The document discusses various profitability and turnover ratios used to analyze the financial performance and efficiency of a business. It provides the formulas and calculations for ratios like overall profitability, return on shareholders' funds, return on total assets, gross profit ratio, net profit ratio, fixed assets turnover, and working capital turnover for different years. These ratios indicate the percentage of profits and returns earned relative to amounts invested in assets, shareholders' funds, and capital employed. They also show how efficiently assets and working capital are utilized to generate sales and profits. The current ratio is presented as a liquidity ratio to assess the firm's ability to meet short-term obligations.
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The document discusses various profitability and turnover ratios used to analyze the financial performance and efficiency of a business. It provides the formulas and calculations for ratios like overall profitability, return on shareholders' funds, return on total assets, gross profit ratio, net profit ratio, fixed assets turnover, and working capital turnover for different years. These ratios indicate the percentage of profits and returns earned relative to amounts invested in assets, shareholders' funds, and capital employed. They also show how efficiently assets and working capital are utilized to generate sales and profits. The current ratio is presented as a liquidity ratio to assess the firm's ability to meet short-term obligations.
The document discusses various profitability and turnover ratios used to analyze the financial performance and efficiency of a business. It provides the formulas and calculations for ratios like overall profitability, return on shareholders' funds, return on total assets, gross profit ratio, net profit ratio, fixed assets turnover, and working capital turnover for different years. These ratios indicate the percentage of profits and returns earned relative to amounts invested in assets, shareholders' funds, and capital employed. They also show how efficiently assets and working capital are utilized to generate sales and profits. The current ratio is presented as a liquidity ratio to assess the firm's ability to meet short-term obligations.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online from Scribd
The document discusses various profitability and turnover ratios used to analyze the financial performance and efficiency of a business. It provides the formulas and calculations for ratios like overall profitability, return on shareholders' funds, return on total assets, gross profit ratio, net profit ratio, fixed assets turnover, and working capital turnover for different years. These ratios indicate the percentage of profits and returns earned relative to amounts invested in assets, shareholders' funds, and capital employed. They also show how efficiently assets and working capital are utilized to generate sales and profits. The current ratio is presented as a liquidity ratio to assess the firm's ability to meet short-term obligations.
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PROFITABILITY RATIOS
Profitability is an indication of the efficiency with which the operations of the business are carried on. Poor operational performance may indicate poor sales and hence poor profits.a lower profitability may arise due to the lack of control over the expenses.bankers, financial institutions and other creditors look at the profitability ratios as an indicator whether or not the firm earns substantially more than it pays interest for the use of borrowed funds and whether the ultimate repayment of their debt appears reasonably certain.
The following are the important profitability ratios:
Over All Profitability Ratio
It is also called as” return on investment”(ROI) or” return on capital employed(ROCE). It
indicates the percentage of return on the total capital employed in the business. It is calculated in the basis of the following formula:
Operating Profit Overall Profitability Ratio = X 100 Capital Employed YEARS 2007-2008 2008-2009 2009-2010 Operating Profit 41260.41 81480.2 71092.64 Capital Employed 179641.02 284704.04 335278.2 Over All Profitability Ratio 22.97 % 28.62 % 21.20 %
Capital employed = capital + reserves and surplus + secured loans + unsecured loans
Interpretation
From the above table, it indicates that the percentage of return on the total capital employed gets highly deviated from year to year. In 2008, 22.97% of return on the total capital employed while in 2009 and 2010 ,28.62% and 21.20 % respectively. Over all profitability is mainly affected by capital employed in the business due to the consistent increase in capital as a result of increase in accumulating the reserves from 2008-2010.
Return On Shareholder’s Funds
It is calculated to work out the profitability of the company from the shareholders point of view, it should be computed as follows
Net Profit After Int & Tax
Return On Shareholder’s Funds = X 100 Shareholders Funds
YEARS 2007 - 2008 2008 - 2009 2009- 2010
Net Profit After Int & Tax 20976 49637.8 46819.89 Shareholders Funds 79443.5 112714.05 143498.81 Return On Shareholders Funds 26.40% 44.04% 32.63%
Interpretation It is stated above that return on shareholders funds has increased from 26.4% in 2007- 2008 to 44.04% in 2008-2009 and again decreased to 32.63% in 2009-2010 due to the consistent increase in shareholders funds but inturn sales have decreased in 2010 when compared to 2009 which result in decrease in net profit.
Return On Total Assets
This ratio is computed to know the productivity of the total assets.
Net Profit After Int +Tax
Return On Total Assets = X 100 Total Assets
YEARS 2007 - 2008 2008 - 2009 2009- 2010
Net Profit After Int + Tax 45707.62 111997.8 94867.89 Total Assets 271449.52 468153.26 439059.95 Return On Total Assets 16.89% 23.92% 21.61% Interpretation
It is shown that return on total assets has been increased from 16.89% in 2008 to 23.92% in 2009 and decreased to 21.61% in 2010 as total assets have decreased from 2009 to 2010.This is mainly due to increase in inventory as well in cash and bank balances which leads to increase in current assets inturn productivity of assets gets increased.
Gross Profit Ratio
This ratio expresses the relationship between gross profit and net sales.
Gross profit Gross profit ratio = X 100 Net sales YEARS 2007 - 2008 2008 - 2009 2009- 2010 Gross Profit 94429.78 245421 206764.19 Net Sales 216845.35 215528.78 283052.6 Gross Profit Ratio 43.55 % 113.87 % 73.05 % Interpretation
It is noted that gross profit ratio has increased from 43.55% in 2008 to 113.87% in 2009. This may be due to government subsidies are given during the period of 2008-2009. During the year 2010 , it has come down to 73.05% as increase in the cost of goods sold.
Net Profit Ratio
This ratio indicated net margin earned on a sale of rs.100. It helps in determining the efficiency with which affairs of the business are being managed.It is calculated as follows:
Net Operating Profit
Net Profit Ratio = X 100 Net Sales
Years 2007 - 2008 2008 - 2009 2009- 2010
Net Operating Profit 41260.41 81480.2 71092.64 Net Sales 216845.35 215528.78 283052.6 Net Profit Ratio 19.03% 37.80 % 25.12 % Interpretation
It is indicated that there is a improvement in the operational efficiency in the business as
an increase in the ratio from 2008 to 2009. But it has slowly came down to 25.12 % in 2010 denotes operating profit has been come down when compare to 2009 operating profit.
Turnover ratios:
The turnover ratios are also known as activity or efficiency ratios. They indicate the efficiency with which the capital employed is rotated in the business.
The following are the important turnover ratios:
Fixed Assets Turnover Ratio
This ratio indicates the extent to which the investments in fixed assets contribute towards sales. If compared with a previous periods, it indicated whether the investment infixed assets has judicious or not. The ratio is calculated as follows:
Net sales Fixed Assets Turnover Ratio = Fixed assets
YEARS 2007 - 2008 2008 - 2009 2009- 2010
Net Sales 216845.35 215528.78 283052.6 Fixed Assets 73538.9 79183.6 81731.46 Fixed Assets Turnover 2 times 2.26 times 2.75times Ratio Interpretation
There has been increased in the fixed assets turnover ratio throughout the year as the investment in fixed assets has brought about commensurate gain.
Working Capital Turnover Ratio
This is also known as working capital leverage ratio. This ratio indicates whether or not working capital has been effectively utilized in making sales. In case a company can achieve higher volume of sales with relatively small amount of working capital ,it is an indication of the operating efficiency of the company. This ratio is calculated as follows:
Net sales Working Capital Turnover Ratio = X 100 Fixed assets Years 2007 - 2008 2008 - 2009 2009- 2010 Net Sales 216845.35 215528.78 283052.6 Current Assets (A) 162776.91 372638.62 336223.88 Current Liabilities (B) 83561.79 175502.51 95235.04 Working Capital (A-B) 79215.12 197136.11 240988.84 Working Capital Turnover Ratio 2.73 Times 1.09 Times 1.17 Times
Interpretation
It is inferred that there has been increased in working capital turnover ratio throughout the year indicates working capital has been effectively utilised in making sales.
Financial ratios :
Financial ratios indicate about the financial position of the company. A company is deemed to be financially sound if it is in a position to carry on its business smoothly and meet its obligations,both short-term as well as long term,without the strain. It is a sound principle of finance that the short term requirements of funds should be met out of short term funds and long term requirements should be met out of long term funds.
Financial ratios can be divided into two broad categories:
1) liquidity ratio
2) stability ratio
liquidity ratio:
these ratios are also termed as ‘working capital” or “short term solvency ratios.”an enterprise must have adequate working capital to run its day to day operations.the important liquidity ratios are as follows:
Current Ratio
This ratio is an indicator of the firms commitment to meet its short-term liabilities.An ideal ratio is 2. It is expressed as follows:
Current Assets Current Ratio = Current Liabilities Years 2007 - 2008 2008 - 2009 2009- 2010 Current Assets 162776.91 372638.62 336223.88 Current Liabilities 83561.79 175502.51 95235.04 Current Ratio 1.9 :1 2.1:1 3.5:1
Interpretation
It is to be noted that current ratio is 1.9 ,2.1 and 3.5 in 2008,2009 and 2010 respectively. It is considered as a safe margin to solvency as an ideal ratio is 2 .in the year 2010, ratio has been increased may be due to excessive dependence on long term sources of raising funds which may lead to lower the profit in future.
Quick ratio
This ratio is also termed as “acid test ratio” or liquidity ratio”.this ratio os ascertained by comparing the liquid assets to current liabilities. Prepaid expenses and stock are not taken as liquid assets.the ideal ratio is 1.It is an indicator of short-term solvency of the company.
Liquid Assets Quick Ratio = Current Liabilities YEAR 2007-2008 2008-2009 2009-2010 Liquid Assets 16890.59 132611.4 181252.9 Current Liabilities 83561.79 175502.5 95235.04 Liquidity Ratio 0.20 0.76 1.90
Interpretation
It is shown above that the company is able to meet out the short term solvency in 2010 when compared to previous year as the ratio was below the ideal ratio 1.
Super Quick Ratio
This is a variation of quick ratio. The ratio is calculated as follows:
Cash and bank balances
super quick Ratio = Current Liabilities year 2007-2008 2008-2009 2009-2010 cash and bank balances 6631.64 34149.28 80985.86 current liabilities 83561.79 175502.5 95235.04 super quick ratio 0.1 0.19 0.85
Interpretation
It is observed that though the cash and bank balances has been increased throughout the year ,it may meet the short term solvency as a part but not the whole due to cash and bank balances are lower than the current liabilities .
Stability ratios
These ratios help in ascertaining the long term solvency of a firm.
Fixed Assets Ratio This ratio explains whether the firm has raised adequate long term funds to meet its fixed assets requirements. The ideal ratio is 1 and should not be more than 1.It is expressed as follows:
Fixed assets Fixed assets Ratio = Long term funds
Year 2007-2008 2008-2009 2009-2010
Fixed Assets 73538.9 79183.6 81731.5 Long Term Funds 79443.5 112714.1 143498.8 Fixed Assets Ratio 0.93 0.70 0.57
Interpretation It is seen above that fixed asset ratio has brought down throughout the year.It shows that a part of the working capital has been financed through long term funds as the ratio is less than 1.Thus,the company has adequate long term funds to meet its fixed assets requirements.
Debt Equity Ratio
The debt equity ratio is determined to ascertain the soundnessof the long term financial policies of the company.it isalso known as “ external – internal equity” equity ratio.it may be calculated as follows:
Total long term debt
Debt equity ratio = Shareholders’ funds
Year 2007-2008 2008-2009 2009-2010
Total Long Term Debt 100197.5 171990 191779.4 Shareholders Funds 79443.5 112714.1 143498.8 Debt Equity Ratio 1.26 1.53 1.37 Interpretation
It is referred that debt equity ratio for 3 years said to be unsatisfactory as shareholders funds are not equal to borrowed funds.
Proprietary ratio
It is a varient of debt equity ratio. It establishes relationship between the proprietors funds and the total tangible assets. It may be expressed as:
Shareholders funds Proprietary ratio = Total tangible assets
Year 2007-2008 2008-2009 2009-2010
Share Holders Funds 79443.5 112714.1 143498.8 Total Tangible Assets 271449.5 468153.3 439060 Proprietory Ratio 0.29 0.24 0.33 Interpretation
As the proprietory ratio is below the 50% incase of all the 3 years, it may be the risk for the creditors of the company. So the company is advised to raise funds in order to prevent the creditors from risk.
