Practical Questions on Ratio Analysis & Reverse Ratios

Q.1) Following is the Balance Sheet and Profit & Loss A/c. of ABC ltd. as on 31 st March 2020. You are required to convert the
same in Vertical formats and calculate all the ratios:
Liabilities ₹ Assets ₹
Equity Share Capital (₹ 10 each) 2,00,000 Land & Building at WDV 1,00,000
10% Preference Share Capital 1,00,000 Plant & Mach at WDV 1,20,000
Reserves and Surplus 2,00,000 Long Term Investments 90,000
12% Debentures 1,00,000 Capital WIP 75,000
Accounts Payable 1,60,000 Inventories 2,00,000
Bank Overdraft 1,00,000 Book Debts (last year ₹ 1,80,000) 2,00,000
Acceptances given 75,000 Marketable Investments 50,000
Income received in Advance 25,000 Advance for purchases 10,000
Provision for Taxation 40,000 Cash and Bank balance 40,000
Advance Tax 30,000
Bills Receivable 75,000
Underwriting Commission 10,000
(To the extent not w/off)
10,00,000 10,00,000

Profit & Loss Account for year ended 31st March 2020
Particulars ₹ Particulars ₹
To Opening Stock 1,50,000 By Sales (10% cash) 20,00,000
To Purchases 10,50000 Less: Returns 2,00,000
To Factory Expenses 4,50,000 18,00,000
To Gross Profit 3,50,000 By Closing Stock 2,00,000
20,00,000 20,00,000
To Administrative Expenses 1,20,000 By Gross Profit 3,50,000
To Rent 30,000 By Bad Debts Recovery 30,000
To Interest paid on Debentures 12,000 By Dividend/ Int. received (₹ 10,000 is 35,000
To Selling Expenses 15,000 in respect of Trade Investments)
To Bad debts w/off 10,000 By Royalty 85,000
To Depreciation 30,000
To Loss on sale of Fixed Assets 21,500
To Provision for Tax 40,000
To Net Profit 2,21,500
5,00,000 5,00,000
To Equity Dividend 50,000 By Net Profit 2,21,500
To Dividend on Preference Share 10,000
To Transfer to General Reserve 61,500
To Balance c/d 1,00,000
2,21,500 2,21,500

The Company’s shares are quoted on stock exchange at ₹ 44.60. The expected growth rate in earnings is 12% p.a.

1 Practical Questions on Calculation on Ratio

PROBLEMS ON DuPont (Q.2 – Time series & Q.3 – Inter-Firm):

Q.2) XYZ Ltd. has maintained a stable and relatively high ROE of approximately 18% over the last three years. Use traditional
DuPont analysis to decompose this ROE into its three components and comment on trends in company performance.
Selected items from Balance Sheet and Income statement (₹ in crores)
Year => 2017-2018 2018-2019 2019-2020
Net Income 21.5 22.3 21.9
Revenue 305 350 410
Average Equity 119 124 126
Average Assets 230 290 350

Q.3) An Analyst has gathered data from two companies in the same industry. Calculate the ROE for both companies and use
the extended DuPont analysis to explain the critical factors that account for the differences in the two companies’ ROEs
Selected items from Balance Sheet and Income Statement (₹ in crores)
Particulars X Ltd. Y Ltd.
Revenues 500 900
EBIT 35 100
Interest Expense 5 0
EBT 30 100
Taxes 10 40
Net Income 20 60

Average Assets 250 300

Total Debt 100 50
Average Equity 150 250

PROBLEMS ON RATIOS FOR EQUITY SHAREHOLDERS AND VALUATION RATIOS (Q.4 & Q.5):

Q.4) The following data of CEE Ltd. is available for the year ending 31/03/2020.
Particulars ₹ (In lacs)
Share Capital
20,00,000 Equity shares of ₹ 10 each 200.00
General Reserve 150.00
Investment Allowance Reserve 50.00
Dividend paid 10.00
Provision for Tax 84.00
15% Long term loan 300.00
Profit before tax 140.00
Calculate the following ratios from the above (i) Return on Capital Employed, (ii) Return on Net worth or shareholders’ funds (iii)
Book Value per share

Q.5) Following information is available relating to A Ltd. and B Ltd. :—

Particulars A Ltd. (₹ In Lakhs) B Ltd. (₹ In Lakhs)
Equity Share Capital (₹ 10) 200 250
10% Preference Share Capital 80 100
15% Debentures 20 60
Profit before Interest & Taxes 60 80
Equity Dividend paid 20 25
Provision for tax 17 21
Market Price per share ₹ 50 ₹ 60
You are required to:
1. Calculate (i) EPS, (ii) P/E Ratio, (iii) Dividend Payout Ratio, (iv) Dividend yield;
2. Advise which company's share is worth investing based on the above ratios
3. Will your decision change if the growth rate of A Ltd. is 5% p.a. and that of B Ltd. is 7% p.a.

2 Practical Questions on Calculation on Ratio

PROBLEMS ON CREDIT ANALYSIS – ICR & DSCR (Q.6 & Q.7):

Q.6) Calculate the important ratios for granting Term Loan and give your recommendations from the following information
Year I II III (Rs in Lacs)
Profit Before depreciation, amortizations, Interest & Tax (EBITDA) 220.00 230.00 240.00
Interest on Term Loan @ 12 % 36.00 24.00 12.00
Tax Rate 35%
Loan is Repayable in equal installments at the end of each of the 3 years along with interest. Investment in Project: ₹ 450
Lacs. Depreciation for the Project is Rs 150 Lacs every year. The pre-operative expenses amount to ₹ 60 lacs to be written off
equally over a period of 3 years.

Q.7) Calculate the important ratios for granting of Term Loan & give your recommendations from the following information
Year => 1 2 3
Profit Before depreciation, Interest & Tax (₹ in lakhs) 200 210 220
The Company aims to invest in a project with a capital outlay of ₹ 450 lakhs. Proposed Loan ₹ 300 lakhs. Loan is repayable in
3 equal annual installments payable at the end of each year. The applicable interest rate for projects with similar risk is 12%
p.a. The present value of annuity factor @ 12% for 3 years is 2.40183. Tax Rate applicable to the project is 35%. Round off the
amounts to the nearest two places after decimal.

Q.8) Following is the Balance Sheet of Common India Ltd.

Balance Sheet as on 31st March 2020
Liabilities ₹ Assets ₹
Capital Reserve 1,26,000 Copyright 1,00,000
General Reserve 1,20,000 Cash 21,000
Provision for Tax 50,000 Calls in Arrears 9,575
Commission received in Advance 10,875 Plant and Machinery 4,20,000
15% debentures 1,60,000 Debtors 3,00,425
12% Bank Loan 40,000 Prepaid Insurance 15,375
6% Preference Share Capital 2,00,000 Land and Building 5,00,000
Equity Share Capital 10,00,000 Fixtures 25,000
Bills Payable 49,125 Furniture 75,000
Profit and Loss Account 9,000 Preliminary Expenses 18,625
Bank Overdraft 10,740 Goodwill 1,00,000
Securities Premium 15,000 Investments (Long Term) 1,75,000
Sundry Creditors 1,89,260 Stock 2,00,700
Market Investments 19,300
19,80,000 19,80,000
You are required to rearrange above Balance Sheet in vertical form and compute the following ratios:
(a) Current Ratio, (b) Liquid Ratio (c) Debt Equity Ratio (d) Capital Gearing Ratio. (e) Proprietary Ratio

Q.9) Shinkanshan Limited commenced business on 1st Jan 2010. The Balance Sheet as on 31st Dec 2018 & as on 31st Dec
2019, the Profit & Loss A/c. for the year ended 31st Dec 2018 & for the year ended 31st Dec 2019 are given below:-
Liabilities 31.12.2018 31.12.2019 Assets 31.12.2018 31.12.2019
Equity Share of ₹ 10 each 2,00,000 2,00,000 Fixed Assets (WDV) 3,96,000 4,16,000
General Reserve 40,000 20,000 Stock in Trade 1,20,000 60,000
Profit & Loss A/c 4,000 28,000 Debtors 1,60,000 80,000
Mortgage Loan 1,60,000 2,20,000 Cash & Bank 4,000 60,000
Bank Overdraft 40,000
Creditors 1,80,000 60,000
Provision for Taxation 26,000 68,000
Dividend declared 30,000 20,000
6,80,000 6,16,000 6,80,000 6,16,000

3 Practical Questions on Calculation on Ratio

 Profit and Loss Account for the year ended_____________
31.12.2018 31.12.2019 31.12.2018 31.12.2019
Directors Remuneration 60,000 20,000 Balance b/f 28,000 4,000
Interest on Mortgage Loan 9,600 8,800 Net Profit after Depreciation 1,21,600 1,60,800
Provision for Taxation 26,000 68,000
Dividend declared 30,000 20,000
Transfer to Reserve 20,000 20,000
Balance c/d 4,000 28,000
1,49,600 1,64,800 1,49,600 1,64,800
Sales for the year 2018 amounted to ₹ 10,00,000 and for 2019 amounted to ₹ 12,00,000
Calculate
a) Net Profit Ratio b) Current Ratio
c) Liquidity Ratio d) Debt/Equity Ratio and
e) Interest Coverage Ratio f) Net Operating Profit Ratio
Give your comments on profitability and solvency of the company.
Do you think that there is an improvement in performance of the Company in 2019?

Q.10) The following is the Balance Sheet of J Ltd on 31st March 2020
Liabilities ₹ Assets ₹
Share Capital 2000000 Fixed Assets 1800000
Reserves 400000 Debtors 500000
Creditors 300000 Stock 400000
Bank Overdraft 100000 Bank Balance 100000
2800000 2800000
Total Sales were ₹ 90,00,000 and Cash Sales were 10% of the total sales. Cost of goods sold was ₹ 70,00,000. Net
profit before payment of tax at 50 % was ₹ 9,00,000. Opening Stock figure was 75 % of the stock figure on 31st
March 2020. Debtors on 31st March 2020 include advances of ₹ 50,000 to suppliers. Advances were given in
March 2020.
Debtors on 1st April 2019 were 50 % of Debtors on 31st March 2020.
There were no non-operating expenses and non-operating incomes.
Calculate the following ratios:
a) Current Ratio b) Liquid Ratio
c) Operating Ratio d) Net Profit Ratio
e) Stock Turnover Ratio f) Debtors Turnover Ratio and Collection Period
g) Stock/Working Capital Ratio

Q.11) The following are the Balances as on 31st March 2020 of Ambika Ltd.
₹
Share Capital (20000 Equity Shares of ₹ 10 each of ₹ 5 called up) 1,00,000
Land and Building 1,25,000
Machinery 50,000
Stock 50,000
Reserves and Surplus:
General Reserve 50,000
Profit and Loss Account 15,000
5% Debentures 1,00,000
Bills Payable 7,000
Bills Receivable 5,000
Furniture 25,000

4 Practical Questions on Calculation on Ratio

 Debtors (less than 6 months) 11,000
Preliminary Expenses 5,000
Creditors 18,000
Cash on Hand 2,000
Bank Balance (Dr.) 18,000
Provision for Doubtful Debts 1,000

Calculate the following Ratios:

a) Debt Equity Ratio b) Proprietary Ratio c) Current Ratio
d) Liquid Ratio e) Stock to Working Capital Ratio
Answer the following questions:
1) How is the short-term solvency position of the company?
2) Is the company financially stable?
3) How is the liquidity position of the company?
4) give your opinions about working capital position of the company.

Q.12) From the ratios and other data set forth below for Auto Accessories Ltd., indicate your interpretation of the company’s
financial condition.
Particulars Year 1 Year 2 Year 3
Current Ratio 2.65 2.78 3.02
Acid-test Ratio 1.55 1.10 0.99
Inventory to working capital (%) 95 100 110
Working Capital Turnover ratio (times) 2.75 3 3.25
Receivable Turnover ratio (times) 9.83 8.41 7.2
Collection period (days) 37 43 50
Inventory Turnover (times) 6.11 6.01 5.41
Income per equity share 5.10 4.05 2.5
Net income to net worth (%) 11.07 8.5 7
Operating Expenses to net sales (%) 22 23 25
Sales increase during the year (%) 10 16 23
COGS to Net Sales (%) 70 71 73
Dividend per share (₹) 3 3 3
Fixed Asset to net worth (%) 16.4 18 22.7
Net profit to Net Sales (%) 7.03 5.09 2

REVERSE RATIOS

Q.13) Consider the following statements: - (Assume there is no bank overdraft)

1. The current ratio of Busy Ltd. is 4.5:1 and liquid ratio is 3:1. Inventory is ₹ 6,00,000. Calculate the current liabilities.
2. Total current liabilities of Beta Ltd. are ₹ 10,00,000 and acid test ratio is 3:1. Inventory is ₹ 5,00,000. Find out the
current assets and compute the current ratio.
3. Inventory of Delta Ltd. is ₹ 6,00,000. Total liquid assets are ₹ 24,00,000 and liquid ratio is 2:1. Work out the current
ratio.
4. Working Capital ₹ 600000, Current Ratio is 2.5:1, Calculate CA and CL. Also Calculate stock if Quick Ratio is 1.5:1
5. COGS = 8,00,000, GP Ratio = 20%. Calculate Sales. Also calculate Debtors if Debtors Velocity is 4 months.
6. WC = 5,00,000, Fixed Assets to Proprietors Fund = 0.75:1, Borrowed funds and Investments = nil. Prepare Vertical
Balance Sheet.
7. Shareholders Fund = 20,00,000. Reserves and Surplus to Share Capital 0.25. Determine the amount of Share Capital
and Reserves & Surplus
8. Interest on 10% Debentures = ₹ 10,000, NPAT = ₹ 20,000, Return on Networth = 5%. Calculate Capital Employed.

5 Practical Questions on Calculation on Ratio

Q.14) Based on the following information, prepare Balance Sheet of D Ltd. as on 31st March, 2020. Explain your working and
assumptions:
Current Ratio 2.5
Liquidity ratio 1.5
Net Working Capital 600000
Stock Turnover Ratio 5
Turnover Ratio to Net Fixed Assets (COGS/FA) 2
Ratio of Gross Profit to sales 20%
Average Debt Collection period 2.4 months
Fixed Assets to Net Worth 0.80
Long Term debt to Capital and Reserve 7/25

Q.15) From the following information, you are required to prepare a Balance Sheet in horizontal form:
Current Ratio 1.75
Acid Test Ratio 1.25
Stock Turnover Ratio 9 times (based on closing stock)
Gross Profit Ratio 25%
Debtors Collection Period 1.5 months
Reserves and Surplus to Share Capital 0.2
Cost of Goods sold to Fixed Assets 1.2
Capital Gearing Ratio 0.6 (Long term loans to Share Capital)
Fixed Assets to Shareholders funds 1.25
Sales (Credit) ₹ 6,00,000
Current Assets consist of Cash, Stock and Debtors only. The Company has not issued preference shares. There are no Bank
O/D and Fictitious Asset.

Q.16) The following ratios and other data pertain, to the financial statements of P Ltd. for the year ended 31 st March 2020.
Working Capital Ratio 1.75:1
Acid Test Ratio 1.27:1
Working Capital ₹ 33,000
Fixed Assets to Shareholders' Equity 0.625:1
Inventory Turnover (based on cost of closing inventory) 4 times
Gross Profit Ratio 40 %
Earnings per share Re. 0.50
Average age of outstanding accounts receivable (based on 365 days) 73days
Share Capital represented by 26,000 shares
Earning us for the year as a percentage of share capital - 25%. There are no prepaid expenses, deferred expenses,
intangible assets and long-term liabilities and no bank over draft. Prepare a Profit & Loss A/c & balance sheet with as much
details as possible for the year 31st March 2020.

6 Practical Questions on Calculation on Ratio