A Complete Ratio Analysis, Worked
Chapter Forty-One
Syllabus topic 4, "Combined Ratio : i) Return on capital employed (Including Long Term Borrowings) ii) Return on proprietor's Fund (Shareholders Fund and Preference Capital) iii) Return on Equity Capital iv) Dividend Payout Ratio v) Debt Service Ratio vi) Debtors Turnover vii) Creditors Turnover (Practical Question on Ratio Analysis and Du Point Analysis)"
Pages 108 to 111 of 162
The statements
Sunrise Industries Ltd, balance sheet as at 31 March 2027, in vertical form
| Particulars | Rs |
|---|---|
| Equity share capital, 1,00,000 shares of Rs 10 | 10,00,000 |
| 9 per cent preference share capital | 2,00,000 |
| Reserves and surplus | 3,00,000 |
| Proprietors' funds | 15,00,000 |
| 10 per cent debentures | 4,00,000 |
| CAPITAL EMPLOYED | 19,00,000 |
| Particulars | Rs |
|---|---|
| Fixed assets, net | 14,00,000 |
| Non-current investments | 1,00,000 |
| Working capital | 4,00,000 |
| CAPITAL EMPLOYED | 19,00,000 |
| Current assets | Rs |
|---|---|
| Stock | 3,00,000 |
| Debtors | 2,40,000 |
| Cash and bank | 1,80,000 |
| Prepaid expenses | 40,000 |
| Total | 7,60,000 |
| Current liabilities | Rs |
|---|---|
| Creditors | 2,20,000 |
| Outstanding expenses | 38,000 |
| Provision for taxation | 1,02,000 |
| Total | 3,60,000 |
Revenue statement for the year ended 31 March 2027
| Particulars | Rs |
|---|---|
| Net sales | 20,00,000 |
| Less: cost of goods sold | 14,00,000 |
| Gross profit | 6,00,000 |
| Less: administrative expenses | 1,00,000 |
| Less: selling and distribution expenses | 1,40,000 |
| Operating profit | 3,60,000 |
| Add: non-operating income | 40,000 |
| Less: non-operating expenses | 20,000 |
| Profit before interest and tax | 3,80,000 |
| Less: interest on debentures | 40,000 |
| Profit before tax | 3,40,000 |
| Less: provision for taxation | 1,02,000 |
| Profit after tax | 2,38,000 |
Further information. Opening stock Rs 2,60,000; opening debtors Rs 1,60,000; opening creditors Rs 1,40,000; all sales and purchases are on credit; equity dividend declared at 6 per cent.
The working notes, done once
| Rs | |
|---|---|
| Average stock, (2,60,000 + 3,00,000) over 2 | 2,80,000 |
| Average debtors, (1,60,000 + 2,40,000) over 2 | 2,00,000 |
| Average creditors, (1,40,000 + 2,20,000) over 2 | 1,80,000 |
| Rs | |
|---|---|
| Cost of goods sold | 14,00,000 |
| Add: closing stock | 3,00,000 |
| Less: opening stock | (2,60,000) |
| Purchases | 14,40,000 |
| Rs | |
|---|---|
| Total assets, 14,00,000 + 1,00,000 + 7,60,000 | 22,60,000 |
| Equity shareholders' funds, 10,00,000 + 3,00,000 | 13,00,000 |
| Profit available to equity, 2,38,000 less 18,000 | 2,20,000 |
| Equity dividend, 6 per cent on 10,00,000 | 60,000 |
Do these six lines first. Every ratio below draws on them, and computing them once saves the arithmetic from being done six times.
The balance sheet ratios
| Formula | Computation | Answer | |
|---|---|---|---|
| Current ratio | Current assets / Current liabilities | 7,60,000 / 3,60,000 | 2.11 to 1 |
| Liquid ratio | (Current assets less stock and prepaid) / Current liabilities | 4,20,000 / 3,60,000 | 1.17 to 1 |
| Stock working capital ratio | Stock / Working capital x 100 | 3,00,000 / 4,00,000 | 75.00 per cent |
| Proprietary ratio | Proprietors' funds / Total assets x 100 | 15,00,000 / 22,60,000 | 66.37 per cent |
| Debt equity ratio | Long-term debt / Proprietors' funds | 4,00,000 / 15,00,000 | 0.27 to 1 |
| Capital gearing ratio | (Preference + debt) / Equity funds | 6,00,000 / 13,00,000 | 0.46 to 1 |
The revenue statement ratios
| Formula | Computation | Answer | |
|---|---|---|---|
| Gross profit ratio | Gross profit / Net sales x 100 | 6,00,000 / 20,00,000 | 30.00 per cent |
| Expenses ratio, administrative | Expense / Net sales x 100 | 1,00,000 / 20,00,000 | 5.00 per cent |
| Expenses ratio, selling | Expense / Net sales x 100 | 1,40,000 / 20,00,000 | 7.00 per cent |
| Operating ratio | (Cost of goods sold + operating expenses) / Net sales x 100 | 16,40,000 / 20,00,000 | 82.00 per cent |
| Net profit ratio | Profit after tax / Net sales x 100 | 2,38,000 / 20,00,000 | 11.90 per cent |
| Net operating profit ratio | Operating profit / Net sales x 100 | 3,60,000 / 20,00,000 | 18.00 per cent |
| Stock turnover ratio | Cost of goods sold / Average stock | 14,00,000 / 2,80,000 | 5.00 times |
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