Finacial Statement Analysis Ratio Analysis

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FINANCIAL STATEMENT ANALYSIS

LEARNING OBJECTIVES :

 To identify the users of financial statement and information relevant for their
decision making.

 To understand major types of business activities and their impact on financial


statement.

 To explain the purpose of financial statement analysis in an efficient market.

 To understand the meaning and importance of income statement and balance sheet .

 To understand the meaning of ratio analysis and interpretation.

Key Words: Financial statement, income statement, net profit, return on equity, cash
flow, ratio analysis.

Introduction

Financial statements demonstrate the financial performance of a company. At usual


period public companies must prepare documents called financial statements. They are
used for both internal and external reasons. When the statements are used internally, the
management and occasionally the employees apply it for their own information. The
decision makers use it to plan ahead and set goals for upcoming periods. When they use
the financial statements that were published, the management can compare them with
their internally used financial statements. They can also use their own and other
enterprises’ financial statements for comparison with macro economical data and
forecasts, as well as to the market and industry in which they operate in. Financial
statements provide useful information for company and other interested parties.

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Definition of Financial Statement

Statements prepared at the end of a certain accounting period for representing operating
performance and financial position of an institution based on incurred transactions are
financial statement. The process of measuring associations among financial statement
items in order to appraise a firm’s financial situation and operating performance is called
financial statement analysis. This analysis is repeatedly performed by individuals outside
the firm to help them in making credit and investment decisions. However, management
also brings into play financial statement analysis internally so that it can learn the
financial strength and weaknesses of the firm.

Objectives of financial statement analysis

 To provide analytical information to all interested parties.


 To justify and analyze the earning capacity of the firm
 To justify and analyze the financial position of the firm
 To evaluate operations of the firm
 To evaluate progress of the business firm
 To utilize resources properly and effectively
 To analyze and evaluate management efficiency.

Income Statement

The income statement is one of the three major financial statements. The other two are
the balance sheet and the statement of cash flows. It measures the company’s sales and
expenses over a specific period of time. Statement reports the results of operations of an
institution at the end of a particular period of time. It is also called income statement or
profit and loss account.

Different Items of Income Statement:

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Sales
It is the gross amount of goods sold or services rendered during an accounting period. It
may be recognized at different stages depending on a company. While some recognize
sales upon cash receipt, other do so upon placement of order by customers.

Net Sales
When sales discount, sales returns and allowances to customers are deducted or
subtracted from gross sales the result is net sales.

Cost of Goods Sold


It represents the sum of the costs of all goods which have been sold during the accounting
period. It is determined by adding the value of unsold goods at the beginning of the year
(opening inventory or stock) to the purchases made during the year and the deducting the
values of unsold goods at the end of the year (closing inventory of stock) from the
purchases. Theses are expired costs, and thus are actual expenses for the year.

Gross Profit
Goods are normally sold at a price that is more than the cost price. Gross profit or gross
margin is what remains after cost of goods sold is deducted from net sales. This is the
margin that is available to cove the other expenses for a period and to yield net income, if
there is any.

Operating Expenses
Merchandising or trading concerns incur operating expenses in addition to cost of goods
sold. So, the expenses which are incurred for the generation of revenues from the sales of
goods are called operating expenses. Operating expenses may be divided into two :
selling expenses and administrative expenses.

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Selling Expenses : All expenses regarding sale of goods and sending them to the buyer
belong to this class e.g. Carriage outwards, advertisements, salesmen's salaries, sales
commission, traveling expenses, bad debts, packaging expenses etc.

Administrative Expenses : All expenses connected with the office and its conduct are
called administrative expenses. Examples of administrative expenses include office
salaries, office rent, electric charges, postage and telegrams, telephones, printing and
stationary etc.

Net Operating Income


Operating expenses are deducted from gross profit to arrive at net operating income. Net
operating income is what is left after both cost of goods sold and operating expenses for a
period have been deducted from net sales. For a merchandising concern, it is what has
been earned from the normal operations of buying and selling merchandises.

Net operating income = Gross profit - operating expenses


or
Net operating income = Net sales - Cost of goods sold - Operating expenses

Net Income
Net Income is arrived at by deducting cost of goods sold, operating expenses, interests
and taxes.

Net income = Net operating income + other revenues - all expenses


or
Net income = Net sales - Cost of goods sold - Operating expenses – interest - Tax

Example of Income Statement

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Income Statement
For the Year Ended December 31, 200Y (1,000)

Sales $ 1005000
Cost of Goods Sold (405000)

Gross Profit $ 600000

General & Admin Expense (85000)


Depreciation and Amortization (10000)
Bad Debt Expense (5000)

Operating Profit (EBIT) $ 500000

Interest Expense (20000)

Net Profit before Tax (EBT) $ 480000

Tax (30%) (144000)

Net Profit after Tax (EAT) $ 336000

Balance Sheet

The balance sheet reports the financial position i.e., amount of equity, liability and assets
of an institution at a particular time point at the end of the certain time period. It is a
statement of the financial position of a business which states the assets, liabilities, and
owners' equity at a particular point of time. In other words, the balance sheet
demonstrates the net worth of the business. The balance sheets provides a clear picture of
the financial condition of the company as a whole.

Assets

Assets include anything that the company actually owns and has disposal over. Examples
of assets of a company are cash, lands, buildings, and real estates, equipment, machinery,
furniture, patents and trademarks, and money owed by certain individuals or/and other
businesses to the particular company. Assets may be any of the following types :

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 Current Assets : It includes anything that company can quickly convert into
cash. Such current assets include cash, government securities, marketable securities,
accounts receivable, notes receivable (other than from officers or employees),
inventories, prepaid expenses, and any other item that could be converted into cash
within one year in the normal course of business.

 Fixed Assets : They are long-term investments of the company, such as land,
plant, equipment, machinery, leasehold improvements, furniture, fixtures, and any
other items with an expected useful business life usually measured in a number of
years or decades. Fixed assets are usually accounted as expenses upon their
purchase.

 Other Assets include any intangible assets, such as patents, copyrights, other
intellectual property, royalties, exclusive contracts, and notes receivable from
officers and employees.

Liabilities

Liabilities are money or goods acquired from individuals, and/or other corporate entities.
Example of liabilities would be loans, services to the company on credit, etc.

 Current Liabilities : These include accounts payable, notes payable to financial


institutions, accrued expenses (eg.: wages, salaries), current payment (due within
one year) of long-term debts, and other obligations to creditors due within one year.

 Long-Term Liabilities : These include mortgages, intermediate and long-term


loans, equipment loans, and other payment obligation due to a creditor of the
company. Long-term liabilities are due to be paid in more than one year.

Shareholder's equity

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The shareholder’s equity is the capital portion of the business where money or other
forms of assets that are invested into the business by the owner to acquire assets and to
start the business. Any net profits that are not paid out in form of dividends to the owner
are also added to the shareholder’s equity. Losses during the operation of the business are
subtracted from the shareholder’s equity. Equity is calculated the following way:

Equity = Assets – Liabilities

Example of balance sheet

The following balance sheet is a very brief example

‘X’ INTERNATIONAL INC.


Balance Sheet
December 31, 200Y
(in thousands of dollars)
Assets

Cash $ 340,000
Accounts receivable 215,000
Inventories 157,050
Prepaid expenses 50,370
Plant and equipment 350,738
Intangible assets 488,600
Total assets $1,601,758

Liabilities

Bank indebtedness $ 62,300


Accounts payable 109,908
Income taxes payable 26,550
Long-term debt 485,900
Future income taxes 80,800
Total liabilities $ 765,458
Shareholders’ Equity

Share capital $535,800


Retained earnings 300,500
Total shareholders’ equity 836,300

Total liabilities and shareholders’ equity $1,601,758

Statement of Cash-Flow

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The statement that shows the amount of cash receipts and amount of cash payments from
different sources and activities and for different purposes and areas is known as cash flow
statement. It is important to any business because it can be used to assess the timing,
amount and predictability of future cash flows and it can be the basis for budgeting. The
statement of cash flows therefore, reports cash receipts, cash payments, and net change in
cash resulting from operating, investing, and financing activities of an enterprise during a
period.

Cash flows from operating activities


It shows how much cash the company generated from its core business, as opposed to
peripheral activities such as investing or borrowing. Investors should look closely at how
much cash a firm generates from its operating activities because it paints the best picture
of how well the business is producing cash that will ultimately benefit shareholders.
OPERATING
(Generally, the following information obtained from Income Statement)
Cash inflows
From sales of goods or services.
From returns on loans (interest) and on equity securities (dividends).

Cash outflows
To suppliers for inventory.
To government for taxes.
To lenders for interest.
To others for expenses

Cash flows from investing activities

It shows the amount of cash firms spent on investments. Investments are usually
classified as either capital expenditures--money spent on items such as new equipment or
anything else needed to keep the business running--or monetary investments such as the
purchase or sale of money market funds.

INVESTING

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(Generally, the following information obtained from Balance Sheet)

Cash inflows
From sale of property, plant, and equipment.
From sale of debt or equity securities of other entities.
From collection of principal on loans to other entities.

Cash outflows
To purchase property, plant, and equipment.
To purchase debt or equity securities of other entities.
To make loans to other entities.

Cash flows from financing activities

It includes any activities involved in transactions with the company's owners or debtors.
For example, cash proceeds from new debt, or dividends paid to investors would be
found in this section.

FINANCING
(Generally, the following information obtained from Balance Sheet)
Cash inflows
From sale of equity securities.
From issuance of debt (bonds and notes).

Cash outflows
To stockholders as dividends.

Ratio Analysis

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The financial statement analysis in which the numerical relationship between two
financial figures of a financial statement is determined is called ratio analysis. Ratio
analysis is a form of financial statement analysis that is used to obtain a quick indication
of a firm's financial performance in several key areas. It is a tool used by individuals to
conduct a quantitative analysis of information in a company's financial statements. Ratios
are calculated from current year numbers and are then compared to previous years, other
companies, the industry, or even the economy to judge the performance of the company.
There are many ratios that can be calculated from the financial statements pertaining to a
company's performance, activity, financing and liquidity.

Importance of Ratio Analysis


 Ratio analysis simplifies and summarizes complex accounting figures and
arranges them systematically for use by different parties.
 It measures and evaluates the financial condition and operating effectiveness of a
business institution.
 It aids in diagnosing the financial health of the business. By calculating and
studying different ratios one can analyze the weaknesses and strengths of the
business.
 By analyzing the past performance future can be projected and predicted.
 It promotes coordination by studying the efficiency and deficiency of different
parts of the business.
 It assists in communication by conveying necessary information to all related
parties.
 It facilitates the effective control of business operations by means of appraisal
targets both physical and monetary.

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There are six aspects of operating performance and financial condition we can evaluate
from financial ratios :

 A liquidity ratio provides information on a company’s ability to meet its short


term, immediate obligations.

 A profitability ratio provides information on the amount of income from each


dollar of sales.

 An activity ratio relates information on a company’s ability to manage its


resources efficiency.

 A financial leverage ratio provides information on the degree of a company’s


fixed financial obligation and its ability to fulfill these financial obligations in the
long term.

 A shareholder ratio describes the company’s financial condition in terms of


amounts per share of stock.

 A return on investment ratio provides information on the amount of profit,


relative to the assets employed to produce that profit.

Liquidity or Working Capital Ratio :

The concept of working capital relies on the classification of assets and


liabilities into “current” and “non current” categories. The traditional
distinction between current assets and liabilities based on a maturity of less
then one year or the operating cycle of the company.

A typical balance sheet has five categories of current assets:

 Cash and cash equivalents.


 Marketable securities.
 Accounts receivable.
 Inventories.
 Prepaid expenses.

Three categories of current liabilities:

 Short-term debt.
 Accounts payable.

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 Accrued liabilities.

By definition, each current asset and liability has a maturity (the expected
date of conversion to cash for an asset; the expected date of liquidation for
cash for liability) of less than one year. However, in practice the line between
current and non-current has blurred in recent years. Marketable securities
and debt are particularly susceptible to arbitrary classification. For this
reason working capital ratios should be used with caution.

The different liquidity ratios are as follows:

 Current ratio.
 Quick ratio.
 Cash ratio.
 Cash flow from operations ratio.

Current Ratio:

Current ratios are used to judge a firm’s ability to meet short-term obligations. It
indicates the amount of cash available at the balance sheet date plus the amount of
current assets that the firm expects to turn into cash within one year of the balance sheet
date relative to obligations that will be due during of that period.

The higher the current ratio the greater the ability of the firm to pay its bills.
However, the higher current ratio may also indicate excessive amount of current assets
which is considered to be management’s failure to utilize the resources properly.
Conversely, the lower current ratio may be an indication of failure to payoff the current
liabilities and at the same time may be an indication of possibility of bankruptcy and
failure of management. The traditional or theoretical threshold for this ratio is 2:1.

Current Asset
Current Ratio =
Current Liabilities

Quick Ratio or Acid Test Ratio:

This ratio is not same as the current ratio. It provides more penetrating
measure of liquidity and it excludes inventory from cash resources
recognizing that the conversion of inventory to cash is less certain both in
terms of timing and the amount. The included assets are quick assets
because they can be quickly converted into cash. In this regard we exclude

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inventories from the current assets for measuring the quick ratio. The
theoretical threshold is 1:1.

Current Assets – Inventories


Quick Ratio =
Current Liabilities

Cash Ratio:

Cash ratio is the most conservative measure of cash resources as only


actual cash and securities easily convertible to cash are used to measure cash
resources.
Cash and marketable securities form an important reservoir that the firm
can use to meet its operating expenditures and other cash obligations when
and as the fall due. The higher the cash ratio, the higher will be the resources
available to the firm.

Cash & cash Equivalents


Cash Ratio =
Current Liabilities

Cash Flow From Operations Ratio:

This ratio is another sophisticated measure of liquidity position of the


firm by comparing actual cash flows (instead of current and potential cash
resources) with current liabilities. This ratio avoids the issues of actual
convertibility to cash, turnover, and the need for minimum levels of working
capital (cash) to maintain operations.

Cash flow from operations


Cash Flow from Operations Ratio =
Total Assets

Efficiency Ratios

Efficiency ratios are used to measure how efficiently the firm uses its
resources to generate sales. Efficiency or activity ratios are used to
evaluating the efficiency, with which the firm manages and utilizes its assets.
These ratios are also called the turnover ratios because they indicate the
speed with which the assets are converted or turnover into sales. A proper

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balance between assets and sales generally reflects that the assets are
managed well.

Various aspects of the efficiency with which assets are utilized can be
gleaned from turnover ratios as well as from other ratios.

 Accounts Receivable Turnover Ratio.


 Accounts Receivable Collection Period.
 Inventory Turnover Ratio.
 Inventory Turnover Period.
 Total Asset Turnover.
 Accounts Payable Turnover.
 Accounts Payable Turnover Period.
 Fixed Asset Turnover.
 Operating Asset Turnover.

Accounts Receivable Turnover Ratio

This ratio indicates the velocity of receivable to turn into cash. It


indicates the level of investment in receivables needed to maintain the firm’s
sales level. It also measures the effectiveness of the firm’s credit policy.

Annual Sales
Accounts Receivable Turnover Ratio =
Accounts Receivables

Average Collection Period

This ratio determines how rapidly the firm’s credit accounts are being
collected.

Accounts Receivable
Average Collection Period = X 365
Annual Sales

Or,
365
=
Accounts Receivable Turnover

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Inventory Turnover

Inventory turnover ratio is an indicator of the liquidity of inventory.


This ratio indicates how many times it will take inventories to turn into sales
on an average. It measures the efficiency of the firm’s inventory
management.

Cost of Good Sold


Inventory Turnover =
Average Inventory

Accounts Payable Turnover

The accounts payable turnover indicates the speed by which a firm


pays for its purchases on account. This ratio indicates the velocity of accounts
payable or to be turned into cash.

Sales
Accounts Payable Turnover =
Accounts Payable

Accounts Payable Turnover Period

Accounts payable turnover period shows the number of days within


which accounts payable will become due.
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Accounts Payable Turnover Period =
Accounts Payable Turnover Ratio

Total Asset Turnover

Total assets turnover ratio indicates to the ability of the firm to


generate sales using its asset properly. Unutilized or under utilized assets
increase the firm’s need for costly financing. So, by achieving a high turnover
a firm reduces cost and increases eventual profit to the owners.

Sales
Total Asset Turnover =
Total Assets

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Fixed Asset Turnover

Fixed asset turnover ratio indicates how efficiently the firm is using its
fixed asset to generate sales.
Sales
Fixed Asset Turnover =
Fixed Assets

Operating Asset Turnover

Operating asset turnover ratio indicates how efficiently the firm uses
its operating assets in generating sales.
Sales
Operating Asset Turnover =
Total Asset – Cash – Short Term Bank Loan

Solvency ratio analysis:

These ratios demonstrate or examine the firm’s ability to meet the


interest and principal payments on long term debt. To do this we will
calculate the following ratios:

 Debt Ratio.
 Long Term Debt to Total Capitalization.
 Time Interest Earned Ratio.
 Financial Leverage Ratio.
 Debt – Equity Ratio.

Debt Ratio

This ratio indicates how much of the firm’s assets have been financed by
borrowing.

Total Liabilities
Debt Ratio =
Total Assets

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Long Term Debt Ratio

This ratio indicates the percentage of long term debt in the capital
structure of the firm. Higher the ratio means higher the proportion of long
term debt in the capital structure.

Long Term Debt


Long Term Debt Ratio =
Long Term Debt + Equity

Time Interest Earned Ratio

This ratio indicates the firm’s ability to meet its interest payment out of
its annual operating earnings i.e. firm’s ability to pay the financial expenses
that can be visualized through this ratio.

EBIT
Time Interest Earned Ratio =
Annual Interest Expense

Leverage Ratio :

This ratio indicates to what extent asset has been financed by equity.

Total Asset
Financial Leverage Ratio =
Equity

Debt – Equity Ratio :

This ratio indicates the amount of debt generated against each amount of
equity margin contributed by the firm’s owner. Higher debt equity means
lower the internal source of fund available to meet the Long Term Debt.

Long Term Debt


Debt – Equity Ratio =
Equity

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Profitability Ratio :

This Ratio covers some ratios that show the company’s profitability in
relation to sales or investment. It is the indicator of the firm’s operational
efficiency. Those ratios are analyzed below.

 Gross Profit Margin.


 Operating Profit Margin.
 Net Profit Margin.
 Return on Assets.
 Return on Equity.
 Earning Per Share (EPS)
 Dividend Per Share (DPS)
 Dividend Payout Ratio

Gross Profit Margin


This ratio gives information about a firm’s profitability from the
operating activities. It shows the profitability relative to sales after cost of
goods sold deducted. It indicates the efficiency of the production operation
and relationship between cost of manufacturing goods and sales price.

Gross Profit
Gross Profit Margin =
Annual Sales

Operating Profit Margin


This ratio gives direction of operating cost efficiency. It is an indication of
how efficiently the firm can manage its overheads.

EBIT
Operating Profit Margin =
Sales

Net Profit Margin

This ratio indicates the profitability of the firm in relation to sales


after taking in to account production cost, operating cost, financial cost and
income tax. The higher the ratio, the more profitable the firm is in relative
sense.

Net Profit
Net Profit Margin =

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Sales

Return on Assets

It measures the success of a firm in using asset to generate earning


independent of the financing of those assets. It is therefore a separate
financing activity from the operating and investing activities. ROA is
particularly useful in assessing the performance of business segment of firm
as is typical.

Net Income
Return on Assets =
Total Assets

Return on Equity

This ratio indicates the degree to which the firm is able to convert
operating income into an after tax income that eventually can be claimed by
the shareholders. This is a useful ratio for analyzing the ability of the firm’s
management to realize an adequate return on capital invested by the owner
of the firm.

Net Income
Return on Equity =
Total Equity

Earning Per Share (EPS)

This ratio indicates the financial strength of the Company.

Net Profit after Tax


Earning Per Share (EPS) =
No. of equity shares outstanding

Dividend Per Share (DPS)

This ratio has been determined by dividing dividend with no. of equity
shares.

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Amount of Dividend declared
Dividend Per Share (DPS) =
No. of equity shares outstanding

Dividend Payout Ratio

DPS
Dividend Payout Ratio =
EPS

Standard Value of Different Ratios

Name of the Ratio Standard


Current Ratio 2:1
Quick Ratio 1:1
Inventory turnover Ratio 8 Times
Accounts Receivable Turnover 55 to 85 days or 6
times.
Debt – Equity Ratio 1:3
Gross Profit Ratio 20% - 30%
Operating Profit Ratio 10% - 20%
Net Profit Ratio 7% - 15%
Return on Investment 25%

Problems & Solutions

Problem – 1

The following is the balance sheet of a company :

Liabilities Amount ($) Assets Amount ($)

Share Capital 200000 Land & Building 250000


Profit & Loss account 40000 Plant & Machinery 350000
General Reserve 90000 Inventory 80000

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Debentures 420000 Sundry Debtors 60000
Sundry Creditors 50000 Accounts Receivable 50000
Bills Payable 50000 Cash at Bank 60000

Total 850000 Total 850000

Other Information :

1) Total Sales $ 1000000, 2) 70% on credit sale.

Calculate :

i) Current Ratio
ii) Quick Ratio
iii) Accounts Receivable Turnover Ratio
iv) Current assets to fixed asset ratio
v) Debt-Equity Ratio
vi) Fixed Asset Turnover Ratio

Solution :

i) Current Asset
Current Ratio =
Current Liabilities

250000
=
100000

= 2.50 : 1

ii) Current Asset - Inventory


Quick Ratio =
Current Liabilities

250000 - 80000
=
100000

= 1.7 : 1

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iii) Credit Sales
Accounts Receivable Turnover Ratio =
Accounts Receivable

700000
=
50000

= 14 Times

iv) Current Asset


Current Asset to Fixed Asset Ratio =
Fixed Assets

250000
=
600000

= 0.42 : 1

v) Long Term Debt


Debt – Equity Ratio =
Equity

420000
=
330000

= 1.27 : 1
vi)
Sales Revenue
Fixed Asset Turnover Ratio =
Fixed Assets

1000000
=
600000

= 1.66 : 1

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Problem – 2

The following is the balance sheet of a company :

Liabilities Amount ($) Assets Amount ($)

Common Stock ($l00 per share) 800000 Land & Building 600000
Reserve & Surplus 200000 Plant & Machinery 500000
10% Preferred Stock 400000 Inventory 400000
12% Debentures 200000 Prepaid Expenses 50000
Accounts Payable 200000 Accounts Receivable 200000
Bank Overdraft 150000 Cash at Bank 100000
Outstanding Liabilities 50000 Marketable Securities 150000

Total 2000000 Total 2000000

Other Information :

1) Gross Profit Margin is $ 500000 which is 25% of Sales, 2) 80% on credit sale, 3)
operating expense is $ 150000 & Tax rate is 20%. 4) Market price per share is $ 250 and
dividend declared $ 10800.

Calculate :

i) Current Ratio.
ii) Quick Ratio.
iii) Accounts Receivable Turnover Ratio.
iv) Inventory Turnover ratio.
v) Operating Profit Margin.
vi) Net Profit Margin.
vii) Return on Asset.
viii) Return on Equity.
ix) Time Interest Earned Ratio.
x) Earning per share.
xi) Dividend per share.
xii) Dividend payout ratio.
xiii) Price Earnings Ratio.

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Solution :
Gross Margin is 25% of Sales, Therefore

Gross Profit
Gross Profit Margin =
Sales

500000
Or 25% =
Sales

500000
Or Sales =
0.25

= 2000000

Sales Revenue 2000000

(-) Cost of Goods Sold 1500000

Gross Profit 500000

(-) Operating Expense 150000

Operating Profit (EBIT) 350000

(-) Interest ( 200000 × 0.12) 24000

Earning before Tax 326000

(-) Tax 20% of 326000 65200

Earning after Tax (EAT) 260800

(-) Dividend (10% on 400000) 40000

Earnings available for Common Stockholders 220800

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i) Current Asset
Current Ratio =
Current Liabilities

800000
=
400000

= 2 :1

ii) Current Asset - Inventory


Quick Ratio =
Current Liabilities

800000 - 300000
=
400000

= 1.25 : 1

iii) Credit Sales


Accounts Receivable Turnover Ratio =
Accounts Receivable

1600000
=
200000

= 8 Times

iv) Cost of Goods Sold


Inventory Turnover Ratio =
Inventory

1500000
=
300000

= 5 Times

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v) EBIT
Operating Profit Margin =
Sales

350000
=
2000000

= 17.5%

vi) Profit after Tax


Net Profit Margin =
Sales

260800
=
2000000

= 13.04%

vii) Earnings after Tax


Return on Asset =
Total Asset

260800
=
2000000

= 13.04%

viii) Earnings available for common stock holders


Return on Equity =
Total Equity

220800
=
1000000

= 22.08%

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ix) EBIT
Time Interest Earned Ratio =
Interest

350000
=
24000

= 14.58 Times

x) Earnings available for common stock holders


Earning Per Share (EPS) =
No. of Share Outstanding

220800
=
8000

= 27.6

xi) Dividend Declared


Dividend per Share =
No. of Share Outstanding

10800
=
8000

= 1.35

xii) DPS
Dividend Payout Ratio =
EPS

1.35
=
27.6

= 0.0489

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xiii) Market Price
Price Earning Ratio =
EPS

250
=
27.6

= 9.06

Reference Books
1) Khan, M. Y. & Jain P. K., “Financial Management”, Tata McGraw Hill
Publishing Co., New Delhi.

2) Van Horne, J. C., ‘Financial Management’ Englewood Cliffs, N. J : ; Prentice


Hall.

3) Ross, Stephen A, et. al, “Fundamentals of Corporate Finance”, Tata McGraw


Hill Publishing Co., New Delhi.

4) Gitman, L. J., “Principles of Managerial Finance”, Pearson Education.

5) Block, S. B. & Hirt, G. A., “Foundations of Financial Management”


Homewood, Illinois: Richard D. Irwin.

6) Pandey, I. M. “Financial Management”, New Delhi; Education Books.

7) Weston, J. F. & Brigham, E. F., Managerial Finance, New Delhi ; Prentice Hall.

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