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Case Study of Ratio Analysis

With the following data analyses the Balance Sheet in a stage wise process.

Classify the following assets and Liabilities for Balance Sheet
1	Cash in Hand	2
2	Provisions for Expenses	2
3	Vehicles	10
4	Unsecured Loan	8
5	Investment in other Firms	3
6	Goodwill	3
7	Capital	20
8	Sundry Debtors	16
9	Term Loan (including installment of term loan of Rs. 4 Lac)	20
10	Plant & Machinery	25
11	Pre-operative expenses	2
12	Sundry Creditors	12
13	Stocks	20
14	Reserves	10
15	Pre-paid expenses	2
16	Expenses payable	2
17	Security Deposit	2
18	Bank CC-OD Limit balance	14
19	Land & Building	15
20	Debentures	12
Profit & Loss items
21	Sales	100
22	Net Profit	5
23	Interest on Term Loan	3
24	Depreciation	2

Classification of Assets and Liabilities

Liabilities			Assets
Net worth			Fixed Assets
7	Capital	20	3	Vehicles	10
14	Reserves	10	10	Plant & Machinery	25
			19	Land & Building	15
Long Term Liabilities			Non - Current Assets
4	Unsecured Loans	8	5	Investment in Firms	3
9	Term loan	20	17	Security Deposits	2
20	Debentures	12
			Intangible Assets
			6	Goodwill	3
			11	Pre-operative exp.	2
Current Liabilities			Current Assets
2	Provision for Exp	2	1	Cash	2
12	Sundry Creditors	12	8	Sundry Debtors	16
16	Expenses Payable	2	13	Stocks	20
18	Bank CC-OD	14	15	Prepaid Expenses	2
Grant Total		100	Grant Total		100

Important terms to be used in ratio calculations

1.  Net Worth                                                                        30

2.  Intangible Assets                                                               5

3.  Tangible Net worth = Net worth – Intangible assets                25

4.  Long Term Liabilities                                                       40

5.  Long Term Sources = Long Term Liab. + Net Worth      70

6.  Current Liabilities (CL)                                                    30

7.  Short Term Sources = Current Liab                                30

8.  Outside Liabilities = Long term Liab. + Current Liab.      70

9.  Long Term Uses =  Fixed Assets + Non-Current Assets + Intangible assets                                                              60

10.  Current Assets (CA)                                                         40

11.  Working Capital = Current Assets                                   40

12.  Short Term Uses = Current Assets                                 40

13.  Net Working Capital = Current Assets – Current Liab     10

14.  Quick Assets = Current Assets – Stocks & Pre-paid expenses 40 - (20+2)                                                        18

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Calculation of Ratios

Ratio	Formula	Calculation	Answer
Current Ratio	Current Assets / Current Liab.
Quick ratio	Quick Assets / Current Liab.
Net Working Capital	Current Assets - Current Liab.
Debt equity Ratio	Long Term Liabilities / Tangible Net worth
Debt Service Coverage Ratio	(Profit + Depreciation + TL Intt.) / (TL Instalment + TL Intt.)
Stock Turnover Ratio	Sales / Stocks
Debtor Turnover Ratio	Sales / Sundry Debtors
Debtor Velocity Ratio	Sundry Debtors / Sales X 12
Net Profit	Net Profit / Sales X 100
Return on networth	Net Profit / Tangible Net worth X 100

Calculation of Ratios

Ratio	Formula	Calculation	Answer
Current Ratio	Current Assets / Current Liab.	40/30	1.33:1
Quick ratio	Quick Assets / Current Liab.	18/30	0.6:1
Net Working Capital	Current Assets - Current Liab.	40-30	10
Debt equity Ratio	Long Term Liabilities / Tangible Net worth	40/25	1.6:1
Debt Service Coverage Ratio	(Profit + Depreciation + TL Intt.) / (TL Instalment + TL Intt.)	(5+2+3) / (4+3)	1.43
Stock Turnover Ratio	Sales / Stocks	100/20	5 Times
Debtor Turnover Ratio	Sales / Sundry Debtors	100/16	6.3 Times
Debtor Velocity Ratio	Sundry Debtors / Sales X 12	16/100 X 12	1.92 Months
Net Profit	Net Profit / Sales X 100	5/100 /100	5 %
Return on networth	Net Profit / Tangible Net worth X 100	5/25 X 100	20 %

Calculation of Ratios

Ratio	Ratio As Above	Ratio for 2nd year( Assumed Figure)	Answer
Current Ratio	1.33:1	1.25:1
Quick ratio	0.6:1	0.7:1
Net Working Capital	10	12
Debt equity Ratio	1.6:1	1.8:1
Debt Service Coverage Ratio	1.43	1.80
Stock Turnover Ratio	5 Times	4 Times
Debtor Turnover Ratio	6.3 Times	8 Times
Debtor Velocity Ratio	1.92 Months	1.50 Months
Net Profit	5 %	3 %
Return on networth	20 %	23 %

Calculation of Ratios

Ratio	Ratio As Above	Ratio for 2nd year( Assumed Figure)	Answer
Current Ratio	1.33:1	1.25:1	Deterioration, Requires Improvement
Quick ratio	0.6:1	0.7:1	Improvement
Net Working Capital	10	12	Improvement
Debt equity Ratio	1.6:1	1.8:1	Deterioration, Requires Improvement
Debt Service Coverage Ratio	1.43	1.80	Improvement, Acceptable at 1.8 but not at 1.4, Ideal is 2
Stock Turnover Ratio	5 Times	4 Times	Deterioration, turnover has slowed down
Debtor Turnover Ratio	6.3 Times	8 Times	Improvement, Debt collection efficiency improved
Debtor Velocity Ratio	1.92 Months	1.50 Months	Debt collection efficiency improved, Hence time has come down
Net Profit	5 %	3 %	Deterioration
Return on networth	20 %	23 %	Improvement