2.15 : 1 would imply the firm has 2.15 of assets to cover every 1 in liabilities It might also suggest that too much of its assets are tied up in unproductive activities too much stock, for example

Quick Ratio

Quick Ratio = Quick Assets/Quick Liabs = 3622 / 2235 = 1.62 : 1

Quick Assets = Current Assets Closing stock = 8038 - 4416 = 3612 Quick Liabilities = Current Liabs Bank Overdraft = 3725 - 1490 = 2235

Interpretation
Also referred to as the Acid ratio 1:1 seen as ideal It gives an indication of the cash the firm has in relation to its liabilities (what it owes) A ratio of 1.62 : 1 therefore would suggest the firm has 1.62 times as much cash as it owes which is quiet healthy!

Stock to Working Capital

Stock to WC = Closing stock / W.C * 100 = 4416 / 4313 * 100 = 102.3 %

Working Capital = Current Assets Current Liab = 8038 - 3725 = 4313

Interpretation
It measures the efficiency with which the working capital is being used by a firm. high ratio indicates efficient utilization of working capital low ratio indicates inefficient utilization of working capital Here the 102.3% shows the efficient use of Working Capital

Proprietary Ratio

PR = Shareholders funds/Total Assets*100 = 2656 / 5313 * 100 = 50 %

Shareholders Fund = Share Capital + Reserves = 133 + 2523 = 2656 Total Assets = FA + Investments + CA = 630 + 370 + 4313 = 5313

Interpretation
It is also known as Equity ratio or net worth to total assets ratio. It indicates the long-term or future solvency position of the business. This means that out of every 1Rupee employed in the business, shareholders contribution is about 50 paisa. Accordingly, the creditors contribution would be the remaining 50 paisa

Capital Gearing Ratio

CGR = Borrowed Funds + Pref sh.cap Shareholders Fund Pref sh.cap = 2657 2656 =1

Borrowed Funds = Secured + Unsecured Loans = 1272 + 1385 = 2657

Interpretation
Its mainly used to analyze the capital structure of a company. It must be carefully planned as it affects the company's capacity to maintain a uniform dividend policy during difficult trading periods.

Debt Equity Ratio

Debt Equity Ratio = Borrowed Funds Shareholders Funds = 2657 / 2656 =1:1

Interpretation

It is also known as external internal equity ratio. It indicates the proportionate claims of owners and the outsiders against the firms assets. Its is 1:1 which is considered as balanced

Debt Turnover Ratio

Debt Turnover Ratio = Sales / Debtors = 11407 / 1730 = 6.6 times

Interpretation

It represents the number of days by the firm to pay its creditors It indicates the number of times average Creditors (Payable) are Paid during a year. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm.

Creditors Turnover Ratio

Creditors Turnover Ratio = Cost of Sales Creditors = 6198 / 2015 = 3.08 times

Cost of Sales = Sales Gross Profit = 11407 - 5209 = 6198

Interpretation
It indicates the velocity of debt collection of a firm It indicates the number of times average debtors (receivable) are turned over during a year. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm. The higher the value, more liquid the debtors are and vice versa.

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Presented by Murli boda Bhavika Vakharia Vikas singh Jagin Desai Krishna Soni 02 12 22 32 42

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