RATIO ANALYSIS

Social Islami Bank Ltd.

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RATIO ANALYSIS
Ratio-analysis means the process of computing, determining and presenting the relationship of related items and groups of items of the financial statements. They provide in a summarized and concise form of fairly good idea about the financial position of a unit. They are important tools for financial analysis.
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RATIO ANALYSIS
Its a tool which enables the banker or lender to arrive at the following factors : Liquidity position Profitability Solvency Financial Stability Quality of the Management Safety & Security of the Finances & advances to be or already been provided
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Before looking at the ratios there are a number of cautionary points concerning their use that need to be identified : a. The dates and duration of the financial statements being compared should be the same. If not, the effects of seasonality may cause erroneous conclusions to be drawn. b. The accounts to be compared should have been prepared on the same bases. Different treatment of stocks or depreciations or asset valuations will distort the results. c. In order to judge the overall performance of the firm a group of ratios, as opposed to just one or two should be used. In order to identify trends at least three years of ratios are normally required.

The utility of ratio analysis will get further enhanced if following comparison is possible. 1.Between the borrower and its competitor 2.Between the borrower and the best enterprise in the industry 3.Between the borrower and the average performance in the industry 4.Between the borrower and the global average
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HOW A RATIO IS EXPRESSED?

As Percentage - such as 25% or 50% . For

example if net profit is Tk.25,000/- and the sales is Tk.1,00,000/- then the net profit can be said to be 25% of the sales. As Proportion - The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4. As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4th of the sales.
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CLASSIFICATION OF RATIOS
Balance Sheet Ratio P&L Ratio or Income/Revenue Statement Ratio
Operating Ratio

Balance Sheet and Profit & Loss Ratio

Composite Ratio

Financial Ratio

Current Ratio Quick Asset Ratio Proprietary Ratio Debt Equity Ratio

Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio

Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors Turnover Ratio,
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FORMAT OF BALANCE SHEET FOR RATIO ANALYSIS

LIABILITIES
NET WORTH/EQUITY/OWNED FUNDS Share Capital/Partners Capital/Paid up Capital/ Owners Funds Reserves ( General, Capital, Revaluation & Other Reserves) Credit Balance in P&L A/c
LONG TERM LIABILITIES/BORROWED FUNDS : Term Finances (Banks & Institutions) Debentures/Bonds, Unsecured Finances, Fixed Deposits, Other Long Term Liabilities CURRENT LIABILTIES Bank Working Capital Limits such as CC/OD/Bills/Export Credit Sundry /Trade Creditors/Creditors/Bills Payable, Short duration Finances or deposits Expenses payable & provisions against various items

ASSETS
FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIES Original Value Less Depreciation Net Value or Book Value or Written down value

NON CURRENT ASSETS Investments in quoted shares & securities Old stocks or old/disputed book debts Long Term Security Deposits Other Misc. assets which are not current or fixed in nature CURRENT ASSETS : Cash & Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks & inventory (RM,SIP,FG) Stores & Spares, Advance Payment of Taxes, Prepaid expenses, Finances and Advances recoverable within 12 months INTANGIBLE ASSETS Patent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses

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Current Ratio : It is the relationship between the current assets and current liabilities of a concern. Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are Tk.4,00,000 and Tk.2,00,000 respectively, then the Current Ratio will be : Tk.4,00,000/Tk.2,00,000 = 2 : 1 The ideal Current Ratio preferred by Banks is 1.33 : 1

2.

Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses, alternatively it is the difference of Current Assets and Current Liabilities. NWC = Current Assets Current Liabilities

Current Assets : Raw Material, Stores, Spares, Work-in Progress. Finished Goods, Debtors, Bills Receivables, Cash. Current Liabilities : Sundry CreditoTk, Installments of Term Finance, DPG etc. payable within one year and other liabilities payable within one year. This ratio must be at least 1.33 : 1 to ensure minimum margin of 25% of current assets as margin from long term sources. Current Ratio measures short term liquidity of the concern and its ability to meet its short term obligations within a time span of a year. It shows the liquidity position of the enterprise and its ability to meet current obligations in time. Higher ratio may be good from the point of view of creditors In the long run very high current ratio may affect profitability ( e.g. high inventory carrying cost) Shows the liquidity at a particular point of time. The position can change immediately after that date. So trend of the current ratio over the years to be analyzed. Current Ratio is to be studied with the changes of NWC. It is also necessary to look at this ratio along with the Debt-Equity ratio.
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3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current

Assets and Current Liabilities. The should be at least equal to 1.
Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example : Cash 50,000 Debtors 1,00,000 Inventories 1,50,000 Total Current Assets 3,00,000

Current Liabilities 1,00,000

Current Ratio = > Quick Ratio =>

3,00,000/1,00,000 1,50,000/1,00,000

= 3:1 = 1.5 : 1
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4. DEBT EQUITY RATIO : It is the relationship between borrowers fund (Debt) and Owners Capital (Equity).
Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets For instance, if the Firm is having the following : Capital = Tk. 200 Lacs Free Reserves & Surplus = Tk. 300 Lacs Long Term Finances/Liabilities = Tk. 800 Lacs Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1

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5. PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owners Fund. Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100 The ratio will be 100% when there is no Borrowing for purchasing of Assets. 6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to
Net Sales we can arrive at the Gross Profit Ratio which indicates the manufacturing efficiency as well as the pricing policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

Alternatively , since Gross Profit is equal to Sales minus Cost of Goods Sold, it can also be interpreted as below :

Gross Profit Ratio = [ (Sales Cost of goods sold)/ Net Sales] x 100
A higher Gross Profit Ratio indicates efficiency in production of the unit.
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7. OPERATING PROFIT RATIO :

It is expressed as =>

(Operating Profit / Net Sales ) x 100

Higher the ratio indicates operational efficiency

8. NET PROFIT RATIO : It is expressed as => ( Net Profit / Net Sales ) x 100

It measures overall profitability.

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9. STOCK/INVENTORY TURNOVER RATIO :

(Average Inventory/Sales) x 365 for days (Average Inventory/Sales) x 52 for weeks (Average Inventory/Sales) x 12 for months

Average Inventory or Stocks = (Opening Stock + Closing Stock) -----------------------------------------

2
. This ratio indicates the number of times the inventory is rotated during the relevant accounting period

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10. DEBTORS TURNOVER RATIO : This is also called Debtors Velocity or Average Collection Period or Period of Credit given . (Average Debtors/Sales ) x 365 for days (52 for weeks & 12 for months) 11. ASSET TRUNOVER RATIO : 12. FIXED ASSET TURNOVER RATIO : Net Sales/Tangible Assets Net Sales /Fixed Assets

13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets 14. CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio, which determines the creditor payment period. (Average Creditors/Purchases)x365 for days (52 for weeks & 12 for months)
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15. RETRUN ON ASSETS :

Net Profit after Taxes/Total Assets

16. RETRUN ON CAPITAL EMPLOYED :

( Net Profit before Interest & Tax / Average Capital Employed) x 100

Average Capital Employed is the average of the equity share capital and long term funds provided by the owners and the creditors of the firm at the beginning and end of the accounting period.

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Composite Ratio
17. RETRUN ON EQUITY CAPITAL (ROE) : Net Profit after Taxes / Tangible Net Worth 18. EARNING PER SHARE : EPS indicates the quantum of net profit of the year that would be ranking for dividend for each share of the company being held by the equity share holders. Net profit after Taxes and Preference Dividend/ No. of Equity Shares

19. PRICE EARNING RATIO : PE Ratio indicates the number of times the Earning Per Share is covered by its market price.
Market Price Per Equity Share/Earning Per Share
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20. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most important one which indicates the ability of an enterprise to meet its liabilities by way of payment of installments of Term Finances and Interest thereon from out of the cash accruals and forms the basis for fixation of the repayment schedule in respect of the Term Finances raised for a project. (The Ideal DSCR Ratio is considered to be 2 ) PAT + Depr. + Annual Interest on Long Term Finances & Liabilities --------------------------------------------------------------------------------Annual interest on Long Term Finances & Liabilities + Annual Installments payable on Long Term Finances & Liabilities ( Where PAT is Profit after Tax and Depr. is Depreciation)
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EXERCISE 1 LIABILITES Capital Reserves ASSETS 180 Net Fixed Assets 20 Inventories 400 150

Term Finance
Bank C/C Trade CreditoTk Provisions

300 Cash
200 Receivables 50 Goodwill 50 800

50
150 50 800

a. b. c. d. e. f.

What is the Net Worth : Capital + Reserve = 200 Tangible Net Worth is : Net Worth - Goodwill = 150 Outside Liabilities : TL + CC + Creditors + Provisions = 600 Net Working Capital : C A - C L = 350 - 250 = 50 Current Ratio : C A / C L = 350 / 300 = 1.17 : 1 Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1

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EXERCISE 2
LIABILITIES Capital Reserves Bank Term Finance 2005-06 300 140 320 2006-07 350 Net Fixed Assets 160 Security Electricity 280 Investments 2005-06 730 30 110 2006-07 750 30 110

Bank CC (Hyp)
Unsec. Long T L Creditors (RM) Bills Payable Expenses Payable Provisions

490
150 120 40 20 20

580 Raw Materials

170 S I P 70 Finished Goods 80 Cash 30 Receivables 40 Finances/Advances Goodwill

150
20 140 30 310 30 50 1600

170
30 170 20 240 190 50 1760

Total

1600

1760

1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390 2. Current Ratio for 2nd Year : (170 + 30 +170+20+ 240 + 190 ) / (580+70+80+70) 820 /800 = 1.02 3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.21

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Exercise 3.
LIABIITIES Equity Capital ASSETS 200 Net Fixed Assets 800

Preference Capital
Term Finance Bank CC (Hyp) Sundry Creditors Total

100 Inventory
600 Receivables 400 Investment In Govt. Secu. 100 Preliminary Expenses 1400

300
150 50 100 1400

1. Debt Equity Ratio will be : 600 / (200+100)

= 2:1

2. Tangible Net Worth : Only equity Capital i.e. = 200 3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200 = 11 : 2 4. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1
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Exercise 4. LIABILITIES Capital + Reserves P & L Credit Balance Finance From S F C Bank Overdraft Creditors 355 ASSETS Net Fixed Assets 265 1 125 128 1 7 Cash 100 Receivables 38 Stocks 26 Prepaid Expenses

Provision of Tax
Proposed Dividend

9 Intangible Assets
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30 550

550
Q. What is the Current Ratio ?

Ans : (1+125 +128+1) / (38+26+9+15) : 255/88 = 2.89 : 1

Q What is the Quick Ratio ?

Ans : (125+1)/ 88 = 1.43 : 11

Ans : LTL / Tangible NW = 100 / ( 362 30) = 100 / 332 = 0.30 : 1
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Q. What is the Debt Equity Ratio ?