Ratio Analysis-1

PSG INSTITUTE OF MANAGEMENT: COIMBATORE
UT MBA - Accounting for Managers

Ratios – Problems to Solve in class
1. From the following data of Sridevi Textiles, compute the ‘Current Ratio’.
Particulars Rs. Particulars Rs.
Sundry Debtors CA 40,000 Sundry Creditors CL 20,000
Prepaid Expenses CA 20,000 Debentures NCL 1,00,000
Short-term Investments CA 10,000 Inventories CA 20,000
Loose Tools NCA 5,000 Outstanding Expenses CL 20,000
Bills Payable CL 10,000
2. The following is the Trading Account of Raaha Garments. Calculate the Stock Turnover Ratio and Gross profit ratio
TRADING ACCOUNT
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock 40,000 By Sales 2,00,000
To Purchases 1,00,000 By Closing stock 20,000
To Carriage 10,000
To Gross Profit 70,000
2,20,000 2,20,000
3. Net Solutions Ltd., Bangalore wants to know its position in the stock market. They have provided
us the following data:
Net profit before tax Rs. 1,00,000
Taxation at 50% of Net Profit before Tax
10% preference share capital (Rs. 10 each) Rs. 1,00,000
Equity Share capital (Rs. 10 share) Rs. 1,00,000
Market Price per Share Rs.80
Calculate their earnings per share and Price Earnings Ratio
Net profit before tax = Rs. 100000

Tax @ 50% = Rs. 50000
Net Profit = Rs. 50000
Earnings per Equity Shares = (Rs. 50000 – Rs. 10000)/ 10000 (Number of shares) = Rs. 4
4.Palamudhir Nilayam, Peelamedu had the following data retrieved from its accounting records for the year
end March 2014.
Rs. Rs.
Sales 10,00,000 Purchases 6,00,000
Sales Returns 1,00,000 Purchases Returns 1,50,000
Opening Stock 2,00,000 Closing Stock 50,000
They have requested for help in calculating their profitability.
Calculate the Gross Profit ratio (considering that there is no other direct expenses).
Answer:
Gross Profit = Net Sales – COGS
COGS = Opn Stock + Net Purchase – Closing Stock
COGS = 2L + (6L – 1.5L) - .5L = 2L + 4.5L - .5L = 6L
Gross Profit = 9L – 6L = 3L
Gross Profit Ratio = Gross Profit / Net Sales = 3L / 9L = 0.33
5. Palamudhir Nilayam further provides following data:

Rs. Rs.
Profit before Tax 10,000 No. of Equity Shares 3,000
Provision for Tax 5,000 Dividend per Equity Share 0.40
Preference Dividend 2,000
They would like to know their dividend payout ratio, and their retained earnings ratio.
Answer:
Dividend Payout Ratio = Dividend per Equtiy Share / Earnings per Equity share
= 0.40 Re / 1 Re = 0.4 (or) 40%
Earnings per Equity Share = (Net Profit – Preference Dividend) / No of equity shares =
Rs(5000-2000)/3000 = 3000/3000 = 1Re
Retained Earnings Ratio = 1 – Dividend payout Ratio = 1-0.4 = 0.6 (or) 60%
6. Arjun Textiles further provides the following figures.
Rs.
Total Sales for the year 2003 1,00,000
Cash Sales for the year 2003 20,000
Debtors as on 01.01. 2003 10,000
Debtors as on 31.12. 2003 15,000
Bills Receivable as on 01.01.2003 7,500
Bills Receivable as on 31.12. 2003 12,500
Let us find the Debtors Turnover Ratio for Arjun Textiles.

7. Further data dug out from Palamudhir Nilayam records:
Credit Sales for the Year Rs. 12,000 Bills receivable Rs. 1,000
Debtors 1,000
Let us calculate the Debtors’ Turnover Ratio and Debt Collection Period (debtor days).
8. Use the following figures from Arjun Textiles to calculate the Creditors’ Turnover Ratio and the Average Age of Accounts
Payable:
Rs. Rs.
Credit purchase during 1988 1,00,000 Bills Payable on 1.1.1988 4,000
Creditors on 1.1.1988 20,000 Bills Payable on 31.12.1988 6,000
Creditors on 31.12.1988 2,000
9. Net Solutions Limited assumes that their net profit before Interest and Tax reduces to Rs. 5,00,000. They require us to
find out what will be the interest coverage ratio, if 10% Debentures of amount Rs. 10,00,000 is outstanding
Exercise:
1. Sigma Limited, manufacturers of Steel pipes, ingots and billets, are planning an expansion. They are on the look out for export
opportunities to the Middle East, and some African Countries.
The following is their profit and loss account for the year ending 31st March 2004, and their balance sheet as on that date.
Dr. PROFIT AND LOSS ACCOUNT Cr.

Opening stock of finished goods 10,00,000 Sales 1,00,00,000
Opening stock of raw materials 5,00,000 Closing stock of raw materials 15,00,000
Purchase of raw materials 30,00,000 Closing stock of finished goods 10,00,000
Direct wages 20,00,000 Profit on sale of shares 5,00,000
Manufacturing expenses 10,00,000
Administration expenses 5,00,000
Selling and distribution expenses 5,00,000
Loss on sale of plant 5,50,000
Interest on debentures 1,00,000
Not Profit 38,50,000
1,30,00,000 1,30,00,000
BALANCE SHEET
Liabilities Rs. Assets Rs.

Share Capital : Fixed assets 2,50,000
Equity share capital 10,00,000 Stock of raw materials 15,00,000
Preference share capital 10,00,000 Stock of finished goods 10,00,000
Reserves 1,00,000 Sundry debtors 1,00,000
Debentures 7,50,000 Bank balance 50,000
Sundry creditors 50,000
29,00,000 29,00,000
As a winter intern at Sigma Limited, you are required to advise the top management on the proposal to expand. Comment on their
liquidity, profitability and leverage position after redrafting the balance sheet and calculating the:
(i) Gross Profit Ratio (ii) Overall Profitability Ratio
(iii) Current Ratio (iv) Debt-Equity Ratio
(v) Stock Turnover Ratio (vi) Liquidity Ratio

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PSG INSTITUTE OF MANAGEMENT: COIMBATORE

UT MBA - Accounting for Managers

Net profit before tax = Rs. 100000

5. Palamudhir Nilayam further provides following data:

Let us find the Debtors Turnover Ratio for Arjun Textiles.

Dr. PROFIT AND LOSS ACCOUNT Cr.

Purchase of raw materials 30,00,000 Closing stock of finished goods 10,00,000

Direct wages 20,00,000 Profit on sale of shares 5,00,000

Manufacturing expenses 10,00,000

Administration expenses 5,00,000

Selling and distribution expenses 5,00,000

Loss on sale of plant 5,50,000

Interest on debentures 1,00,000

Not Profit 38,50,000

Liabilities Rs. Assets Rs.

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