Balance sheet analysis a few points -- for interview -- B.Com, M.Com, MBA candidates
Approach to Processing
& Appraising of Credit Proposal.
Interpretation of Financial Statements in Assessment of Credit Needs of
borrowers:-
Why Financial Analysis ?
Analysis of the financial data is done for ascertaining the past,
existing and projected financial status of the borrower. This is also to
compare the SOLVENCY, LIQUIDITY and PROFITABILITY of the borrower’s past,
present and future activities.
Review of borrower’s past performance is a base for appraisal, which
involves assessment of credit needs and safety aspect of bank credit.
Review should be based on latest financial position and performance.
Even at the year end, we may obtain tentative data, Balance Sheet and Profit
& Loss Account.
Review of financial position/performance means analysis of past data,
which can be classified into–
(a) Profit & Loss Account Analysis.
(b) Balance Sheet Analysis.
(c) Ratio Analysis.
(d) Funds Flow Analysis.
In practice, we may deal with the following types of financial
statements – (Balance Sheet and Profit & Loss Account.)
a) Audited Financial Statement – is one which is duly certified by a
Chartered Accountant after due verification of books of account in
accordance with accepted accounting principles and policies, various relevant
statutes etc.
b)Unaudited/ Provisional Financial Statement – is one which is prepared and certified by the
borrower after the completion of the accounting year.
c)Tentative/ Estimated Financial Statement – Before the close of the year, financial statement can be prepared on
the basis of performance of the past months and estimates made for the rest of
the year. This is tentative/estimated financial statement.
d)Projected Financial Statement – This is made for future period after taking into account the past
performance, rate of growth, market condition, demand/supply of the products,
capacity available and all other factors affecting the business.
Contributed by Shri Uday
Bose, Retired from STC,Pune and Shri Sharad Kumar Rewatkar, Chief Manager,
Raopura Br
Some Points Relating to Audited Financial Statement -
1) For Corporate bodies i.e. public limited and private
limited companies, accounts are audited in accordance with the companies Act
1956 and the Balance Sheet / Profit & Loss A/c. are drawn as per Schedule
VI to the Act.
1) For others, Income Tax Act provides for audit of
accounts by Chartered Accountants in respect of assessees carrying on business
with turnover of Rs.40 lakhs and in respect of professional with gross income
receipts of Rs.10 lakhs. Balance Sheet and Profit & Loss account are certified
besides tax audit forms no. 3 CA to 3 CD.
1) As far as banks are concerned, RBI directives state that
in case of non corporate borrowers, banks should obtain audited financial
statement duly certified by CA’s in the prescribed formats, from the borrowers
(existing as well as new) enjoying/approaching for working capital facilities
of Rs.10 lakhs & above. This was implemented from the accounting year
commencing from 31-3-1984( Formats given vide our circular No.374/132/1985
dt.09.08.1985)
Analysis of Financial Statements.
I) Profit & Loss Account Analysis From Operational Data -
(a) Profit & Loss A/c. is a very important part of financial
statements as it reveals the result of the performance of the borrowers during
the accounting year. It matches revenues (sales/income and other misc.
receipts) earned and costs incurred in the process of earning the revenue.
Firstly - net sales
(Gross Sales – Excise Duty), and other operating revenues, are compared with
the cost of goods sold and gross profit / loss is arrived at.
Secondly - from gross
profit other operating expenses (administrative, selling, general expenses and
interest) are deducted to calculate operating profit / loss.
Thirdly - where
nonoperating income/expenses are added to/ deducted from the operating profit
and profit before tax is obtained. When Tax is deducted, the resultant figure
is net profit. (profit after tax.)
(b) Profit & Loss Appropriation Account -This shows
how the profit earned is utilized. In case of corporate bodies, this account is
required to be done to show how much profit is transferred to reserves and paid
by way of dividend. The Balance amount is transferred to Profit & Loss A/c.
shown in the Balance Sheet.
c) Profit & Loss A/c. analysis would cover the
following :-
(i) Trend in Sales turnover is an indicator of the size of
business operations. A comparison with past years would be meaningful in
judging the progress.
(ii) Trend in components of cost of production viz. cost of
Raw Materials, stores and spares consumed, power, direct layout, other
manufacturing expenses etc. as well as total cost of production.
(iii) Analysis of fixed costs viz. Selling and Administrative
expenses, interest.
(iv) Examination of operating results, indicated by profit
before tax and after tax.
(v) How much profit has been retained in the business after
dividend /withdrawals.
II) Balance Sheet Analysis – This involves -
(a) Classification of assets into Current and Non Current / fixed and
Liabilities into Current, term (noncurrent) and net worth. Current Assets are
those which would be converted into cash during normal operating cycle of
business, which is 12 months as per RBI guidelines. Similarly liabilities
maturing during the next 12 months should be treated as current liabilities.
(b) It is to be noted that Bank borrowings on A/c of Bills
purchased/discounted on the Balance sheet date, which normally do not find a
place in the Balance Sheet, should be added to the figure of Bank borrowings on
liabilities side and to the receivable (debtors) on assets side. While
examining current assets/liabilities, current ratio is considered to be very
important ratio. We shall study the same in detail under Ratio Analysis.
(c) Analysis of Capital Structure –
It is subjective judgment regarding adequacy of capital which varies
from concern to concern, based on the nature of business/industry.
However it is good to make judgment on the long-term debt/equity ratio
and total debt/equity ratio.
d) Analysis of Composition of Assets /Current Assets -
Here the study is made to know how much funds are utilised in a
particular kind of asset like inventory, receivable etc. Since the value of
assets in the Balance Sheet are either historical or as estimated by the
borrower, they do not necessarily represent the realisable value or replacement
value. They may also include some items having no real value to the business.
It is, therefore, necessary to analyze individual items of assets to
find out –
(i) Whether fixed asset include nonproductive assets or
intangible assets.
(ii) Whether they are made in associate provisions.
(iii) Whether investment is made in associate concerns, and
these are in the interest of the business. If amount is large, further enquiry
should be made.
(iv) Whether inventory includes non-borrowing items/obsolete
stock.
(v) Whether there are any doubtful debts and adequate
provision is made therefor, whether there are debts outstanding over 6 months
preferably 90 days ? If so, detailed enquiry should be made to assess their
realisability. They should be classified as non current assets.
(vi) Whether receivable are due from associate companies and
genuine trade dues, otherwise they should be classified as non current assets.
(vii) Whether loans and advances are made to the directors and
employees. If so, we should ascertain the probable time of employment.
(viii) Whether there are accumulated loss, whether deferred
revenue expenditure/preliminary expenses are written off. These are intangible
assets and should be deducted from Capital and Reserves & Surplus to arrive
at Tangible Net Worth.
e) Assessment of composition
of Liabilities -
Detailed discussion should be made to find out –
(i) Whether there are overdue installments in term loans
granted by other banks.
(ii) Any deposits accepted are overdue.
(iii) Whether there are any borrowings from directors/partners
and their family members, associate concern, friends and relatives. If so, what
are the terms ?
(iv) Whether there are pressing creditors and any disputes.
(v) Whether there are any overdue statutory liabilities.
(vi) Whether provisions made for depreciation, doubtful
debts, bonus, dividend are adequate.
(vii) Magnitude of contingent liabilities and the possibility
of their crystallization.
III) Ratio Analysis –
Ratio is the numerical relationship between two numbers. In the context
of financial statements Ratio represents relationship between any two items of
Balance Sheet and Profit & Loss Account.
Ratios can be expressed by (I) Ratio like 2:1 (ii) ratios like two items
or (iii) percentage.
There are some limitations, which should be borne in mind, while using
the ratios during the operations of financial statements.
They are :-
(i) Ratios by themselves are based on single set of figures
will not reveal anything. They became more useful and informative only when
they are compared with the ratios based on past years figures or standard
ratios.
(ii) Ratios are meaningless, if detached from the details for
which they were derived.
(iii) Since ratios are drawn on the basis of accounting
records they suffer from inherent weaknesses of the accounting
systems/policies.
(iv) Too many ratios are likely to confuse instead of
revealing meaningful conclusions.
(v) Any particular ratio is not a sure indication of good or
bad management. On the contrary, they merely convey certain observations
pointing to its probability, if matter is needing further investigation.
Ratios as of a particular date are compared with
a) those of the previous year which is called trend
analysis.
b) those of the some other units in the same industry or
with ratios revealing average performance of the Industry.
Ratios are analyzed by shareholders, short-term creditors and long term
creditors. However, discussion is confined to bankers point of view which
consists of both short term and long term creditors view and on the
circumstances.
A) Analysis for liquidity/short term solvency of the
borrowers –
a) LIQUIDITY RATIO
:-
(i) Current Ratio : It is calculated as :
Current Assets
Current Liability. (including bank borrowing)
It throws light on the liquidity management of the borrower. Current
Ratio of above 1 indicates that there is reasonable cushion of current assets
over current liabilities. It shows that there is some amount of long term funds
that have been deployed in the current assets thereby in working capital.
Current Ratio of below 1 indicates that liquidity of the borrower is not
sound and the current assets are not adequate to pay off the current
liabilities.
It also indicates that short terms funds have been used for long term
uses/to meet funds lost.
This Ratio should be analyzed in association with the net working
capital /liquid surplus because current ratio is susceptible to manipulation
e.g. if equal amount is added to both numerator and denominator the ratio would
decrease and vice versa.
Net working capital /liquid surplus would indicate how much retained
profit has been deployed in working capital.
Normally increase in the liquid surplus will increase the Ratio.
Standard current ratio will range between 1.10:1 to 1.33:1
If the ratio is disproportionately high, it indicates –
i) Under utilisation of resources
ii) Inventory is poor, not marketable
iii) Poor debt recovery.
iv) Poor marketing – No demand for products
v) High liquidity at the cost of profitability.
If the ratio is disproportionately low, indicates –
i) Working capital shortage.
ii) Declining sales-cash flow problem.
iii) Declining profitability.
iv) Short-term sources funded in long term use.
v) Diversion / siphoning of fund.
vi) Erosion of capital.
vii)Frequent approach for exceeding/ TOD, return of cheques
& bills.
viii) Defaulter in repayment.
B) Debt – Equity Ratio (Solvency Ratio):-
The total debt/equity ratio reveals the stake of the borrower in
business i.e. his investment in the activity. Ideal ratio is 3:1. Against the
own stake in the business, to what extent the unit has raised the outside
liabilities.
As per our credit policy, for Large & Medium industries, it is 3.5 :
1 but for SSI it is relaxed to 4:1, For traders, Service Industry,
Infrastructure it is 5:1 & Ship breaking it is 6:1. If 100% or more
collateral security it is relaxed in between 4.5:1 to 7:1 i.e. for SSI 5:1, For traders, Service
Industry, Infrastructure it is 6:1 & Ship breaking it is 7:1.For Trade
finance acceptable DER is 6:1.
Debt Equity Ratio (DER) = Total Outside Liability
Tangible Net Worth
C)Profitability Ratio is calculated as - Profit
X 100
Sales
D)Debt Service coverage Ratio (DSCR) –
Net
Profit + Deprecation + Interest
DSCR = Installment + Interest
Data are to be collected from the projected figures for all the years of
proposed repayment of the term loan. Minimum should be 1.5
Fund flow & Cash flow –
We have observed that the figures in two balance sheets of different dates
of the same business organisation are different. What is the reason for this
change ? We know that the balance sheet of a particular day is the snap shot of
the asset & liability position of the organisation on the particular day.
In any on going business activity, there is a continuous flow of fund from
various sources to various uses i.e. flow from liabilities to deployment in
assets and recycled / liquidated back to sources/resources. In this course of
cycle if the fund generates surplus over the cost, it creates profit. If the
profit retained in the business cycle, it increases capital (net worth). If
some fresh fund (new sources) like share issue or Bank finance have injected in
the cycle it will create new assets
either for long term or for short term use which in course of turnover will
generate more surplus. How much fresh fund is to be injected depends upon the
fund utilisation capacity. Similarly the surplus generation also depend how
quick the fund is recycled and increase of profit depends upon the maximisation
of surplus over minimization of cost. Fund may be cash or noncash. Sources
(liabilities) and uses (assets) have been classified as long term (term) and
short term (current). Long-term sources could be deployed for both long and
short term uses i.e. in fixed assets and current assets. But short term sources
i.e. current liabilities are to be deployed only for short term uses i.e. in
creation of current assets, which can be liquidated easily for recirculation.
Deployment of short term sources in long term uses will create cash flow or
liquidity problem for the organisation.
Cash is the most liquid part of the fund meant for fast recycling i.e.
from short term sources ( Current liability like sale proceeds ) to short term
uses (Current assets like inventory) and back to sources through sell. We call
this flow of cash as Cash Flow.
Application of Fund Flow in Appraisal Process -
If we see our banks proposal memorandum form, there we shall find four
columns- two columns for two previous years, one for present year-estimated and
one for next year’s projection. Here we have to fill in the data of operation
(sales & profit), assets and liabilities, their various ratios. There after
we have to compare the operational data, ratios and year to year flow of fund
from sources to uses to justify the projected figures. From the projected data
justified as above, we shall proceed to arrive at the justified Maximum
Permissible Bank Finance (MPBF) through the Methodologies as discussed here
after.
Now let us discuss what do we mean by term capital, working capital and
net working capital (NWC) as we are going to finance the term capital and
working capital of the business organisation.
The sources of funds which are required for creation of fixed assets are
called as Term Capital or Sunk Capital. This long term fund will come
from the owners stake i.e. his net worth /capital or from long term borrowings.
The sources of funds which are used by a business unit for deployment in
current assets for smooth running of the production /sales cycle are known as working
capital. Here sources are sale proceeds, recovery from book debts and
working capital borrowing from banks, deployed in stock of raw material and
other inventory.
Working Capital
The
components of working capital requirements are -
a. Raw materials, consumable b. Work in process c. Finished Goods
d. Bills Receivable e. Expenses.
Net Working Capital (NWC)
is the difference between the total current asset and total current liability
i.e. excess of Current Assets over Current Liabilities. We call it liquid
surplus or surplus of long term sources over long term uses.
Working Capital Gap (WCG)
is the difference between the total current asset and current liability
excluding the bank borrowings.
Assessment of working capital limits As per
our Credit Policy -
For
SSI units upto Rs. 5.00 crs & other than SSI units upto Rs. 2.00 crs assessment is done as per turnover method
i.e. as per Nayak committee recommendations.
For
SSI units above Rs. 5.00 crs & other than SSI units above Rs. 2.00 crs
assessment is done as per Modified Maximum Permissible Bank Finance Method
which is nothing but Tondon’s IInd method of lending.
Justification for Determining of Credit Limit –
Apart from the assessment of MPBF as per the methodology, some
justification are to be made for determining the credit limit by considering
some practical operational aspects. These may be –
i) Operating cycle,
ii) Cost of required
level of inventory holding,
iii) Cost of other
consumable spares and monthly expenses,
iv) Borrower’s credit
recovery period,
v) Seasonality,
vi) Demand &
Supply position of market for sale,
vii) Any other
factor.
Please cross check each financial data with the physical operational
data as reflected in the books of the borrower and in the books of the Bank
from where these have been generated.
Apart from the financial data, some more data as mentioned below are
required for sound appraisal of a credit facility.
1) Borrower’s personal profile,
2) Guarantor’s personal profile,
3) Their Associate’s profile,
4) Profile of the unit,
5) Market report,
6) About their other banking arrangements & confidential
report from their Bankers.
7) Viability of the business activity.
8) This part we shall call to “Know Your Borrower”.
In case of existing units, following points are to be examined:
1) Value of the account is to be assessed i.e. how much
interest and other commission income earned by the Bank from the various
operation of the limit.
2) Assessment of credit utilisation / over utilisation of
limit from minimum & maximum outstanding in the account. Under utilisation
puts some questions in the mind but outstanding always remains at the top of
the limit is alarming.
3) Liquidity position of the borrower from keeping the outstanding
always at the top of the limit or exceeding the limit, bouncing of cheques and
bills, all these indicates either liquidity problem or diversion of fund or may
be due to poor debts recovery position by bouncing of cheques and bills.
4) Non observance of credit discipline by not routing sale
proceeds through account i.e. credit summation not talleys with that of the
sales figure.
5) Delay in payment of loan installment. ( Delay beyond 90
days means slippage to NPA).
6) Delay in submission of stock statement and financial data
papers for renewal of limit.( Delay beyond 3 months means slippage to NPA).
7) Adverse comment by the Auditors. Are they rectified?
Our ultimate aim is to keep the account performing.
Contributed by Shri Uday
Bose, Retired from STC,Pune and Shri Sharad Kumar Rewatkar, Chief Manager,
Raopura Br
Working Capital Assessment
|
Calculation
of Maximum Permissible Bank Finance as per the Recommendations of Nayak
Committee.
|
1) Accepted level of Projected Annual Turnover
(PAT)
2) Working Capital Funds @ 25% Of PAT
(Taking 90 days as operating cycle)
3) Borrower’s Contribution
5%
of PAT (*)
4) Permissible Bank Finance (2 - 3)
(*) In case of assessment under turnover method -
a) Margin
requirements are to be maintained upfront.
b) Where upfront
NWC is higher than the minimum margin requirements, the MPBF may be computed by
excluding the minimum margin requirement from 25% of the accepted turnover.
Where the
Projected Annual Turnover is found to be over optimistic, the same should be
pruned to realistic/accepted level.
In case of operating cycle more or less than 3 months,
Working Capital Funds is to be increased or decreased accordingly.
Current ratio should be 1.10 : 1.
|
Calculation
of Maximum Permissible Bank Finance as per the Recommendations of Tandon
Committee.
|
First
Method of Lending.
(1)
Working Capital Gap (WCG) =Total Current Assets (CA) less
Other Current Liabilities(OCL).
( OCL means
Current Liabilities (CL) excluding Bank Borrowings).
(2) Working Capital Funds required is =
WCG (as per 1)
(3) Borrower’s Contribution
a) 25% of WCG
b) Net Working Capital (CA- CL) _______
c) Higher of 3(a) & 3(b)
(4) Permissible
Bank Finance (2-3)
Minimum
Current Ratio - 1.17 : 1.
Second
Method of Lending. ( Modified Method )
(1)
Working Capital Gap (WCG) =Total Current Assets (CA) less
Other Current Liabilities(OCL).
( OCL
means Current Liabilities (CL) excluding Bank Borrowings).
(2) Working Capital Funds required is =
WCG (as per 1)
(3) Borrower’s Contribution
a) 25% of Current Asset
b) Net Working Capital (CA- CL) _______
c) Higher of 3(a) & 3(b)
(4) Permissible
Bank Finance (2-3)
Minimum
Current Ratio - 1.33 : 1.
For
SSI units upto Rs. 5.00 crs & other than SSI units upto Rs. 2.00 crs assessment is done as per turnover method
i.e. as per Nayak committee recommendations.
For
SSI units above Rs. 5.00 crs & other than SSI units above Rs. 2.00 crs
assessment is done as per Modified Maximum Permissible Bank Finance Method
which is nothing but Tandon’s IInd
method of lending.
Contributed by Shri Uday
Bose, Retired from STC,Pune and Shri Sharad Kumar Rewatkar, Chief Manager,
Raopura Br
IMPORTANT FINANCIAL RATIOS WITH
PRACTICAL SOLUTION
Before we discuss important
ratios we must know the very basic terms of Balance Sheet. They are-
1. Gross Working Capital =
Current Assets
2. Net Working Capital =
Current Assets - Current Liabilities ( CA-CL)
3. Other Current Liability(OCL) = Current Liabilities - Bank Borrowing
or overdraft
4. Quick Assets =
Current Assets - Inventories
5. Working Capital Gap =
Current Assets - Other Current Liabilities
(CA - OCL).
6. Net Worth =
Paid up Capital + Free Reserves + Surplus
7. Tangible Net Worth = Net worth
- Intangible Assets
For interpretation of balance
sheet the following ratios are to be compared.
A) Liquidity Ratios, B) Solvency
Ratio, C) Leverage Ratios, D) Profitability Ratios & E) Activity Ratios (
i.e. Operational efficiency Ratios).
Basically Liquidity Ratios &
Solvency Ratios (Leverage Ratios) are the ratios which indicate financial
strength of unit. Liquidity Ratios express instant financial strength of unit
whereas Solvency Ratio express financial strength in long run.
(A) Liquidity Ratios
1. Current Ratio = Current Assets
Current Liabilities
Bench Mark is minimum 1.33:1. But as per our Credit Policy
Desirable CR under Turn over Method is 1.10:1 & under
Modified MPBF-for credit limits upto Rs. 10.00 crs is 1.17 : 1 & Above Rs. 10.00 crs is 1.25:1. It means for working out MPBF, minimum margin is to be
taken @15% or 20% of total current assets.
2. Acid test Ratio or Quick Ratio = Quick Assets
Quick Liabilities, Accepted
1:1
(B) Solvency Ratio = Tangible Assets
Total Outside Liabilities, should be more than 1.
(C) Leverage Ratios
1. Debt Equity Ratio (DER) = Total Outside Liability
Tangible Net Worth
Bench Mark is maximum 3:1. As per our credit policy, for Large & Medium industries, it is 3.5 :
1 but for SSI it is relaxed to 4:1, For traders, Service Industry,
Infrastructure it is 5:1 & Ship breaking it is 6:1. If 100% or more
collateral security it is relaxed in between 4.5:1 to 7:1 i.e. for SSI 5:1, For traders, Service
Industry, Infrastructure it is 6:1 & Ship breaking it is 7:1.For Trade finance acceptable DER
is 6:1.
2. Debt Service Coverage Ratio
(DSCR)
= Net Profit + Depreciation +
Interest on Term Loan
Installment
+ Interest on Term Loan.
Bench Mark is minimum 1.5. As per our credit policy minimum
average DSCR between 1.50 to 2.00 is acceptable. Higher the better. Higher the
DSCR the lower the repayment schedule & lower the DSCR higher the repayment
schedule.
3. Interest Service Coverage
Ratio (ISCR) = Profit Before Depreciation & Interest
Interest
As per our credit policy Accepted
ISCR should be between 1.50 and 1.75. Higher the better.
(D) Profitability Ratios
1. Gross Profit Ratio = Gross Profit x 100
Net Sales
Net Sales
2. Operating Profit Ratio = Operating
Profit x 100
Net sales
Net sales
3. Net Profit Ratio = Net Profit x 100
Net Sales
4.
Return on Assets =
Profit Before Interest & Tax
x 100
Total Tangible Assets
5.
Return on Equity =
Net Profit x 100
Net Worth.
(E) Activity
Ratios (Operational Efficiency Ratios).
1.
Debtors Turnover Ratio =
Debtors x 12
(in months) OR
Sales
Sales
= Debtors
x 365 (in days) Sales
2.
Creditors Turnover Ratio =
Creditors x 12
(in months) OR
Purchases
Purchases
=
Creditors x 365
(in days) Purchases
3. Current Assets Turnover Ratio = Gross Sales
Stock + Debtors
As per our credit policy bench
Mark is minimum 1.75:1, More the better.
Break Even Point. For a business unit Break Even Point means a certain
business level where unit registers no loss and no profit.
Break Even Point (in Rupees) =
Fixed Cost (F) x Sales OR
Contribution
Break Even Point (in Units) =
Fixed Cost (F) OR
Contribution
Break Even Point =
Fixed Cost (F)
P/V Ratio
Profit Volume Ratio ( P/V Ratio) = Contribution X 100
Sales
Contribution =
Selling Price - Variable Cost *
Profit (P) =
Contribution - Fixed Cost
* Variable cost means cost which varies according to the size of
production.
Formula for Registering Desired Level of Profit is-
A Level of Business to Register
Desired Level of Profit = Fixed
Cost + Desired Profit x Sales
Contribution
Contributed by Shri Sharad
Kumar Rewatkar, Chief Manager, Raopura Branch
Following is a Balance Sheet of M/s Girdharilal & Co. for the Year
March, 2008.
|
Liabilities
|
Amt. in Lacs
|
Assets
|
Amt. in Lacs
|
|
Capital
|
430
|
Land & Building
|
100
|
|
Reserves
|
60
|
Plant & Machinery
|
200
|
|
Term Loan
|
30
|
Bank Fixed Deposit
|
20
|
|
Provision for Taxation
|
10
|
Govt. Securities
|
50
|
|
Sundry Creditors
|
200
|
Stock
|
300
|
|
Unsecured loan
|
50
|
Sundry Debtors.
|
250
|
|
Cash Credit
|
200
|
Prepaid Expenses
|
20
|
|
Deposit from Dealer
|
50
|
Advance Payment to Supplier
|
10
|
|
Advance Payment from Customer
|
70
|
Cash on Hand
|
10
|
|
|
|
Cash on Bank
|
10
|
|
|
|
Patent
|
50
|
|
|
|
Goodwill
|
40
|
|
|
|
Tender Deposit
|
20
|
|
|
|
Old Stock
|
20
|
|
Total
|
1,100
|
Total
|
1,100
|
Last
Year’s Sale -Rs. 1,200 lacs Last Year’s Purchase - Rs.
1,100 lacs
This
Year’s Sale - Rs. 1,500 lacs This Year’s Purchase - Rs. 1,350 lacs
Projected
Sale -Rs. 2,000 lacs Projected Purchase - Rs.
1,760 lacs
Gross
Profit - Rs. 150 lacs Operating Profit - Rs. 100 lacs
Profit
After Tax - Rs. 75 lacs
Net Worth =
Capital + Reserves = Rs. 430 + Rs. 60 = Rs. 490 lacs
Intangible Assets = Patent & Goodwill = Rs. 50+ 40 = Rs. 90 lacs
Tangible Net Worth = Total Worth - Intangible Assets = Rs. 490 - 90 = Rs. 400 lacs
Term Liability = Term Loan = Rs. 30 lacs
Current Liability = Provision for Taxation + Sundry Creditors + Cash Credit + Unsecured
Loan* + Deposit from Dealer * + Advance Payment from Customer * = Rs. 10 + 200
+ 50 + 50 + 200 + 70 = Rs. 580 lacs.( Deposit taken from Dealer or Advance
Payment taken from Customer are Current Liability)
*
Unsecured loan is a loan taken from close relatives. So if loan taken from
director or close relatives and no period is mentioned then it is a current
liability. If period is mentioned for
more than 12 months or it is not required to be repaid till the currency of
Bank loan. Then it is considered as term liability.
Total Outside Liability =Term Liability + Current Liability OR Liability other
than Total worth
= Rs. 30 + Rs. 580 = Rs. 610 lacs.
Term / Fixed assets = Land & Building + Plant
& Machinery = Rs. 100 + Rs. 200 = Rs. 300 lacs
Current Assets = Bank Fixed Deposit $ + Govt. Securities $ + Stock + Sundry Debtors +
Pre paid Expenses + Advance Payment to Supplier + Cash on Hand + Cash in Bank
= Rs. 20 + 50 + 300 + 250 + 20 + 10 +
10 + 10 = Rs. 670 lacs.
($
Bank Fixed Deposit & investment in Govt. Securities are treated as Current
Asset).
Non Current Assets = Tender Deposit + Old/ outdated stock = Rs. 20 + 20 = Rs. 40 lacs.
1. Gross Working Capital = Current
Assets = Rs. 670 lacs
2. Net Working Capital = Current Assets - Current Liabilities = Rs. 670
- Rs. 580 = Rs. 90 lacs
3. Other Current Liability(OCL) =
Current Liabilities - Bank Borrowing or overdraft
= 580 - 200 = Rs. 380 lacs
4. Working Capital Gap = Current Assets - Other Current
Liabilities
=
Rs. 670 - 380 = Rs. 290 lacs.
5. Quick Assets = Current Assets -
Inventories = Rs. 670 - 300 = Rs. 370 lacs.
(A) Liquidity Ratios
1. Current Ratio = Current Assets = 670 = 1.16
Current Liabilities 580
2. Acid test Ratio or Quick
Ratio = Quick Assets = 370 = 0.97
Quick Liabilities 380
(B) Solvency Ratio = Tangible Assets
= 1010 = 1.66
Total Outside Liabilities 610
(C) Leverage Ratios
1. Debt Equity Ratio (DER) = Total Outside Liability
= 610 =
1.53
Tangible Net Worth 400
(D) Profitability Ratios
1. Gross Profit Ratio = Gross Profit
x 100 = 150 X 100 = 10%
Net Sales 1500
Net Sales 1500
2. Operating Profit Ratio = Operating Profit x
100 = 100 X 100 = 6.67%
Net sales 1500
Net sales 1500
3. Net Profit Ratio = Profit After Tax x 100 =
75 X 100 = 5%
Net Sales 1500
(E) Activity
Ratios
1.
Debtors Turnover Ratio = Debtors
x 12 (in months) = 250X
12 =
2 Months Sales 1500
OR
= Debtors
x 365 (in days) = 250 X 365 = 61 Days Sales 1500
2.
Creditors Turnover Ratio = Creditors
x 12 (in months) =
200 X 12 = 1.78
Months Purchases 1350
OR
=
Creditors x 365
(in days) = 200 X 365 =
54 Days Purchases 1350
3. Current Assets Turnover Ratio = Gross Sales = 1500 = 2.73
Stock + Debtors 300+ 250
Following is a Balance Sheet of
M/s Shyamsunder & Co. for the Year March, 2008.
|
Liabilities
|
Amt. in Lacs
|
Assets
|
Amt. in Lacs
|
|
Capital
|
300
|
Plant & Machinery
|
170
|
|
General Reserves
|
140
|
Furniture & Fixture
|
30
|
|
Surplus in P & L
|
20
|
Stock
|
|
|
Term Loan from IDBI
|
130
|
Raw Material
|
340
|
|
Car loan from Dena Bank
|
15
|
Work In Progress
|
160
|
|
Term Deposits
|
45
|
Finished Goods
|
100
|
|
Debentures
|
60
|
Receivable
|
320
|
|
Cash Credit from Dena Bank
|
210
|
Cash on Hand
|
40
|
|
OD from Dena Bank
|
150
|
Cash with Bank
|
10
|
|
Creditors - Trade
|
170
|
Investment in shares
|
50
|
|
Creditors - Others
|
30
|
Preliminary Expenses
|
50
|
|
|
|
|
|
|
Total
|
1,270
|
Total
|
1,270
|
1)
Credit Purchase is Rs. 1,700 lacs.
2)
Annual Sales is Rs. 3,200 lacs.
3)
5% of the debtors is not recoverable.
i.e. - Rs. 16 lacs
4)
Gross Profit - Rs. 200.00 lacs. Operating Profit - Rs. 125 lacs, Net Profit i.e. Profit After tax - Rs. 90
lacs.
-272
Total/Net Worth = Capital + General Reserves + Surplus in P & L Term Loan=
Rs. 300 + Rs. 140 + Rs. 20 = Rs. 460 lacs
Intangible Assets = Preliminary Expenses = Rs. 50 lacs
Tangible Net Worth = Total Worth - Intangible Assets = Rs. 460 - 50 = Rs. 410 lacs
Term Liability = TL from IDBI + Car Loan + Term Deposit + Debentures = 130 + 15 + 45 +
60 = Rs. 250 lacs
Current Liability = Cash Credit from Dena
Bank + OD from Dena Bank + Creditors (Trade) + Creditors (Others) = Rs. 210 + 150 + 170 + 30 = Rs. 560 lacs.
Total Outside Liability =Term Liability + Current Liability OR Liability other
than Total worth
= Rs. 250 + Rs. 560 = Rs. 810 lacs
Term / Fixed Assets = Plant & Machinery + Furniture & Fixture = Rs. 170 + Rs. 30 =
Rs. 200 lacs
Current Assets = Stock (RM + WIP + FG) + Receivable + Cash on Hand + Cash in Bank
= Rs. 600 (340 + 160 + 100) + 304 (320-16) + 40 + 10 = Rs.
954 lacs
Non Current Assets = Bad Doubtful Debt + Investment in Shares = Rs. 16 + 50 = Rs. 66 lacs.
Total Assets = FA + CA + NCA + IN. A = 200 +
954 + 66 + 50 = Rs. 1270 lacs
1. Gross Working Capital = Current Assets = Rs. 954 lacs
2. Net Working Capital = Current Assets - Current Liabilities = Rs. 954
- Rs. 560 = Rs 394 lacs.
3. Other Current Liability(OCL) = Current Liabilities - Bank Borrowing
& overdraft
= 560 - 210 - 150 = Rs. 200 lacs
4. Working Capital Gap = Current Assets - Other Current
Liabilities = Rs. 954 - 200
=
Rs. 754 lacs.
5. Quick Assets = Current Assets -
Inventories = Rs. 954 - 600 = Rs. 354 lacs.
(A) Liquidity Ratios
1. Current Ratio = Current Assets = 954 = 1.70
Current Liabilities 560
2. Acid test Ratio or Quick
Ratio = Quick Assets = 354 = 1.77
Quick Liabilities 200
(B) Solvency Ratio= Tangible
Assets =
1220 = 1.51
Total Outside Liabilities
810
(C) Leverage Ratios
1. Debt Equity Ratio (DER) =
Total Outside Liability = 810 =
1.98
Tangible
Net Worth 410
(D) Profitability Ratios
1. Operating Profit Ratio = Operating Profit x
100 = 125 X 100 = 3.91%
Net sales 3200
Net sales 3200
2. Net Profit Ratio = Profit After Tax x 100 =
90 X 100 = 2.81%
Net Sales 3200
(E) Activity
Ratios
1.
Debtors Turnover Ratio = Debtors
x 12 (in months) = 304X
12 =
1.14 Months Sales 3200
OR
= Debtors
x 365 (in days) = 304 X 365 = 35 Days Sales 3200
2.
Creditors Turnover Ratio = Creditors
x 12 (in months) =
170 X 12 = 1.20
Months Purchases 1700
OR
=
Creditors x 365
(in days) = 170 X 365 =
36 Days Purchases 1700
3. Current Assets Turnover Ratio = Gross Sales = 3200
= 3.54
Stock + Debtors 600 +
304
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