Financial Statement Analysis
Ratio Analysis
“A ratio is defined as the indicated quotient of two mathematical expressions and as the
relationship between two things
……... Webster
“Ratio is the relationship of one item to another in simple mathematical form.”
. …….. Kenedey
A. Short Term Solvency:
NAME OF THE RATIO
FORMULA
1. Current ratio/
STANDARED
2:1
Working Capital ratio
2. Acid Test ratio/ Quick
Ratio/Liquid Ratio
1:1
3. Absolute Liquidity Ratio
.05:1
4. Inventory Turnover ratio
8 Times
5. Accounts Receivable
turnover
60 to 90
Days/ or 6 times
6. Accounts Payable
30 to 60 days/I 2
Velocity/ turnover
times
Aminul Islam Student of ICAB
Aminul-01914943142, Armanur Rahman-01919750350
Page 1
Financial Statement Analysis
B. Long Term Solvency:
NAME OF THE RATIO
FORMULA
STANDARED
1. Debt Equity ratio
1:3
2. Capital Gearing Ratio
2:1
1:2
3. Proprietary
Ratio/Proprietor’s Fund to
total Assets Ratio/ Owners
Equity to total Assets
3:4
/Net worth to Total Assets
4. Proprietor’s Fund to total
liabilities
3:1
6. Capitalization rate/Long
term debt to Net worth
1:2 to 1:3
C. Profitability Ratio:
NAME OF THE RATIO
1.Gross Profit Ratio
FORMULA
STANDARED
20% -30%
Or, 15% -25%
2. Operating Profit Ratio
10% - 20%
3. Net Profit Ratio
5%-10%
4. Operating Ratio
80% - 90%
5. ROI (Return on
Investment)
25%
Aminul-01914943142, Armanur Rahman-01919750350
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Financial Statement Analysis
Return on Capital
25%
employed
6. ROA (Return on Assets)
7. Return on Shareholders’
Equity
8. Fixed Assets Turn Over
9. Total Assets Turn Over
2 times for longs
business 4 to 6
times
for short
A.
Other Ratio:
NAME OF THE RATIO
1.Turn over to Total Assets
(Assets Turnover Ratio)
2. Turn over to Fixed Assets
FORMULA
STANDARED
2 times for
Large, 4 to 6 times
for small.
4 times for
large & 8 to 12 times
for
normal organization
3.Proprietory Capital to
long term Investment Ratio
4. Capital Turnover Ratio
5. Assets Proprietorship
Ratio
6. Fixed Assets to
Aminul-01914943142, Armanur Rahman-01919750350
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Financial Statement Analysis
Proprietary Fund
7. Dividend per share (DPS)
No Standard
8. Earnings per share (EPS)
No Standard
9. Dividend yield Ratio
No Standard
10. Margin on sales
4% - 6%
11. Price Earnings Ratio
No
Standard
or, Earning Price Ratio
No
Standard
12. Dividend payout Ratio
(Payout Ratio)
No
Standard
13. Debtors turnover
ratio/Debtors
60 to 90 days
Velocity/Average
collection period
6 times
14. Creditors Velocity
30 to 60 days
6 times
15 Dividend Cover
EPS/DPS
16.Interest Cover
PBIT/Finance Cost
17.Fixed Assets
Working Capital ×Fixed Asset Ratio to property
/Remaining Ratio
.
Aminul-01914943142, Armanur Rahman-01919750350
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Financial Statement Analysis
Basic Concept
1. Current Assets: Cash, Bank Balance Accounts Receivable/Sundry Debtors. Bills/Note Receivables,
Work-in-Progress, Finished goods, Merchandise inventory, Short term investment, Marketable
security, Advance payment, Income tax.
2. Current liabilities: Bank overdraft, Accounts Payable/Sundry Creditors, Bills/Notes Payable,
Expenses payable, Deferred expenses, outstanding liabilities, payable tax, Payable dividend,
Proposed dividend, any other amount which is payable within a year.
3. Liquid Assets = Total Current Assets - Stock - Work-in-Progress - Finished goods-Pre paid
expenses.
* Current liabilities = Total Assets - Capital employed.
4. Total Assets = Total fixed Assets + Total Current Assets.
5. Total Fixed Assets = Total Assets - Total Current Assets - Total Fictitious Assets.
6. Total Current Assets = Total Assets - Total Fixed Assets - Total Fictitious Assets.
7. Total Assets = Capital employed + Total Current liabilities.
8. Fictitious Assets = Preliminary expenses, share discount, Share brokerage, Profit and Loss
Account (Dr. Balance/Net Loss), Unadjusted expenses, Underwriting commission, discount on
debenture.
9. Capital employed /Total Capital = Total Fixed Assets + Total Current Assets - Total Current
liabilities.
10. Capital employed = Equity share capital + Preference share + Resave and Surplus + Profit and
Loss Account (Credit balances). + Retain earnings + Debenture - Fictitious Assets.
11. Capital employed = Total Assets-Current liabilities - Fictitious Assets.
12. Capital employed = Owner’s equity + Long term debt.
13. Owner’s fund/Proprietary fund/Net worth = Equity share + Preference Share + General
Reserve + Profit and Loss Account (Profit)+Retain earnings - Fictitious Assets.
14. Owners fund/ Proprietary fund/Net worth = Total Assets - Total liabilities - Fictitious Assets.
15. Inventory/ Stock= Total Current Assets - Total liquid Assets.
16. Total Credit sales = Net Sales - Cash sales - Sales Return.
17. Total Credit Purchase = Net Purchase - Cash Purchase - Purchase return.
18. Purchase = Sale + Closing stock - Opening stock - Direct expense - Gross Profit.
19. Purchase = Cost of goods sold + Closing stock - Opening stock.
20. Sale = Opening stock + Purchase + Direct expenses + Gross profit - Closing stock.
21. Sale = Cost of goods sold + Gross Profit.
22. Cost of goods sold = Sales - Gross profit.
23. Cost of goods sold = Opening stock + Purchase+ Direct expenses - Closing stock.
24. Operating expenses = Administrative expenses + Financial expenses + Selling expenses.
25. Operation profit = Net profit + Non-operating expenses – Non-Operating income.
26. Operating profit = Gross profit + Operating income — Operating expenses.
27. Operating profit = Sales x (100% - Operating Ratio)
Aminul-01914943142, Armanur Rahman-01919750350
Page 5
Financial Statement Analysis
Q.No.-1:
The balance sheet of Caravan Ltd. at 31st March, 2000, shows the following
Tk.
9,500
15,000
1,00,000
83,000
5,000
1,06,000
64,000
9,000
2,000
12,800
Cash
Marketable securities
Inventories
Debtors
Prepaid expenses
Long-term loans
Trade creditors
Income tax payable
Accrued income
Accrued expenses
You are asked to compute
(i) Working capital,
(ii) Current ratio,
(iii)Acid-test ratio (or quick ratio).
Q.No.-2:
The following information is derived from the accounts
of a company :
Tk.
Net credit sales
Cost of goods sold
Debtors :
on 1st January, 1999
on 31st December, 1999
Inventory : on 1st January 1999
on 31st December, 1999
1,86,000
1,24,000
24,000
28,000
10,000
16,000
You are required to calculate :
(i) Debtors' turnover; (ii) Debtors' collection period in days; (iii) Inventory turnover;
(iv) Age of inventory in days; and (v) Operating cycle.
Q.No.-3:
Apex Ltd. sells goods for cash as well as on credit. The following particulars are extracted
from their books of account for the year ended 31st December 1999.
Total gross sales (including cash sales Tk. 20,000)
Sales returns
Total debtors for sales as on 31.12.1999
Bills receivable as on 31.12.1999
Provision for doubtful debts as on 31.12.1999
Total creditors as on 31.12.1999
Aminul-01914943142, Armanur Rahman-01919750350
Tk.
1,00,000
7,000
9,000
2,000
1,000
10,000
Page 6
Financial Statement Analysis
Calculate the average collection period of debtors in
Q.No.-4:
The summarized trading and profit and loss account of Mr. Najmul for the year ended 31st
December, 1999 was as follows
Tk.
Sales
Less : Cost of goods sold
Opening stock
Purchase
Closing stock
Tk.
1,00,
12,00
72,00
84,00
8,000
76,00
24,00
Less : Expenses
4,000
20,00
Net profit
0
Najmul's ledger contained the following further balances as on 31st December, 1999 :
Cash at bank
Capital
Creditors
Debtors
Equipments, cost
Land and buildings, cost
Depreciation provision
Equipments
Land and buildings
Stock
Drawings
T k.
7,000
55,00
20,00
25,00
8,000
50,00
3,000
10,00
8,000
10,00
You are required to :
(i) Prepare Najmul's balance sheet as at 31st December, 1999; and
(ii) Calculate the following
(iii)Net profit to sales percentage,
(iv) Rate of stock turnover,
(v) Stock life in days,
(vi) Working capital (or current) ratio,
(vii) Liquidity (or acid-test or quick) ratio,
(viii) Average credit period allowed to debtors in days, given that average debtors figure was Tk.
20,000.
(ix) Average credit period allowed by creditors in days, given that average creditors figure was
Tk. 12,000.
(x) Cash operating cycle.
Aminul-01914943142, Armanur Rahman-01919750350
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Financial Statement Analysis
Q.No.-5:
The following balances appeared in the books of Bright Ltd. at 30 th June, 2000.
Plant and machinery (at cost less depreciation)
Stock in trade
Sundry debtors
Sundry creditors
General reserve
Bank overdraft
Cash and bank balances
Equity share capital (shares of Tk. 10 each)
Furniture and fixture (at cost less depreciation)
Motor car (at cost less depreciation)
Tk.
2,00,000
95,000
1,00,000
70,000
96,000
10,000
5,000
3,84,000
92,000
68,000
Additional information :
(i) Sales during the year totaled Tk. 6,00,000 and there were no cash sales. Gross profit ratio is
25% on turnover.
(ii) Closing stock is Tk.. 10,000 higher than the opening stock.
(iii)You are required to work out the following ratios
(iv) Current ratio;
(v) Liquid ratio;
(vi) Credit period allowed to debtors;
(vii) Stock turnover ratio.
Q.No.-6:
The following ratios and information relate to the business of Crinoline Traders Ltd:
Credit period allowed to debtors
2 months
Stock turnover ratio
8
Lag in payment to suppliers
1 month
Gross profit ratio
25% on turnover
Opening stock
Tk. 1,05,000
Gross profit for the year ended 31st March, 2,000 amounted to Tk. 3,00,000.
Find out : (a) Sales; (b) Sundry debtors; (c) Closing stock; (d) Sundry creditors.
Aminul-01914943142, Armanur Rahman-01919750350
Page 8
Financial Statement Analysis
Q.No.-7:
The summarised balance sheets of Slick Ltd., at 31st December, 1998 and 31st December. 1999
are as given below :
Liabilities
Share capital
Retained
Creditors
Proposed
1998
Tk.
3,00,000
1,50,000
60,000
30,000
5,40,000
1999
Tk.
3,00,000
2,10,000
1,05,000
15,000
6,30,000
Assets
1998
Tk.
3,30,000
1,20,000
60,000
30,000
5,40,000
Fixed assets
Stock
Debtors
Cash
1999
Tk.
3,15,000
1,80,000
90,000
45,000
6,30,000
(i) The rate of stock turnover for the year (based on average stocks) was 12 times.
(ii) The ratio of gross profit to sales was 25 percent.
(iii)An interim dividend of Tk. 15,000 was paid during the year (in addition to the Tk. 30,000
dividend outstanding at 31st December, 1998).
You are required to calculate, for the year 1999, the following
(a) Sales;
(b) Purchases;
(c) Net profit;
(d) Total profit and loss account expenses;
(e) Return on shareholders' funds;
(f) Average period of credit allowed to customers;
(g) Average period of credit received from suppliers.
Q.No.-8:
Following are the financial information of ADBI LIMITED:
Cash
Accounts Receivable
Inventory
Accounts payable
Bank overdraft
Annual sales
Gross profit
Net profit
20,00,000
20,00,000
30,00,000
20,00,000
5,00,000
1,50,00,000
60,00,000
30,00,000
Ascertain the following ratios
(a) Current ratio
(b) Acid Test Ratio/Quick Ratio
(c) Gross Profit Ratio
(d) Net Profit Ratio
(e) Inventory Turnover Ratio
(f) Working Capital Ratio
Aminul-01914943142, Armanur Rahman-01919750350
Page 9
Financial Statement Analysis
Q.No.-9:
From the following balance sheet compute the following ratios:
i) Current ratio ii) Liquid ratio iii) Proprietary ratio iv) Capital Structure ratio v) Debt-Equity ratio
vi) Asser- Equity ratio vii) Inventory –working capital ratio.
Padma Ltd
Balance Sheet
December 31, 2004
Liabilities
Equity Share
Preference Share
Reserve
Undistributed Profit
Debt
Accounts Payable
Expenses Payable
Bank overdraft
Tk
1,00,000
50,000
20,000
20,000
50,000
10,000
5,000
15,000
2,70,000
Assets
Fixed Assets
Preliminary Expenses
Accounts Receivable
Inventory
Revenue receivable
Prepaid Expenses
Tk
2,00,000
10,000
30,000
20,000
9,000
1,000
2,70,000
Q.No.-10:
McDougal Printing Inc. had sales totaling Tk. 4,00,00,000 in fiscal year 2003. Some ratios for the
company are listed below. Use this information to determine the dollar values of various income
statement and balance sheet accounts as requested.
McDougal Printing Inc.
Year Ended December 31, 2003
Sales
Gross Profit margin
Operating profit margin
Net profit margin
Return on total assets
Return on common equity
Total assets turnover
Average collection period
Calculate values for the following :
a. Gross Profits
b. Cost of goods sold
e. Earnings available for common stockholders
h. Accounts receivable.
Aminul-01914943142, Armanur Rahman-01919750350
400,00,000
80%
35%
8%
16%
20%
2
62.2 days
c. Operating profits
d. Operating expenses
f. Total assets
g. Total common stock equity
Page 10
Financial Statement Analysis
Q.No.-11:
The balance sheet of Star Ltd. is as follows:
Liabilities
Common Stock
Preference Stock
Reserve
10% Bond
Bank overdraft
Accounts Payable
Notes Payable
Tk
50,000
70,000
25,000
1,00,000
80,000
70,000
25,000
4,20,000
Assets
Equipment
Building
Inventory
Accounts Receivable
Notes Receivables
Cash
Tk
1,55,000
90,000
1,00,000
60,000
10,000
5,000
4,20,000
Other information:
i) Sales Tk. 4,00,000
ii) Gross Profit 80,000
iii) Net profit 24,500
Compute the following ratios:
i) Current ratio ii) Liquid ratio iii) Proprietary ratio iv) Debt-Equity ratio v) Capital gearing
ratio vi) Return on investment ratio vii) Accounts Receivable turnover viii) Inventory
Turnover ix) Gross Profit Ratio x) Earning ratio.
Q.No.-12:
You are asked to compute----i) Sales
i)) Accounts Receivables
iii) Closing Stock
iv) Accounts Payable using the following information and ratios:
Accounts Receivables collection period
Accounts Payable Turnover
Stock Turnover
Gross profit ratio
Opening stock
Gross profit
Aminul-01914943142, Armanur Rahman-01919750350
2 Months
8 Times
6 Times
30%
Tk. 1,15,000
Tk. 3,00,000
Page 11
Financial Statement Analysis
Q.No.-13:
The following data are extracted from the published accounts of XYZ Ltd:
Cash
Accounts Receivable
Inventories
Plant and machinery
Current liabilities
Debenture
Capital stock
Retained Earnings
Tk. 15,000
20,000
80,000
1,15,000
2,30,000
Tk.
65,000
40,000
1,00,000
25,000
2,30,000
Sales Tk.2,80,000; Gross profit Tk.70,000; Selling and administrative expenses Tk. 54,000; Interest
expenses Tk. 6,000; Income tax Tk. 5,000; Dividend Tk. 8,000; Net profit after tax Tk. 5,000.
Required:
(1) Acid Test Ratio. (2) Basic Defensive Interval (3) Average Collection Period (4)Return on
Total Investment (5) Capitalization Rate Ratio (6) Gross profit Ratio (7) Net profit Ratio.
Aminul Islam Student of ICAB
Aminul-01914943142, Armanur Rahman-01919750350
Page 12