Ratio Analysis
A) Cash Position Ratio : -
1) Absolute Cash Ratio = Cash Reservoir
Current Liabilities
2) Cash Position to Total asset Ratio = Cash Reservoir * 100
(Measure liquid layer of assets) Total Assets
3) Interval measure = Cash Reservoir
(ability of cash reservoir to meet cash expenses) Average daily cash expenses
( Answer in days)
Notes : -
• Cash Reservoir = Cash in hand + Bank + Marketable Non trade investment at market value.
• Current liabilities = Creditors + Bills Payable + Outstanding Expenses + Provision for tax (Net of advance tax) + Proposed dividend + Other provisions.
• Total assets = Total in asset side – Miscellaneous expenses – Preliminary expenses + Any increase in value of marketable non trading Investments.
• Average cash expenses =Total expenses in debit side of P & L a/c – Non cash item such as depreciation, goodwill, preliminary expenses written off, loss on sale of investments, fixed assets written off + advance tax (Ignore provision for tax) . The net amount is divided by 365 to arrive average expenses.
Remarks : - In Comparison
• When absolute cash ratio is lower then current liability is higher
• When cash position to Total Asset ratio is lower then the total asset is relatively higher.
• When cash interval is lower the company maintain low cash position. It is not good to maintain too low cash position or too high cash position.
B) Liquidity Ratio : -
1) Current ratio = Current asset
Current Liability
2) Quick ratio or Acid Test ratio = Quick Asset
Quick liability
Notes : -
• Quick Asset = Current Asset – Stock
• Quick Liability = Current liability – Cash credit, Bank borrowings, OD and other Short term Borrowings.
• Secured loan is a current liability and also come under cash credit
• Sundry debtors considered doubtful should not be taken as quick asset.
• Creditors for capital WIP is to be excluded from current liability.
• Current asset can include only marketable securities.
• Loans to employees in asset side are long term in nature and are not part of current assets.
• Provision for gratuity is not a current liability.
• Gratuity fund investment is not a part of marketable securities.
• Trade investments are not part of marketable securities.
Remarks : -
• Higher the current ratios better the liquidity position.
C) Capital structure ratios : -
1) Debt equity ratio = Debt = External Equity
(or) Leverage ratio Equity Internal Equity
= Long term debt = Share holders fund
Long term fund Long term fund
2) Proprietary ratio = Proprietary fund
Total Assets
3) Total Liability to Net worth ratio = Total Liabilities
Net worth
4) Capital gearing ratio = Preference share capital + Debt
Equity – Preference share capital
Notes : -
• Share holders fund (or) Equity (or) Proprietary fund (or) Owners fund (or) Net worth = Equity share + Preference share + Reserves and surplus – P & L a/c – Preliminary Expenses.
• Debt (or) Long term liability (or) Long term loan fund = Secured loan (excluding cash credit) + unsecured loan + Debentures.
• Total asset = Total assets as per Balance sheet – Preliminary expenses.
• Total liability = Long term liability + Current liability (or) short term liability
• Long term fund = Total asset – Current liability = Share holders fund + long term loan fund.
Remarks : -
• In debt equity ratio higher the debt fund used in capital structure, greater is the risk.
• In debt equity ratio, operates favorable when if rate of interest is lower than the return on capital employed.
• In total liability to Net worth Ratio = Lower the ratio, better is solvency position of business, Higher the ratio lower is its solvency position.
• If debt equity ratio is comparatively higher then the financial strength is better.
D) Profitability Ratio : -
1) Gross Profit Ratio = Gross Profit * 100
Sales
2) Net Profit Ratio = Net Profit * 100
Sales
3) Operating Profit ratio = Operating profit * 100
Sales
4) Return to shareholders = Net profit after interest and tax
Share holders fund
5) Return on Net Worth = Return on Net worth * 100
Net worth
6) Return on capital employed (or) Return on investment = Return (EBIT)
Capital Employed
7) Expenses Ratios :-
a) Direct expenses Ratios : -
i) Raw material consumed * 100
Sales
ii) Wages * 100
Sales
iii) Production Expenses * 100
Sales
b) Indirect expenses Ratios : -
i) Administrative Expenses * 100
Sales
ii) Selling Expenses * 100
Sales
iii) Distribution Expenses * 100
Sales
iv) Finance Charge * 100
Sales
Notes : -
• In the above the term “term” is used for business engaged in sale of goods, for other enterprises the word “revenue” can be used.
• Gross profit = Sales – Cost of goods sold
• Operating profit = Sales – Cost of sales
= Profit after operating expenses but before Interest and tax.
• Operating Expenses = Administration Expenses + Selling and distribution expenses, Interest on short term loans etc.
• Return = Earning before Interest and Tax
= Operating profit
= Net profit + Non operating expenses – Non operating Income
• Capital employed = Share holders fund + Long term borrowings
= Fixed assets + Working capital
• If opening and closing balance is given then average capital employed can be substituted in case of capital employed which is
Opening capital employed + Closing capital employed
2
E) Debt service coverage ratios = Profit available for debt servicing
Loan Installments + Interest
Notes : -
• Profit available for debt servicing = Net profit after tax provision + Depreciation + Other non cash charges + Interest on debt.
Remarks : -
• Higher the debt servicing ratio is an indicator of better credit rating of the company.
• It is an indicator of the ability of a business enterprise to pay off current installments and interest out of profits.
F) Turnover Ratios: -
i) Assets turnover = Sales
Total assets
2) Fixed assets turnover = Sales [Number of times fixed assets has
Fixed assets turned into sales]
3) Working capital turnover = Sales
Working capital
4) Inventory turnover = Cost of goods sold
(for finished goods) Average inventory
5) Debtors turnover (or) Average collection period = Credit sales (in ratio)
Average accounts receivable
(or) = Average accounts receivable * 365 (in days)
Credit sales
6) Creditors turnover (or) Average payment period Credit purchases (in ratio)
Average accounts payable
(or) = Average accounts Payable * 365 (in days)
Credit Purchases
7) Inventory Turnover (for WIP) = Cost of production
Average Inventory (for WIP)
8) Inventory Turnover (for Raw material) = Raw material consumed
Average inventory (for raw material)
10) Inventory Holding Period = 365 .
Inventory turnover ratio
11) Capital Turnover ratio = Cost of sales
Capital employed
Note : -
• Working capital = Current asset – Current liability
= 0.25 * Proprietary ratio
• Accounts Receivable = Debtors + Bills receivable
• Accounts payable = Creditors + Bills Payable
Remarks : -
• If assets turnover ratio is more than 1, then profitability based on capital employed is profitability based on sales.
• Higher inventory turnover is an indicator of efficient inventory movement. It is an indicator of inventory management policies.
• Low inventory holding period lower working capital locking, but too low is not safe.
• Higher the debtors turnover, lower the credit period offered to customers. It is an indicator of credit management policies.
• Higher the creditors turnover, lower the credit period offered by suppliers.
G) Other Ratios: -
1) Operating profit ratio = Net profit ratio + Non operating loss / Sales ratio
2) Gross profit ratio = Operating profit ratio + Indirect expenses ratio
3) Cost of goods sold / Sales ratio = 100% - Gross profit ratio
4) Earnings per share = Net profit after interest and tax
Number of equity shares
5) Price earning ratio = Market price per equity share
Earning per share
6) Pay out ratio = Dividend per equity share * 100
Earning per equity shares
7) Dividend yield ratio = Dividend per share * 100
Market price per share
8) Fixed charges coverage ratio = Net profit before interest and tax
Interest charges
9) Interest coverage ratio = Earning before interest and tax
Interest charges
10) Fixed dividend coverage ratio = Net profit .
Annual Preference dividend
11) Over all profitability ratio = Operating profit * 100
Capital employed
12) Productivity of assets employed = Net profit .
Total tangible asset
13) Retained earning ratio = Retained earnings * 100
Total earnings
H) General Remarks: -
• Fall in quick ratio when compared with last year or other company is due to huge stock pilling up.
• If current ratio and liquidity ratio increases then the liquidity position of the company has been increased.
• If debt equity ratio increases over a period of time or is greater when comparing two ratios, then the dependence of the company in borrowed funds has increased.
• Direct expenses ratio increases in comparison then the profitability decreases.
• If there is wages / Sales ratio increases, then this is to verified
a) Wage rate
b) Output / Labour rate
• Increment in wage rate may be due to increased rate or fall in labour efficiency.
• Again there are many reasons for fall in labour productivity namely abnormal idle time due to machine failure, power cut etc.
• Reduction in Raw material consumed / sales ratio may be due to reduction in wastage or fall in material price.
• Increase in production expenses ratio may also be due to price raise.
• Stock turnover ratio denotes how many days we are holding stock.
• In stock turnover ratio greater the number of days, the movement of goods will be on the lower side.
• Financial ratios are Current ratio, Quick ratio, Debt equity ratio, Proprietary ratio, Fixed asset ratio.
• Short term solvency ratios are current ratio, Liquidity ratio
• Long term solvency or testing solvency of the company ratios are Debt equity ratio, fixed asset ratio, fixed charges coverage ratio (or) Interest coverage ratio.
• To compute financial position of the business ratios to be calculated are – current ratio, Debt equity ratio, Proprietary ratio, fixed asset ratio.
• Fictitious asset are Preliminary expenses, Discount on issue of shares and debentures, Profit and loss account debit balance.
Assignment
1) Basis of Technique used is minimization Technique
2) It can also be done in maximation Technique
3) Various steps in Assignment Problem are
Step 1: Check whether the problem is balanced or unbalanced by checking
whether row is equal to column, if unbalanced add dummy column or
row to balance the problem
Step 2: Identify Least Number in each row and subtract with all number in that
Row.
Step 3: Identify least number of each column and subtract with all number in that
column.
Step 4: Check whether solution is reached with zero selection in one row and
column, ie. Cover all the zero with minimum number of lines, solution is
reached only when selected zeros is equal to number of rows or columns
or number of lines is equal to order of matrix.
Step 5: If solution is not reached so maximum sticking
Step 6: Select the least element in within the unstriked Element
Step 7: The element selected above is
i) Subtracted with all the unstriked element
ii) Added to all the double striked element (Intersection of two lines)
Step 8: Check the solution
Step 9: If solution is not reached continue with the process from step 5.
Linear Programming
Simplex Method:-
Steps:-
1. Determine the objective function Z. Objective may be maximization or minimization.
2. For maximation problem the constraints would be < sign.
For minimization problem the constraints would be > sign.
3. Introduce slack variable
For < sign – add the slack variable ie. Add S1
For > sign – subtract the slack variable and add artificial variable
ie. Subtract S1, add A1.
4. Change the Objective function
For S1 – Add ‘0S1’
For A1 – Add ‘MA1’
5. Simplex table format:-
Cj
Quantity Variable Const. X Y Z S1 S2 RR
S1
S2
Zj
Cj - Zj
6. Zj is arrived by summation of constant column with X,Y,Z columns
7. Criteria for selecting the key column :-
For Maxima ion Problem – Highest value of Cj – Zj
For Minimization Problem – Lowest Value of Cj – Zj
8. Divide the Quantity Column with Key column to arrive at RR
9. Criteria for Selecting the Key row :-
For Maximation & Minimization Problem – Lowest Positive RR is selected
10. The Meeting Point is key Element
11. Criteria for deciding the optimal solution
For Maximation Problem – All elements in Cj – Zj row is negative or zero.
For Minimization Problem – All elements in Cj – Zj row is positive or zero
Note – For finding whether all the elements in Cj – Zj row is positive or zero
for minimization problem substitute all the ‘M’ with highest value.
12. If solution is not reached next table is formed.
13. Input for next table is
First key row in the next table is filled by dividing all the numbers in the key row of the previous table with the key element.
Remaining all the rows is arrived as follows: -
Corresponding previous _ (Value relating to that * Corresponding
Table row element row in the key column element in key row
in the 2nd table as
filled in previous step)
14. Check the optimal solution, if not reached form the third table.
15. If solution is reached then answer is amount in quantity column corresponding to the variable.
Other Points : -
• We can convert the Minimization Problem into Maximation Problem. This is known as duality.
• We can change the > sign to < sign to match the problem
E.g. X + Y < 100
is converted into -X - Y > -100
Transportation
• The procedure followed is Minimization Procedure
• Problem is generally solved in Vogel’s Approximation Method(VAM)
• Steps for the problem is : -
1. Convert profit matrix into loss matrix.
2. Balance the problem.
3. Arrive at Row penalty and column penalty
Row penalty and column penalty is calculated at (2nd least – 1st least) in the corresponding row or column.
4. Select from the entire Row penalty and column penalty maximum number.
5. From the entire Row or Column minimum is selected.
6. Strike the row or column which gets eliminated.
7. Continue until the entire item in the table is strike.
8. Write separately Initial solution table.
9. Check for Degeneracy. Degeneracy occurs when all the elements in the initial solution is equal to (Row + column – 1)
10. If degeneracy occurs introduce efcilon – ‘e’. ‘e’ is introduced in least independent cell.
11. Form UV Matrix. It is formed by the element in the original solution corresponding to the element in the Initial solution.
12. Find unalloted elements in the UV Matrix
13. Find Ij i.e.(Original Matrix element – Unalloted element found above)
14. Check for optimal solution ie. All items must be zero or positive.
15. If not reached select the maximum negative in Ij matrix.
16. Form a loop and reallocate the solution.
17. Repeat from step 9.
Notes: -
1. If there is zero in Ij matrix while arriving at optimal solution then there is another solution for the problem.
2. Dummy column can be introduced in profit or loss matrix.
3. If there is penalty/redundancy payment for unsatisfying demand etc. is given then fills the dummy row or column with that amount or fill it with zeros.
4. If there is constraint in the problem first satisfy the constraint and then solve.
5. various other methods for solving the problem is
• Least cost method
• North west corner rule
6. Generally VAM method is used
Bookmark this post: | 
|
Save And Share :
0 comments:
Post a Comment